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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-9250
CONSECO, INC.
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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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, No Par Value New York Stock Exchange, Inc.
8 1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
10 1/2% Senior Notes due 2004 New York Stock Exchange, Inc.
9.16% Trust Originated Preferred Securities New York Stock Exchange, Inc.
7% FELINE PRIDES New York Stock Exchange, Inc.
8.70% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9.44% Trust Originated Preferred Securities New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by nonaffiliates (computed as
of April 11, 2000): $2,309,952,454
Shares of common stock outstanding as of April 11, 2000: 325,264,121
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement for the 2000 annual meeting of shareholders are
incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF CONSECO.
Conseco, Inc. is a financial services holding company. We conduct and
manage our business through two operating segments, reflecting our major lines
of business: (i) insurance and fee-based operations; and (ii) finance
operations. Our insurance subsidiaries develop, market and administer
supplemental health insurance, annuity, individual life insurance, individual
and group major medical insurance and other insurance products. This segment
also includes other asset accumulation products such as mutual funds. Our
finance subsidiaries originate, purchase, sell and service consumer and
commercial finance loans throughout the United States. As used in this report,
the terms "we," "Conseco" or the "Company" refer to Conseco, Inc. and its
consolidated subsidiaries, unless the context requires otherwise. Since 1982,
Conseco has acquired 19 insurance groups. In 1998, we acquired Conseco Finance
Corp. ("Conseco Finance", formerly Green Tree Financial Corporation prior to its
name change in November 1999) which comprises our finance operations. Our
operating strategy is to grow our businesses by focusing our 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. On March 31, 2000, we announced that we plan
to explore the sale of Conseco Finance and are hiring Lehman Brothers Inc. to
assist in the planned sale. If the planned sale is completed, the Company will
no longer have finance operations. For a discussion concerning results of
operations by operating segment, see "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations."
In recent years, Conseco has been active in efforts to increase the
familiarity and overall preference for our brand. We believe that in a
competitive marketplace like financial services, companies that can
differentiate themselves through a familiar brand can obtain full value for
their products; sell more efficiently and command greater customer loyalty;
recruit and retain talent more easily; better withstand and weather inevitable
business crises; and have better access to the financial markets and the capital
they need in order to grow. Our advertising campaign is designed to introduce
consumers to the Conseco brand, to our product line and to the benefits of doing
business with Conseco.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Our executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100.
Data in Item 1 are provided as of December 31, 1999, or for the year then
ended (as the context implies), unless otherwise described.
MARKETING AND DISTRIBUTION
INSURANCE
Our insurance products are sold through three primary distribution
channels -- career agents, professional independent producers and direct
marketing.
Conseco seeks to retain the loyalty of its agency force by providing
marketing and sales support; electronic and automated access to account and
commission information; and marketing and training tools. We also have
introduced new products like equity-indexed annuities (1996) and multibucket
flexible premium annuities (which provide for various earnings strategies under
one product) (1999). We are also seeking to reduce our agents' administrative
burden, increase their productive sales time and get them the information they
need faster and more reliably. The Conseco Online Information System ("COINS")
enables agents to track policy and commission information and order materials at
their convenience. Many of our marketing companies and agents use COINS.
Our insurance subsidiaries collectively hold licenses to market our
insurance products in all fifty states, the District of Columbia, and certain
protectorates of the United States. Sales to residents of the following states
accounted for at least 5 percent of our 1999 collected premiums: California (9.8
percent), Florida (8.6 percent), Illinois (8.2 percent) and Texas (6.9 percent).
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We believe that people purchase most types of life insurance, accident and
health insurance and annuity products only after being contacted and solicited
by an insurance agent. Accordingly, the success of our distribution system is
largely dependent on our ability to attract and retain agents who are
experienced and highly motivated.
A description of the primary distribution channels follows:
Career Agents. This agency force of approximately 5,000 agents working
from 187 branch offices, permits one-on-one contacts with potential
policyholders and promotes strong personal relationships with existing
policyholders. The career agents sell primarily Medicare supplement and
long-term care insurance policies, senior life insurance and annuities. In 1999,
this distribution channel accounted for $1,522.0 million, or 23 percent, of our
total collected premiums. These agents sell only Conseco policies and typically
visit the prospective policyholder's home to conduct personalized
"kitchen-table" sales presentations. After the sale of an insurance policy, the
agent serves as a contact person for policyholder questions, claims assistance
and additional insurance needs.
Professional Independent Producers. This distribution channel consists of
a general agency and insurance brokerage distribution system comprised of
approximately 140,000 independent licensed agents doing business in all fifty
states. In 1999, this channel accounted for $4,808.0 million, or 74 percent, of
our total collected premiums.
Professional independent producers are a diverse network of independent
agents, insurance brokers and marketing organizations. Marketing companies
typically recruit agents for Conseco by advertising our products and commission
structure through direct mail advertising or through seminars for insurance
agents and brokers. These organizations bear most of the costs incurred in
marketing our products. We compensate the marketing organizations by paying them
a percentage of the commissions earned on new sales generated by the agents
recruited by such organizations. Certain of these marketing organizations are
specialty organizations that have a marketing expertise or a distribution system
relating to a particular product, such as flexible-premium annuities for
educators. During 1999, Conseco purchased three organizations that specialize in
marketing and distributing supplemental health products. In 1999, these three
organizations accounted for $213.8 million, or 3 percent, of our total collected
premiums.
Direct Marketing. This distribution channel is engaged primarily in the
sale of "graded benefit life" insurance policies. In 1999, this channel
accounted for $176.7 million, or 3 percent, of our total collected premiums.
FINANCE
Our finance group, with nationwide operations and managed finance
receivables of $45.8 billion at December 31, 1999, is one of America's largest
consumer finance companies, with leading market positions in retail home equity
mortgages, home improvement loans and consumer and dealer floorplan loans for
manufactured housing. Originations to customers in the following states
accounted for at least 5.0 percent of our 1999 originations: Texas (7.5
percent), California (7.1 percent), Florida (6.2 percent) and North Carolina
(5.9 percent). On March 31, 2000, we announced that we plan to explore the sale
of Conseco Finance. If the planned sale is completed, the Company will no longer
have finance operations.
During 1999, we sold our aircraft and franchise commercial finance
business. We also decided to discontinue the origination of commercial
asset-based loans. These actions are consistent with our intention to focus our
capital and resources on our core consumer businesses. The aircraft, franchise
and commercial asset-based loans represented 6.4 percent of our originations
during 1999.
During 1999, 70 percent of our finance products were marketed indirectly to
customers through intermediary channels such as dealers, vendors, contractors
and retailers; the remaining products were marketed directly to our customers
through our regional offices and service centers. A description of the primary
distribution channels follows:
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Dealers, Vendors, Contractors and Retailers. Manufactured housing, home
improvement, home equity, consumer finance and equipment finance receivables are
purchased from and originated by selected dealers and contractors after being
underwritten and analyzed via one of the Company's automated credit scoring
systems at one of our regional service centers. During 1999, these marketing
channels accounted for the following percentages of total loan originations: 88
percent of consumer loans for manufactured housing, 61 percent of home
improvement, 40 percent of home equity, 92 percent of consumer finance and 71
percent of equipment finance.
Regional Service Centers, Retail Satellite Offices and Telemarketing
Center. We market and originate manufactured housing loans through 45 regional
offices and 3 origination and processing centers. We originate home equity loans
through a system of 139 retail satellite offices and 6 regional centers. We also
market private label retail credit products through selected retailers and
process the contracts through Conseco Bank, Inc. ("Conseco Bank"), a Utah
industrial loan company, and through Green Tree Retail Services Bank, Inc.
("Retail Bank"), a South Dakota limited purpose credit card bank, both of which
are wholly owned subsidiaries of the Company. We utilize direct mail to
originate home improvement loans, home equity loans and credit cards. We provide
commercial finance loans to dealers, manufacturers and other distributors
through three regional lending centers. During 1999, these marketing channels
accounted for the following percentages of total loan originations: 12 percent
of manufactured housing, 39 percent of home improvement, 60 percent of home
equity, 8 percent of consumer finance, 29 percent of equipment finance and 100
percent of retail credit contracts.
INSURANCE PRODUCTS
SUPPLEMENTAL HEALTH
Supplemental health products include Medicare supplement, long-term care
and specified-disease insurance products distributed through our career agency
force and professional independent producers. During 1999, we collected Medicare
supplement premiums of $915.6 million, long-term care premiums of $793.5
million, specified-disease premiums of $376.3 million and other supplemental
health premiums of $121.2 million.
The following describes the major supplemental health products:
Medicare supplement. Medicare is a two-part federal health insurance
program for disabled persons and senior citizens (age 65 and older). Part A of
the program provides protection against the costs of hospitalization and related
hospital and skilled nursing home care, subject to an initial deductible,
related coinsurance amounts and specified maximum benefit levels. The deductible
and coinsurance amounts are subject to change each year by the federal
government. Part B of Medicare covers doctors bills and a number of other
medical costs not covered by Part A, subject to deductible and coinsurance
amounts for "approved" charges.
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as deductibles,
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Our Medicare supplement plans automatically adjust coverage to reflect
changes in Medicare benefits. In marketing these products, we concentrate on
individuals who have recently become eligible for Medicare by reaching the age
of 65. We offer a higher first-year commission for sales to these policyholders
and competitive premium pricing. Approximately one-half of new sales of Medicare
supplement policies are to individuals who are 65 years old.
Long-term care. Long-term care products provide coverage, within
prescribed limits, for nursing home, home healthcare, or a combination of both
nursing home and home healthcare expenses. The long-term care plans are sold
primarily to retirees, and to a lesser degree, to older self-employed
individuals and others in middle-income levels.
Current nursing home care policies cover incurred and daily fixed-dollar
benefits available with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of
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nursing home care before the insurance coverage begins), subject to a maximum
benefit. Home healthcare policies cover the usual and customary charges after a
deductible and are subject to a daily or weekly maximum dollar amount, and an
overall benefit maximum. We monitor the loss experience on our long-term care
products and, when necessary, apply for rate increases in the states in which we
sell such products.
Specified-disease products. These policies generally provide fixed or
limited benefits. Cancer insurance and heart/stroke products are guaranteed
renewable individual accident and health insurance policies. Payments under
cancer insurance policies are generally made directly to, or at the direction
of, the policyholder following diagnosis of, or treatment for, a covered type of
cancer. Heart/stroke policies provide for payments directly to the policyholder
for treatment of a covered heart disease, heart attack or stroke. The benefits
provided under the specified-disease policies do not necessarily reflect the
actual cost incurred by the insured as a result of the illness; benefits are not
reduced by any other medical insurance payments made to or on behalf of the
insured.
Approximately 73 percent of our specified-disease policies in force (based
on a count of policies) are sold with return of premium or cash value riders.
The return of premium rider generally provides that after a policy has been in
force for a specified number of years or upon the policyholder reaching a
specified age, the Company will pay to the policyholder, or a beneficiary under
the policy, the aggregate amount of all premiums paid under the policy, without
interest, less the aggregate amount of all claims incurred under the policy.
ANNUITIES
Annuity products include equity-indexed annuity, variable annuity,
traditional fixed rate annuity and market value-adjusted annuity products sold
through both career agents and professional independent producers. During 1999,
we collected annuity premiums of $2,473.7 million.
The following describes the major annuity products:
Equity-indexed annuity products. These products accounted for $911.8
million, or 14 percent, of our total premiums collected in 1999. The
accumulation value of these annuities is credited with interest at an annual
minimum guaranteed average rate over the term of the contract of 3 percent (or,
including the effect of applicable sales loads, a 1.7 percent compound average
interest rate over the term of the contracts), but the annuities provide for
potentially higher returns based on a percentage (the "participation rate") of
the change in the Standard & Poor's Corporation ("S&P") 500 Index during each
year of their term. The Company has the discretionary ability to annually change
the participation rate which currently ranges from 50 percent to 70 percent plus
a first-year "bonus", similar to the bonus interest described below for
traditional fixed rate annuity products, which generally ranges from 20 percent
to 30 percent. The minimum guaranteed values are equal to: (i) 90 percent of
premiums collected for annuities for which premiums are received in a single
payment (single premium deferred annuities "SPDAs"), or 75 percent of first year
and 87.5 percent of renewal premiums collected for annuities which allow for
more than one payment (flexible premium deferred annuities "FPDAs"); plus (ii)
interest credited on such percentage of the premiums collected at an annual rate
of 3 percent. The annuity provides for penalty-free withdrawals of up to 10
percent of premium in each year after the first year of the annuity's term.
Other withdrawals from SPDA products are generally subject to a surrender charge
of 9 percent over the eight year contract term at which time the contract must
be renewed or withdrawn. Other withdrawals from FPDA products are subject to a
surrender charge of 12 percent to 20 percent in the first year, declining 1.2
percent to 1.3 percent each year, to zero over a 10 to 15 year period, depending
on issue age. We purchase S&P 500 Index Call Options ("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.
Other fixed rate annuity products. These products include SPDAs, FPDAs
(excluding the equity-indexed products) and single-premium immediate annuities
("SPIAs"). These products accounted for $958.5 million, or 15 percent, of our
total collected premiums in 1999. Our SPDAs and FPDAs typically have an interest
rate (the "crediting rate") that is guaranteed by the Company for the first
policy year, after which, we have the discretionary ability to change the
crediting rate to any rate not below a guaranteed minimum rate. The guaranteed
rate on annuities written recently ranges from 3.0 percent to 4.5 percent, and
the rate on
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all policies in force ranges from 3.0 percent to 6.0 percent. The initial
crediting rate is largely a function of: (i) the interest rate we can earn on
invested assets acquired with the new annuity fund deposits; (ii) the costs
related to marketing and maintaining the annuity products; and (iii) the rates
offered on similar products by our competitors. For subsequent adjustments to
crediting rates, we take into account the yield on our investment portfolio,
annuity surrender assumptions, competitive industry pricing and the crediting
rate history for particular groups of annuity policies with similar
characteristics.
Approximately 55 percent of our new annuity sales have been "bonus"
products. The initial crediting rate on these products specifies a bonus
crediting rate ranging from 1 percent to 6 percent of the annuity deposit for
the first policy year only. After the first year, the bonus interest portion of
the initial crediting rate is automatically discontinued, and the renewal
crediting rate is established. As of December 31, 1999, crediting rates on our
outstanding traditional annuities were at an average rate, excluding bonuses, of
4.3 percent.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his or her account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of our
traditional annuities provide for penalty-free withdrawals of up to 10 percent
of the accumulation value each year, subject to limitations. Withdrawals in
excess of allowable penalty-free amounts are assessed a surrender charge during
a penalty period which generally ranges from five to 12 years after the date a
policy is issued. The initial surrender charge is generally 6 percent to 12
percent of the accumulation value and generally decreases by approximately 1 to
2 percentage points per year during the penalty period. Surrender charges are
set at levels to protect the Company from loss on early terminations and to
reduce the likelihood of policyholders terminating their policies during periods
of increasing interest rates. This practice lengthens the effective duration of
policy liabilities and enables the Company to maintain profitability on such
policies.
SPIAs accounted for $41.8 million, or .6 percent, of our total collected
premiums in 1999. SPIAs are designed to provide a series of periodic payments
for a fixed period of time or for life, according to the policyholder's choice
at the time of issue. Once the payments begin, the amount, frequency and length
of time for which they are payable are fixed. SPIAs often are purchased by
persons at or near retirement age who desire a steady stream of payments over a
future period of years. The single premium is often the payout from a terminated
annuity contract. The implicit interest rate on SPIAs is based on market
conditions when the policy is issued. The implicit interest rate on the
Company's outstanding SPIAs averaged 6.9 percent at December 31, 1999.
Recently, the Company introduced its multibucket annuity product which
provides for different rates of cash value growth based on the experience of a
particular market strategy. Earnings are credited to this product based on the
market activity of a given strategy, less management fees, and funds may be
moved between cash value strategies. Portfolios available include high-yield
bond, investment-grade bond, convertible bond and guaranteed-rate portfolios.
During 1999, this product accounted for $76.9 million, or 1.2 percent, of our
total collected premiums.
Variable annuity products. Variable annuities accounted for $603.4
million, or 9.3 percent, of our total premiums collected in 1999. Variable
annuities, sold on a single-premium or flexible-premium basis, differ from fixed
annuities in that the principal value may fluctuate, depending on the
performance of assets allocated pursuant to various investment options chosen by
the contract owner. Variable annuities offer contract owners a fixed or variable
rate of return based upon the specific investment portfolios into which premiums
may be directed.
LIFE
Life products include traditional, universal life and other life insurance
products. These products are currently sold through career agents, professional
independent producers and direct response marketing. During 1999, we collected
$970.7 million, or 15 percent, of our total collected premiums from life
products.
Interest-sensitive life products. These products include universal life
products that provide whole life insurance with adjustable rates of return
related to current interest rates. They accounted for $511.3 million, or
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7.9 percent, of our total collected premiums in 1999 and are marketed through
professional independent producers and to a lesser extent, career agents. The
principal differences between universal life products and other
interest-sensitive life insurance products are policy provisions affecting the
amount and timing of premium payments. Universal life policyholders may vary the
frequency and size of their premium payments, and policy benefits may also
fluctuate according to such payments. Premium payments under other interest-
sensitive policies may not be varied by the policyholders, and as a result, are
designed to reduce the administrative costs typically associated with monitoring
universal life premium payments and policy benefits.
Traditional life. These products accounted for $459.4 million, or 7.1
percent, of our total collected premiums in 1999. Traditional life policies,
including whole life, graded benefit life and term life products, are marketed
through professional independent producers, career agents and direct response
marketing. Under whole life policies, the policyholder generally pays a level
premium over an agreed period or the policyholder's lifetime. The annual premium
in a whole life policy is generally higher than the premium for comparable term
insurance coverage in the early years of the policy's life, but is generally
lower than the premium for comparable term insurance coverage in the later years
of the policy's life. These policies, which continue to be marketed by the
Company on a limited basis, combine insurance protection with a savings
component that increases in amount gradually over the life of the policy. The
policyholder may borrow against the savings generally at a rate of interest
lower than that available from other lending sources. The policyholder may also
choose to surrender the policy and receive the accumulated cash value rather
than continuing the insurance protection. Term life products offer pure
insurance protection for a specified period of time -typically 5, 10 or 20
years.
Traditional life products also include graded benefit life insurance
products. Graded benefit life products accounted for $176.7 million, or 2.7
percent, of our total collected premiums in 1999. Graded benefit life insurance
products are offered on an individual basis primarily to persons age 50 to 80,
principally in face amounts of $350 to $10,000, without medical examination or
evidence of insurability. Premiums are paid as frequently as monthly. Benefits
paid are less than the face amount of the policy during the first two years,
except in cases of accidental death. Graded benefit life policies are marketed
using direct response marketing techniques. New policyholder leads are generated
primarily from television and print advertisements.
INDIVIDUAL AND GROUP MAJOR MEDICAL
Current sales of our individual and group major medical health insurance
products are targeted to self-employed individuals, small business owners, large
employers and early retirees. Various deductible and coinsurance options are
available, and most policies require certain utilization review procedures. The
profitability of this business depends largely on the overall persistency of the
business in force, claim experience and expense management. During 1999, we
collected $855.7 million, or 13 percent, of our total collected premiums from
these products.
FINANCE PRODUCTS
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance. If the planned sale is completed, the Company will no longer have
finance operations.
CONSUMER FINANCING
Manufactured Housing. Our finance subsidiaries provide financing for
consumer purchases of manufactured housing. During 1999, we originated $6.6
billion of contracts for manufactured housing purchases, or 26 percent of our
total originations. At December 31, 1999, our managed receivables include $24.7
billion of contracts for manufactured housing purchases, or 54 percent of total
managed receivables. Manufactured housing or a manufactured home is a structure,
transportable in one or more sections, which is designed to be a dwelling with
or without a permanent foundation. Manufactured housing does not include either
modular housing (which typically involves more sections, greater assembly and a
separate means of transporting the sections) or recreational vehicles.
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The majority of sales contracts for manufactured home purchases are
financed on a conventional basis. Federal Housing Administration and Veterans'
Administration contracts represent less than 1 percent of our manufactured
housing originations and 2 percent of our total servicing portfolio.
Manufactured housing contracts are generally subject to minimum down payments of
at least 5 percent of the amount financed and have terms of up to 30 years.
Through our regional service centers, we purchase manufactured housing
contracts from dealers located throughout the United States. Our regional
service center personnel solicit dealers in their region. If the dealer wishes
to utilize our financing, the dealer completes an application. Upon approval, a
dealer agreement is executed. We also originate manufactured housing installment
loan agreements directly with customers. For the year ended December 31, 1999,
88 percent of our manufactured housing loan originations were purchased from
dealers and 12 percent were originated directly by us.
Customers' credit applications for new manufactured homes are reviewed in
our service centers. If the application meets our guidelines, we generally
purchase the contract after the customer has moved into the manufactured home.
We use a proprietary automated credit scoring system to evaluate manufactured
housing contracts. The scoring system is statistically based, quantifying
information using variables obtained from customer credit applications and
credit reports.
Mortgage Services. Products within this category include home equity and
home improvement loans. During 1999, we originated $6.7 billion of contracts for
these products, or 27 percent of our total originations. At December 31, 1999,
our managed receivables include $12.2 billion of contracts for home equity and
home improvement loans, or 27 percent of total managed receivables.
We originate home equity loans through 139 retail satellite offices and 6
regional centers and through a network of correspondent lenders throughout the
United States. The satellite offices are responsible for originating,
processing, underwriting and funding the loan transaction. Subsequently, loans
are re-underwritten on a test basis by a third party to ensure compliance with
our credit policy. After the loan has closed, the loan documents are forwarded
to our loan servicing center. The servicing center is responsible for handling
customer service and performing document handling, custodial and quality control
functions.
During 1999, approximately 60 percent of our home equity finance loans were
originated directly with the borrower. The remaining finance volume was
originated through approximately 220 correspondent lenders.
Typically, home equity loans are secured by first or second liens. Homes
used for collateral in securing home equity loans may be either residential or
investor owned, one-to-four-family properties having a minimum appraised value
of $25,000. During 1999, approximately 57 percent of the loans originated were
secured by first liens. The average loan to value for loans originated in 1999
was approximately 91 percent. The majority of our home equity loans are fixed
rate closed-end loans. We periodically purchase adjustable rate loans from our
correspondent network. Adjustable rate loans accounted for 22 percent of our
home equity finance volume during 1999.
We originate the majority of our home improvement loan contracts indirectly
through a network of home improvement contractors located throughout the United
States. We review the financial condition, business experience and
qualifications of all contractors through which we obtain loans.
We finance both conventional home improvement contracts and contracts
insured through the Federal Housing Administration Title I program. Such
contracts are generally secured by first, second or, to a lesser extent, third
liens on the improved real estate. We also implemented an unsecured conventional
home improvement lending program for certain customers which generally allows
for loans of $2,500 to $15,000. Unsecured loans account for less than 3 percent
of our home improvement servicing portfolio.
Typically, an approved contractor submits the customer's credit application
and construction contract to our centralized service center where an analysis of
the creditworthiness of the customer is made using a proprietary credit scoring
system. If it is determined that the application meets our underwriting
guidelines, we typically purchase the contract from the contractor when the
customer verifies satisfactory completion of the work.
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We also originate home improvement loans directly with borrowers. After
receiving a mail solicitation, the customer calls our telemarketing center and
our sales representative explains the available financing plans, terms and rates
depending on the customer's needs. The majority of the loans are secured by a
second or third lien on the real estate of the customer. Direct distribution
accounted for approximately 39 percent of the home improvement finance
originations during 1999.
The types of home improvements we finance include exterior renovations
(such as windows, siding and roofing); pools and spas; kitchen and bath
remodeling; and room additions and garages. We may also extend additional credit
beyond the purchase price of the home improvement for the purpose of debt
consolidation.
Consumer/Credit Card. These products include financing for consumer
products and our private label credit card programs. During 1999, we originated
$3.2 billion of contracts for these products, or 13 percent of our total
originations. At December 31, 1999, our managed receivables include $3.8 billion
of contracts for consumer product and credit card loans, or 8 percent of total
managed receivables.
We also provide financing for the purchase of certain consumer products
such as marine products (boats, boat trailers and outboard motors); motorcycles;
recreational vehicles; sport vehicles (snowmobiles, personal watercraft and
all-terrain vehicles); pianos and organs; and horse and utility trailers. These
financing contracts are typically originated by dealers throughout the United
States. Approved dealers submit the customer's credit application and purchase
order to our central service center where an analysis of the creditworthiness of
the proposed buyer is made. If the application is approved, we purchase the
contract when the customer completes the purchase transaction.
We also offer private label retail credit card programs with select
retailers. We review the credit of individual customers seeking credit cards
utilizing a credit scoring system.
COMMERCIAL FINANCING
Commercial. Commercial financing primarily includes: (i) floorplan
lending; (ii) truck lending and leasing; and (iii) small-ticket equipment
lending and leasing. During 1999, we originated $8.5 billion of contracts for
commercial financing, or 34 percent of our total originations. At December 31,
1999, our managed receivables include $5.1 billion of contracts for commercial
financing, or 11 percent of total managed receivables.
During 1999, we sold our aircraft and franchise commercial finance
divisions. We also decided to discontinue the origination of commercial
asset-backed loans. These actions are consistent with our intention to focus our
capital and resources on our core consumer businesses. During 1999, we
originated $1.6 billion of these loans, or 6.4 percent of our total
originations.
"Floorplan receivables" represent the financing of product inventory for
retail dealers of a variety of consumer products. The products securing the
floorplan receivables include manufactured housing, recreational vehicles and
marine products. During 1999, we originated $5.6 billion of these loans, or 22
percent of our total originations. We generally provide floorplan financing for
products only if we have also entered into an agreement with the manufacturer,
distributor or other vendor of such product to allow us to provide the consumer
financing in connection with the sale of products that are the subject of the
floorplan financing. Advances made for the purchase of inventory are most
commonly arranged in the following manner: the dealer will contact the
manufacturer and place a purchase order for a shipment of inventory. The
manufacturer will then contact us to obtain approval for the loan. Upon such
request, we will analyze whether: (i) the manufacturer is in compliance with its
floorplan agreement; (ii) the dealer is in compliance with our program; and
(iii) such purchase order is within the dealer's credit limit. If these
requirements are met, we will approve the loan. The manufacturer will then ship
the inventory and directly submit the invoice for such purchase order to us for
payment. Interest or finance charges normally begin as of the invoice date. The
proceeds of the loan being made are paid directly to the manufacturer and are
often funded a number of days subsequent to the invoice date depending upon
specific arrangements with the manufacturer. Inventory inspections are
frequently performed to physically verify the collateral securing the dealer's
loan, check the condition of the
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inventory, account for any missing inventory and collect any funds due.
Approximately two-thirds of our manufactured housing dealers are participants in
this program.
We also provide financing and leasing programs to commercial borrowers for
the purchase of trucks and trailers and small-equipment (such as computer,
office and telecommunications equipment). During 1999, we originated $1.3
billion of these loans, or 5.2 percent of total originations. In early 2000, we
significantly reduced our originations of loans and leases relating to trucks
and trailers.
ACQUISITIONS
Since 1982, Conseco has acquired 19 insurance groups and related businesses
and two finance companies. We continue to regularly investigate acquisition
opportunities in the industries in which we operate. We evaluate potential
acquisitions based on a variety of factors, including the operating results and
financial condition of the business to be acquired, its growth potential,
management and personnel and the potential return on such acquisition in
relation to other acquisition opportunities and the internal development of our
existing business operations. No assurances can be given as to when, if at all,
or upon what terms Conseco will make any such acquisition.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolios of Conseco's
subsidiaries. CCM had approximately $41.8 billion of assets (at fair value)
under management at December 31, 1999, of which $30.4 billion were assets of
Conseco's subsidiaries and $11.4 billion were assets of unaffiliated parties.
Our investment philosophy is to maintain a largely investment-grade fixed-income
portfolio, provide adequate liquidity for expected liability durations and other
requirements and maximize total return through active investment management.
Investment activities are an integral part of our business; investment
income is a significant component of our total revenues. Profitability of many
of our insurance products is significantly affected by spreads between interest
yields on investments and rates credited on insurance liabilities. Although
substantially all credited rates on SPDAs and FPDAs may be changed annually,
changes in crediting rates may not be sufficient to maintain targeted investment
spreads in all economic and market environments. In addition, competition and
other factors, including the impact of the level of surrenders and withdrawals,
may limit our ability to adjust or to maintain crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions. As of
December 31, 1999, the average yield, computed on the cost basis of our
investment portfolio, was 7.2 percent, and the average interest rate credited or
accruing to our total insurance liabilities (excluding interest rate bonuses for
the first policy year only and excluding the effect of credited rates
attributable to variable or equity-indexed products) was 5.0 percent.
We manage the equity-based risk component of our equity-indexed annuity
products by: (i) purchasing S&P 500 Index Call Options in an effort to hedge
such risk; and (ii) adjusting the participation rate to reflect the change in
the cost of such options (such cost varies based on market conditions).
Accordingly, we are able to focus on managing the interest rate spread component
of these products.
We seek to balance the duration of our invested assets with the expected
duration of benefit payments arising from our insurance liabilities. At December
31, 1999, the adjusted modified duration of fixed maturities and short-term
investments was approximately 6.6 years and the duration of our insurance
liabilities was approximately 6.6 years.
For information regarding the composition and diversification of the
investment portfolio of our subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of
Operations -- Investments" and the notes to our consolidated financial
statements.
COMPETITION
Our businesses operate in a highly competitive environment. The financial
services industry consists of a large number of companies, some of which are
larger and have greater financial resources, broader and more
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diversified product lines and larger staffs than those of Conseco. An expanding
number of banks, securities brokerage firms and other financial intermediaries
also market insurance products or offer competing products, such as mutual fund
products, traditional bank investments and other investment and retirement
funding alternatives. We also compete with many of these companies and others in
providing services for fees. In most areas, competition is based on a number of
factors, including pricing, service provided to distributors and policyholders
and ratings. Conseco's subsidiaries must also compete with their competitors to
attract and retain the allegiance of dealers, vendors, contractors,
manufacturers, retailers and agents.
In the finance industry, operations are affected by consumer demand which
is influenced by regional trends, economic conditions and personal preferences.
Competition in the finance industry is primarily among banks, finance companies
(or finance divisions of manufacturers), savings and loan associations and
credit unions. Competition is based on a number of factors, including service,
the credit review process, the integration of financing programs and the ability
to manage the servicing portfolio in changing economic environments.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The provisions of the
Omnibus Budget Reconciliation Act of 1984 and the work of the National
Association of Insurance Commissioners ("NAIC") (an association of state
regulators and their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of such policies
and may intensify competition based on factors other than product features. See
"Underwriting" and "Governmental Regulation." In addition to the products of
other insurance companies, our health insurance products compete with health
maintenance organizations, preferred provider organizations and other health
care-related institutions which provide medical benefits based on contractual
agreements.
Marketing companies, agents who market insurance products, school
districts, financial institutions and policyholders use the financial strength
ratings assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. All of our primary
life insurance companies have received: (i) an "A" (Excellent) rating by A.M.
Best Company ("A.M. Best"); (ii) an "AA-" claims-paying ability rating from Duff
& Phelps' Credit Rating Company ("Duff & Phelps"); (iii) an "A-" claims-paying
ability rating from S&P; and (iv) a "Baa1" insurance financial strength rating
from Moody's Investor Services ("Moody's"). A.M. Best ratings for the industry
currently range from "A++ (Superior)" to "F (In Liquidation)." Publications of
A.M. Best indicate that the "A" and "A-" ratings are assigned to those companies
that, in A.M. Best's opinion, have demonstrated excellent overall performance
when compared to the standards established by A.M. Best and have demonstrated a
strong ability to meet their obligations to policyholders over a long period of
time. Duff & Phelps' claims-paying ability ratings range from "AAA (Highest
claims-paying ability)" to "DD (Company is under an order of liquidation)." An
"AA-" rating represents "Very high claims-paying ability." S&P claims-paying
ability ratings range from "AAA (Superior)" to "R (Regulatory Action)." An "A"
rating is assigned by S&P to those companies which, in its opinion, have a
secure claims-paying ability and whose financial capacity to meet policyholder
obligations is viewed on balance as sound, but their capacity to meet such
policyholder obligations is somewhat more susceptible to adverse changes in
economic or underwriting conditions than more highly rated insurers. A plus or
minus sign attached to a S&P or Duff & Phelps claims-paying rating shows
relative standing within a ratings category. A "Baa" is assigned by Moody's to
those companies which, in its opinion, "offer adequate financial security,
however, certain protective elements may be lacking or may be characteristically
unreliable over any great period of time." A numeric modifier attached to a
Moody's insurance financial strength rating refers to ranking within the group,
with one being the highest. These A.M. Best, Duff & Phelps, S&P and Moody's
ratings consider the claims paying ability of the rated company and are not a
rating of the investment worthiness of the rated company. Following our
announcement on March 31, 2000, that we plan to explore the sale of Conseco
Finance, the ratings in the previous paragraph were placed under review as the
agencies analyze the developing transaction. In addition, S&P changed its
outlook to negative.
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We believe that we are able to compete effectively because: (i) we
emphasize a number of specialized distribution channels, where the ability to
respond rapidly to changing customer needs yields a competitive edge; (ii) we
are experienced in establishing and cultivating relationships with the unique
distribution networks and the independent marketing companies operating in these
specialized markets; (iii) we can offer competitive rates as a result of our
operating efficiencies and higher-than-average investment yields achieved by
applying active investment portfolio management techniques; and (iv) we have
reliable policyholder administrative services, supported by customized
information technology systems.
INSURANCE UNDERWRITING
Under regulations promulgated by the NAIC and adopted as a result of the
Omnibus Budget Reconciliation Act of 1990, we are prohibited from underwriting
our Medicare supplement policies for certain first-time purchasers. If a person
applies for insurance within six months after becoming eligible by reason of
age, or disability in certain limited circumstances, the application may not be
rejected due to medical conditions. Some states prohibit underwriting of all
Medicare supplement policies. For other prospective Medicare supplement
policyholders, such as senior citizens who are transferring to Conseco's
products, the underwriting procedures are relatively limited, except for
policies providing prescription drug coverage.
Before issuing long-term care or comprehensive major medical products to
individuals and groups, we generally apply detailed underwriting procedures
designed to assess and quantify the insurance risks. We require medical
examinations of applicants (including blood and urine tests, where permitted)
for certain health insurance products and for life insurance products which
exceed prescribed policy amounts. These requirements are graduated according to
the applicant's age and may vary by type of policy or product. We also rely on
medical records and the potential policyholder's written application. In recent
years, there have been significant regulatory changes with respect to
underwriting individual and group major medical plans. An increasing number of
states prohibit underwriting and/or charging higher premiums for substandard
risks. We monitor changes in state regulation that affect our products, and
consider these regulatory developments in determining where we market our
products.
Most of our life insurance policies are underwritten individually, although
standardized underwriting procedures have been adopted for certain low
face-amount life insurance coverages. After initial processing, insurance
underwriters review each file and obtain the information needed to make an
underwriting decision (such as medical examinations, doctors' statements and
special medical tests). After collecting and reviewing the information, the
underwriter either: (i) approves the policy as applied for, or with an extra
premium charge because of unfavorable factors; or (ii) rejects the application.
We underwrite group insurance policies based on the characteristics of the group
and its past claim experience. Graded benefit life insurance policies are issued
without medical examination or evidence of insurability. There is minimal
underwriting on annuities.
REINSURANCE
Consistent with the general practice of the life insurance industry, our
subsidiaries enter into both facultative and treaty agreements of indemnity
reinsurance with other insurance companies in order to reinsure portions of the
coverage provided by our insurance products. Indemnity reinsurance agreements
are intended to limit a life insurer's maximum loss on a large or unusually
hazardous risk or to diversify its risk. Indemnity reinsurance does not
discharge the original insurer's primary liability to the insured. The Company's
reinsured business is ceded to numerous reinsurers. We believe the assuming
companies are able to honor all contractual commitments, based on our periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments.
As of December 31, 1999, the policy risk retention limit was generally $.8
million or less on the policies of our subsidiaries. Reinsurance ceded by
Conseco represented 21 percent of gross combined life insurance in force and
reinsurance assumed represented 5.2 percent of net combined life insurance in
force. At December 31, 1999, the total ceded business in force of $27.7 billion
was primarily ceded to insurance companies rated "A- (Excellent)" or better by
A.M. Best. Our principal reinsurers at December 31, 1999
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were American Equity Investment Life Insurance Company, General & Cologne Life
Insurance Company, Connecticut General Life Insurance Company, Employers
Reassurance Corporation, Life Reassurance Corporation of America, Lincoln
National Life Insurance Company, RGA Reinsurance Company, Security Life of
Denver and Swiss Re Life and Health America. No other single reinsurer assumes
greater than 3 percent of the total ceded business in force.
EMPLOYEES
At December 31, 1999, Conseco, Inc. and its subsidiaries had approximately
17,000 employees, including: (i) 3,700 home office employees; (ii) 1,400
employees in our Chicago office (primarily involved with our career agent
operations); (iii) 1,800 employees in various locations serving as
administrative centers for our insurance operations; (iv) 500 employees in
branch offices (primarily supporting our career agency force); and (v) 9,600
employees supporting our finance operations. None of our employees is covered by
a collective bargaining agreement. We believe that we have excellent relations
with our employees.
GOVERNMENTAL REGULATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Financial Modernization Act"), which significantly
modifies the regulation of financial services companies. The Financial
Modernization Act allows full affiliations among banks, insurance companies,
securities firms and other financial services companies, that could result in
increased consolidation of, and competition among, these firms. In addition, the
Financial Modernization Act contains privacy provisions relating to the
protection, transfer and use of the nonpublic personal information of consumers.
Consumer privacy laws containing expanded provisions also have been adopted, or
are under consideration, in a number of states.
INSURANCE
Our insurance subsidiaries are subject to regulation and supervision by the
insurance regulatory agencies of the states in which they transact business.
State laws generally establish supervisory agencies with broad regulatory
authority, including the power to: (i) grant and revoke business licenses; (ii)
regulate and supervise trade practices and market conduct; (iii) establish
guaranty associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; (x) perform financial, market conduct and other
examinations; (xi) define acceptable accounting principles; (xii) regulate the
type and amount of permitted investments; and (xiii) limit the amount of
dividends and surplus debenture payments that can be paid without obtaining
regulatory approval. Our insurance subsidiaries are subject to periodic
examinations by state regulatory authorities. We do not expect the results of
any ongoing examinations to have a material effect on the Company's financial
condition.
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions and other
related matters. Currently, the Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in the
domiciliary states of the insurance subsidiaries (Arizona, Illinois, Indiana,
Missouri, New York, Ohio, Pennsylvania and Texas), and they routinely report to
other jurisdictions.
Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company domiciled in the state; or (ii) the acquisition of 10 percent or more of
the outstanding stock of an insurance holding company whose insurance subsidiary
is domiciled in the state. The acquisition of 10 percent of such shares is
generally deemed to be the acquisition of control for the purpose of the holding
company statutes. These regulations require the acquirer to file detailed
information concerning
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the acquiring parties and the plan of acquisition, and to obtain administrative
approval prior to the acquisition. In many states, however, an insurance
authority may determine that control does not exist, even in circumstances in
which a person owns or controls 10 percent or a greater amount of securities.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, do affect the insurance
business. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in regulating the
companies or allowing combinations between insurance companies, banks and other
entities.
On the basis of statutory statements filed with state regulators annually,
the NAIC calculates certain financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of our insurance subsidiaries have resulted in inquiries from insurance
departments to which we have responded. Such inquiries did not lead to any
restrictions affecting our operations.
In recent years, the NAIC has developed several model laws and regulations
including: (i) investment reserve requirements; (ii) risk-based capital ("RBC")
standards; (iii) codification of insurance accounting principles; (iv)
additional investment restrictions; (v) restrictions on an insurance company's
ability to pay dividends; and (vi) product illustrations. The NAIC is currently
developing new model laws or regulations, including product design standards and
reserve requirements.
The RBC standards establish capital requirements for insurance companies
based on the ratio of the company's total adjusted capital (defined as the total
of its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its RBC (such ratio is referred to herein as the "RBC ratio").
The standards are designed to help identify companies which are under
capitalized and require specific regulatory actions in the event an insurer's
RBC ratio falls below specified levels. Each of our life insurance subsidiaries
has more than enough statutory capital to meet the standards as of December 31,
1999.
The NAIC has adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Various bills are proposed from time to time in the
U.S. Congress which would provide for the implementation of certain minimum
consumer protection standards for inclusion in all long-term care policies,
including guaranteed renewability, protection against inflation and limitations
on waiting periods for pre-existing conditions. Federal legislation permits
premiums paid for qualified long-term care insurance to be treated as
tax-deductible medical expenses and for benefits received on such policies to be
excluded from taxable income.
In addition, our insurance subsidiaries are required under guaranty fund
laws of most states in which we transact business, to pay assessments up to
prescribed limits to fund policyholder losses or liabilities of insolvent
insurance companies. Assessments can be partially recovered through a reduction
in future premium taxes in some states.
Most states mandate minimum benefit standards and loss ratios for accident
and health insurance policies. We are generally required to maintain, with
respect to our individual long-term care policies, minimum anticipated loss
ratios over the entire period of coverage of not less than 60 percent. With
respect to our Medicare supplement policies, we are generally required to attain
and maintain an actual loss ratio, after three years, of not less than 65
percent. We provide, to the insurance departments of all states in which we
conduct business, annual calculations that demonstrate compliance with required
minimum loss ratios for both long-term care and Medicare supplement insurance.
These calculations are prepared utilizing statutory lapse and interest rate
assumptions. In the event we have failed to maintain minimum mandated loss
ratios, our insurance subsidiaries could be required to provide retrospective
refunds and/or prospective rate reductions. We believe that our insurance
subsidiaries currently comply with all applicable mandated minimum loss ratios.
NAIC model regulations, adopted in substantially all states, created 10
standard Medicare supplement plans (Plans A through J). Plan A provides the
least extensive coverage, while Plan J provides the most extensive coverage.
Under NAIC regulations, Medicare insurers must offer Plan A, but may offer any
of the
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other plans at their option. Our insurance subsidiaries currently offer nine of
the model plans. We have declined to offer Plan J, due in part to its high
benefit levels and, consequently, high costs to the consumer.
Numerous proposals to reform the current health care system (including
Medicare) have been introduced in Congress and in various state legislatures.
Proposals have included, among other things, modifications to the existing
employer-based insurance system, a quasi-regulated system of "managed
competition" among health plans, and a single-payer, public program. Changes in
health care policy could significantly affect our business. For example, Federal
comprehensive major medical or long-term care programs, if proposed and
implemented, could partially or fully replace some of Conseco's current
products.
A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for health care
coverages between new business and renewal business for similar demographic
groups. State legislation has also been adopted or is being considered that
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to offer a basic plan
exempt from certain benefits as well as a standard plan, or by establishing a
mechanism to spread the risk of high risk employees to all small group insurers.
Congress and various state legislators have from time to time proposed changes
to the health care system that could affect the relationship between health
insurers and their customers, including external review.
We cannot predict with certainty the effect that any proposals, if adopted,
or legislative developments could have on our insurance businesses and
operations.
FINANCE
The Company's finance operations are subject to regulation by certain
federal and state regulatory authorities. A substantial portion of the Company's
consumer loans and assigned sales contracts are originated or purchased by
finance subsidiaries licensed under applicable state law. The licensed entities
are subject to examination by and reporting requirements of the state
administrative agencies issuing such licenses. The finance subsidiaries are
subject to state laws and regulations which in certain states: limit the amount,
duration and charges for such loans and contracts; require disclosure of certain
loan terms and regulate the content of documentation; place limitations on
collection practices; and govern creditor remedies. The licenses granted are
renewable and may be subject to revocation by the respective issuing authority
for violation of such state's laws and regulations. Some states have adopted or
are considering the adoption of consumer protection laws or regulations that
impose requirements or restrictions on lenders who make certain types of loans
secured by real estate.
In addition to the finance companies licensed under state law, both Conseco
Bank and Retail Bank, both of which are wholly owned subsidiaries of Conseco,
are under the supervision of, and subject to examination by, the Federal Deposit
Insurance Corporation. Conseco Bank is also supervised and examined by the Utah
Department of Financial Institutions. Retail Bank is supervised and examined by
the South Dakota Department of Banking. The ownership of these entities does not
subject the Company to regulation by the Federal Reserve Board as a bank holding
company. Conseco Bank has the authority to engage generally in the banking
business and may accept all types of deposits, other than demand deposits.
Retail Bank is limited by its charter to engage in the credit card business and
may issue only certificates of deposit in denominations of $100,000 or greater.
Conseco Bank and Retail Bank are subject to regulation relating to capital
adequacy, leverage, loans, deposits, consumer protection, community
reinvestment, payment of dividends and transactions with affiliates.
A number of states have usury and other consumer protection laws which may
place limitations on the amount of interest charged on loans originated in such
state. Generally, state law has been preempted by federal law under the
Depositary Institutions Deregulation and Monetary Control Act of 1980 ("DIDA")
which deregulates the rate of interest, discount points and finance charges with
respect to first lien residential loans, including manufactured home loans and
real estate secured mortgage loans. As permitted under DIDA, a number of states
enacted legislation timely opting out of coverage of either or both of the
interest rate and/or finance charge provisions of the Act. States may no longer
opt out of the interest rate provisions of the Act, but
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could in the future opt out of the finance charge provisions. To be eligible for
federal preemption for manufactured home loans, the Company's licensed finance
companies must comply with certain restrictions providing protection to
consumers. In addition, another provision of DIDA applicable to state-chartered
insured depository institutions permits both Conseco Bank and Retail Bank to
export interest rates, finance charges and certain fees from the states where
they are located to all other states, with the exception of Iowa which opted out
of the Act during the permitted time period. Interest rates, finance charges and
fees in Utah and South Dakota are, for the most part, deregulated.
The Company's operations are subject to federal regulation under other
applicable federal laws and regulations, the more significant of which include:
the Truth in Lending Act ("TILA"); the Equal Credit Opportunity Act ("ECOA");
the Fair Credit Reporting Act ("FCRA"); the Real Estate Settlement and
Procedures Act ("RESPA"); the Home Mortgage Disclosure Act ("HMDA"); the Home
Owner Equity Protection Act ("HOEPA"); and certain rules and regulations of the
Federal Trade Commission ("FTC Rules").
TILA and Regulation Z promulgated thereunder contain certain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of extensions of credit and
the ability to compare credit terms. TILA also provides consumers with a three
day right to cancel certain credit transactions, including certain of the loans
originated by the Company.
ECOA requires certain disclosures to applicants for credit concerning
information that is used as a basis for denial of credit and prohibits
discrimination against applicants with respect to any aspect of a credit
transaction on the basis of sex, race, color, religion, national origin, age,
marital status, derivation of income from a public assistance program or the
good faith exercise of a right under TILA. ECOA also requires that adverse
action notices be given to applicants who are denied credit.
FCRA regulates the process of obtaining, using and reporting of credit
information on consumers. This Act also regulates the use of credit information
among affiliates.
RESPA regulates the disclosure of information for consumers in loans
involving a mortgage on real estate. The Act and related regulations also govern
payment for and disclosure of payments for settlement services in connection
with mortgage loans and prohibits the payment of referral fees for the referral
of a loan or related services.
HMDA requires reporting of certain information to the Department of Housing
and Urban Development, including the race and sex of applicants in connection
with mortgage loan applications. A lender is required to obtain and report such
information if the application is made in person, but is not required to obtain
such information if the application is taken over the telephone.
HOEPA provides for additional disclosure and regulation of certain consumer
mortgage loans which are defined by the Act as "Covered Loans." A Covered Loan
is a mortgage loan (other than a mortgage loan to finance the initial purchase
of a dwelling) which (1) has total origination fees in excess of the greater of
eight percent of the loan amount, or $441, or (2) has an annual percentage rate
of more than ten percent higher than comparably maturing United States treasury
obligations. A number of the Company's home equity and home improvement loans
are Covered Loans under the Act.
The FTC Rules provide, among other things, that in connection with the
purchase of consumer sales finance contracts from dealers, the holder of the
contract is subject to all claims and defenses which the consumer could assert
against the dealer, but the consumer's recovery under such provisions cannot
exceed the amount paid under the sales contract.
In the judgment of the Company, existing federal and state law and
regulations have not had a material adverse effect on the finance operations of
the Company. There can, however, be no assurance that future law and regulatory
changes will not occur and will not place additional burdens on the Company's
finance operations.
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The Company's commercial lending operations are not subject to material
regulation in most states, although certain states do require licensing. In
addition, certain provisions of ECOA apply to commercial loans to small
businesses.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by our
insurance subsidiaries generally provide the policyholder with an income tax
advantage, as compared to other savings investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until it is received by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits and life
insurance benefits, which accrue prior to the death of the policyholder, are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably, as
opposed to the methods used for some other investments which tend to accelerate
taxable income into earlier years. The tax advantage for annuities and life
insurance is provided in the Internal Revenue Code (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
From time to time, various tax law changes have been proposed that could
have an adverse effect on our business, including elimination of all or a
portion of the income tax advantage of certain insurance products and changes in
how life insurance companies are taxed; such changes could affect the
marketability of our products and increase the Company's current tax liability.
Various such changes were proposed in the Revenue Proposal of the Clinton
Administration released in February 2000. In addition, from time to time,
various tax law changes have been proposed that could increase the
attractiveness of our products to certain consumers. For example, Congress is
currently considering a proposal which would allow more consumers to be eligible
to deduct long-term care policy premiums from taxable income.
Our insurance company subsidiaries are taxed under the life insurance
company provisions of the Code. Provisions in the Code require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to immediate deduction in the year incurred. This provision
increases the tax for statutory accounting purposes, which reduces statutory
earnings and surplus and, accordingly, decreases the amount of cash dividends
that may be paid by the life insurance subsidiaries. As of December 31, 1999,
the cumulative taxes paid by our insurance subsidiaries as a result of this
provision were approximately $370 million.
The Company had tax loss carryforwards at December 31, 1999, of
approximately $.8 billion, portions of which begin expiring in 2003. However,
the amount of such loss that may be offset against current taxable income is
subject to the following limitations: (i) losses may be offset against income of
other corporate entities only if such entities are included in the same
consolidated tax return (insurance companies are currently not eligible for
inclusion in Conseco's consolidated tax return until five years after they are
acquired); (ii) losses incurred in non-life companies (which comprise most of
the loss carryforwards) may offset only a portion of income from life companies
in the same consolidated tax return; and (iii) some loss carryforwards may not
be used to offset taxable income of entities acquired after the loss was
incurred. We, however, believe we will be able to utilize substantially all
current loss carryforwards before they expire.
ITEM 2. PROPERTIES.
Headquarters. Our headquarters is located on a 180-acre corporate campus
in Carmel, Indiana, immediately north of Indianapolis. The 12 buildings on the
campus (all but one of which are owned) contain approximately 956,000 square
feet of space and house Conseco's executive offices and certain administrative
operations of its subsidiaries. The campus has ample room for additional
buildings to support future growth.
Insurance operations. Our career agent operations are primarily
administered from a single facility of 300,000 square feet in downtown Chicago,
Illinois, leased under an agreement having a remaining life of eight years. We
also lease approximately 130,000 square feet of warehouse space in a second
Chicago facility; this lease has a remaining life of three years. Conseco owns
an office building in Kokomo, Indiana (100,000 square
17
<PAGE> 18
feet), and two office buildings in Rockford, Illinois (total of 169,000 square
feet), which serve as administrative centers for portions of our insurance
operations. Conseco owns one office building in Philadelphia, Pennsylvania
(127,000 square feet), which serves as the administrative center for our direct
response life insurance operations; approximately 60 percent of this space is
occupied by the Company, with the remainder leased to tenants. Conseco also
leases 223 sales offices and 4 other administrative offices in various states
totaling approximately 463,700 square feet; these leases are short-term in
length, with remaining lease terms ranging from one to five years.
Finance operations. Certain corporate servicing operations are housed in
Saint Paul, Minnesota, in 120,000 square feet of a building owned by the
Company. The finance segment operates 45 manufactured housing regional service
centers and three commercial finance business centers. Such offices are leased,
typically for a term of three to five years, and range in size from 1,700 to
22,000 square feet. We also operate a central servicing center in Rapid City,
South Dakota. The lease on this facility has a remaining term of four years,
with an option to purchase, and consists of 137,000 square feet. In Rapid City,
South Dakota, we have agreed to lease one additional building under construction
which will contain approximately 76,000 square feet. The home improvement and
consumer product divisions lease their main office in Saint Paul, Minnesota. The
lease has a remaining term of four years and consists of 125,000 square feet.
The home equity business has operations in six regional locations and 139
regional satellite offices, plus a service center in Tempe, Arizona, which
opened in February 1997 (which consists of three buildings totaling
approximately 200,000 square feet). The finance operations also lease 4 other
administrative offices in Minnesota, New Jersey and Georgia totaling
approximately 197,000 square feet; these leases are short-term in length with
remaining lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
Conseco Finance was served with various related lawsuits filed in the
United States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options of Conseco Finance during alleged class
periods that generally run from February 1995 to January 1998. One action
(Florida State Board of Admin. v. Green Tree Financial Corp., Case No. 98-1162)
did not include class action claims. In addition to Conseco Finance, certain
current and former officers and directors of Conseco Finance are named as
defendants in one or more of the lawsuits. Conseco Finance and other defendants
obtained an order consolidating the lawsuits seeking class action status into
two actions, one of which pertains to a purported class of common stockholders
(In re Green Tree Financial Corp. Stock Litig., Case No. 97-2666) and the other
which pertains to a purported class action of stock option traders (In re Green
Tree Financial Corp. Options Litig., Case No. 97-2679). 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 Conseco Finance 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
Conseco Finance (particularly with respect to prepayment assumptions and
performance of certain loan portfolios of Conseco Finance) which allegedly
rendered Conseco Finance's financial statements false and misleading. On August
24, 1999, the United States District Court for the District of Minnesota issued
an order to dismiss with prejudice all claims alleged in the lawsuits. The
plaintiffs subsequently appealed the decision to the U.S. Court of Appeals for
the 8th Circuit, and the appeal is currently pending. The Company believes that
the lawsuits are without merit and intends to continue to defend them
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
Four lawsuits have been filed against Conseco in the United States District
Court for the Southern District of Indiana. The cases, captioned Luisi v.
Conseco, Inc., et al., Case No. IP00-C-0593-B/S and Sechrist v. Conseco, Inc.,
et al., Case No. IP00-C-0585-M/S, Klein v. Conseco, Inc., et al., Case No.
IP00-0602 C-M/S, and Brody v. Conseco, Inc., et al., Case No. IP00-0609 C-M/S,
were filed as purported class actions on behalf of persons or entities that
purchased Conseco common stock during the alleged class periods that generally
run from April of 1999 through April of 2000. Two officers/directors of Conseco
are named as defendants in the lawsuits. In each case, the plaintiffs assert
claims under Section 10(b) and 20(a) of the Securities and Exchange Act of 1934.
In each case, plaintiffs allege that
18
<PAGE> 19
Conseco and the individual defendants violated federal securities laws by, among
other things, making false and misleading statements about the current state and
future prospects of Conseco Finance (particularly with respect to performance of
certain loan portfolios of Conseco Finance) which allegedly rendered Conseco's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend them vigorously. The ultimate
outcome of these lawsuits cannot be predicted with certainty.
Conseco, Inc. and its subsidiaries, Conseco Life Insurance Company and
Wabash Life Insurance Company, are currently named as defendants in a certified
nationwide class action lawsuit in the Superior Court for Santa Clara County
(California, cause number CV768991) and captioned "John P. Dupell and the John
P. Dupell 1992 Insurance Trust vs. Massachusetts General Life Insurance Company:
Life Partners Group, Inc., Wabash Life Insurance Company, Conseco, Inc., Donovan
R. Bolton, et al." The class, approximately 345,000 in number, consists of all
persons who purchased universal life insurance policies from Conseco Life
Insurance Company, formerly named Massachusetts General Life Insurance Company,
between January 1, 1984 and July 23, 1999 (excluding policies where death
benefits were paid). The claims involve the changing interest rate climate
between the 1980's and the comparatively lower rates in the 1990's, and the
resulting lower rates credited to universal life products. The plaintiffs
asserted claims of fraud, breach of the covenant of good faith and fair dealing,
negligence, negligent misrepresentation, unjust enrichment and related matters.
Conseco believes this lawsuit is without merit and is defending it vigorously.
The ultimate outcome of this lawsuit cannot be predicted with certainty.
In addition, 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, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
<PAGE> 20
Optional Item. Executive Officers of the Registrant.
<TABLE>
<CAPTION>
POSITIONS WITH CONSECO, PRINCIPAL
OFFICER NAME AND AGE(A) SINCE OCCUPATION AND BUSINESS EXPERIENCE(B)
- ----------------------- ----- -------------------------------------
<S> <C> <C>
Stephen C. Hilbert, 54............... 1979 Since 1979, Chairman of the Board and Chief Executive
Officer of Conseco; from 1988 to February 2000,
President of Conseco.
Thomas J. Kilian, 49................. 1998 Since February 2000, President of Conseco; from 1998
to February 2000, Executive Vice President and Chief
Operations Officer of Conseco; since 1996, President
of Conseco Services, LLC (responsible for insurance
operations, data processing, human resources and
administrative services for various Conseco
subsidiaries); from 1989 to 1996, Senior Vice
President of data processing for various Conseco
subsidiaries.
Ngaire E. Cuneo, 49.................. 1992 Since 1992, Executive Vice President, Corporate
Development and, since 1994, Director of Conseco.
Rollin M. Dick, 68................... 1986 Since 1986, Executive Vice President, Chief Financial
Officer and Director of Conseco.
John J. Sabl, 48..................... 1997 Since 1997, Executive Vice President, General Counsel
and Secretary of Conseco; from 1983 to 1997, Partner
in the law firm of Sidley & Austin.
James S. Adams, 40................... 1997 Since 1997, Senior Vice President, Chief Accounting
Officer and Treasurer of Conseco; from 1989 to
present, Senior Vice President and Treasurer of
various Conseco subsidiaries.
Edward M. Berube, 52................. 1999 Since 1999, Senior Vice President and
President-Insurance Group of Conseco; from 1997 to
1999, President and Chief Operating Officer of
American Life Insurance Company; from 1992 to 1997,
President of CIGNA Financial Advisors and Life
Brokerage.
Maxwell E. Bublitz, 44............... 1998 Since 1998, Senior Vice President, Investments of
Conseco; from 1994 to present, President and Chief
Executive Officer of Conseco Capital Management, Inc.,
a subsidiary of Conseco.
Bruce A. Crittenden, 48.............. 1999 Since 1999, Senior Vice President and
President-Finance Group of Conseco; from 1996 to
present, Executive Vice President, from 1997 to
present, President, Retail/Mortgage Services and Home
Improvement Divisions, from 1995 to 1996, Senior Vice
President of Conseco Finance Corp., a subsidiary of
Conseco; from 1972 to 1995, various officer positions
with Household International, Inc., including Managing
Director of Household Finance Corporation (1993-
1995), Senior Vice President (1991-1993) and Chief
Operating Officer of Household Retail Services, Inc.
(1988-1991).
</TABLE>
- -------------------------
(a) The executive officers serve as such at the discretion of the Board of
Directors and are elected annually.
(b) Business experience is given for at least the last five years.
20
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been listed for
trading on the New York Stock Exchange (the "NYSE") since 1986. The following
table sets forth the quarterly dividends paid per share and the ranges of high
and low sales prices per share on the NYSE for the last two fiscal years, based
upon information supplied by the NYSE.
<TABLE>
<CAPTION>
MARKET PRICE
------------------ DIVIDEND
PERIOD HIGH LOW PAID
- ------ ---- --- --------
<S> <C> <C> <C>
1998:
First Quarter............................................. $57 7/8 $38 1/2 $.1250
Second Quarter............................................ 58 1/8 43 3/8 .1250
Third Quarter............................................. 51 3/4 26 5/8 .1250
Fourth Quarter............................................ 38 1/4 22 .1400
1999:
First Quarter............................................. $37 13/16 $26 13/16 $.1400
Second Quarter............................................ 35 5/16 28 .1400
Third Quarter............................................. 31 15/16 19 .1400
Fourth Quarter............................................ 24 3/4 16 9/16 .1500
</TABLE>
As of March 10, 2000, there were approximately 140,000 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
Cash dividends are paid quarterly at an amount determined by our Board of
Directors. As part of our plans to strengthen our capital structure, Conseco
reduced the cash dividend on its common stock to a quarterly rate of 5 cents per
share, beginning with the dividend paid in April of 2000.
Our general policy is to retain most of our earnings. Retained earnings
have been used: (i) to finance the growth and development of the Company's
business through acquisitions or otherwise; (ii) to pay preferred stock
dividends; (iii) to pay distributions on the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts; (iv) to repurchase common
stock on those occasions when we have determined that our shares were
undervalued in the market and that the use of funds for stock repurchases would
not interfere with other cash needs; and (v) to pay dividends on common stock.
We have paid all cumulative dividends on our preferred stock and
distributions on our Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts when due. We are prohibited from paying common
stock dividends if such payments are not current. Certain Conseco financing
agreements require the Company to maintain financial ratios which could also
limit our ability to pay dividends.
Our ability to pay dividends depends primarily on the receipt of cash
dividends and other cash payments from our finance and life insurance company
subsidiaries. Our life insurance companies are organized under state laws and
subject to regulation by state insurance departments. These laws and regulations
limit the ability of insurance subsidiaries to make cash dividends, loans or
advances to a holding company such as Conseco. However, these laws generally
permit the payment out of the subsidiary's earned surplus, without prior
approval, of annual dividends which in the aggregate do not exceed the greater
of (or in a few states, the lesser of): (i) the subsidiary's prior year net gain
from operations; or (ii) 10 percent of surplus attributable to policyholders at
the prior year-end, both computed on the statutory basis of accounting
prescribed for insurance companies. On March 31, 2000, we announced that we plan
to explore the sale of our finance subsidiary. Cash receipts available to pay
dividends will change if the planned sale is completed. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Liquidity of Conseco (parent company)."
21
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (A).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income......................... $ 4,040.5 $ 3,948.8 $ 3,410.8 $ 1,654.2 $ 1,465.0
Gain on sale of finance receivables(b).......... 550.6 745.0 779.0 400.6 443.3
Net investment income........................... 3,411.4 2,506.5 2,171.5 1,505.3 1,318.6
Net investment gains (losses) from the sale of
investments................................... (156.2) 208.2 266.5 60.8 204.1
Total revenues.................................. 8,335.7 7,760.2 6,872.2 3,789.8 3,561.2
Interest expense:
Corporate..................................... 169.6 165.4 109.4 108.1 119.4
Finance and investment borrowings............. 392.1 275.1 202.9 92.1 79.5
Total benefits and expenses..................... 7,184.8 6,714.5 5,386.5 2,974.0 2,738.5
Income before income taxes, minority interest
and extraordinary charge...................... 1,150.9 1,045.7 1,485.7 815.8 822.7
Extraordinary charge on extinguishment of debt,
net of tax.................................... -- 42.6 6.9 26.5 2.1
Net income(c)................................... 595.0 467.1 866.4 452.2 470.9
Preferred stock dividends....................... 1.5 7.8 21.9 27.4 18.4
Net income applicable to common stock........... 593.5 459.3 844.5 424.8 452.5
PER SHARE DATA(D)
Net income, basic............................... $ 1.83 $ 1.47 $ 2.72 $ 1.85 $ 2.19
Net income, diluted(c).......................... 1.79 1.40 2.52 1.69 2.03
Dividends declared per common share............. .580 .530 .313 .083 .046
Book value per common share outstanding......... 15.50 16.37 16.45 13.47 8.52
Shares outstanding at year-end.................. 327.7 315.8 310.0 293.4 205.2
Weighted average shares outstanding for diluted
earnings...................................... 332.9 332.7 338.7 267.7 232.3
BALANCE SHEET DATA -- PERIOD END
Total assets.................................... $52,185.9 $43,599.9 $40,679.8 $28,724.0 $19,517.7
Notes payable and commercial paper:
Corporate..................................... 2,481.8 2,932.2 2,354.9 1,094.9 1,456.1
Finance....................................... 4,682.5 2,389.3 1,863.0 762.5 383.6
Related to securitized finance receivables
structured as collateralized borrowings..... 4,641.8 -- -- -- --
Total liabilities............................... 43.990.6 36,229.4 34,082.0 23,810.2 17,082.7
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts... 2,639.1 2,096.9 1,383.9 600.0 --
Other equity interests in subsidiaries........ -- -- -- 97.0 403.3
Shareholders' equity............................ 5,556.2 5,273.6 5,213.9 4,216.8 2,031.7
OTHER FINANCIAL DATA(D)(E)
Premium and asset accumulation product
collections(f)................................ $ 6,986.0 $ 6,051.3 $ 5,075.6 $ 3,280.2 $ 3,106.5
Operating earnings(g)........................... 1,068.0 1,046.3 991.8 467.5 381.8
Managed finance receivables..................... 45,791.4 37,199.8 27,957.1 20,072.7 13,887.6
Total managed assets (at fair value)(h)......... 98,561.8 87,247.4 70,259.8 59,084.8 42,711.4
Shareholders' equity, excluding accumulated
other comprehensive income (loss)............. 6,327.8 5,302.0 5,013.3 4,180.2 1,919.0
Book value per common share outstanding,
excluding accumulated other comprehensive
income (loss)................................. 17.85 16.46 15.80 13.34 7.97
Delinquencies greater than 60 days as a
percentage of managed finance receivables..... 1.42% 1.19% 1.08% 1.08% .93%
Net credit losses as a percentage of average
managed finance receivables................... 1.31% 1.03% 1.05% .74% .56%
</TABLE>
- -------------------------
(a) Comparison of selected supplemental consolidated financial data in the table
above is significantly affected by the following business combinations
accounted for as purchases: Washington National Corporation (effective
December 1, 1997); Colonial Penn Life Insurance Company and Providential
Life Insurance Company (September 30, 1997); Pioneer Financial Services,
Inc. (April 1, 1997); Capitol
22
<PAGE> 23
American Financial Corporation (January 1, 1997); Transport Holdings Inc.
(December 31, 1996); American Travellers Corporation (December 31, 1996); FINOVA
Acquisition I, Inc. (December 1, 1996); and Life Partners Group, Inc. (July 1,
1996). All financial data have been restated to give retroactive effect to
the merger with Conseco Finance accounted for as a pooling of interests.
(b) On September 8, 1999, we announced that we would no longer structure the
securitizations of the loans we originate in a manner that results in
gain-on-sale revenues. For more information on this change, see
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Finance Segment -- General."
(c) Net income of $595.0 million for the year ended December 31, 1999, or $1.79
per diluted share, included an impairment charge of $349.2 million (net of
taxes), or $1.05 per share, to write down the carrying value of Conseco
Finance's interest-only securities and servicing rights. Net income of
$467.1 million for the year ended December 31, 1998, or $1.40 per diluted
share, included merger-related and impairment charges totaling $503.8
million (net of income taxes), or $1.52 per share. Such amounts were
comprised of (i) $148.0 million of merger-related costs; (ii) $549.4 million
to write down the carrying value of Conseco Finance's interest-only
securities and servicing rights; and (iii) income taxes of $193.6 million.
(d) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on February 11, 1997 and April 1, 1996.
(e) Amounts under this heading are included to assist the reader in analyzing
the Company's financial position and results of operations. Such amounts are
not intended to, and do not, represent insurance policy income, net income,
shareholders' equity or book value per share prepared in accordance with
generally accepted accounting principles ("GAAP").
(f) Includes premiums received from universal life products and products without
mortality or morbidity risk. Such premiums are not reported as revenues
under GAAP and were $3,023.3 million in 1999; $2,585.7 million in 1998;
$2,099.4 million in 1997; $1,881.3 million in 1996; and $1,757.5 million in
1995. Also includes deposits in mutual funds totaling $479.3 million in
1999; $87.1 million in 1998; and $19.9 million in 1997.
(g) Represents income before extraordinary charge and net investment gains
(losses) of our insurance segment (less that portion of amortization of cost
of policies purchased and cost of policies produced and income taxes
relating to such gains (losses)). In 1995, operating earnings also excluded
income of $87.1 million (net of income taxes) primarily arising from the
release of deferred income taxes previously accrued on income related to two
affiliates (such deferred tax was no longer required when Conseco reached 80
percent ownership of these companies) and the sale of Conseco's investment
in Eagle Credit (a finance subsidiary of Harley Davidson). In 1996,
operating earnings also excluded income of $17.4 million (net of income
taxes) primarily arising from the sale of Conseco's investment in Noble
Broadcast Group, Inc. Operating earnings in 1997 also excluded: (i) an
impairment loss in the finance segment of $117.8 million (net of income
taxes); (ii) a charge of $40.5 million (net of income taxes) related to
premium deficiencies on our Medicare supplement business in the State of
Massachusetts; and (iii) a charge of $4.3 million (net of income taxes)
related to the death of an executive officer. Operating earnings in 1998
exclude the merger-related and impairment charges of $503.8 million (net of
income taxes) described in note (c) above. Operating earnings in 1999
exclude: (i) the impairment charge of $349.2 million (net of income taxes)
described in note (c) above; and (ii) the provision for losses on loan
guarantees of $11.9 million (net of taxes).
(h) Represents: (i) our assets excluding finance receivables, interest-only
securities and servicing assets, of $41.4 billion, $38.9 billion, $37.2
billion, $26.4 billion and $17.9 billion at December 31, 1999, 1998, 1997,
1996 and 1995, respectively; (ii) the total fixed and revolving credit
receivables that Conseco Finance manages, including receivables on its
balance sheet and receivables applicable to the holders of asset-backed
securities sold by Conseco Finance of $45.8 billion, $37.2 billion, $28.0
billion, $20.1 billion and $13.9 billion at December 31, 1999, 1998, 1997,
1996 and 1995, respectively; and (iii) the total market value of the
investment portfolios managed by CCM, excluding assets of Conseco's
subsidiaries, of $11.4 billion, $11.2 billion, $5.1 billion, $12.6 billion
and $10.9 billion at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In this section, we review the consolidated financial condition of Conseco
at December 31, 1999 and 1998, the consolidated results of operations for the
three years ended December 31, 1999, and where appropriate, factors that may
affect future financial performance. We have prepared all financial information
to give retroactive effect to the merger with Conseco Finance (the "Conseco
Finance Merger") accounted for as a pooling of interests. Please read this
discussion in conjunction with the accompanying consolidated financial
statements, notes and selected consolidated financial data.
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance and are hiring Lehman Brothers Inc. to assist in the planned sale. If
the planned sale is completed, the Company will no longer have finance
operations.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by Conseco with the Securities and
Exchange Commission, press releases, presentations by Conseco or its management
or oral statements) relative to markets for Conseco's products and trends in
Conseco's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"should," "could," "goal," "target," "on track," "comfortable with," 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, stock and credit market performance and health care inflation,
which may affect (among other things) Conseco's ability to sell its products,
its ability to make loans and access capital resources and the costs associated
therewith, the market value of Conseco's investments, the lapse rate and
profitability of policies, and the level of defaults and prepayments of loans
made by Conseco; (ii) Conseco's ability to achieve anticipated synergies and
levels of operational efficiencies; (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) performance of our
investments; (vi) changes in the Federal income tax laws and regulations which
may affect the relative tax advantages of some of Conseco's products; (vii)
increasing competition in the sale of insurance and annuities and in the finance
business; (viii) 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 products, and health care regulation affecting health insurance
products; (ix) the outcome of the contemplated sale process relating to Conseco
Finance Corp.; and (x) the risk factors or uncertainties listed from time to
time in Conseco's filings with the Securities and Exchange Commission.
CONSOLIDATED RESULTS AND ANALYSIS
Net income of $595.0 million in 1999, or $1.79 per diluted share, included:
(i) the impairment charge (net of taxes) of $349.2 million, or $1.05 per share,
to reduce the value of interest-only securities and servicing rights; and (ii)
net investment losses (net of related costs, amortization and taxes) of $111.9
million, or 34 cents per share.
Net income of $467.1 million in 1998, or $1.40 per diluted share, included:
(i) net investment losses (net of related costs, amortization and taxes) of
$32.8 million, or 10 cents per share; (ii) an extraordinary charge (net of
taxes) of $42.6 million, or 13 cents per share, related to early retirement of
debt; (iii) the impairment charge (net of taxes) of $355.8 million, or $1.08 per
share, to reduce the value of interest-only securities and servicing rights; and
(iv) a merger-related charge (net of taxes) of $148.0 million, or $.44 per
share, related primarily to costs incurred in conjunction with the Conseco
Finance Merger.
Net income of $866.4 million in 1997, or $2.52 per diluted share, included:
(i) net investment gains (net of related costs, amortization and taxes) of $44.1
million, or 13 cents per share; (ii) an extraordinary charge of $6.9 million, or
2 cents per share, related to early retirement of debt; (iii) a charge of 4
cents per
24
<PAGE> 25
share related to the induced conversion of preferred stock (treated as a
preferred stock dividend); (iv) an impairment loss totaling $117.8 million or 35
cents per share; (v) charges of $40.5 million, or 12 cents per share, related to
premium deficiencies on our Medicare supplement business in the state of
Massachusetts; and (vi) charges of $4.3 million, or 1 cent per share, related to
the death of an executive officer. The impairment loss represents a charge to
reduce the value of interest-only securities and servicing rights generally due
to adverse prepayments.
Total revenues included net investment losses of $156.2 million in 1999,
and net investment gains of $208.2 million and $266.5 million in 1998 and 1997,
respectively. Excluding net investment gains (losses), total revenues were $8.5
billion in 1999, up 12 percent over 1998. Total revenues, excluding net
investment gains, were up 14 percent in 1998 over 1997. Increases in total
revenues in all three years reflect the impact and timing of acquisitions, as
well as growth in both segments.
We evaluate performance and base management's incentives on operating
earnings which is defined as income before extraordinary charge, net investment
gains (losses) of our life insurance and corporate segments (less that portion
of amortization of cost of policies purchased and cost of policies produced and
income taxes relating to such gains (losses)), and unusual or infrequent items
(net of income taxes). Operating earnings are determined by adjusting GAAP net
income for the above mentioned items. While these items may be significant
components in understanding and assessing our consolidated financial
performance, we believe that the presentation of operating earnings enhances the
understanding of our results of operations by highlighting net income
attributable to the normal, recurring operations of the business and by
excluding events that materially distort trends in net income. However,
operating earnings are not a substitute for net income determined in accordance
with GAAP.
RESULTS OF OPERATIONS BY SEGMENT FOR THE THREE YEARS ENDED DECEMBER 31,
1999:
The following tables and narratives summarize our operating results by
business segment.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Operating earnings:
Operating income of segments before income taxes and
minority interest:
Insurance and fee-based operations (see page 26)..... $1,513.6 $1,367.8 $1,116.3
Finance operations (see page 30)..................... 588.3 584.0 672.6
Corporate interest and other expenses (see page
35)............................................... (205.7) (180.4) (126.8)
-------- -------- --------
Operating income before income taxes and minority
interest........................................ 1,896.2 1,771.4 1,662.1
Income tax related to operating income.................... 695.4 634.7 618.0
-------- -------- --------
Operating income before minority interest......... 1,200.8 1,136.7 1,044.1
Minority interest in consolidated subsidiaries............ 132.8 90.4 52.3
-------- -------- --------
Operating earnings................................ 1,068.0 1,046.3 991.8
Nonoperating items:
Net investment gains (losses), net of tax and other
items.................................................. (111.9) (32.8) 44.1
Impairment charge, net of tax............................. (349.2) (355.8) (117.8)
Provision for loss........................................ (11.9) -- --
Merger-related charge, net of tax......................... -- (148.0) --
Charge related to premium deficiencies on Medicare
supplement business in the State of Massachusetts...... -- -- (40.5)
Charge related to the death of an executive officer....... -- -- (4.3)
-------- -------- --------
Income before extraordinary charge................ 595.0 509.7 873.3
Extraordinary charge, net of tax............................ -- 42.6 6.9
-------- -------- --------
Net income........................................ $ 595.0 $ 467.1 $ 866.4
======== ======== ========
</TABLE>
25
<PAGE> 26
INSURANCE AND FEE-BASED OPERATIONS:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Premiums and asset accumulation product collections:
Annuities........................................... $ 2,473.7 $ 1,999.1 $ 1,689.7
Supplemental health................................. 2,206.6 2,158.1 1,912.8
Life................................................ 970.7 928.8 709.2
Individual and group major medical.................. 855.7 878.2 744.0
Mutual funds........................................ 479.3 87.1 19.9
---------- ---------- ----------
Total premiums and asset accumulation
product collections....................... $ 6,986.0 $ 6,051.3 $ 5,075.6
========== ========== ==========
Average liabilities for insurance and asset
accumulation products:
Annuities:
Mortality based.................................. $ 600.3 $ 689.5 $ 617.4
Equity-linked.................................... 1,710.1 902.5 254.0
Deposit based.................................... 10,864.7 11,649.6 11,336.4
Separate accounts and investment trust
liabilities...................................... 1,717.4 913.7 461.1
Health.............................................. 4,761.2 4,452.0 3,626.5
Life:
Interest sensitive............................... 4,121.6 4,131.4 3,256.2
Non-interest sensitive........................... 2,799.9 2,762.9 2,284.7
---------- ---------- ----------
Total average liabilities for insurance and
asset accumulation products, net of
reinsurance ceded......................... $ 26,575.2 $ 25,501.6 $ 21,836.3
========== ========== ==========
Revenues:
Insurance policy income............................. $ 4,040.5 $ 3,948.8 $ 3,410.8
Net investment income:
General account invested assets.................. 2,012.6 1,972.1 1,729.4
Venture capital investments...................... 368.2 6.9 .8
Equity-indexed products based on S&P 500 Index... 142.3 103.9 39.4
Amortization of cost of S&P 500 Call Options..... (96.3) (52.0) (14.6)
Separate account assets.......................... 172.7 51.0 70.3
Fee revenue and other income........................ 117.9 91.3 65.8
---------- ---------- ----------
Total revenues(a)........................... 6,757.9 6,122.0 5,301.9
---------- ---------- ----------
Expenses:
Insurance policy benefits........................... 2,835.4 2,704.8 2,368.3
Amounts added to policyholder account balances:
Annuity products other than those listed below... 666.5 728.6 697.1
Equity-indexed products based on S&P 500 Index... 141.3 96.1 39.3
Separate account liabilities..................... 172.7 51.0 70.3
Amortization related to operations.................. 733.1 493.6 408.8
Interest expense on investment borrowings........... 57.9 65.3 42.0
Other operating costs and expenses.................. 637.4 614.8 559.8
---------- ---------- ----------
Total benefits and expenses (a)............. 5,244.3 4,754.2 4,185.6
---------- ---------- ----------
Operating income before income taxes,
minority interest and extraordinary
charge.................................... 1,513.6 1,367.8 1,116.3
Net investment gains (losses), including related costs
and amortization.................................... (172.1) (28.3) 85.3
Charge related to premium deficiencies on Medicare
supplement business in the State of Massachusetts... -- -- (62.4)
---------- ---------- ----------
Income before income taxes, minority
interest and extraordinary charge......... $ 1,341.5 $ 1,339.5 $ 1,139.2
========== ========== ==========
(continued)
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(continued from previous page)
Ratios:
Investment income, net of interest credited on
annuities and universal life products and interest
expense on investment borrowings, as a percentage
of average liabilities for insurance and asset
accumulation products excluding liabilities
related to separate accounts and investment trust
and reinsurance ceded............................. 6.04% 4.45% 4.35%
Operating costs and expenses (excluding amortization
of cost of policies produced and cost of policies
purchased) as a percentage of average liabilities
for insurance and asset accumulation products..... 2.80% 2.83% 2.95%
Health loss ratios:
All health lines:
Insurance policy benefits......................... $ 2,161.9 $ 2,020.5 $ 1,837.5
Loss ratio........................................ 70.62% 67.04% 68.29%
Medicare supplement:
Insurance policy benefits......................... $ 638.1 $ 604.2 $ 544.5
Loss ratio........................................ 68.95% 68.30% 69.13%
Long-term care:
Insurance policy benefits......................... $ 545.0 $ 477.1 $ 433.4
Loss ratio........................................ 71.98% 66.88% 63.56%
Specified disease:
Insurance policy benefits......................... $ 232.9 $ 212.7 $ 239.6
Loss ratio........................................ 62.03% 55.57% 61.64%
Major medical:
Insurance policy benefits......................... $ 659.4 $ 633.1 $ 579.6
Loss ratio........................................ 77.22% 72.52% 77.99%
Other:
Insurance policy benefits......................... $ 86.5 $ 93.4 $ 40.4
Loss ratio........................................ 65.58% 68.78% 60.11%
</TABLE>
- -------------------------
(a) Revenues exclude net investment gains (losses); benefits and expenses
exclude amortization related to realized gains.
General: Conseco's life insurance subsidiaries develop, market and
administer annuity, supplemental health, individual life insurance, individual
and group major medical and other insurance products. We distribute these
products through a career agency force, professional independent producers and
direct response marketing. The segment's 1998 results were affected by several
recent acquisitions, including: Pioneer Financial Services, Inc. (acquired April
1, 1997); Colonial Penn Life Insurance Company and Providential Life Insurance
Company (September 30, 1997); and Washington National Corporation (December 1,
1997). This segment also includes our venture capital investment activities.
Premiums and asset accumulation product collections in 1999 were $7.0
billion, up 15 percent over 1998. Premiums and deposits collected in 1998 were
$6.1 billion, up 19 percent over 1997. These increases were primarily due to
increased production and premium rate increases in 1999 and due to the recent
acquisitions and premium rate increases in 1998.
See "Premium and Asset Accumulation Product Collections" for further
analysis.
Average insurance liabilities for insurance and asset accumulation
products, net of reinsurance receivables, were $26.6 billion in 1999, up 4.2
percent over 1998, and $25.5 billion in 1998, up 17 percent over 1997.
27
<PAGE> 28
Insurance policy income is comprised of: (i) premiums earned on policies
which provide mortality or morbidity coverage; and (ii) fees and other charges
made against other policies. See "Premium and Asset Accumulation Product
Collections" for further analysis.
Net investment income on general account invested assets (which excludes
income on separate account assets related to variable annuities; the income,
cost and change in the fair value of S&P 500 Call Options related to
equity-indexed products; and the income related to venture capital investments)
increased by 2.1 percent, to $2,012.6 million, in 1999, and by 14 percent, to
$1,972.1 million, in 1998. The average balance of general account invested
assets increased by 2.2 percent in 1999 to $26.2 billion and by 17 percent in
1998 to $25.7 billion. The increase in invested assets in 1998 was primarily due
to the recent acquisitions. The yield on these assets was 7.7 percent in both
1999 and 1998 and 7.9 percent in 1997. The 1998 decrease reflects general
decreases in investment interest rates during the period.
Venture capital investment income includes the income earned on the
investments made by our venture capital subsidiary. This income will fluctuate
from period-to-period based on changes in estimated market values of our venture
capital investments. When these investments are publicly traded, fair value is
generally based upon market prices. When liquidity is limited because of thinly
traded securities, limited partnership structures, large block holdings,
restricted shares or other special circumstances, we adjust quoted market prices
to determine an estimate of the attainable fair values. During 1999, we invested
$53.2 million in a company in the wireless communication business. The market
values of many companies in this sector increased significantly in 1999. In the
fourth quarter of 1999, our investee sold shares of common stock to the public
in an initial public offering. As a result, an ascertainable market value was
established for our investment, which we adjusted to recognize liquidity
restrictions. In 1999, we recognized venture capital income of $354.8 million
related to this investment.
Net investment income related to equity-indexed products based on the S&P
500 Index is substantially offset by a corresponding charge to amounts added to
policyholder account balances for equity-indexed products. Such income and
related charge fluctuated based on the policyholder account balances subject to
this provision and the performance of the S&P 500 Index to which the returns on
such products are linked. During 1999, we recorded income from the S&P 500
Options of $142.3 million and added amounts to policyholders' account balances
of the equity-indexed products of $141.3 million.
Amortization of cost of S&P 500 Call Options represents the premiums paid
to purchase S&P 500 Call Options related to our equity-linked products. We
amortize these amounts over the terms of the options. Such amortization has
increased because of the increase in our equity-linked product business, changes
in the participation rate of such business in the S&P 500 Index, and the cost of
the options. Our equity-indexed products are designed in an effort to have the
investment income spread earned on the related insurance liabilities are
adequate to cover the cost of the S&P 500 Call Options and other costs related
to these policies.
Net investment income from 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 fluctuated in
relationship to total separate account assets and the return earned on such
assets.
Fee revenue and other income includes: (i) revenues we receive for managing
investments for other companies; and (ii) fees received for marketing insurance
products of other companies. This amount has increased over the last three years
as a result of growth in both of these businesses.
Insurance policy benefits increased in 1999 as a result of the factors
summarized in the explanations for loss ratio fluctuations related to specific
products which follows. In 1998, such benefits increased primarily as a result
of an increase in the amount of business in force.
The loss ratios for Medicare supplement products have been relatively
stable and within our expectations for the last three years. Governmental
regulations generally require us to attain and maintain a loss ratio, after
three years, of not less than 65 percent.
The loss ratios for long-term care products increased in 1999, reflecting
unfavorable claims experience, partially offset by the effects of the asset
accumulation phase of these products. The net cash flows from our
28
<PAGE> 29
long-term care products generally result in the accumulation of amounts in the
early policy years of a policy (accounted for as reserve increases) which will
be paid out as benefits in later policy years (accounted for as reserve
decreases). Accordingly, during the asset accumulation phase of these policies,
the loss ratio will increase, but the increase in the change in reserve will be
partially offset by investment income earned on the assets which have
accumulated. The increase in the loss ratio in 1998 also reflects the different
characteristics of long-term care policies sold by companies acquired in 1997.
In order to improve the profitability of the long-term care product line, we are
currently selling products which are expected to be more profitable and we have
continued to apply for appropriate rate increases on older blocks of business.
The 1999 loss ratio for specified-disease products was within our
expectations. The 1998 ratio benefited from favorable claim developments which
were not expected to continue.
The 1999 loss ratio for major medical policies reflects unfavorable claims
experience. During the fourth quarter of 1999, reported claims increased. We
believe other companies in these lines experienced similar unfavorable trends.
The 1998 loss ratio for major medical products reflects premium rate increases
and favorable claim developments. We have been focusing on the individual major
medical product lines for the past year while decreasing our group blocks of
business. Since individual products have better profitability than group
products, this mix change should support our efforts to improve profitability.
In addition, we are also raising rates on certain products and exiting certain
product lines and states.
The loss ratios on our other products will fluctuate more than other lines
due to the smaller size of these blocks of business. Such ratios have generally
been within our expectations.
Amounts added to policyholder account balances for annuity products
decreased by 8.5 percent, to $666.5 million, in 1999, and increased by 4.5
percent, to $728.6 million, in 1998. The decrease in 1999 was primarily due to a
smaller block of this type of annuity business in force, on the average,
compared to 1998, while the increase in 1998 was primarily due to a larger block
of business in force compared to 1997. The weighted average crediting rates for
these annuity liabilities was 4.5 percent, 4.6 percent and 4.8 percent during
1999, 1998 and 1997, respectively.
Amounts added to equity indexed products and separate account liabilities
correspond to the related investment income accounts described above.
Amortization related to operations includes amortization of: (i) the cost
of policies produced; (ii) the cost of policies purchased; and (iii) goodwill.
We are required to amortize the cost of policies purchased and produced in
relationship to the profits earned on universal life, annuity and investment
products. The venture capital income recognized in 1999 resulted from
investments backing these products. Accordingly, additional amortization expense
was recognized because of the income recognized. Balances subject to
amortization increased as a result of recent acquisitions and new policies sold.
Interest expense on investment borrowings decreased along with our
investment borrowing activities. Average investment borrowings were $1,081.1
million during 1999, compared to $1,092.4 million during 1998. The weighted
average interest rate on such borrowings was 5.4 percent and 6.0 percent during
1999 and 1998, respectively.
Other operating costs and expenses increased in 1999 primarily as a result
of our increased business and marketing initiatives. Such expenses increased in
1998 primarily because of recent acquisitions.
Net investment gains (losses), net of related costs and amortization
fluctuate from period to period. We sell securities and realize net investment
gains (losses) in an effort to maximize total return on our portfolio through
active investment management. Such securities are sold in response to changes in
the investment environment which created opportunities to enhance the total
return of the investment portfolio without adversely affecting the quality of
the portfolio or the matching of expected maturities of assets and liabilities.
Selling securities at a gain, especially when those gains result from reductions
in general levels of interest rates, 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 lower yields on future net income: (i) we recognize additional
amortization of cost of policies purchased and
29
<PAGE> 30
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 and realizing gains, our amortization of the cost of policies
purchased and the cost of policies produced increased by $15.9 million, $236.5
million and $181.2 million in 1999, 1998 and 1997, respectively. Net realized
gains (losses) also include losses related to credit losses and other investment
impairments. These losses do not affect the amount of additional amortization we
recognize.
FINANCE OPERATIONS:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loan originations:
Manufactured housing..................................... $ 6,607.3 $ 6,077.5 $ 5,479.3
Mortgage services........................................ 6,745.8 5,215.8 3,476.3
Consumer/credit card..................................... 3,241.3 2,727.9 1,511.0
Commercial............................................... 8,514.6 7,400.8 5,181.2
--------- --------- ---------
Total............................................ $25,109.0 $21,422.0 $15,647.8
========= ========= =========
Securitizations of receivables recorded as sales:
Manufactured housing..................................... $ 5,598.2 $ 5,556.4 $ 5,369.8
Home equity/home improvement............................. 3,748.4 5,038.5 3,031.5
Consumer/equipment....................................... 600.0 2,022.4 1,615.5
Leases................................................... -- 379.9 508.0
Commercial and retail revolving credit................... 117.7 741.0 224.4
Retained bonds........................................... (405.2) (364.6) --
--------- --------- ---------
Total............................................ $ 9,659.1 $13,373.6 $10,749.2
========= ========= =========
Managed receivables (average):
Manufactured housing..................................... $22,899.2 $19,478.2 $16,279.3
Mortgage services........................................ 10,237.5 6,425.3 3,444.3
Consumer/credit card..................................... 3,324.1 2,388.6 1,368.9
Commercial............................................... 5,303.0 4,082.2 2,642.1
--------- --------- ---------
Total............................................ $41,763.8 $32,374.3 $23,734.6
========= ========= =========
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Net investment income:
Finance receivables and other......................... $ 647.1 $ 295.5 $ 220.4
Interest-only securities.............................. 185.1 132.9 125.8
Gain on sale of finance receivables...................... 550.6 745.0 779.0
Fee revenue and other income............................. 372.7 260.4 178.6
--------- --------- ---------
Total revenues................................... 1,755.5 1,433.8 1,303.8
--------- --------- ---------
Expenses:
Provision for losses..................................... 128.7 44.2 25.8
Finance interest expense................................. 341.3 213.7 160.9
Other operating costs and expenses....................... 697.2 591.9 444.5
--------- --------- ---------
Total expenses................................... 1,167.2 849.8 631.2
--------- --------- ---------
Operating income before impairment and
merger-related charges, income taxes and
extraordinary charge........................... 588.3 584.0 672.6
Impairment charges......................................... 554.3 549.4 190.0
Merger-related charges..................................... -- 148.0 --
--------- --------- ---------
Income (loss) before income taxes and
extraordinary charge........................... $ 34.0 $ (113.4) $ 482.6
========= ========= =========
</TABLE>
General: Conseco's finance subsidiaries provide financing for manufactured
housing, home equity, home improvements, consumer products and equipment, and
provide consumer and commercial revolving credit. Finance products include both
fixed-term and revolving loans and leases. Conseco also markets physical damage
and term mortgage life insurance and other credit protection relating to the
loans it services.
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance. If the planned sale is completed, the Company will no longer have
finance operations.
On September 8, 1999, we announced that we would no longer structure our
securitizations in a manner that results in recording a sale of the loans.
Instead, new securitization transactions after that date are being structured to
include provisions that entitle the Company to repurchase assets transferred to
the special purpose entity when the aggregate unpaid principal balance reaches a
specified level. Until these assets are repurchased, however, the assets are the
property of the special purpose entity and are not available to satisfy the
claims of creditors of the Company. Pursuant to Financial Accounting Standards
Board Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities", such securitization transactions are
accounted for as secured borrowings whereby the loans and securitization debt
remain on the balance sheet, rather than as sales.
The change to the structure of our new securitizations will have no effect
on the total profit we recognize over the life of each new loan, but it will
change the timing of profit recognition. Under the portfolio method (the
accounting method required for our securitizations which are structured as
secured borrowings), we will recognize: (i) earnings over the life of new loans
as interest revenues are generated; (ii) interest expense on the securities
which are sold to investors in the loan securitization trusts; and (iii)
provisions for losses. As a result, our reported earnings from new loans
securitized in transactions accounted for under the portfolio method will be
lower in the period in which the loans are securitized (compared to our
historical method) and higher in later periods, as interest spread is earned on
the loans.
Loan originations in 1999 were $25.1 billion, up 17 percent over 1998. Loan
originations in 1998 were $21.4 billion, up 37 percent over 1997.
Manufactured housing loan originations increased by $529.8 million, or 9
percent, during 1999 and by $598.2 million, or 11 percent, during 1998. The
increase in 1999 is primarily due to an increase in the number
31
<PAGE> 32
of contracts written. The increase in 1998 is primarily due to an increase in
the average size of the contracts written.
Mortgage services loan originations increased by $1.5 billion, or 29
percent, during 1999 and by $1.7 billion, or 50 percent, during 1998. The
increase reflects growth in both home equity and home improvement business. We
have continued to expand these origination networks.
Consumer/credit card loan originations increased by $513.4 million, or 19
percent, during 1999 and by $1.2 billion, or 81 percent, during 1998. The
increase is primarily the result of our successful marketing efforts, including
a number of new private label credit card relationships with large retailers.
Commercial loan originations increased by $1.1 billion, or 15 percent,
during 1999 and increased by $2.2 billion, or 43 percent, during 1998. The
increase primarily reflects higher production in floorplan financing.
Securitizations of receivables recorded as sales relate to the
securitizations structured prior to our September 8, 1999, announcement. The
total finance receivables sold in 1999 decreased by 28 percent from 1998
reflecting the change in securitization structure described above.
Managed receivables include finance receivables transferred to special
purpose entities in securitization transactions (whether accounted for as sales
or on the portfolio method) and finance receivables recorded on our balance
sheet that have not been securitized. Average managed receivables increased to
$41.8 billion in 1999, up 29 percent over 1998, and to $32.4 billion in 1998, up
36 percent over 1997.
Net investment income on finance receivables and other consists of: (i)
interest earned on finance receivables; and (ii) interest income on short-term
and other investments. Such income increased by 119 percent, to $647.1 million,
in 1999 and by 34 percent, to $295.5 million, in 1998, consistent with the
increases in average on-balance sheet finance receivables. The weighted average
yields earned on finance receivables and other investments were 12.2 percent,
10.8 percent and 12.5 percent during 1999, 1998 and 1997, respectively. As a
result of the change in the structure of our securitizations, future interest
earned on finance receivables should increase as our average on-balance sheet
finance receivables increase.
Net investment income on interest-only securities is the accretion
recognized on the interest-only securities we retain after we sell finance
receivables. Such income increased by 39 percent, to $185.1 million, in 1999 and
by 5.6 percent, to $132.9 million, in 1998. The increase is consistent with the
change in the average balance of interest-only securities and the June 30, 1998,
increase in the discount rate assumption we use to value our interest-only
securities. The weighted average yields earned on interest-only securities were
13.5 percent, 13.2 percent and 11.2 percent during 1999, 1998 and 1997,
respectively. As a result of the change in the structure of our securitizations,
we will account for future transactions as secured borrowings and we will not
recognize gain-on-sale revenue or additions to interest-only securities.
Accordingly, future investment income accreted on the interest-only security
will decrease, as cash remittances from the prior gain-on-sale securitizations
reduce the interest-only security balances. The balance of the interest-only
securities was reduced further in 1999 by the portion of the impairment charge
related to the interest-only security ($546.8 million) which will cause a
reduction in interest income accreted to this security in future years. We
regularly analyze future expected cash flows from this security to determine the
appropriate interest accretion rate. If we determine that this rate should be
lower, investment income accreted on the interest-only security will decrease in
future periods.
Gain on sale of finance receivables is the difference between the proceeds
from the sale of receivables (net of related sale costs) and the allocated
carrying amount of the receivables sold, including deferred origination fees and
costs. The amount relates to the securitizations structured as sales prior to
our September 8, 1999, announcement. In those securitizations, we determined
such carrying amount by allocating the total carrying amount of the finance
receivables between the portion we sell and the interests we retain (generally,
securities classified as fixed maturities, interest-only securities and
servicing rights), based on each portion's relative fair value at the time of
sale. Assumptions used in calculating the estimated fair value of such retained
interests are subject to volatility that could materially affect operating
results. Prepayment rates may vary from expected rates as a result of
competition, obligor mobility, general and
32
<PAGE> 33
regional economic conditions and changes in interest rates. In addition, actual
losses incurred as a result of loan defaults may vary from projected
performance.
Our gain on sale of finance receivables decreased by 26 percent, to $550.6
million, in 1999 and decreased by 4.4 percent, to $745.0 million, in 1998. The
decrease in 1999 primarily reflects our decision to no longer structure our
securitizations as sales and to a lesser extent, the lower ratio of gain on sale
to loans sold. Our new securitizations are being structured as secured
borrowings and no gain on sale is recognized. The gain recognized for our
previous securitizations fluctuated when changes occurred in: (i) the amount of
loans sold; (ii) market conditions (such as the market interest rates available
on securities sold in these securitizations); (iii) the amount and type of
interest we retained in the receivables sold; and (iv) assumptions used to
calculate the gain. The gain recognized in the first quarter of 1998 was reduced
by $47 million for an interest-only security valuation adjustment. In response
to higher prepayment rates and higher market yields on publicly traded
securities similar to our interest-only securities, we increased the assumed
prepayment and discount rates used to calculate the gain on sale of finance
receivables for sales completed after June 30, 1998. During 1999, the general
level of interest rates increased, causing us to incur higher interest costs on
securitizations completed at that time. Accordingly, the amount of gain (before
valuation adjustments) as a percentage of closed-end loans sold decreased to 5.4
percent in 1999 from 6.3 percent in 1998 and 7.4 percent in 1997.
In recent periods, the Company has emphasized the inclusion of points and
origination fees in finance receivables originated. Points and origination fees
collected upon the securitization of finance receivables increased to $390.0
million (or 71 percent of the gain on sale recognized) in 1999 compared to
$298.3 million (or 40 percent of the gain on sale recognized) in 1998; and
$179.8 million (or 23 percent of the gain on sale recognized) in 1997.
In recent periods, conditions in the credit markets have resulted in
less-attractive pricing of certain lower-rated securities in our securitization
structure. As a result, we have chosen to hold rather than sell some of the
securities in the securitization trusts, particularly securities having
corporate guarantee provisions. Prior to our September 8, 1999, announcement,
the securities that we hold were treated as retained interests in the
securitization trusts. We recognized no gain on the portion of the assets
related to such securities, but we expect to recognize greater interest income,
net of related interest expense, over the term we hold them. At December 31,
1999 and 1998, we held $694.3 million and $340.8 million, respectively, of such
securities which are classified as actively managed fixed maturities.
Fee revenue and other income includes servicing income, commissions earned
on insurance policies written in conjunction with financing transactions, and
other income from late fees. Such income increased by 43 percent, to $372.7
million, in 1999 and by 46 percent, to $260.4 million, in 1998. Our servicing
portfolio (on which we earn servicing income) and our net written insurance
premiums both grew along with managed receivables. As a result of the change in
the structure of our future securitizations announced on September 8, 1999, we
no longer record an asset for servicing rights at the time of our
securitizations, nor do we record servicing fee revenue; instead, the entire
amount of interest income is recorded as investment income. Accordingly, the
amount of servicing income will decline in subsequent periods.
Provision for losses related to finance operations increased by 191
percent, to $128.7 million, in 1999 and by 71 percent, to $44.2 million, in
1998. The increase is principally due to the increase of loans held on our
balance sheet. Under the portfolio method (which is used for securitizations
structured as secured borrowings), we recognize the credit losses on the loans
on our balance sheet as the losses are incurred. For loans previously recorded
as sales, the anticipated discounted credit losses are reflected through a
reduction in the gain-on-sale revenue recorded at the time of securitization.
Finance interest expense increased by 60 percent, to $341.3 million, in
1999 and by 33 percent, to $213.7 million, in 1998. Our borrowings grew in order
to fund the increase in finance receivables. These increases were offset
somewhat by a decrease in our average borrowing rate, which was 6.4 percent, 7.2
percent and 8.1 percent during 1999, 1998 and 1997, respectively, and a
reduction in borrowings attributable to the proceeds of the $1.1 billion capital
contribution from Conseco in 1998.
33
<PAGE> 34
Under the portfolio method, we recognize interest expense on the securities
issued to investors in the securitization trusts. Since these securities
typically have higher interest rates than our other debt, we expect our average
borrowing rate to increase in the future.
Other operating costs and expenses include the costs associated with
servicing our managed receivables, and non-deferrable costs related to
originating new loans. Such expense increased by 18 percent, to $697.2 million,
in 1999 and by 33 percent, to $591.9 million, in 1998, reflecting: (i) the
growth in our servicing portfolio; and (ii) the growth of our loan origination
offices and infrastructure.
Impairment charges represent reductions in the value of interest-only
securities and servicing rights recognized as a loss in the statement of
operations. We carry interest-only securities at estimated fair value, which is
determined by discounting the projected cash flows over the expected life of the
receivables sold using current prepayment, default, loss and interest rate
assumptions. Estimates for prepayments, defaults and losses for manufactured
housing loans are determined based on a macroeconomic model developed by the
Company with the assistance of outside experts. We record any unrealized gain or
loss determined to be temporary, net of tax, as a component of 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 current assumptions is less than the book value of the interest-only
securities. When declines in value considered to be other than temporary occur,
we reduce the amortized cost to estimated fair value and recognize a loss in the
statement of operations. The assumptions used to determine new values are based
on our internal evaluations and consultation with external advisors having
significant experience in valuing these securities.
During 1999 and early 2000, the Company reevaluated its interest-only
securities and servicing rights, including the underlying assumptions, in light
of loss experience exceeding previous expectations. The principal change in the
revised assumptions resulting from this process was an increase in expected
future credit losses, relating primarily to reduced assumptions as to future
housing price inflation, recent loss experience and refinements to the
methodology of the model. The effect of this change was offset somewhat by a
revision to the estimation methodology to incorporate the value associated with
the cleanup call rights held by the Company in securitizations. We recognized a
$554.3 million impairment charge ($349.2 million after tax) in 1999 to reduce
the book value of the interest-only securities and servicing rights.
During the second quarter of 1998, prepayments on securitized loan
contracts continued to exceed our expectations and we concluded that such
prepayments were likely to continue to be higher than expected in future periods
as well. As a result of these developments, we concluded that the value of the
interest-only securities and servicing rights had been impaired and we
determined a new value using current assumptions. In addition, during the second
quarter of 1998, the market yields of publicly traded securities similar to our
interest-only securities increased. 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 11.5 percent; and (iii) an increase in
anticipated default rates. We recognized a $549.4 million ($355.8 million after
tax) impairment charge in 1998 to reduce the carrying value of the interest-only
securities and servicing rights.
In 1997, we conducted a review of the systems, financial modeling and
assumptions used in the valuation of our interest-only securities. The review
was part of our ongoing process to ascertain the appropriateness of assumptions,
systems and methods of modeling to determine the valuation of our interest-only
securities. The nature and extent of the review procedures were influenced by
our experiencing higher manufactured housing loan prepayments in 1997. We
recognized a $190.0 million ($117.8 million after tax) impairment charge in 1997
to take into account the adverse prepayment experience in 1997 and our
expectations of future prepayments, the effect upon the interest-only securities
of partial prepayments (principal curtailments), and the impact that higher
prepayments have on the weighted average rate of projected future interest due
to investors.
Merger-related charges of $148.0 million were recognized in 1998 and
include: $45.0 million of transaction costs; $71.0 million of severance and
other employment related costs; and $32.0 million of other costs. Transaction
costs included expenses related to the Merger such as fees paid for investment
bankers, attorneys, accountants and printers. Severance and other employment
related costs included contractual
34
<PAGE> 35
severance and other benefits due to certain executives. Other costs included the
write-off of computer equipment and related software that will no longer be
used, losses for facilities to be vacated, increases to legal expense accruals,
and various other costs.
OTHER COMPONENTS OF INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY CHARGE:
Corporate interest and other expenses were $205.7 million in 1999, $180.4
million in 1998 and $126.8 million in 1997. Interest expense on corporate debt
included in that total was $169.6 million in 1999, $165.4 million in 1998 and
$109.4 million in 1997, fluctuating in relationship to the average debt
outstanding and the average interest rate thereon. The average debt outstanding
was $2.8 billion, $2.8 billion and $1.6 billion during 1999, 1998 and 1997,
respectively. The average interest rate on such debt was 6.15 percent, 6.01
percent and 6.94 percent during 1999, 1998 and 1997, respectively.
Provision for loss on loan guarantees represents the noncash provision we
established in connection with our guarantees of bank loans to approximately 170
directors, officers and key employees and our related loans for interest. The
funds from the bank loans were used by the participants to purchase
approximately 19.0 million shares of Conseco common stock. In 1999 we
established a provision of $18.9 million ($11.9 million after tax) in connection
with these guarantees and loans.
PREMIUM AND ASSET ACCUMULATION PRODUCT COLLECTIONS
In accordance with GAAP, insurance policy income as shown in our
consolidated statement of operations consists of premiums earned 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 as deposits to insurance liabilities. We recognize revenues for
these products over time in the form of investment income and surrender or other
charges.
35
<PAGE> 36
Total premiums and accumulation product collections:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Premiums collected by our insurance subsidiaries:
Annuities:
Equity-indexed (first-year)........................... $ 871.9 $ 783.2 $ 387.7
Equity-indexed (renewal).............................. 39.9 15.0 --
-------- -------- --------
Subtotal -- equity-indexed annuities................ 911.8 798.2 387.7
-------- -------- --------
Other fixed (first-year).............................. 896.4 804.3 1,023.4
Other fixed (renewal)................................. 62.1 64.0 93.4
-------- -------- --------
Subtotal -- other fixed annuities................... 958.5 868.3 1,116.8
-------- -------- --------
Variable (first-year)................................. 519.1 267.2 127.4
Variable (renewal).................................... 84.3 65.4 57.8
-------- -------- --------
Subtotal -- variable annuities...................... 603.4 332.6 185.2
-------- -------- --------
Total annuities.................................. 2,473.7 1,999.1 1,689.7
-------- -------- --------
Supplemental health:
Medicare supplement (first-year)...................... 106.8 106.6 101.8
Medicare supplement (renewal)......................... 808.8 810.1 694.4
-------- -------- --------
Subtotal -- Medicare supplement..................... 915.6 916.7 796.2
-------- -------- --------
Long-term care (first-year)........................... 127.1 122.6 143.3
Long-term care (renewal).............................. 666.4 605.8 520.4
-------- -------- --------
Subtotal -- long-term care.......................... 793.5 728.4 663.7
-------- -------- --------
Specified disease (first-year)........................ 39.0 41.5 44.9
Specified disease (renewal)........................... 337.3 350.8 338.7
-------- -------- --------
Subtotal -- specified disease....................... 376.3 392.3 383.6
-------- -------- --------
Other health (first-year)............................. 23.8 12.6 13.2
Other health (renewal)................................ 97.4 108.1 56.1
-------- -------- --------
Total -- other health............................ 121.2 120.7 69.3
-------- -------- --------
Total supplemental health........................ 2,206.6 2,158.1 1,912.8
-------- -------- --------
Life insurance:
First-year............................................ 211.5 154.0 150.0
Renewal............................................... 759.2 774.8 559.2
-------- -------- --------
Total life insurance............................. 970.7 928.8 709.2
-------- -------- --------
Individual and group major medical:
Individual (first-year)............................... 96.4 95.5 70.5
Individual (renewal).................................. 233.3 228.3 147.2
-------- -------- --------
Subtotal -- individual.............................. 329.7 323.8 217.7
-------- -------- --------
Group (first-year).................................... 53.0 48.0 63.6
Group (renewal)....................................... 473.0 506.4 462.7
-------- -------- --------
Subtotal -- group................................... 526.0 554.4 526.3
-------- -------- --------
Total major medical.............................. 855.7 878.2 744.0
-------- -------- --------
Mutual funds (all first year, excludes variable
annuities)............................................... 479.3 87.1 19.9
-------- -------- --------
Total first-year collections............................. 3,424.3 2,522.6 2,145.7
Total renewal collections................................ 3,561.7 3,528.7 2,929.9
-------- -------- --------
Total collections................................ $6,986.0 $6,051.3 $5,075.6
======== ======== ========
</TABLE>
36
<PAGE> 37
Annuities include equity-indexed annuities, other fixed annuities and
variable annuities sold through both career agents and professional independent
producers.
We introduced our first equity-indexed annuity product in 1996. The
accumulation value of these annuities is credited with interest at an annual
guaranteed minimum rate of 3 percent (or, including the effect of applicable
sales loads, a 1.7 percent compound average interest rate over the term of the
contracts). These annuities provide for potentially higher returns based on a
percentage of the change in the S&P500 Index during each year of their term. We
purchase S&P500 Call Options in an effort to hedge increases to policyholder
benefits resulting from increases in the S&P 500 Index. Total collected premiums
for this product increased by 14 percent, to $911.8 million, in 1999 and by 106
percent, to $798.2 million, in 1998.
Other fixed rate annuity products include single-premium deferred annuities
("SPDAs"), flexible-premium deferred annuities ("FPDAs") and single-premium
immediate annuities ("SPIAs"), which are credited with a declared rate. 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. SPDA and FPDA policies 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 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. Annuity
premiums on these products increased by 10 percent, to $958.5 million, in 1999
and decreased by 22 percent, to $868.3 million, in 1998. Fixed annuity
collections in 1999 included $208.8 million of premiums on reinsurance contracts
entered into during the year. We intend to seek other reinsurance opportunities
in the future, although the timing of such transactions is not predictable.
Variable annuities offer contract holders the ability to direct premiums
into specific investment portfolios; rates of return are based on the
performance of the portfolio. Such annuities have become increasingly popular
recently as a result of the desire of investors to invest in common stocks. In
1996, we began to offer more investment options for variable annuity deposits,
and we expanded our marketing efforts, resulting in increased collected
premiums. Our profits on variable annuities come from the fees charged to
contract holders. Variable annuity collected premiums increased by 81 percent,
to $603.4 million, in 1999 and by 80 percent, to $332.6 million, in 1998.
Supplemental health products include Medicare supplement, long-term care,
specified disease and other insurance products distributed through a career
agency force and professional independent producers. Our profits on supplemental
health policies depend on the overall level of sales, persistency of in-force
business, investment yields, claim experience and expense management.
Collected premiums on Medicare supplement policies decreased by .1 percent,
to $915.6 million, in 1999 and increased by 15 percent, to $916.7 million, in
1998. Sales of Medicare supplement policies have been affected by: (i) steps
taken to improve profitability by increasing premium rates and changing our
commission structure and underwriting criteria; (ii) increased competition from
alternative providers, including HMOs; and (iii) reduced production in
Massachusetts due to our decision to cease writing new business in that state
(as announced in the third quarter of 1997).
Premiums collected on long-term care policies increased by 8.9 percent, to
$793.5 million, in 1999 and by 9.7 percent, to $728.4 million, in 1998. The
increase reflects increases in premium rates as well as growth from both
recently acquired and previously owned companies.
Premiums collected on specified-disease products were $376.3 million,
$392.3 million and $383.6 million in 1999, 1998 and 1997, respectively. During
1999, we curtailed sales of these products in one state due to adverse
regulatory decisions, which accounts for most of the decrease.
Other health products include: (i) various health insurance products that
are not currently being actively marketed; and (ii) in 1999 and 1998, the
specialty health insurance products of a recently acquired company marketed to
educators. Premiums collected in 1999 were $121.2 million, up .4 percent over
1998. Premiums collected in 1998 were $120.7 million, up 74 percent over 1997.
Since we no longer actively market these products, we expect collected premiums
to decrease in future years. The in-force business continues to be profitable.
37
<PAGE> 38
Life products are sold through career agents, professional independent
producers and direct response distribution channels. Life premiums collected in
1999 were $970.7 million, up 4.5 percent over 1998. Life premiums collected in
1998 were $928.8 million, up 31 percent over 1997. Collections in 1999 included
$38.7 million of premiums on reinsurance contracts entered into during the year.
We intend to seek other reinsurance opportunities in the future, although the
timing of such transactions is not predictable. The 1998 increase reflects
premiums collected by recently acquired companies.
Individual and group major medical products include major medical health
insurance products sold to individuals and groups. Group premiums decreased by
5.1 percent, to $526.0 million, in 1999 and increased by 5.3 percent, to $554.4
million, in 1998. Individual health premiums collected in 1999 were comparable
to 1998 and increased in 1998 compared to 1997 as a result of our recent
acquisitions. Our efforts to secure rate increases and emphasize only profitable
major medical business restrict our ability to grow these premiums.
Mutual fund sales were very strong in 1999, reflecting our expanded
distribution and new marketing programs. We also believe that these sales have
been positively impacted by the recent investment performance of our funds.
PRO FORMA DATA ASSUMING PORTFOLIO LENDING
On September 8, 1999, we announced that we would no longer structure the
securitization of loans we originate in a manner that results in gain-on-sale
revenues. Our new securitizations are being structured as secured borrowings and
are accounted for using the portfolio method.
In this section, we present our estimate of our operating earnings (income
before extraordinary charge and net investment gains (losses) (less that portion
of amortization of cost of policies purchased and cost of policies produced and
income taxes relating to such gains (losses))) on a portfolio basis; that is, as
if we had accounted for the securitizations of our finance receivables as
financing transactions, rather than as sales, throughout the Company's history.
Accordingly, the pro forma data exclude gain on sale of finance receivables,
servicing revenues and interest income on interest-only securities. The pro
forma data do reflect, over the life of the loans, the spread between: (i) the
interest earned on the loans included in the securitization pools; and (ii) the
sum of the interest paid to the holders of the debt securities pursuant to the
securitizations and credit losses in the portfolio. The provision for credit
losses represents the amount which management believes is sufficient to maintain
the allowance for credit losses at a level that adequately provides for
potential losses. This section is intended to assist you in analyzing our
operating results. It is not intended to, and does not, represent the results of
the Company's operations prepared in accordance with GAAP.
38
<PAGE> 39
This presentation assumes that the Company had been a portfolio lender
since its inception. Although we intend to account for all future financings
that support our lending activities under the portfolio method, our actual
earnings will initially be substantially lower than the pro forma earnings
presented here since the portion of our managed portfolio accounted for under
the portfolio method will initially be small.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Margin on interest spread products:
Finance income........................................... $4,497.9 $3,430.8 $2,556.3
Investment income from insurance product investments..... 2,599.5 2,078.1 1,825.3
Provision for credit losses.............................. 602.0 380.6 281.9
Finance and investment borrowing interest expense........ 2,851.0 2,235.3 1,701.7
Amounts added to annuity and financial product account
balances.............................................. 980.5 875.7 806.7
-------- -------- --------
Net interest margin.............................. 2,663.9 2,017.3 1,591.3
-------- -------- --------
Margin on morbidity and mortality products:
Insurance policy income.................................. 3,935.7 3,849.0 3,332.7
Insurance policy benefits................................ 2,835.4 2,704.8 2,368.3
-------- -------- --------
Net mortality and morbidity...................... 1,100.3 1,144.2 964.4
-------- -------- --------
Other revenues:
Fee revenue and other.................................... 325.3 211.6 130.7
Policy surrender fees.................................... 104.8 99.8 78.1
-------- -------- --------
Total other revenues............................. 430.1 311.4 208.8
-------- -------- --------
Interest expense on corporate debt......................... 169.6 165.4 109.4
Amortization............................................... 733.1 496.5 408.8
Other operating costs and expenses......................... 1,295.4 1,042.2 888.3
-------- -------- --------
Total costs and expenses......................... 2,198.1 1,704.1 1,406.5
-------- -------- --------
Pro forma operating earnings before income taxes
and minority interest.......................... 1,996.2 1,768.8 1,358.0
Income tax expense......................................... 733.3 633.8 461.3
-------- -------- --------
Pro forma operating earnings before minority
interest....................................... 1,262.9 1,135.0 896.7
Minority interest.......................................... 132.8 90.4 52.3
-------- -------- --------
Pro forma operating earnings..................... $1,130.1 $1,044.6 $ 844.4
======== ======== ========
</TABLE>
INVESTMENTS
Our investment strategy is to: (i) maintain a predominately
investment-grade fixed income portfolio; (ii) provide adequate liquidity to meet
our cash obligations to policyholders and others; and (iii) maximize current
income and total investment return through active investment management.
Consistent with this strategy, investments in fixed maturity securities,
mortgage loans and policy loans made up 91 percent of our $26.4 billion
investment portfolio at December 31, 1999. The remainder of the invested assets
were interest-only securities, equity securities, venture capital investments
and other invested assets.
Insurance statutes regulate the type of investments that our insurance
subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In light of these statutes and regulations
and our business and investment strategy, we generally seek to invest in United
States government and government-agency securities and corporate securities
rated investment grade by established nationally recognized rating organizations
or in securities of comparable investment quality, if not rated.
39
<PAGE> 40
The following table summarizes investment yields earned over the past three
years on the general account invested assets of our insurance subsidiaries.
General account investments exclude venture capital investments, separate
account assets, the value of S&P 500 call options and the investments held by
our finance segment.
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Weighted average general account invested assets as
defined:
As reported........................................... $25,440.7 $26,023.5 $22,129.6
Excluding unrealized appreciation (depreciation)(a)... 26,249.4 25,693.1 21,984.7
Net investment income on general account invested
assets................................................ 2,012.6 1,972.1 1,729.4
Yields earned:
As reported........................................... 7.9% 7.6% 7.8%
Excluding unrealized appreciation (depreciation)(a)... 7.7% 7.7% 7.9%
</TABLE>
- -------------------------
(a) Excludes the effect of reporting fixed maturities at fair value as described
in note 1 to the consolidated financial statements.
Although investment income is a significant component of total revenues,
the profitability of certain of our insurance products is determined primarily
by the spreads between the interest rates we earn and the rates we credit or
accrue to our insurance liabilities. At December 31, 1999, the average yield,
computed on the cost basis of our actively managed fixed maturity portfolio, was
7.2 percent, and the average interest rate credited or accruing to our total
insurance liabilities (excluding interest rate bonuses for the first policy year
only and excluding the effect of credited rates attributable to variable or
equity-indexed products) was 5.0 percent.
ACTIVELY MANAGED FIXED MATURITIES
Our actively managed fixed maturity portfolio at December 31, 1999,
included primarily debt securities of the United States government, public
utilities and other corporations, and mortgage-backed securities.
Mortgage-backed securities included collateralized mortgage obligations ("CMOs")
and mortgage-backed pass-through securities.
At December 31, 1999, our fixed maturity portfolio had $77.0 million of
unrealized gains and $1,563.6 million of unrealized losses, for a net unrealized
loss of $1,486.6 million. Estimated fair values for fixed maturity investments
were determined based on: (i) estimates from nationally recognized pricing
services (82 percent of the portfolio); (ii) broker-dealer market makers (2
percent of the portfolio); and (iii) internally developed methods (16 percent of
the portfolio).
At December 31, 1999, approximately 6.6 percent of our invested assets (7.9
percent of fixed maturity investments) were fixed maturities rated
below-investment grade by nationally recognized statistical rating organizations
(or, if not rated by such firms, with ratings below Class 2 assigned by the
NAIC). We plan to maintain approximately the present level of
below-investment-grade fixed maturities. These securities generally have greater
risks than other corporate debt investments, including risk of loss upon default
by the borrower, and are often unsecured and subordinated to other creditors.
Below-investment-grade issuers usually have higher levels of indebtedness and
are more sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are investment-grade issuers. We are aware of
these risks and monitor our below-investment-grade securities closely. At
December 31, 1999, our below-investment-grade fixed maturity investments had an
amortized cost of $1,939.7 million and an estimated fair value of $1,763.8
million.
We periodically evaluate the creditworthiness of each issuer whose
securities we hold. We pay special attention to those securities whose market
values have declined materially for reasons other than changes in interest rates
or other general market conditions. We evaluate the realizable value of the
investment, the specific condition of the issuer and the issuer's ability to
comply with the material terms of the security. Information reviewed may include
the recent operational results and financial position of the issuer, information
about its industry, recent press releases and other information. Conseco employs
a staff of
40
<PAGE> 41
experienced securities analysts in a variety of specialty areas. Among its other
responsibilities, this staff is charged with compiling and reviewing such
information. If evidence does not exist to support a realizable value equal to
or greater than the carrying value of the investment, and such decline in market
value is determined to be other than temporary, we reduce the carrying amount to
its net realizable value, which becomes the new cost basis; we report the amount
of the reduction as a realized loss. We recognize any recovery of such
reductions in the cost basis of an investment only upon the sale, repayment or
other disposition of the investment. In 1999, we recorded writedowns of fixed
maturity investments, equity securities and other invested assets totaling $27.8
million. Our investment portfolio is subject to the risks of further declines in
realizable value. However, we attempt to mitigate this risk through the
diversification and active management of our portfolio.
As of December 31, 1999, our fixed maturity investments in substantive
default (i.e., in default due to nonpayment of interest or principal) had an
amortized cost and carrying value of $52.2 million and $42.8 million,
respectively. The Company had no fixed maturity investments in technical (but
not substantive) default (i.e., in default, but not as to the payment of
interest or principal). There were no other fixed maturity investments about
which we had serious doubts as to the ability of the issuer to comply on a
timely basis with the material terms of the instrument.
When a security defaults, our policy is to discontinue the accrual of
interest and eliminate all previous interest accruals, if we determine that such
amounts will not be ultimately realized in full. Investment income forgone due
to defaulted securities was not significant in any of the three years ended
December 31, 1999.
At December 31, 1999, fixed maturity investments included $7.3 billion of
mortgage-backed securities (or 33 percent of all fixed maturity securities).
CMOs are backed by pools of mortgages that are segregated into sections or
"tranches" that provide for reprioritizing of retirement of principal.
Pass-through securities receive principal and interest payments through their
regular pro rata share of the payments on the underlying mortgages backing the
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 prevailing interest rates decline
significantly relative to the interest rates on such loans. The yields on
mortgage-backed securities purchased at a discount to par will increase when the
underlying mortgages prepay faster than expected. The yields on mortgage-backed
securities purchased at a premium will decrease when they prepay faster than
expected. 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.
41
<PAGE> 42
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 December 31, 1999:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
PAR VALUE COST FAIR VALUE
--------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Below 7 percent............................................ $4,619.4 $4,587.6 $4,309.5
7 percent -- 8 percent..................................... 1,876.2 1,862.6 1,806.6
8 percent -- 9 percent..................................... 290.5 290.3 287.5
9 percent and above........................................ 869.0 874.0 854.1
-------- -------- --------
Total mortgage-backed securities(a).............. $7,655.1 $7,614.5 $7,257.7
======== ======== ========
</TABLE>
- -------------------------
(a) Includes below-investment grade mortgage-backed securities with an amortized
cost and estimated fair value of $27.4 million and $26.6 million,
respectively.
The amortized cost and estimated fair value of mortgage-backed securities
at December 31, 1999, summarized by type of security, were as follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR VALUE
----------------------
AMORTIZED % OF FIXED
TYPE COST AMOUNT MATURITIES
- ---- --------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization
classes................................................. $4,053.9 $3,885.9 18%
Planned amortization classes and accretion-directed
bonds................................................... 1,919.9 1,796.2 8
Commercial mortgage-backed securities..................... 767.5 724.4 3
Subordinated classes and mezzanine tranches............... 832.4 813.2 4
Other..................................................... 40.8 38.0 --
-------- -------- ---
Total mortgage-backed securities(a)............. $7,614.5 $7,257.7 33%
======== ======== ===
</TABLE>
- -------------------------
(a) Includes below-investment grade mortgage-backed securities with an amortized
cost and estimated fair value of $27.4 million and $26.6 million,
respectively.
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. Pass-throughs are also used frequently in
the dollar roll market and can be used as the collateral when creating
collateralized mortgage obligations. Sequential classes are a series of tranches
that return principal to the holders in sequence. Targeted amortization classes
offer slightly better structure in return of principal than sequentials when
prepayment speeds are close to the speed at the time of creation.
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 or companion classes. This insulates the planned amortization class from
the consequences of both faster prepayments (average life shortening) and slower
prepayments (average life extension).
Commercial mortgage-backed securities ("CMBS") are bonds secured by
commercial real estate mortgages. Commercial real estate encompasses income
producing properties that are managed for economic profit. Property types
include multi-family dwellings including apartments, retail centers, hotels,
restaurants, hospitals, nursing homes, warehouses, and office buildings. The
CMBS market currently offers high yields, strong credits and call protection
compared to similar rated corporate bonds. Most CMBS have strong call protection
features where borrowers are locked out from prepaying their mortgages for a
stated period of time. If the borrower does prepay any or all of the loan, they
will be required to pay prepayment penalties.
42
<PAGE> 43
Subordinated and mezzanine tranches are classes that provide credit
enhancement to the senior tranches. The rating agencies require that this credit
enhancement not deteriorate due to prepayments for a period of time, usually
five years of complete lockout followed by another period of time where
prepayments are shared pro rata with senior tranches. The credit risk of
subordinated and mezzanine tranches is derived from owning a small percentage of
the mortgage collateral, while bearing a majority of the risk of loss due to
property owner defaults. Subordinated bonds can be anything rated "AA" or lower,
while typically we do not buy anything lower than "BB".
If we decide to sell an investment held in the actively managed fixed
maturity category, we either sell the security or transfer it to the trading
account at its fair value and recognize the gain or loss immediately. There were
no material transfers into our trading account during 1999.
During 1999, we sold $15.8 billion of investments (primarily fixed
maturities), resulting in $131.3 million of investment gains and $189.9 million
of investment losses (both before related expenses, amortization and taxes).
Such securities were sold in response to changes in the investment environment,
which created opportunities to enhance the total return of the investment
portfolio without adversely affecting the quality of the portfolio or the
matching of expected maturities of assets and liabilities. As discussed in the
notes to the consolidated financial statements, the realization of gains and
losses affects the timing of the amortization of the cost of policies produced
and the cost of policies purchased related to universal life and investment
products.
VENTURE CAPITAL INVESTMENTS
These investments had an estimated fair value of $527.5 million at December
31, 1999, and include equity and equity-type investments made by our subsidiary
which engages in venture capital investment activities. At the time we enter
into these investments, we believe they have high growth or appreciation
potential. We do not participate in the day-to-day management of these
investees. These investments are carried at estimated fair value, with changes
in fair value recognized as investment income. This income will fluctuate from
period-to-period based on changes in estimated market values of our venture
capital investments. The fair value of venture capital investments that are
publicly traded are generally based upon market prices. When liquidity is
limited because of thinly traded securities, limited partnership structures,
large-block holdings, restricted shares or other special situations, we adjust
quoted market prices to produce an estimate of the attainable fair values. We
estimate the fair values of securities that are not publicly traded based upon
transactions which directly affect the value of such securities and
consideration of the investee's financial results, conditions and prospects.
OTHER INVESTMENTS
At December 31, 1999, we held mortgage loan investments with a carrying
value of $1,274.5 million (or 4.7 percent of total invested assets) and a fair
value of $1,188.0 million. Mortgage loans were substantially comprised of
commercial loans. Noncurrent mortgage loans were insignificant at December 31,
1999. Realized losses on mortgage loans were not significant in any of the past
three years. At December 31, 1999, we had a mortgage loan loss reserve of $3.8
million. Approximately 8 percent of the mortgage loans were on properties
located in Ohio, 8 percent in New York, 7 percent in Texas, 7 percent in
Florida, 7 percent in Pennsylvania and 7 percent in California. No other state
accounted for more than 5 percent of the mortgage loan balance.
At December 31, 1999, we held $51.8 million of trading securities; they are
included in other invested assets. Trading securities are investments we intend
to sell in the near term. We carry trading securities at estimated fair value;
changes in fair value are reflected in the statement of operations.
Other invested assets also include: (i) S&P 500 Call Options; and (ii)
certain nontraditional investments, including investments in limited
partnerships, mineral rights and promissory notes.
As part of our investment strategy, we enter into reverse repurchase
agreements and dollar-roll transactions to increase our return on investments
and improve our liquidity. Reverse repurchase agreements
43
<PAGE> 44
involve a sale of securities and an agreement to repurchase the same securities
at a later date at an agreed-upon price. Dollar rolls are similar to reverse
repurchase agreements except that the repurchase involves securities that are
only substantially the same as the securities sold. We enhance our investment
yield by investing the proceeds from the sales in short-term securities pending
the contractual repurchase of the securities at discounted prices in the forward
market. We are able to engage in such transactions due to the market demand for
mortgage-backed securities to form CMOs. Such investment borrowings averaged
$1,081.1 million during 1999 and were collateralized by investment securities
with fair values approximately equal to the loan value. The weighted average
interest rate on short-term collateralized borrowings was 5.4 percent in 1999.
The primary risk associated with short-term collateralized borrowings is that
the counterparty might be unable to perform under the terms of the contract. Our
exposure is limited to the excess of the net replacement cost of the securities
over the value of the short-term investments (which was not material at December
31, 1999). We believe that the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that counterparty risk is
minimal.
FINANCE RECEIVABLES, INTEREST-ONLY SECURITIES AND SERVICING RIGHTS OF FINANCE
SUBSIDIARIES
FINANCE RECEIVABLES
Finance receivables (at December 31, 1999, include $4,730.7 million which
serve as collateral for the notes issued to investors in securitization trusts)
summarized by type, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Manufactured housing........................................ $1,748.8 $ 798.8
Mortgage services........................................... 3,354.3 603.5
Consumer/credit card........................................ 1,901.6 587.3
Commercial.................................................. 2,918.3 1,352.9
-------- --------
9,923.0 3,342.5
Less allowance for credit losses............................ 88.4 43.0
-------- --------
Net finance receivables........................... $9,834.6 $3,299.5
======== ========
</TABLE>
On September 8, 1999, we announced that we would no longer structure our
securitizations in a manner that results in recording a sale of the loans. Our
new securitizations are structured to include provisions that entitle the
Company to repurchase assets transferred to the special purpose entity when the
aggregate unpaid principal balance reaches a specified level. Until these assets
are repurchased, however, the assets are the property of the special purpose
entity and are not available to satisfy the claims of creditors of the Company.
Pursuant to Financial Accounting Standards Board Statement No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, such securitization transactions are accounted for under the
portfolio method, whereby the loans and the securitization debt remain on our
balance sheet, rather than as sales.
For loans we finance through securitizations, this change, and the
resulting use of the portfolio method of accounting, has no effect on the total
profit we recognize over the life of each new loan, but does change the timing
of profit recognition. Under the portfolio method, we recognize earnings over
the life of a new loan as it generates interest. As a result, our reported
earnings from each new loan under the portfolio method are lower in the period
it is securitized (compared to our historical method) and higher in later
periods, as interest is earned on the loan.
The securitizations structured prior to our September 8, 1999, announcement
met the applicable criteria to be accounted for as sales. We sold $9.7 billion
of finance receivables during 1999 and recognized gains of $550.6 million. At
the time the loans were securitized and sold, we recognized a gain and recorded
our residual interest in the securitization. The residual interest represents
the right to receive, over the life of the pool of
44
<PAGE> 45
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 of those securitizations, we also retained certain
lower-rated securities that are senior in payment priority to the interest-only
securities. Such retained securities had a par value, fair market value and
amortized cost of $769.8 million, $694.3 million and $712.6 million,
respectively, at December 31, 1999, and were classified as actively managed
fixed maturity securities.
We service for a fee all of the finance receivables we previously sold in
securitization transactions accounted for as sales. We collect, in the special
purpose securitization entity, loan payments, and where applicable, other
payments from borrowers and remit principal and interest payments to holders of
the securities backed by the finance receivables we have sold. The cash
applicable to the servicing fee and residual interest is remitted from the
special purpose entity to the Company, after payment of all required principal
and interest.
The securitizations structured after our September 8, 1999, announcement
are accounted for under the portfolio method. At December 31, 1999, finance
receivables of $4,730.5 million are held on our balance sheet as collateral for
the notes of $4,641.8 million issued to investors in the securitization trusts.
Managed finance receivables by loan type were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Fixed term........................................... $ 41,471 $ 33,992 $ 26,023
Revolving credit..................................... 4,320 3,208 1,934
---------- ---------- ----------
Total...................................... $ 45,791 $ 37,200 $ 27,957
========== ========== ==========
Number of fixed term contracts serviced.............. 1,424,000 1,263,000 1,076,000
========== ========== ==========
Number of revolving credit accounts serviced......... 1,984,000 1,298,000 700,000
========== ========== ==========
</TABLE>
At December 31, 1999, no single state accounted for more than 8 percent of
the contracts we serviced. In addition, no single contractor, dealer or vendor
accounted for more than one percent of the total contracts we originated.
45
<PAGE> 46
The following table provides certain information with respect to the
60-days-and-over contractual dollar delinquency, loss experience and repossessed
collateral for the Company's managed finance receivables as of December 31, for
the years indicated.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Delinquency(a):
Manufactured housing...................................... 1.57% 1.39% 1.22%
Mortgage services......................................... 1.00 .92 .88
Consumer/credit card...................................... 2.23 1.61 1.21
Total consumer lending............................ 1.46 1.29 1.15
Commercial lending........................................ .92 .53 .55
Total............................................. 1.42% 1.19% 1.08%
Net credit losses(b):
Manufactured housing...................................... 1.25% 1.14% 1.14%
Mortgage services......................................... .99 .72 .72
Consumer/credit card...................................... 2.99 2.01 1.47
Total consumer lending............................ 1.34 1.12 1.09
Commercial lending........................................ 1.05 .44 .69
Total............................................. 1.31% 1.03% 1.05%
Repossessed collateral(c):
Manufactured housing...................................... 1.09% .97% 1.04%
Mortgage services......................................... 2.29 1.88 .71
Consumer/credit card...................................... .42 .32 .50
Total consumer lending............................ 1.38 1.14 .94
Commercial lending........................................ .97 1.11 1.00
Total............................................. 1.34% 1.14% .95%
</TABLE>
- -------------------------
(a) As a percentage of managed finance receivables at period end, excluding
receivables already in repossession or foreclosure.
(b) As a percentage of average managed finance receivables during the period,
net of recoveries.
(c) Includes receivables in the process of foreclosure and repossessed
collateral in process of liquidation as a percentage of managed finance
receivables at period end.
These ratios increased during 1999 primarily as a result of: (i) the
expected increases in delinquencies and credit losses as the portfolios age;
(ii) changes in the mix of managed receivables; and (iii) underlying loss
experience.
INTEREST-ONLY SECURITIES
Interest-only securities represent interests we retained in securitization
transactions structured prior to our September 8, 1999, announcement and are
carried at estimated fair value. On a quarterly basis, we estimate the fair
value of these securities by discounting the projected future cash flows using
current assumptions. If we determine that the differences between the estimated
fair value and the book value of these securities is a temporary difference we
adjust shareholders' equity. At December 31, 1999, this adjustment decreased the
carrying value of the interest-only securities by $11.2 million to $905.0
million. Declines in value are considered to be other than temporary when the
present value of the estimated future cash flows discounted at a risk free rate
using current assumptions is less than the book value of the interest-only
securities. When this occurs, we reduce the amortized cost to the estimated fair
value and recognize a loss in the statement of operations.
We recognized impairment charges of $554.3 million ($349.2 million after
tax) in 1999 and $549.4 million ($355.8 million after tax) in 1998 to reduce the
book value of interest-only securities and servicing rights as described above
under "Finance Operations."
46
<PAGE> 47
Based on our current assumptions and expectations as to future events
related to the loans underlying our interest-only securities, we estimate
receiving cash from these securities of $210 million in 2000, $130 million in
2001, $120 million in 2002, $105 million in 2003, $145 million in 2004, and $1.1
billion in all years thereafter.
CONSOLIDATED FINANCIAL CONDITION
CHANGES IN THE CONSOLIDATED BALANCE SHEET OF 1999 COMPARED WITH 1998
Changes in the consolidated balance sheet at December 31, 1999, compared to
1998, reflect: (i) our operating results; (ii) our origination of finance
receivables; (iii) the sale of finance receivables in securitizations structured
as sales (prior to our September 8, 1999, announcement); (iv) the transfer of
finance receivables to securitization trusts and sale of notes to investors in
transactions accounted for as secured borrowings; (v) changes in the fair value
of actively managed fixed maturity securities and interest-only securities; and
(vi) various financing transactions. Financing transactions (described in the
notes to the consolidated financial statements) include: (i) the issuance and
repurchase of common stock; (ii) the issuance of convertible preferred stock;
(iii) the issuance and repayment of notes payable and commercial paper; and (iv)
the issuance of trust preferred securities.
In accordance with GAAP, we record our actively managed fixed maturity
investments, interest-only securities, equity securities and certain other
invested assets at estimated fair value with any unrealized gain or loss, net of
tax and related adjustments, recorded as a component of shareholders' equity. At
December 31, 1999, primarily because of the recent increases in interest rates
and related decrease in values of interest-bearing securities, we decreased the
carrying value of such investments by $1,504.3 million as a result of this fair
value adjustment. The fair value adjustment resulted in a $40.4 million decrease
in carrying value at year-end 1998.
Total capital shown below excludes debt of the finance segment used to fund
finance receivables. Total capital, before the fair value adjustment recorded in
accumulated other comprehensive loss, increased $1,117.6 million, or 11 percent,
to $11.4 billion.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Total capital, excluding accumulated other comprehensive
loss:
Corporate notes payable and commercial paper.............. $ 2,481.8 $ 2,932.2
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts........................ 2,639.1 2,096.9
Shareholders' equity:
Preferred stock........................................ 478.4 105.5
Common stock and additional paid-in capital............ 2,987.1 2,736.5
Retained earnings...................................... 2,862.3 2,460.0
--------- ---------
Total shareholders' equity, excluding accumulated
other comprehensive loss........................ 6,327.8 5,302.0
--------- ---------
Total capital, excluding accumulated other
comprehensive loss.............................. 11,448.7 10,331.1
Accumulated other comprehensive loss........................ 771.6 28.4
--------- ---------
Total capital..................................... $10,677.1 $10,302.7
========= =========
</TABLE>
Corporate notes payable and commercial paper decreased during 1999
primarily due to the repayment of debt using the proceeds from the issuance of
$300.0 million of 9.44% Trust Originated Preferred Securities ("9.44% TOPrS")
and $250.0 million of Redeemable Hybrid Income Overnight Shares ("RHINOS").
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts increased during 1999 due to the aforementioned issuances of 9.44% TOPrS
and RHINOS.
47
<PAGE> 48
Shareholders' equity, excluding accumulated other comprehensive loss,
increased by $1.0 billion in 1999, to $6.3 billion. Significant components of
the increase included: (i) net income of $595.0 million; (ii) the issuance of
convertible preferred stock with net proceeds of $478.2 million; (iii) the
issuance of $209.6 million of common stock; and (iv) the tax benefit of $25.0
million related to the issuance of shares under stock option plans. These
increases were partially offset by: (i) repurchases of $89.5 million of common
stock; and (ii) $192.7 million of common and preferred stock dividends. The
accumulated other comprehensive loss increased by $743.2 million principally
related to the decreasing fair value of our insurance companies' investment
portfolio as interest rates rose.
Book value per common share outstanding decreased to $15.50 at December 31,
1999, from $16.37 a year earlier. Such change was primarily attributable to the
factors discussed in the previous paragraph. Excluding accumulated other
comprehensive loss, book value per common share outstanding increased to $17.85
at December 31, 1999, from $16.46 a year earlier.
Goodwill (representing the excess of the amounts we paid to acquire
companies over the fair value of net assets acquired in transactions accounted
for as purchases) was $3,927.8 million and $3,960.2 million at December 31, 1999
and 1998, respectively. Goodwill as a percentage of shareholders' equity was 71
percent and 75 percent at December 31, 1999 and 1998, respectively. Goodwill as
a percentage of total capital, excluding other comprehensive loss, was 34
percent and 38 percent at December 31, 1999 and 1998, respectively. We believe
that the life of our goodwill is indeterminable and, therefore, have generally
amortized its balance over 40 years as permitted by generally accepted
accounting principles. Amortization of goodwill totaled $110.1 million, $106.2
million, and $84.5 million during 1999, 1998 and 1997, respectively. If we had
determined the estimated useful life of our goodwill was less than 40 years,
amortization expense would have been higher.
We continually monitor the value of our goodwill based on our best
estimates of future earnings considering all available evidence. We determine
whether goodwill is fully recoverable from projected undiscounted net cash flows
from earnings of the business acquired over the remaining amortization period.
If we were to determine that changes in such projected cash flows no longer
support the recoverability of goodwill over the remaining amortization period,
we would reduce its carrying value with a corresponding charge to expense or
shorten the amortization period (no such changes have occurred). Cash flows
considered in such an analysis are those of the business acquired, if separately
identifiable, or the product line of the business acquired, if such earnings are
not separately identifiable.
48
<PAGE> 49
FINANCIAL RATIOS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Book value per common share:
As reported.................................... $15.50 $16.37 $16.45 $13.47 $ 8.52
Excluding accumulated other comprehensive
income (loss)(a)............................ 17.85 16.46 15.80 13.34 7.97
Ratio of earnings to fixed charges:
As reported.................................... 2.98x 3.30x 5.55x 4.85x 4.94x
Excluding interest expense on debt related to
finance receivables and other
investments(b).............................. 7.06x 6.79x 13.00x 7.80x 7.36x
Ratio of operating earnings to fixed charges(c):
As reported.................................... 4.26x 4.89x 6.09x 4.73x 4.57x
Excluding interest expense on debt related to
finance receivables and other
investments(b).............................. 10.99x 10.81x 14.43x 7.60x 6.76x
Ratio of earnings to fixed charges, preferred
dividends and distributions on
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts:
As reported................................. 2.20x 2.47x 4.10x 3.74x 4.14x
Excluding interest expense on debt related
to finance receivables and other
investments(b)............................ 3.38x 3.68x 6.72x 5.11x 5.61x
Ratio of operating earnings to fixed charges,
preferred dividends and distributions on
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts(c):
As reported................................. 3.14x 3.66x 4.49x 3.65x 3.83x
Excluding interest expense on debt related
to finance receivables and other
investments(b)............................ 5.26x 5.86x 7.45x 4.98x 5.16x
Rating agency ratios(a)(d)(e):
Debt to total capital.......................... 22% 28% 27% 18% 27%
Debt and Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts to total capital(f)....... 45% 49% 43% 28% 27%
</TABLE>
- -------------------------
(a) Excludes accumulated other comprehensive income (loss).
(b) We include these ratios to assist you in analyzing the impact of interest
expense on debt related to finance receivables and other investments (which
is generally offset by interest earned on finance receivables and other
investments financed by such debt). Such ratios are not intended to, and do
not, represent the following ratios prepared in accordance with GAAP: the
ratio of earnings and operating earnings to fixed charges; and the ratio of
earnings and operating earnings to fixed charges, preferred dividends and
distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts.
(c) Such ratios exclude the following items from earnings: (i) net investment
gains (losses) (less that portion of amortization of cost of policies
purchased and cost of policies produced relating to such gains (losses));
(ii) impairment charges; and (iii) charges that are considered to be
unusual. Such ratios are not intended to, and do not, represent the
following ratios prepared in accordance with GAAP: the ratio of earnings to
fixed charges; and the ratio of earnings to fixed charges, preferred
dividends and distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.
(d) Excludes debt of the finance segment used to fund finance receivables and
investment borrowings of the insurance segment. In 1995, excludes debt of
affiliates of $584.7 million which was not a direct obligation of Conseco.
(e) These ratios are calculated in a manner discussed with rating agencies.
49
<PAGE> 50
(f) Total Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts exclude, and total capital includes: (i) amounts related
to FELINE PRIDES which require the holders to purchase a number of shares of
the Company's common stock under the terms specified in the stock purchase
contracts; and (ii) amounts related to RHINOS. In April 2000, the Company
and the holder of the RHINOS agreed to the repurchase by the Company of the
RHINOS. In connection with the RHINOS repurchase, the Company is entering
into a bank credit facility of $125.0 million.
LIQUIDITY FOR INSURANCE AND FEE-BASED 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 any applicable 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.
Only a small portion of our insurance liabilities have a time for
contractual payment; the majority of such liabilities are payable upon
occurrence of the insured event or upon surrender. Of our total insurance
liabilities at December 31, 1999, approximately 20 percent could be surrendered
by the policyholder without a penalty. Approximately 56 percent could be
surrendered by the policyholder subject to penalty or the release of an
insurance liability in excess of surrender benefits paid. The remaining 24
percent do not provide a surrender benefit.
Approximately 64 percent of insurance liabilities were subject to interest
rates (or participation rates for equity-indexed annuities) that may be reset
annually; 3 percent have a fixed explicit interest rate for the duration of the
contract; and the remainder have no explicit interest rate.
Insurance liabilities for interest-sensitive products by credited rate
(excluding interest rate bonuses for the first policy year only) at December 31,
1999 were as follows (dollars in millions):
<TABLE>
<S> <C>
Below 4.00 percent.......................................... $ 5,886.9(a)
4.00 percent - 4.25 percent................................. 2,173.3
4.25 percent - 4.50 percent................................. 649.4
4.50 percent - 4.75 percent................................. 3,349.6
4.75 percent - 5.00 percent................................. 1,355.3
5.00 percent - 5.25 percent................................. 896.6
5.25 percent - 5.50 percent................................. 1,051.6
5.50 percent - 5.75 percent................................. 587.6
5.75 percent and above...................................... 1,372.1
---------
Total insurance liabilities on interest-sensitive
products......................................... $17,322.4
=========
</TABLE>
- -------------------------
(a) Includes liabilities related to our equity-indexed annuity product of
$2,306.1 million. The accumulation value of these annuities is credited with
interest at an annual guaranteed minimum rate of 3 percent (or, including
the effect of applicable sales loads, a 1.7 percent compound average
interest rate over the term of the contract). These annuities provide for
potentially 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 increases to insurance liabilities resulting from
increases in the S&P 500 Index.
We believe that the diversity of our investment portfolio and the
concentration of investments in high-quality, liquid securities provide
sufficient liquidity to meet foreseeable cash requirements. At December 31,
1999, we held $1.7 billion of cash and cash equivalents and $17.5 billion of
publicly traded investment grade bonds. Although there is no present need or
intent to dispose of such investments, our life insurance subsidiaries could
readily liquidate portions of their investments, if such a need arose. In
addition, investments could be used to facilitate borrowings under
reverse-repurchase agreements or dollar-roll transactions. Such borrowings have
been used by the life companies from time to time to increase their return on
investments and to improve liquidity.
50
<PAGE> 51
LIQUIDITY FOR FINANCE OPERATIONS
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance. During the time prior to completion of the sale, should it occur, we
intend to continue our prior financing practices, as described in the following
paragraphs, to provide the cash needed to originate finance receivables. Should
there be any disruption in the availability of cash from these sources, we would
seek to take other actions, including selling our loans through the resale
markets or negotiating forward funding agreements. The use of prior financing
practices or new actions during this period is likely to increase the cost of
funds.
Our finance operations require cash to originate finance receivables. Our
primary sources of cash are the collection of receivable balances; proceeds from
the issuance of debt, certificate of deposits and securitization of loans; cash
provided by operations; and cash provided by the parent company from its credit
sources.
The most significant source of liquidity for our finance operations has
been our ability to finance the receivables we originate in the secondary
markets through loan securitizations. Under certain securitization 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 and over-collateralization or other equivalent collateral.
When choosing the appropriate structure for a securitization of loans, we
analyze the cash flows unique to each transaction, as well as its marketability
and projected economic value. The structure of each securitized transaction
depends, to a great extent, on conditions in the fixed-income markets at the
time the transaction is completed, as well as on cost considerations and the
availability and effectiveness of the various enhancement methods.
The market for securities backed by receivables is a cost-effective source
of funds. In recent periods, conditions in the credit markets have resulted in
less-attractive pricing of certain lower rated securities typically included in
loan securitization transactions. As a result, we have chosen to hold rather
than sell some of the securities in the securitization trusts, particularly
securities having corporate guarantee provisions. Accordingly, we must finance a
portion of the loans we originate through sources other than the securitization
markets. We believe there are adequate sources of liquidity other than
securitizations to finance a portion of the loans we originate while still
maintaining planned levels of loan originations.
Market conditions in the credit markets for loan securitizations change
from time to time. For example, liquidity in the credit markets became extremely
limited for many issuers during the third and fourth quarters of 1998. In
addition during certain periods of 1999, the general levels of interest rates
increased on securities issued in securitizations, causing us to incur higher
interest costs on securitizations completed during those periods. Changes in
market conditions in the securitization markets could affect the interest rate
spreads we earn on the loans we originate and the cash provided by our finance
operations. We have increased interest rates on our lending products as we
strive to maintain our targeted spread regardless of the interest rate
environment.
Several competing lenders have announced in recent periods that they are no
longer lending in product lines in which we compete. We and other lenders have
increased the interest rates charged on new loans in recent periods. We are
unable to estimate the effect, if any, of these events on the amount of new
loans we originate, or the level of profitability of that business. We are also
unable to estimate the period of time that these conditions will persist.
We continually investigate and pursue alternative and supplementary methods
to finance our lending operations. In late 1998, we began issuing certificates
of deposit through our bank subsidiary. At December 31, 1999, we had $870.5
million of such deposits outstanding which are recorded as liabilities related
to certificates of deposit. The average rate paid on these deposits was 5.8
percent during 1999.
Our finance segment generated cash flows from operating activities of
$624.0 million during 1999, compared to $349.2 million in 1998. Such cash flows
include cash received from the securitization trusts of $618.3 million in 1999
and $517.9 million in 1998, representing distribution of excess interest and
servicing fees.
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<PAGE> 52
On September 8, 1999, we announced that, although we plan to continue to
finance the receivables we originate through loan securitizations, we will no
longer structure future securitizations in a manner that results in gain-on-sale
revenues. This change is not expected to have any material effect on the amount
or timing of cash flows we receive, but the change required us to classify
certain activities differently on our cash flow statement (e.g., certain cash
flows recorded as "operating cash flows" under the gain-on-sale method must be
recorded as "investing activities" under the portfolio method and vice versa).
At December 31, 1999, we had $6.9 billion in master repurchase agreements
and commercial paper conduit facilities (subject to the availability of eligible
collateral) with various banking and investment banking firms for the purpose of
financing our consumer and commercial finance loan production. These agreements
generally provide for annual terms, some of which are extended each quarter by
mutual agreement of the parties for an additional annual term based upon receipt
of updated quarterly financial information. At December 31, 1999, we had $2.9
billion borrowed under the repurchase agreements.
Independent rating agencies, financial institutions, analysts and other
interested parties monitor the leverage ratio of our finance segment. Such ratio
(calculated, as discussed with independent rating agencies, as the ratio of debt
to equity of our finance subsidiary calculated on a pro forma basis as if we had
accounted for the securitizations of our finance receivables as financing
transactions throughout the Company's history) was 22-to-1 at both December 31,
1999 and 1998.
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 uses cash for:
(i) principal and interest payments on debt; (ii) dividends on preferred and
common stock; (iii) payments to subsidiary trusts to be used for distributions
on the Company-obligated mandatorily redeemable preferred securities 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 are payments from our subsidiaries, including the statutorily
permitted payments from our life insurance subsidiaries in the form of: (i) fees
for services provided; (ii) tax sharing payments; (iii) dividend payments; and
(iv) surplus debenture interest and principal payments. The parent company may
also obtain cash by: (i) issuing debt or equity securities; (ii) borrowing
additional amounts under its revolving credit agreement, as described in the
notes to the consolidated financial statements; or (iii) selling all or a
portion of its subsidiaries. These sources have historically provided adequate
cash flow to fund the needs of the parent company's: (i) normal operations; (ii)
internal expansion, acquisitions and investment opportunities; and (iii) the
retirement of debt and equity.
The Company and its subsidiaries generated consolidated cash flows from
operating activities of $1,788.6 million, $979.6 million and $609.5 million,
during the years ended December 31, 1999, 1998 and 1997, respectively. Excess
operating cash flows, together with cash flows from financing activities, were
primarily used to increase investment portfolios, originate finance receivables
and fund policyholder account withdrawals.
Cash provided by operating activities at the parent company, including
dividends received from subsidiaries, totaled $282.8 million, $163.0 million and
$156.9 million in 1999, 1998 and 1997, respectively. The Company followed the
practice in those years of retaining capital in its operating subsidiaries by
limiting dividends paid to the parent company. Consistent with our discussions
with rating agencies, we modified that practice for future years. At the parent
company, we have announced a target of receiving cash from operating activities,
including dividends, interest and fees received from the subsidiaries, of twice
the parent's cash requirement for interest, dividends and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
The ability of our insurance subsidiaries to pay dividends is subject to
state insurance department regulations. These regulations generally permit
dividends to be paid from earned surplus of the insurance
52
<PAGE> 53
company for any 12-month period in amounts equal to the greater of (or in a few
states, the lesser of): (i) net gain from operations for the prior year; or (ii)
10 percent of surplus as of the end of the preceding year. Any dividends in
excess of these levels require the approval of the director or commissioner of
the applicable state insurance department. After deduction of $274.3 million of
fees and interest paid to Conseco in 1999, the remaining statutory earnings of
our insurance subsidiaries permit distributions to Conseco in 2000 of
approximately $204.6 million without the permission of regulatory authorities.
In addition, our finance subsidiary had operating cash flows of $601.0 million
in 1999.
We completed several transactions during 1999 to improve our capital
structure. We contributed capital of $481.3 million to our life insurance
subsidiaries to provide additional capital to fund current and projected growth.
In the fourth quarter of 1999, we issued Series F Common-Linked Convertible
Preferred Stock with net proceeds of $478.2 million and $1.0 billion of term
debt. Such amounts were used to repay other debt and support our future growth
in the financing segment. Subsequent to these actions, Moody's upgraded: (i) its
ratings of Conseco's debt and preferred stock (for example, the rating on our
senior debt was upgraded to "Baa3" from "Ba1"); and (ii) the financial strength
ratings of Conseco's principal insurance companies (upgraded to "Baa1" from
"Baa2"). Moody's also retained its positive ratings outlook on Conseco. Duff &
Phelps reaffirmed all existing ratings of Conseco and its subsidiaries and moved
its outlook for all Conseco-related fixed income ratings from stable to
positive.
Following our announcement on March 31, 2000, that we plan to explore the
sale of Conseco Finance, the ratings described in the previous paragraph were
placed on review as the agencies analyze the impact of the developing
transaction. In addition, S&P reduced its ratings of our senior debt securities
from "BBB+" to "BBB-" and changed its ratings outlook to negative. These rating
actions are expected to increase the cost of capital to the Company.
In September 1999, $1.0 billion of our bank credit facility expired. This
borrowing capacity was replaced by a new bank credit line of $766 million
(allowing us to borrow up to $2,266 million under our bank credit facilities), a
$50 million extendible commercial note, and a $200 million increase in amounts
which are available under a credit facility collateralized by interest-only and
other securities (allowing us to borrow up to $700 million under such facility).
In February 2000, we issued $800.0 million of 8.75 percent notes due 2004. Also,
in February 2000, the credit facility collateralized by interest-only and other
securities was extended for an additional one-year term in the amount of $500.0
million.
Our debt agreements require us to maintain minimum working capital and
risk-based capital ratios, and limit our ability to incur additional
indebtedness. They also restrict the amount of retained earnings that is
available for dividends and require Conseco to maintain certain minimum ratings
at its insurance subsidiaries.
INFLATION
Inflation does not have a significant effect on our balance sheet; we have
minimal investments in property, equipment or inventories. To the extent that
interest rates may change to reflect inflation or inflation expectations, there
would be an effect on our balance sheet and operations. Lower interest rates
experienced in periods prior to 1999 have increased the value of our investment
in fixed maturities and may have increased the amount of new finance receivables
originated. These lower rates may also have made it more difficult to issue new
fixed rate annuities and may have accelerated prepayments of finance
receivables. Rising interest rates experienced in 1999 decreased the value of
our investments in fixed maturities and may have slowed the issuance of new
finance receivables and the prepayment of existing finance receivables. Changes
in interest rates can also affect the value of the finance receivables we hold.
It is not possible to calculate the effect of these changes on our operating
results.
Medical cost inflation has had a significant impact on our supplemental
health operations. Generally, these costs have increased more rapidly than the
Consumer Price Index. Medical costs will likely continue to rise. The impact of
medical cost inflation on our operations depends on our ability to increase
premium rates. Such increases are subject to approval by state insurance
departments. We seek to price our new standardized supplement plans to reflect
the impact of these filings and the lengthening of the period required to
implement rate increases.
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<PAGE> 54
YEAR 2000 PROJECTS
Many computer programs were originally designed to identify each year using
two digits. If not corrected, these computer programs could cause system
failures or miscalculations in the year 2000, with possible adverse effects on
our operations. In 1996, we initiated a comprehensive corporate-wide program
designed to ensure that our computer programs function properly in the year
2000. Our year-2000 projects were completed on schedule and our year-end
processing proceeded smoothly. There were no significant problems experienced.
The total expense incurred on our year-2000 projects during the last four years
was approximately $75 million, of which $23 million was incurred during 1999.
This expense is not material to Conseco's financial position and it was funded
through operating cash flows. The expense related primarily to modifying
existing software systems. During the last three years, our year-2000 projects
were the highest priority for our information technology and many other
employees. Other projects continued while our year-2000 projects were being
completed and, in many cases, we accelerated system upgrades when the new
systems addressed year-2000 issues.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
INSURANCE AND FEE-BASED
We seek to invest our available funds in a manner that will maximize
shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. We seek to meet this objective
through investments that: (i) have similar characteristics to the liabilities
they support; (ii) are diversified among industries, issuers and geographic
locations; and (iii) make up a predominantly investment-grade fixed maturity
securities portfolio. Many of our products incorporate surrender charges, market
interest rate adjustments or other features to encourage persistency.
We seek to maximize the total return on our investments through active
investment management. Accordingly, we have determined that our entire portfolio
of fixed maturity securities is available to be sold in response to: (i) changes
in market interest rates; (ii) changes in relative values of individual
securities and asset sectors; (iii) changes in prepayment risks; (iv) changes in
credit quality outlook for certain securities; (v) liquidity needs; and (vi)
other factors. From time to time, we invest in securities for trading purposes,
although such investments account for a relatively small portion of our total
portfolio.
The profitability of many of our products depends on the spreads between
the interest yield we earn on investments and the rates we credit on our
insurance liabilities. Although substantially all credited rates on our annuity
products may be changed annually (subject to minimum guaranteed rates), changes
in competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit our ability to adjust or to maintain
crediting rates at levels necessary to avoid narrowing of spreads under certain
market conditions. Approximately 60 percent of our insurance liabilities were
subject to interest rates that may be reset annually; the remainder have no
explicit interest rates. As of December 31, 1999, the average yield, computed on
the cost basis of our investment portfolio, was 7.2 percent, and the average
interest rate credited or accruing to our total insurance liabilities (excluding
interest rate bonuses for the first policy year only and excluding the effect of
credited rates attributable to variable or equity-indexed products) was 5.0
percent.
We use computer models to simulate the cash flows expected from our
existing insurance business under various interest rate scenarios. These
simulations help us to measure the potential gain or loss in fair value of our
interest rate-sensitive financial instruments. With such estimates, we seek to
closely match the duration of our assets to the duration of our liabilities.
When the estimated durations of assets and liabilities are similar, exposure to
interest rate risk is minimized because a change in the value of assets should
be largely offset by a change in the value of liabilities. At December 31, 1999,
the adjusted modified duration of our fixed maturity securities and short-term
investments was approximately 6.6 years and the duration of our insurance
liabilities was approximately 6.6 years. We estimate that our fixed maturity
securities and short-term investments (net of corresponding changes in the value
of cost of policies purchased, cost of policies produced and insurance
liabilities) would decline in fair value by approximately $605 million if
interest rates were to increase by 10 percent from their December 31, 1999
levels. This compares to a decline in fair value of $490 million based on
amounts and rates at December 31, 1998. The calculations involved in our
computer simulations
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<PAGE> 55
incorporate numerous assumptions, require significant estimates and assume an
immediate change in interest rates without any management of the investment
portfolio in reaction to such change. Consequently, potential changes in value
of our financial instruments indicated by the simulations will likely be
different from the actual changes experienced under given interest rate
scenarios, and the differences may be material. Because we actively manage our
investments and liabilities, our net exposure to interest rates can vary over
time.
The operations of the Company are subject to risk resulting from
fluctuations in market prices of our equity securities and venture-capital
investments. In general, these investments have more year-to-year price
variability than our fixed maturity investments. However, returns over longer
time frames have been consistently higher. We manage this risk by limiting our
equity securities and venture-capital investments to a relatively small portion
of our total investments.
Our investment in S&P 500 Call Options is closely matched with our
obligation to equity-indexed annuity holders. Market value changes associated
with that investment are substantially offset by an increase or decrease in the
amounts added to policyholder account balances for equity-indexed products.
FINANCE
We substantially reduce interest rate risk of our finance operations by
funding most of the loans we make through securitization transactions. The
finance receivables transferred in these transactions and the asset-backed
securities purchased by investors generally both have fixed rates. Principal
payments on the assets are passed through to investors in the securities as
received, thereby reducing interest rate exposure in these transactions that
might otherwise arise from maturity mismatches between debt instruments and
assets.
On September 8, 1999, we announced that we would no longer structure the
securitizations of the loans we originate in a manner that results in
gain-on-sale revenues. Our new securitizations are being structured as secured
borrowings. Prior to September 8, 1999, we retained interests in the finance
receivables sold through investments in interest-only securities that are
subordinated to the rights of other investors. Interest-only securities do not
have a stated maturity or amortization period. The expected amount of the cash
flow as well as the timing depends on the performance of the underlying
collateral supporting each securitization. The actual cash flow of these
instruments could vary substantially if performance is different from our
assumptions. We develop assumptions to value these investments by analyzing past
portfolio performance, current loan characteristics, current and expected market
conditions and the expected effect of our actions to mitigate adverse
performance. Assumptions used as of December 31, 1999, are summarized in the
notes to the consolidated financial statements.
We use computer models to simulate the cash flows expected from our
interest-only securities under various interest rate scenarios. These
simulations help us to measure the potential gain or loss in fair value of these
financial instruments, including the effects of changes in interest rates on
prepayments. We estimate that our interest-only securities would decline in fair
value by approximately $72.4 million if interest rates were to decrease by 10
percent from their December 31, 1999 levels. This compares to a decline in fair
value of $79 million based on amounts and rates at December 31, 1998. The
calculations involved in our computer simulations incorporate numerous
assumptions, require significant estimates and assume an immediate change in
interest rates without any management of the interest-only securities in
reaction to such change. Consequently, potential changes in value of our
interest-only securities indicated by the simulations will likely be different
from the actual changes experienced under given interest rate scenarios, and the
differences may be material.
We estimate that our finance receivables (including both "finance
receivables" and "finance receivables-securitized") would decline in fair value
by approximately $128.8 million if interest rates were to increase by 10 percent
from their December 31, 1999 levels. This compares to a decline in fair value of
$43.6 million based on amounts and rates at December 31, 1998.
Our finance receivables are primarily funded with the fixed rate
asset-backed securities purchased by investors in our securitizations and
floating-rate debt. Such borrowings included bank credit facilities, master
repurchase agreements, intercompany loans and the notes payable related to
securitized finance receivables
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<PAGE> 56
structured as collateralized borrowings ($2.8 billion of which was at fixed
rates and $6.5 billion of which was at floating rates). Based on the interest
rate exposure and prevalent rates at December 31, 1999, a relative 10 percent
decrease in interest rates would increase the fair value of the finance
segment's fixed-rate borrowed capital by approximately $70.0 million. The
interest expense on this segment's floating-rate debt will fluctuate as
prevailing interest rates change.
CORPORATE
We manage the ratio of borrowed capital to total capital and the portion of
our outstanding capital subject to fixed and variable rates, taking into
consideration the current interest rate environment and other market conditions.
Our borrowed capital at December 31, 1999, included notes payable and
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts totaling $5.1 billion ($4.6 billion of which is at fixed rates and $.5
billion of which is at floating rates). Based on the interest rate exposure and
prevalent rates at December 31, 1999, a relative 10 percent decrease in interest
rates would increase the fair value of our fixed-rate borrowed capital by
approximately $47 million. This compares to a $90 million increase based on our
borrowed capital and prevalent rates at December 31, 1998. Our interest expense
on floating-rate debt will fluctuate as prevailing interest rates change.
We periodically enter into interest rate swap agreements which effectively
exchange a fixed rate of interest on a notional amount ($2.4 billion at December
31, 1999) for a floating rate. At December 31, 1999, such interest rate swap
agreements were scheduled to mature in various years through 2008 and had an
average remaining life of 3.5 years (the average call date is 1.9 years). If the
counterparties of these interest rate swaps do not meet their obligations,
Conseco could have a loss. Conseco limits its exposure to such a loss by
diversifying among several counterparties believed to be financially sound and
creditworthy. At December 31, 1999, all of the counterparties were rated "A" or
higher by Standard & Poor's Corporation. Based on the interest rate exposure and
prevalent rates at December 31, 1999, a relative 10 percent increase in interest
rates would cause the value of our interest rate swaps to decrease by $35
million. This compares to a $25 million decrease based on prevalent rates at
December 31, 1998.
The fair value of our borrowed capital also varies with credit ratings and
other conditions in the capital markets. Following our announcement of March 31,
2000, concerning our plan to explore the sale of Conseco Finance, the capital
markets reacted by lowering the value of our publicly traded securities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information included under the caption "Market-Sensitive Instruments
and Risk Management" in "Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" is incorporated
herein by reference.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 58
Consolidated Balance Sheet at December 31, 1999 and 1998.... 59
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... 61
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................... 62
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 65
Notes to Consolidated Financial Statements.................. 66
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Conseco, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Conseco, Inc. and subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements give retroactive effect to
the merger of Conseco Finance Corp. (formerly Green Tree Financial Corporation)
on June 30, 1998 in a transaction accounted for as a pooling of interests, as
described in Note 1 to the consolidated financial statements. We did not audit
the financial statements of Conseco Finance Corp., which statements reflect
total revenues of $1,307.3 million for the year ended December 31, 1997. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included in 1997 for Conseco Finance Corp., is based solely on the
report of the other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 2000
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<PAGE> 59
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized
cost: 1999 -- $23,690.4; 1998 -- $21,848.3)............ $22,203.8 $21,827.3
Interest-only securities at fair value (amortized cost:
1999 -- $916.2; 1998 -- $1,313.6)...................... 905.0 1,305.4
Equity securities at fair value (cost: 1999 -- $323.7;
1998 -- $373.0)........................................ 312.7 376.4
Mortgage loans............................................ 1,274.5 1,130.2
Policy loans.............................................. 664.1 685.6
Venture capital investments at fair value (cost:
1999 -- $142.5; 1998 -- $43.7)......................... 527.5 47.1
Other invested assets..................................... 544.0 701.0
--------- ---------
Total investments................................. 26,431.6 26,073.0
Cash and cash equivalents................................... 1,686.9 1,704.7
Accrued investment income................................... 436.0 383.8
Finance receivables......................................... 5,104.1 3,299.5
Finance receivables -- securitized.......................... 4,730.5 --
Cost of policies purchased.................................. 2,258.5 2,425.2
Cost of policies produced................................... 2,087.4 1,453.9
Reinsurance receivables..................................... 728.6 734.8
Goodwill.................................................... 3,927.8 3,960.2
Income tax assets........................................... 209.8 --
Assets held in separate accounts and investment trust....... 2,231.4 1,411.1
Cash held in segregated accounts for investors.............. 853.0 843.7
Other assets................................................ 1,500.3 1,310.0
--------- ---------
Total assets...................................... $52,185.9 $43,599.9
========= =========
</TABLE>
(continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE> 60
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1999 AND 1998
(DOLLARS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Liabilities:
Liabilities for insurance and asset accumulation products:
Interest-sensitive products............................ $17,322.4 $17,229.4
Traditional products................................... 7,100.9 6,768.2
Claims payable and other policyholder funds............ 1,478.7 1,491.5
Liabilities related to separate accounts and investment
trust................................................. 2,231.4 1,411.1
Liabilities related to certificates of deposit......... 870.5 30.0
Investor payables......................................... 853.0 843.7
Other liabilities......................................... 1,498.7 1,980.7
Income tax liabilities.................................... -- 197.1
Investment borrowings..................................... 828.9 956.2
Notes payable and commercial paper:
Corporate.............................................. 2,481.8 2,932.2
Finance................................................ 4,682.5 2,389.3
Related to securitized finance receivables structured
as collateralized borrowings.......................... 4,641.8 --
--------- ---------
Total liabilities................................. 43,990.6 36,229.4
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts........................ 2,639.1 2,096.9
Shareholders' equity:
Preferred stock........................................... 478.4 105.5
Common stock and additional paid-in capital (no par value,
1,000,000,000 shares authorized, shares issued and
outstanding: 1999 -- 327,678,638;
1998 -- 315,843,609)................................... 2,987.1 2,736.5
Accumulated other comprehensive loss...................... (771.6) (28.4)
Retained earnings......................................... 2,862.3 2,460.0
--------- ---------
Total shareholders' equity........................ 5,556.2 5,273.6
--------- ---------
Total liabilities and shareholders' equity........ $52,185.9 $43,599.9
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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<PAGE> 61
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Insurance policy income............................. $4,040.5 $3,948.8 $3,410.8
Net investment income............................... 3,411.4 2,506.5 2,171.5
Gain on sale of finance receivables................. 550.6 745.0 779.0
Net gains (losses) from sale of investments......... (156.2) 208.2 266.5
Fee revenue and other income........................ 489.4 351.7 244.4
----------- ----------- -----------
Total revenues.............................. 8,335.7 7,760.2 6,872.2
----------- ----------- -----------
Benefits and expenses:
Insurance policy benefits........................... 3,815.9 3,580.5 3,216.5
Provision for losses................................ 147.6 44.2 25.8
Interest expense.................................... 561.7 440.5 312.3
Amortization........................................ 752.1 733.0 610.9
Other operating costs and expenses.................. 1,353.2 1,218.9 1,031.0
Impairment charge................................... 554.3 549.4 190.0
Merger-related charges.............................. -- 148.0 --
----------- ----------- -----------
Total benefits and expenses................. 7,184.8 6,714.5 5,386.5
----------- ----------- -----------
Income before income taxes, minority
interest and extraordinary charge......... 1,150.9 1,045.7 1,485.7
Income tax expense.................................... 423.1 445.6 560.1
----------- ----------- -----------
Income before minority interest and
extraordinary charge...................... 727.8 600.1 925.6
Minority interest:
Distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary
trusts, net of income taxes...................... 132.8 90.4 49.0
Dividends on preferred stock of subsidiaries........ -- -- 3.3
----------- ----------- -----------
Income before extraordinary charge.......... 595.0 509.7 873.3
Extraordinary charge on extinguishment of debt, net of
income taxes........................................ -- 42.6 6.9
----------- ----------- -----------
Net income.................................. 595.0 467.1 866.4
Preferred stock dividends............................. 1.5 7.8 21.9
----------- ----------- -----------
Net income applicable to common stock....... $ 593.5 $ 459.3 $ 844.5
=========== =========== ===========
Earnings per common share:
Basic:
Weighted average shares outstanding.............. 324,635,000 311,785,000 311,050,000
Net income before extraordinary charge........... $1.83 $1.61 $2.74
Extraordinary charge............................. -- .14 .02
----------- ----------- -----------
Net income.................................. $1.83 $1.47 $2.72
=========== =========== ===========
Diluted:
Weighted average shares outstanding.............. 332,893,000 332,701,000 338,722,000
Net income before extraordinary charge........... $1.79 $1.53 $2.54
Extraordinary charge............................. -- .13 .02
----------- ----------- -----------
Net income.................................. $1.79 $1.40 $2.52
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
61
<PAGE> 62
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED OTHER
PREFERRED AND ADDITIONAL COMPREHENSIVE RETAINED
TOTAL STOCK PAID-IN CAPITAL INCOME EARNINGS
-------- --------- --------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... $4,216.8 $267.1 $2,350.7 $ 36.6 $1,562.4
Comprehensive income, net of
tax:
Net income.................. 866.4 -- -- -- 866.4
Change in unrealized
appreciation
(depreciation) of
investments (net of
applicable income tax
expense of $90.5
million).................. 164.9 -- -- 164.9 --
Change in minimum pension
liability adjustment (net
of applicable income tax
benefit of $.5 million)... (.9) -- -- (.9) --
--------
Total comprehensive
income............... 1,030.4
Conversion of preferred stock
into common shares.......... -- (151.3) 151.3 -- --
Issuance of shares in merger
transactions................ 471.5 -- 471.5 -- --
Issuance of shares for stock
options and for employee
benefit plans............... 246.7 -- 246.7 -- --
Tax benefit related to issuance
of shares under stock option
plans....................... 91.4 -- 91.4 -- --
Conversion of convertible
debentures into common
shares...................... 150.0 -- 150.0 -- --
Cost of shares acquired........ (857.0) -- (830.9) -- (26.1)
Other.......................... (10.9) -- (10.9) -- --
Dividends and inducements
applicable to preferred
stock....................... (21.9) -- -- -- (21.9)
Dividends on common stock...... (103.1) -- -- -- (103.1)
-------- ------ -------- ------ --------
Balance, December 31, 1997....... $5,213.9 $115.8 $2,619.8 $200.6 $2,277.7
</TABLE>
(continued on following page)
The accompanying notes are an integral part
of the consolidated financial statements.
62
<PAGE> 63
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED OTHER
PREFERRED AND ADDITIONAL COMPREHENSIVE RETAINED
TOTAL STOCK PAID-IN CAPITAL INCOME (LOSS) EARNINGS
-------- --------- --------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 (carried
forward from prior page)............ $5,213.9 $115.8 $2,619.8 $200.6 $2,277.7
Comprehensive income, net of tax:
Net income....................... 467.1 -- -- -- 467.1
Change in unrealized appreciation
(depreciation) of investments
(net of applicable income tax
benefit of $125.1)............. (227.8) -- -- (227.8) --
Change in minimum pension
liability adjustment (net of
applicable income tax expense
of $.4 million)................ (1.2) -- -- (1.2) --
--------
Total comprehensive
income.................... 238.1
Conversion of preferred stock into
common shares.................... -- (10.3) 10.3 -- --
Issuance of shares for stock options
and for employee benefit plans... 158.1 -- 158.1 -- --
Tax benefit related to issuance of
shares under stock option
plans............................ 63.1 -- 63.1 -- --
Conversion of convertible debentures
into common shares............... 67.4 -- 67.4 -- --
Issuance of warrants in conjunction
with financing transaction....... 7.7 -- 7.7 -- --
Cost of shares acquired............. (308.4) -- (189.9) -- (118.5)
Dividends on preferred stock........ (7.8) -- -- -- (7.8)
Dividends on common stock........... (158.5) -- -- -- (158.5)
-------- ------ -------- ------ --------
Balance, December 31, 1998............ $5,273.6 $105.5 $2,736.5 $(28.4) $2,460.0
</TABLE>
(continued on following page)
The accompanying notes are an integral part
of the consolidated financial statements.
63
<PAGE> 64
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED OTHER
PREFERRED AND ADDITIONAL COMPREHENSIVE RETAINED
TOTAL STOCK PAID-IN CAPITAL INCOME (LOSS) EARNINGS
-------- --------- --------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 (carried
forward from prior page............. $5,273.6 $105.5 $2,736.5 $ (28.4) $2,460.0
Comprehensive income (loss), net of
tax:
Net income....................... 595.0 -- -- -- 595.0
Change in unrealized appreciation
(depreciation) of investments
(net of applicable income tax
benefit of $429.7)............. (747.4) -- -- (747.4) --
Change in minimum pension
liability adjustment (net of
applicable income tax expense
of $2.3 million)............... 4.2 -- -- 4.2 --
--------
Total comprehensive loss.... (148.2)
Issuance of common shares........... 209.6 -- 209.6 -- --
Issuance of convertible preferred
shares........................... 478.4 478.4 -- --
Tax benefit related to issuance of
shares under stock option
plans............................ 25.0 -- 25.0 -- --
Conversion of preferred stock into
common shares.................... -- (105.5) 105.5 -- --
Cost of shares acquired............. (89.5) -- (89.5) -- --
Dividends on preferred stock........ (1.5) -- -- -- (1.5)
Dividends on common stock........... (191.2) -- -- -- (191.2)
-------- ------ -------- ------- --------
Balance, December 31, 1999............ $5,556.2 $478.4 $2,987.1 $(771.6) $2,862.3
======== ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
64
<PAGE> 65
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Insurance policy income................................ $ 3,488.5 $ 3,378.5 $ 2,956.3
Net investment income.................................. 3,090.7 2,658.3 2,240.1
Points and origination fees............................ 390.0 298.3 179.8
Fee revenue and other income........................... 499.9 371.6 259.8
Insurance policy benefits.............................. (2,747.6) (2,932.4) (2,735.6)
Interest expense....................................... (533.6) (453.6) (315.9)
Policy acquisition costs............................... (819.4) (790.3) (699.0)
Merger-related charges................................. (20.9) (93.7) --
Other operating costs.................................. (1,306.3) (1,161.4) (1,044.2)
Taxes.................................................. (252.7) (295.7) (231.8)
---------- ---------- ----------
Net cash provided by operating activities........... 1,788.6 979.6 609.5
---------- ---------- ----------
Cash flows from investing activities:
Sales of investments................................... 15,811.6 30,708.4 18,436.8
Maturities and redemptions of investments.............. 1,056.8 1,541.2 750.7
Purchases of investments............................... (18,957.4) (32,040.0) (20,043.8)
Cash received from the sale of finance receivables, net
of expenses......................................... 9,516.6 13,303.6 10,683.2
Principal payments received on finance receivables..... 7,487.2 6,065.9 4,084.4
Finance receivables originated......................... (24,650.5) (21,261.6) (15,550.2)
Acquisition of subsidiaries, net of cash held at date
of merger........................................... -- -- (759.7)
Other.................................................. (124.8) (78.2) (62.8)
---------- ---------- ----------
Net cash used by investing activities............... (9,860.5) (1,760.7) (2,461.4)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts........... 534.3 710.8 780.4
Issuance of common and convertible preferred shares.... 588.4 121.3 57.4
Issuance of notes payable and commercial paper......... 21,219.7 16,630.9 13,604.3
Payments on notes payable and commercial paper......... (14.657.5) (15,522.5) (11,747.3)
Payments to repurchase equity securities............... (29.5) (257.4) (738.6)
Purchase of preferred stock of subsidiary.............. -- -- (98.4)
Investment borrowings.................................. (127.3) (433.3) 962.5
Amounts received for deposit products.................. 3,935.0 3,127.4 2,099.4
Withdrawals from deposit products...................... (3,029.6) (2,763.2) (2,072.3)
Other.................................................. -- -- (13.2)
Dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts................................... (379.4) (282.9) (173.7)
---------- ---------- ----------
Net cash provided by financing activities........... 8,054.1 1,331.1 2,660.5
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... (17.8) 550.0 808.6
Cash and cash equivalents, beginning of year............. 1,704.7 1,154.7 346.1
---------- ---------- ----------
Cash and cash equivalents, end of year................... $ 1,686.9 $ 1,704.7 $ 1,154.7
========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
65
<PAGE> 66
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The following summary explains the accounting policies we use to arrive at
the more significant numbers in our financial statements. We prepare our
financial statements in accordance with generally accepted accounting principles
("GAAP"). We follow the accounting standards established by the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission. We have restated all
share and per-share amounts for the two-for-one stock split distributed February
11, 1997.
Conseco, Inc. ("we", "Conseco" or the "Company" ) is a financial services
holding company operating throughout the United States. Our life insurance
segment develops, markets and administers supplemental health insurance,
annuity, individual life insurance, individual and group major medical insurance
and other insurance products. This segment also includes other asset
accumulation products such as mutual funds. Our finance segment originates,
purchases, sells and services consumer and commercial finance loans. Conseco's
operating strategy is to grow its businesses by focusing 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. Conseco has supplemented its growth by acquiring companies
with profitable niche products and strong distribution systems.
Consolidation issues. The consolidated financial statements give
retroactive effect to the merger (the "Merger") with Conseco Finance Corp.
("Conseco Finance", formerly Green Tree Financial Corporation prior to its name
change in November 1999) in a transaction accounted for as a pooling of
interests (see note 2, "Acquisitions"). The pooling of interests method of
accounting requires the restatement of all periods presented as if Conseco and
Conseco Finance had always been combined. The consolidated statement of
shareholders' equity therefore reflects the accounts of the Company as if
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
Conseco Finance's financial statements to conform to Conseco's presentations.
See note 2 for additional discussion of the Merger.
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance. If the planned sale is completed, the Company will no longer have
finance operations.
Our consolidated financial statements exclude the results of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates. We reclassified certain amounts in our 1998 and 1997
consolidated financial statements and notes to conform with the 1999
presentation. These reclassifications have no effect on net income or
shareholders' equity.
INVESTMENTS
Fixed maturities are securities that mature more than one year after
issuance and include bonds, notes receivable and redeemable preferred stock.
Fixed maturities that we may sell prior to maturity are classified as actively
managed and are carried at estimated fair value, with any unrealized gain or
loss, net of tax and related adjustments, recorded as a component of
shareholders' equity. Fixed maturity securities that we intend to sell in the
near term are classified as trading and included in other invested assets. We
include any unrealized gain or loss on trading securities in net investment
gains.
Interest-only securities represent the right to receive certain future cash
flows from securitization transactions structured prior to our September 8, 1999
announcement (see "Revenue Recognition for Sales of Finance Receivables and
Amortization of Servicing Rights" below). Such cash flows generally are equal to
the value of the principal and interest to be collected on the underlying
financial contracts of each
66
<PAGE> 67
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securitization in excess of the sum of the principal and interest to be paid on
the securities sold and contractual servicing fees. We carry interest-only
securities at estimated fair value. We determine fair value by discounting the
projected cash flows over the expected life of the receivables sold using
current prepayment, default loss and interest rate assumptions. Estimates for
prepayments, defaults, and losses for manufactured housing loans are determined
based on a macroeconomic model developed by the Company with the assistance of
outside experts. We record any unrealized gain or loss determined to be
temporary, net of tax, as a component of 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 current assumptions is
less than the book value of the interest-only securities. When declines in value
considered to be other than temporary occur, we reduce the amortized cost to
estimated fair value and recognize a loss in the statement of operations. The
assumptions used to determine new values are based on our internal evaluations
and consultation with external advisors having significant experience in valuing
these securities. See note 4 for additional discussion of gain on sale of
receivables and interest-only securities.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholders' equity.
Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses.
Policy loans are stated at their current unpaid principal balances.
Venture capital investments include equity and equity-type investments made
by our subsidiary which engages in venture capital investment activity. At the
time we enter into these investments, we believe they have high growth or
appreciation potential. These investments are carried at estimated fair value,
with changes in fair value recognized as investment income. When these venture
capital investments are publicly traded, fair value is generally based upon
market prices. When liquidity is limited because of thinly traded securities,
limited partnership structures, large-block holdings, restricted shares or other
special situations, we adjust quoted market prices to produce an estimate of the
attainable fair values. We estimate the fair values of securities that are not
publicly traded based upon transactions which directly affect the value of such
securities and consideration of the investee's financial results, conditions and
prospects.
Other invested assets include: (i) trading securities; (ii) Standard &
Poor's 500 Call Options ("S&P 500 Call Options"); and (iii) certain
non-traditional investments. We carry the S&P 500 Call Options at estimated fair
value as further described below under "Standard & Poor's 500 Index Call Options
and Interest Rate Swap Agreements". Non-traditional investments include
investments in certain limited partnerships, mineral rights and promissory
notes; we account for them using either the cost method, or for investments in
partnerships over whose operations the Company exercises significant influence,
the equity method.
We defer any fees received or costs incurred when we originate investments.
We amortize fees, costs, discounts and premiums as yield adjustments over the
contractual lives of the investments. We consider anticipated prepayments on
mortgage-backed securities in determining estimated future yields on such
securities.
When we sell a security (other than trading securities, venture capital
investments or S&P 500 Call Options), we report the difference between our sale
proceeds and its amortized cost (determined based on specific identification) as
an investment gain or loss.
We regularly evaluate all of our investments based on current economic
conditions, credit loss experience and other investee-specific developments. If
there is a decline in a security's net realizable value that is other
67
<PAGE> 68
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than temporary, we treat it as a realized loss and reduce our cost basis of the
security to its estimated fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value.
FINANCE RECEIVABLES
Finance receivables include manufactured housing, home equity, home
improvement, general consumer, equipment, commercial finance and revolving
credit loans. Commercial finance receivables generally represent dealer
floorplan; truck lending and leasing; and small-ticket equipment lending and
leasing (such as small-ticket computer, office and telecommunication equipment).
Revolving credit loans consist of retail credit card arrangements with
merchants, dealers and their customers. We carry finance receivables at
amortized cost, net of an allowance for credit losses.
We defer fees received and costs incurred when we originate finance
receivables. We amortize deferred fees, costs, discounts and premiums over the
contractual lives of the receivables, giving consideration to anticipated
prepayments. We include such deferred fees or costs in the amortized cost of
finance receivables.
We generally stop accruing investment income on finance receivables after
three consecutive months of contractual delinquency.
Finance receivables transferred to securitization trusts in transactions
structured as securitized borrowings are classified as finance
receivables -- securitized. These receivables are held as collateral for the
notes issued to investors in the securitization trusts. Finance receivables held
by us without such collateral restrictions are classified as finance
receivables.
PROVISION FOR LOSSES
The provision for credit losses charged to expense is based upon an
assessment of current and historical loss experience, loan portfolio trends,
prevailing economic and business conditions, and other relevant factors. In
management's opinion, the provision is sufficient to maintain the allowance for
credit losses at a level that adequately provides for losses inherent in the
portfolio.
We reduce the carrying value of finance receivables to net realizable value
after six months of contractual delinquency.
COST OF POLICIES PRODUCED
The costs that vary with, and are primarily related to, producing new
insurance business are referred to as cost of policies produced. We amortize
these costs using the interest rate credited to the underlying policy: (i) in
relation to the estimated gross profits for universal life-type and
investment-type products; or (ii) in relation to future anticipated premium
revenue for other products.
When we realize a gain or loss on investments backing our universal life or
investment-type products, we adjust the amortization to reflect the change in
estimated gross profits from the products due to the current realized gain or
loss and the effect of the event on future investment yields. We also adjust the
cost of policies produced for the change in amortization that would have been
recorded if actively managed fixed maturity securities had been sold at their
stated aggregate fair value and the proceeds reinvested at current yields. We
include the impact of this adjustment in accumulated other comprehensive income
(loss) within shareholders' equity.
68
<PAGE> 69
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When we replace an existing insurance contract with another insurance
contract with substantially different terms, all unamortized cost of policies
produced related to the replaced contract is immediately written off. When we
replace an existing insurance contract with another insurance contract with
substantially similar terms, we continue to defer the cost of policies produced
associated with the replaced contract. Such costs related to the replaced
contracts which continue to be deferred were $8.6 million, $9.1 million and $9.1
million in 1999, 1998 and 1997, respectively.
Each year, we evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable.
COST OF POLICIES PURCHASED
The cost assigned to the right to receive future cash flows from contracts
existing at the date of an acquisition is referred to as the cost of policies
purchased. We also defer renewal commissions paid in excess of ultimate
commission levels related to the purchased policies in this account. The balance
of this account is amortized, evaluated for recovery, and adjusted for the
impact of unrealized gains (losses) in the same manner as the cost of policies
produced described above.
The discount rate we use to determine the value of the cost of policies
purchased is the rate of return we need to earn in order to invest in the
business being acquired. In determining this required rate of return, we
consider many factors including: (i) the magnitude of the risks associated with
each of the actuarial assumptions used in determining expected future cash
flows; (ii) the cost of our capital required to fund the acquisition; (iii) the
likelihood of changes in projected future cash flows that might occur if there
are changes in insurance regulations and tax laws; (iv) the acquired company?s
compatibility with other Conseco activities that may favorably affect future
cash flows; (v) the complexity of the acquired company; and (vi) recent prices
(i.e., discount rates used in determining valuations) paid by others to acquire
similar blocks of business.
The discount rate used to determine the cost of policies purchased for each
of our 1997 acquisitions was 18 percent.
GOODWILL
Goodwill is the excess of the amount we paid to acquire a company over the
fair value of its net assets. Our analysis of acquired insurance businesses
indicates that the anticipated ongoing cash flows from the earnings of the
purchased businesses extend significantly beyond the maximum 40-year period
allowed for goodwill amortization. Accordingly, we amortize goodwill on the
straight-line basis generally over a 40-year period. At December 31, 1999, the
total accumulated amortization of goodwill was $391.2 million. We continually
monitor the value of our goodwill based on our estimates of future earnings. We
determine whether goodwill is fully recoverable from projected undiscounted net
cash flows from earnings of the subsidiaries over the remaining amortization
period. If we were to determine that changes in such projected cash flows no
longer support the recoverability of goodwill over the remaining amortization
period, we would reduce its carrying value with a corresponding charge to
expense or shorten the amortization period (no such changes have occurred). Cash
flows considered in such an analysis are those of the business acquired, if
separately identifiable, or the product line that acquired the business, if such
earnings are not separately identifiable.
ASSETS HELD IN SEPARATE ACCOUNTS AND INVESTMENT TRUST
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims that may arise out of any
other business of Conseco. We report separate account assets at market value;
the underlying
69
<PAGE> 70
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment risks are assumed by the contract holders. We record the related
liabilities at amounts equal to the market value of the underlying assets. We
record the fees earned for administrative and contractholder services performed
for the separate accounts in insurance policy income.
In addition, we hold investments in a trust for the benefit of the
purchasers of certain products of our asset management subsidiary; this amount
is offset by a corresponding liability account, the value of which fluctuates in
relation to changes in the values of these investments. Because we hold the
residual interests in the cash flows from the trust and actively manage its
investments, we are required to include the accounts of the trust in our
consolidated financial statements. We record the fees earned for investment
management and other services provided to the trust as fee revenue.
RECOGNITION OF INSURANCE POLICY INCOME AND RELATED BENEFITS AND EXPENSES ON
INSURANCE CONTRACTS
Generally, we recognize insurance premiums for traditional life and
accident and health contracts as earned over the premium-paying periods. We
establish reserves for future benefits on a net-level premium method based upon
assumptions as to investment yields, mortality, morbidity, withdrawals and
dividends. We record premiums for universal life-type and investment-type
contracts that do not involve significant mortality or morbidity risk as
deposits to insurance liabilities. Revenues for these contracts consist of
mortality, morbidity, expense and surrender charges. We establish reserves for
the estimated present value of the remaining net costs of all reported and
unreported claims.
LIABILITIES RELATED TO CERTIFICATES OF DEPOSIT
These liabilities relate to the certificates of deposits issued by our bank
subsidiary. The liability and interest expense account are also increased for
the interest which accrues on the deposits. The weighted average interest
crediting rate on these deposits was 5.8 percent during 1999.
REINSURANCE
In the normal course of business, we seek to limit our exposure to loss on
any single insured or to certain groups of policies by ceding reinsurance to
other insurance enterprises. We currently retain no more than $.8 million of
mortality risk on any one policy. We diversify the risk of reinsurance loss by
using a number of reinsurers that have strong claims-paying ratings. If any
reinsurer could not meet its obligations, the Company would assume the
liability. The likelihood of a material loss being incurred as a result of the
failure of one of our reinsurers is considered remote. The cost of reinsurance
is recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policy. The cost of
reinsurance ceded totaled $418.6 million, $541.3 million and $499.0 million in
1999, 1998 and 1997, respectively. A receivable is recorded for the reinsured
portion of insurance policy benefits paid and liabilities for insurance
products. Reinsurance recoveries netted against insurance policy benefits
totaled $392.0 million, $484.3 million and $587.5 million in 1999, 1998 and
1997, respectively.
From time-to-time, we assume insurance from other companies. Any costs
associated with the assumption of insurance are amortized consistent with the
method used to amortize the cost of policies produced described above.
Reinsurance premiums assumed totaled $547.8 million, $316.0 million and $290.3
million in 1999, 1998 and 1997, respectively.
INCOME TAXES
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities. In assessing the realization of deferred income tax assets, we
consider whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets depends
upon generating future taxable income during the
70
<PAGE> 71
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periods in which temporary differences become deductible. If future income is
not generated as expected, deferred income tax assets may need to be written off
(no such write-offs have occurred).
INVESTMENT BORROWINGS
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that, with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. Such borrowings averaged $1,081.1
million during 1999 and $1,092.4 million during 1998. These borrowings were
collateralized by investment securities with fair values approximately equal to
the loan value. The weighted average interest rate on short-term collateralized
borrowings was 5.4 percent and 6.0 percent in 1999 and 1998, respectively. The
primary risk associated with short-term collateralized borrowings is that a
counterparty will be unable to perform under the terms of the contract. Our
exposure is limited to the excess of the net replacement cost of the securities
over the value of the short-term investments (such excess was not material at
December 31, 1999). We believe the counterparties to our reverse repurchase and
dollar-roll agreements are financially responsible and that the counterparty
risk is minimal.
USE OF ESTIMATES
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, venture capital
investments, servicing rights, goodwill, liabilities for insurance and asset
accumulation products, liabilities related to litigation, guaranty fund
assessment accruals, gain on sale of finance receivables, allowance for credit
losses on finance receivables and deferred income taxes. If our future
experience differs materially from these estimates and assumptions, our
financial statements could be affected.
STANDARD & POOR'S 500 INDEX CALL OPTIONS AND INTEREST RATE SWAP AGREEMENTS
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 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. Policyholder
account balances for these annuities fluctuate in relation to changes in the
values of these options. We reflect changes in the value of these options in net
investment income. During 1999, 1998 and 1997, net investment income included
$142.3 million, $103.9 million and $39.4 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 $129.2
million at December 31, 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 $96.3
million, $52.0 million and $14.6 million during 1999, 1998 and 1997,
respectively. The unamortized premium of the S&P 500 Call Options was $59.5
million at December 31, 1999.
We periodically use interest-rate swaps to hedge the interest rate risk
associated with our borrowed capital. At December 31, 1999, we held instruments
having an aggregate notional principal amount of $2.4 billion that effectively
convert a portion of our fixed-rate borrowed capital into floating-rate
instruments
71
<PAGE> 72
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for specified periods of time. The agreements mature in various years through
2008 and have an average remaining life of 3.5 years (the average call date is
1.9 years). We record the difference between the rates as an adjustment to
interest expense. During 1999, interest expense was reduced by $6.4 million as a
result of these interest-rate swap agreements. At December 31, 1999, such
agreements had a fair value of $(48.2) 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 December 31, 1999, all of the counterparties were
rated "A" or higher by Standard & Poor's Corporation.
REVENUE RECOGNITION FOR SALES OF FINANCE RECEIVABLES AND AMORTIZATION OF
SERVICING RIGHTS
On September 8, 1999, we announced that we would no longer structure our
securitizations in a manner that results in recording a sale of the loans.
Instead, we are using the portfolio method (the accounting method required for
securitizations which are structured as secured borrowings) to account for
securitization transactions structured after that date. Our new securitizations
are structured to include provisions that entitle the Company to repurchase
assets transferred to the special purpose entity when the aggregate unpaid
principal balance reaches a specified level. Until these assets are repurchased,
however, the assets are the property of the special purpose entity and are not
available to satisfy the claims of creditors of the Company. Pursuant to
Financial Accounting Standards Board Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"), such securitization transactions are accounted for under the
portfolio method, whereby the loans and securitization debt remain on our
balance sheet, rather than as sales.
For securitizations structured prior to September 8, 1999, we accounted for
the sale of finance receivables in accordance with SFAS 125. In applying SFAS
125 to our securitized sales, we recognized a gain, representing the difference
between the proceeds from the sale (net of related sale costs) and the carrying
value of the component of the finance receivable sold. We determined such
carrying amount by allocating the carrying value of the finance receivables
between the portion we sell and the interests we retain (generally interest-only
securities, servicing rights and, in some instances, other securities), based on
each portion's relative fair values on the date of the sale.
We amortize the servicing rights (classified as other assets) we retain
after the sale of finance receivables, in proportion to, and over the estimated
period of, net servicing income.
We evaluate servicing rights for impairment on an ongoing basis, stratified
by product type and origination period. To the extent that the recorded amount
exceeds the fair value, we establish a valuation allowance through a charge to
earnings. If we determine, upon subsequent measurement of the fair value of
these servicing rights, that the fair value equals or exceeds the amortized
cost, any previously recorded valuation allowance would be deemed unnecessary
and restored to earnings.
FAIR VALUES OF FINANCIAL INSTRUMENTS
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, we use values obtained from
broker-dealer market makers or by discounting expected future cash flows
using a current market rate appropriate for the yield, credit quality, and
(for fixed maturity securities) the maturity of the investment being
priced.
72
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest-only securities. We discount future expected cash flows over the
expected life of the receivables sold using prepayment, default, loss
severity and interest rate assumptions that we believe market participants
would use to value such securities.
Venture capital investments. We carry these investments at estimated fair
value based on quoted market prices or estimates of fair value if the
securities are not publicly traded. In certain situations, including thinly
traded securities, limited partnership structures, large-block holdings,
restricted shares or other special situations, we adjust quoted market
prices to produce an estimate of the attainable fair values.
Cash and cash equivalents. The carrying amount for these instruments
approximates their estimated fair value.
Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. We aggregate loans with similar characteristics in our
calculations.
Other invested assets. We use quoted market prices, where available. When
quotes are not available, we estimate the fair value based on: (i)
discounted future expected cash flows; or (ii) independent transactions
which establish a value for our investment. When we are unable to estimate
a fair value, we assume a market value equal to carrying value.
Finance receivables. The estimated fair value of finance receivables,
including those that have been securitized, is determined based on general
market transactions which establish values for similar loans.
Insurance liabilities for interest-sensitive products. We discount future
expected cash flows based on interest rates currently being offered for
similar contracts with similar maturities.
Liabilities related to certificates of deposit. We estimate the fair value
of these liabilities using discounted cash flow analyses based on current
crediting rates. Since crediting rates are generally not guaranteed beyond
one year, market value approximates carrying value.
Investment borrowings and notes payable. For publicly traded debt, we use
current market values. For other notes, we use discounted cash flow
analyses based on our current incremental borrowing rates for similar types
of borrowing arrangements.
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts. We use quoted market prices.
73
<PAGE> 74
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets:
Actively managed fixed maturities............... $22,203.8 $22,203.8 $21,827.3 $21,827.3
Interest-only securities........................ 905.0 905.0 1,305.4 1,305.4
Equity securities............................... 312.7 312.7 376.4 376.4
Mortgage loans.................................. 1,274.5 1,188.0 1,130.2 1,200.9
Policy loans.................................... 664.1 664.1 685.6 685.6
Venture capital investments..................... 527.5 527.5 47.1 47.1
Other invested assets........................... 544.0 820.0 701.0 701.0
Cash and cash equivalents....................... 1,686.9 1,686.9 1,704.7 1,704.7
Finance receivables (including finance
receivables-securitized)..................... 9,834.6 10,183.0 3,299.5 3,390.0
Financial liabilities:
Insurance liabilities for interest-sensitive
products(1).................................. 17,322.4 17,322.4 17,229.4 17,229.4
Liabilities related to certificates of
deposit...................................... 870.5 870.5 30.0 30.0
Investment borrowings........................... 828.9 828.9 956.2 956.2
Notes payable and commercial paper:
Corporate.................................... 2,481.8 2,431.1 2,932.2 2,900.4
Finance...................................... 4,682.5 4,681.7 2,389.3 2,386.4
Related to securitized finance receivables
structured as collateralized borrowings.... 4,641.8 4,636.8 -- --
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.... 2,639.1 2,135.3 2,096.9 1,966.6
</TABLE>
- -------------------------
(1) The estimated fair value of the liabilities for interest-sensitive products
was approximately equal to its carrying value at December 31, 1999 and 1998.
This was because interest rates credited on the vast majority of account
balances approximate current rates paid on similar products and because
these rates are not generally guaranteed beyond one year. We are not
required to disclose fair values for insurance liabilities, other than those
for interest-sensitive products. However, we take into consideration the
estimated fair values of all insurance liabilities in our overall management
of interest rate risk. We attempt to minimize exposure to changing interest
rates by matching investment maturities with amounts due under insurance
contracts.
IMPAIRMENT CHARGE
During 1999 and early 2000 the Company reevaluated its interest-only
securities and servicing rights, including the underlying assumptions, in light
of loss experience exceeding previous expectations. The principal change in the
revised assumptions resulting from this process was an increase in expected
future credit losses, relating primarily to reduced assumptions as to future
housing price inflation, recent loss experience and refinements to the
methodology of the model. The effect of this change was offset somewhat by a
revision to the estimation methodology to incorporate the value associated with
the cleanup call rights held by the Company in securitizations. We recognized a
$554.3 million impairment charge ($349.2 million after tax) in 1999 to reduce
the book value of the interest-only securities and servicing rights.
During the second quarter of 1998, prepayments on securitized loan
contracts continued to exceed expectations and management concluded that such
prepayments were likely to continue to be higher than
74
<PAGE> 75
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected in future periods as well. As a result of these developments, we
concluded that the value of the interest-only securities and servicing rights
had been impaired, and we determined a new value using current assumptions. In
addition, the market yields of publicly traded securities similar to our
interest-only securities also increased during the second quarter. The
assumptions used to determine the new value at that time were based on our
internal evaluations and consultation with external investment managers having
significant experience in valuing these securities. The new assumptions reflect
the following changes from the assumptions previously used: (i) an increase in
prepayment rates; (ii) an increase (to 15 percent from 11.5 percent) in the
discount rate used to determine the present value of future cash flows; and
(iii) an increase in anticipated default rates. We recognized a $549.4 million
impairment charge in 1998 to reduce the carrying value of the interest-only
securities and servicing rights.
In 1997, we conducted a review of the systems, financial modeling and
assumptions used in the valuation of our interest-only securities. The review
was part of our ongoing process to ascertain the appropriateness of assumptions,
systems and methods of modeling to determine the valuation of our interest-only
securities. The nature and extent of the review procedures were influenced by
our experiencing higher manufactured housing loan prepayments in 1997. We
recognized a $190.0 million impairment charge in 1997 to take into account the
adverse prepayment experience in 1997 and our expectations of future
prepayments, the effect upon the interest-only securities of partial prepayments
(principal curtailments), and the impact that higher prepayments have on the
weighted average rate of projected future interest due to investors.
CHARGE RELATED TO CONSECO FINANCE MERGER
We recognized a $148.0 million merger-related charge in the second quarter
of 1998 related to the Merger consisting of: $45.0 million transaction costs;
$71.0 million severance and other employment related costs; and $32.0 million
other costs. Transaction costs included expenses related to the Merger such as
fees paid for investment bankers, attorneys, accountants and printers. Severance
and other employment related costs included contractual severance and other
benefits due to certain executives. Other costs included the write-off of
computer equipment and related software that will no longer be used, losses for
facilities to be vacated, increases to legal expense accruals, and various other
costs.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 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. SFAS 133 is required to be implemented in year 2001. We are
currently evaluating the impact of SFAS 133; at present, we do not believe it
will have a material effect on our consolidated financial position or results of
operations. Because of ongoing changes to implementation guidance, we do not
plan on adopting the new standard until the first quarter of 2001.
We implemented Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") on
January 1, 1999. SOP 98-1 defines internal use software and when the costs
associated with internal use software should be capitalized. The implementation
of SOP 98-1 did not have a material effect on our consolidated financial
position or results of operations.
75
<PAGE> 76
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
MERGER ACCOUNTED FOR AS A POOLING OF INTERESTS
On June 30, 1998, we completed the 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 Conseco Finance's outstanding options), exchanging
.9165 of a share of Conseco common stock for each share of Conseco Finance
common stock. The 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 Conseco Finance as though it had always been a
subsidiary of Conseco.
The results of operations for Conseco and Conseco Finance, separately and
combined, for periods prior to the merger were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Revenues:
Conseco................................................... $3,232.1 $5,568.4
Conseco Finance........................................... 581.9 1,307.3
Less elimination of intercompany revenues................. (.8) (3.5)
-------- --------
Combined............................................... $3,813.2 $6,872.2
======== ========
Net income (loss):
Conseco................................................... $ 274.7 $ 567.3
Conseco Finance........................................... (358.9) 301.4
Less elimination of intercompany net income............... (2.8) (2.3)
-------- --------
Combined............................................... $ (87.0) $ 866.4
======== ========
</TABLE>
ACQUISITIONS ACCOUNTED FOR AS PURCHASES
The following acquisitions were accounted for under the purchase method of
accounting. Under this method, we allocated the cost to acquire the company to
the assets and liabilities acquired based on fair values as of the acquisition
date and we recorded goodwill equal to the excess of the total purchase cost
over the fair value of the assets acquired less the fair value of the
liabilities assumed.
<TABLE>
<CAPTION>
ACQUISITION EFFECTIVE DATE TOTAL COST FINANCING
- ----------- -------------- ----------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Washington National
Corporation................ December 1, 1997 $400 Cash
Colonial Penn Life Insurance
Company and Providential
Life Insurance Company..... September 30, 1997 460 Cash and notes payable
Pioneer Financial Services,
Inc........................ April 1, 1997 505 Common stock and assumption of debt
Capitol American Financial
Corporation................ January 1, 1997 700 Common stock and assumption of debt
</TABLE>
76
<PAGE> 77
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS:
At December 31, 1999, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities............................ $13,570.6 $37.7 $ 965.9 $12,642.4
United States Treasury securities and
obligations of United States government
corporations and agencies.................... 317.4 1.7 8.0 311.1
States and political subdivisions............... 151.5 .1 10.1 141.5
Debt securities issued by foreign governments... 124.1 .8 11.0 113.9
Mortgage-backed securities...................... 7,587.1 6.4 362.4 7,231.1
Below-investment grade (primarily corporate
securities)..................................... 1,939.7 30.3 206.2 1,763.8
--------- ----- -------- ---------
Total actively managed fixed
maturities............................ $23,690.4 $77.0 $1,563.6 $22,203.8
========= ===== ======== =========
Equity securities................................. $ 323.7 $22.8 $ 33.8 $ 312.7
========= ===== ======== =========
</TABLE>
At December 31, 1998, the amortized cost and estimated fair value of
actively managed fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities............................ $12,717.2 $287.7 $167.8 $12,837.1
United States Treasury securities and
obligations of United States government
corporations and agencies.................... 364.7 17.6 .3 382.0
States and political subdivisions............... 103.2 2.3 .9 104.6
Debt securities issued by foreign governments... 131.4 3.9 8.5 126.8
Mortgage-backed securities...................... 6,294.7 100.1 17.6 6,377.2
Below-investment grade (primarily corporate
securities)..................................... 2,237.1 12.6 250.1 1,999.6
--------- ------ ------ ---------
Total actively managed fixed
maturities............................ $21,848.3 $424.2 $445.2 $21,827.3
========= ====== ====== =========
Equity securities................................. $ 373.0 $ 15.8 $ 12.4 $ 376.4
========= ====== ====== =========
</TABLE>
77
<PAGE> 78
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accumulated other comprehensive loss is primarily comprised of unrealized
losses on actively managed fixed maturity investments. Such amounts, included in
shareholders' equity as of December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Unrealized losses on investments............................ $(1,504.3) $(40.4)
Adjustments to cost of policies purchased and cost of
policies produced......................................... 291.2 10.4
Deferred income tax benefit................................. 443.4 13.7
Other....................................................... (1.7) (7.7)
--------- ------
Net unrealized losses on investments.............. (771.4) (24.0)
Minimum pension liability adjustment, net of income tax
benefit................................................... (.2) (4.4)
--------- ------
Accumulated other comprehensive loss.............. $ (771.6) $(28.4)
========= ======
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 1999, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Most of the mortgage-backed securities shown below
provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Due in one year or less..................................... $ 299.1 $ 299.6
Due after one year through five years....................... 2,156.9 2,105.0
Due after five years through ten years...................... 5,058.6 4,706.3
Due after ten years......................................... 8,561.3 7,835.2
--------- ---------
Subtotal............................................... 16,075.9 14,946.1
Mortgage-backed securities(a)............................... 7,614.5 7,257.7
--------- ---------
Total actively managed fixed maturities........... $23,690.4 $22,203.8
========= =========
</TABLE>
- -------------------------
(a) Includes below-investment grade mortgage-backed securities with an amortized
cost and estimated fair value of $27.4 million and $26.6 million,
respectively.
78
<PAGE> 79
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Insurance and fee-based operations:
Fixed maturities......................................... $1,641.0 $1,628.5 $1,467.5
Venture capital investments.............................. 368.2 6.9 .8
Equity securities........................................ 85.1 27.4 23.6
Mortgage loans........................................... 106.4 96.4 84.0
Policy loans............................................. 44.5 44.1 38.6
Equity-indexed products.................................. 142.3 103.9 39.4
Other invested assets.................................... 78.1 132.6 88.6
Cash and cash equivalents................................ 60.2 57.0 39.6
Separate accounts........................................ 172.8 51.0 70.3
-------- -------- --------
Gross investment income.......................... 2,698.6 2,147.8 1,852.4
Amortization of the cost of S&P 500 Call Options and
other investment expenses............................. 104.9 69.7 27.1
-------- -------- --------
Net investment income earned by insurance and
fee-based operations........................... 2,593.7 2,078.1 1,825.3
Finance operations:
Finance receivables and other............................ 632.6 295.5 220.4
Interest-only securities................................. 185.1 132.9 125.8
-------- -------- --------
Net investment income............................ $3,411.4 $2,506.5 $2,171.5
======== ======== ========
</TABLE>
The carrying value of fixed maturity investments and mortgage loans not
accruing investment income totaled $48.3 million, $50.1 million and $3.1 million
at December 31, 1999, 1998 and 1997, respectively.
Investment gains (losses), net of investment gain expenses, were included
in revenue as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities:
Gross gains............................................... $ 121.1 $458.0 $342.6
Gross losses.............................................. (168.4) (138.6) (41.4)
Other than temporary decline in fair value................ (24.1) (11.7) (1.2)
------- ------ ------
Net investment gains (losses) from fixed
maturities before expenses...................... (71.4) 307.7 300.0
Equity securities........................................... 10.2 (9.1) 13.2
Mortgages................................................... (.8) (2.1) (.8)
Other than temporary decline in fair value of other invested
assets.................................................... (3.7) (20.7) --
Other....................................................... (20.7) 1.9 (1.2)
------- ------ ------
Net investment gains (losses) before expenses..... (86.4) 277.7 311.2
Investment expenses......................................... 69.8 69.5 44.7
------- ------ ------
Net investment gains (losses)..................... $(156.2) $208.2 $266.5
======= ====== ======
</TABLE>
At December 31, 1999, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 8 percent, 8 percent, 7 percent, 7 percent, 7
percent and 7 percent of the mortgage loan balance were on properties located in
Ohio, New York, Texas, Florida, Pennsylvania and California,
79
<PAGE> 80
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. No other state comprised greater than 5 percent of the mortgage
loan balance. Less than 1 percent of the mortgage loan balance was noncurrent at
December 31, 1999. At December 31, 1999, our allowance for loss on mortgage
loans was $3.8 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $210.0 million at December 31, 1999.
Conseco had no investments in any single entity in excess of 10 percent of
shareholders' equity at December 31, 1999, other than investments issued or
guaranteed by the United States government or a United States government agency.
Our venture capital investments had an estimated fair value of $527.5
million at December 31, 1999, and include equity and equity-type investments
made by our subsidiary which engages in venture capital investment activities.
Venture capital investment income will fluctuate from period-to-period based on
changes in estimated market values of our venture capital investments. During
1999, we invested $53.2 million in a company in the wireless communication
business. The market values of many companies in this sector increased
significantly in 1999. In the fourth quarter of 1999, our investee sold shares
of common stock to the public in an initial public offering. As a result, an
ascertainable market value was established for our investment, which we adjusted
to recognize liquidity restrictions. In 1999, we recognized venture capital
income of $354.8 million related to this investment.
4. FINANCE RECEIVABLES AND INTEREST-ONLY SECURITIES:
On September 8, 1999, we announced that we would no longer structure our
securitizations in a manner that results in recording a sale of the loans.
Instead, we are using the portfolio method to account for securitization
transactions structured after that date. Our new securitizations are structured
to include provisions that entitle the Company to repurchase assets transferred
to the special purpose entity when the aggregate unpaid principal balance
reaches a specified level. Until these assets are repurchased, however, the
assets are the property of the special purpose entity and are not available to
satisfy claims of creditors of the Company. Pursuant to SFAS 125, such
securitization transactions are accounted for under the portfolio method,
whereby the loans and securitization debt remain on our balance sheet, rather
than as sales.
We classify the finance receivables transferred to the securitization
trusts and held as collateral for the notes issued to investors as finance
receivables-securitized. We are generally able to repurchase these receivables
from the trust when the aggregate unpaid principal balance reaches 20 percent of
the initial principal balance of the finance receivables. The average interest
rate earned on these receivables at December 31, 1999, was approximately 11.7
percent. We classify the notes issued to investors in the securitization trusts
as "notes payable related to securitized finance receivables structured as
collateralized borrowings".
Finance receivables-securitized, summarized by type, were as follows at
December 31, 1999 (dollars in millions):
<TABLE>
<S> <C>
Manufactured housing........................................ $ 953.0
Mortgage services........................................... 2,077.3
Consumer/credit card........................................ 1,076.9
Commercial.................................................. 637.0
--------
4,744.2
Less allowance for credit losses............................ 13.7
--------
Net finance receivables-securitized............... $4,730.5
========
</TABLE>
80
<PAGE> 81
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The other finance receivables, summarized by type, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Manufactured housing........................................ $ 795.8 $ 798.8
Mortgage services........................................... 1,277.0 603.5
Consumer/credit card........................................ 824.7 587.3
Commercial.................................................. 2,281.3 1,352.9
-------- --------
5,178.8 3,342.5
Less allowance for credit losses............................ 74.7 43.0
-------- --------
Net finance receivables........................... $5,104.1 $3,299.5
======== ========
</TABLE>
The changes in the allowance for credit losses included in finance
receivables were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Allowance for credit losses, beginning of year.............. $ 43.0 $ 19.8 $ 14.3
Provision for losses........................................ 128.7 44.2 25.8
Credit losses............................................... (83.3) (21.0) (20.3)
------ ------ ------
Allowance for credit losses, end of year.................... $ 88.4 $ 43.0 $ 19.8
====== ====== ======
</TABLE>
The securitizations structured prior to our September 8, 1999, announcement
met the applicable criteria to be accounted for as sales. At the time the loans
were securitized and sold, we recognized a gain and recorded our retained
interest represented by the interest-only security. The interest-only security
represents the right to receive, over the life of the pool of receivables, the
excess of the principal and interest received on the receivables transferred to
the special purpose entity over the sum of: (i) principal and interest paid to
the holders of other interests in the securitization; and (ii) contractual
servicing fees. In some of those securitizations, we also retained certain
lower-rated securities that are senior in payment priority to the interest-only
securities. Such retained securities had a par value, fair market value and
amortized cost of $769.8 million, $694.3 million and $712.6 million,
respectively, at December 31, 1999, and were classified as actively managed
fixed maturity securities.
During 1999, 1998 and 1997, the Company sold $9.7 billion, $13.4 billion
and $10.7 billion, respectively, of finance receivables in various securitized
transactions and recognized gains of $550.6 million, $745.0 million and $779.0
million, respectively.
81
<PAGE> 82
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest-only securities on our balance sheet represent an allocated
portion of the cost basis of the finance receivables in the securitization
transactions accounted for as sales related to transactions structured prior to
September 8, 1999. We used the following assumptions to adjust the amortized
cost to estimated fair value at December 31, 1999. The difference between
estimated fair value and the amortized cost of the interest-only securities is
included in accumulated other comprehensive loss, net of taxes.
<TABLE>
<CAPTION>
MANUFACTURED HOME EQUITY/ CONSUMER/
HOUSING HOME IMPROVEMENT EQUIPMENT TOTAL
------------ ---------------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-only securities at fair value....... $ 528.3 $ 318.0 $ 58.7 $ 905.0
Cumulative principal balance of sold finance
receivables at December 31, 1999........... 22,854.6 8,804.8 3,049.4 34,708.8
Weighted average stated customer interest
rate on sold finance receivables........... 10.0% 11.5% 11.0%
Assumptions to determine estimated fair value
of interest-only securities at December 31,
1999:
Expected weighted average annual
constant prepayment rate as a
percentage of principal balance of
related finance receivables(a)........ 9.4% 21.7% 22.4%
Expected nondiscounted credit losses as
a percentage of principal balance of
related finance receivables(a)........ 9.0% 5.8% 5.1%
Weighted average discount rate.......... 14.0% 14.0% 14.0%
</TABLE>
- -------------------------
(a) 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. Additionally, such
valuation is determined by discounting cash flows over the entire expected
life of the receivables sold.
We used the assumptions in the table below to determine the initial value
of the interest-only securities related to securitizations accounted for as
sales in 1999.
<TABLE>
<CAPTION>
MANUFACTURED HOME EQUITY/ CONSUMER/
HOUSING HOME IMPROVEMENT EQUIPMENT
------------ ---------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Related to securitizations completed in 1999:
Weighted average stated customer interest rate on
sold finance receivables(a)....................... 9.7% 11.7% 11.4%
Assumptions to determine gain on sale during 1999:
Expected weighted average annual constant
prepayment rate as a percentage of principal
balance of sold finance receivables(b).......... 10.6% 27.7% 25.8%
Expected nondiscounted credit losses as a
percentage of principal balance of sold finance
receivables(b).................................. 8.6% 3.3% 2.8%
Weighted average discount rate used for
determining the gain on sale of finance
receivables..................................... 14.0% 14.0% 14.0%
</TABLE>
- -------------------------
(a) 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 10.8 percent in 1999.
82
<PAGE> 83
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) 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.
Activity in the interest-only securities account during 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Balance, beginning of year.................................. $1,305.4 $1,398.7
Additions resulting from securitizations during the
period................................................. 393.9 719.6
Investment income......................................... 185.1 132.9
Cash received............................................. (442.6) (358.0)
Impairment charge to reduce carrying value................ (533.8) (544.4)
Change in unrealized depreciation charged to shareholders'
equity................................................. (3.0) (43.4)
-------- --------
Balance, end of year........................................ $ 905.0 $1,305.4
======== ========
</TABLE>
Credit quality of managed finance receivables was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
60-days-and-over delinquencies as a percentage of managed
finance receivables at period end......................... 1.42% 1.19%
Net credit losses incurred the last twelve months as a
percentage of average managed finance receivables during
the period................................................ 1.31% 1.03%
Repossessed collateral inventory as a percentage of managed
finance receivables at period end......................... 1.34% 1.14%
</TABLE>
83
<PAGE> 84
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LIABILITIES FOR INSURANCE AND ASSET ACCUMULATION PRODUCTS:
These liabilities consisted of the following:
<TABLE>
<CAPTION>
INTEREST
WITHDRAWAL MORTALITY RATE
ASSUMPTION ASSUMPTION ASSUMPTION 1999 1998
------------- ---------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts.............. N/A N/A (c) $12,641.0 $12,566.1
Universal life-type contracts..... N/A N/A N/A 4,681.4 4,663.3
--------- ---------
Total interest-sensitive
products................... 17,322.4 17,229.4
--------- ---------
Traditional products:
Traditional life insurance
contracts....................... Company (a) 6% 1,972.3 1,950.2
experience
Limited-payment contracts......... Company (b) 7% 985.3 974.9
experience,
if applicable
Individual and group accident and
health.......................... Company Company 6% 4,143.3 3,843.1
experience experience
--------- ---------
Total traditional products... 7,100.9 6,768.2
--------- ---------
Claims payable and other policyholder
funds................................ N/A N/A N/A 1,478.7 1,491.5
Liabilities related to separate
accounts and investment trust........ N/A N/A N/A 2,231.4 1,411.1
Liabilities related to certificates of
deposit.............................. N/A N/A N/A 870.5 30.0
--------- ---------
Total........................ $29,003.9 $26,930.2
========= =========
</TABLE>
- -------------------------
(a) Principally, modifications of the 1965 -- 70 and 1975 -- 80 Basic, Select
and Ultimate Tables.
(b) Principally, the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(c) In 1999 and 1998: (i) approximately 96 percent and 95 percent, respectively,
of this liability represented account balances where future benefits are not
guaranteed; and (ii) approximately 4 percent and 5 percent, respectively,
represented the present value of guaranteed future benefits determined using
an average interest rate of approximately 6 percent.
84
<PAGE> 85
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
Income tax liabilities (assets) were comprised of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Deferred income tax liabilities (assets):
Actively managed fixed maturities......................... $ 126.0 $ 59.5
Interest-only securities.................................. 271.3 447.1
Cost of policies purchased and cost of policies
produced............................................... 1,086.0 920.0
Insurance liabilities..................................... (1,137.6) (1,102.7)
Unrealized depreciation................................... (443.4) (13.7)
Net operating loss carryforward........................... (269.9) (353.4)
Other..................................................... 212.6 188.2
--------- ---------
Deferred income tax liabilities (assets).......... (155.0) 145.0
Current income tax liabilities (assets)..................... (54.8) 52.1
--------- ---------
Income tax liabilities (assets)................... $ (209.8) $ 197.1
========= =========
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current tax provision....................................... $270.3 $235.7 $207.9
Deferred tax provision...................................... 152.8 209.9 352.2
------ ------ ------
Income tax expense........................................ $423.1 $445.6 $560.1
====== ====== ======
</TABLE>
A reconciliation of the income tax provisions based on the U.S. statutory
corporate tax rate to the provisions reflected in the consolidated statement of
operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax on income before income taxes at statutory rate......... 35.0% 35.0% 35.0%
Goodwill.................................................... 3.3 3.6 2.0
State taxes................................................. .9 1.4 1.8
Settlement of tax issues related to revenue recognized as
gain on sale of finance receivables....................... (2.6) -- --
Other....................................................... .2 2.6 (1.1)
---- ---- ----
Income tax expense........................................ 36.8% 42.6% 37.7%
==== ==== ====
</TABLE>
At December 31, 1999, Conseco had federal income tax loss carryforwards of
$771.1 million available (subject to various statutory restrictions) for use on
future tax returns. Portions of these carryforwards begin expiring in 2003. The
following restrictions exist with respect to the utilization of portions of the
loss carryforwards: (i) $44.7 million may be used only to offset income from our
non-life insurance companies; (ii) $107.0 million (attributable to acquired
companies) may be used only to offset the income from those companies; and (iii)
$619.4 million is available to offset income from certain life insurance
subsidiaries, our finance subsidiaries and all other non-life insurance
subsidiaries. None of the carryforwards are available to reduce the future tax
provision for financial reporting purposes.
85
<PAGE> 86
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND COMMERCIAL PAPER:
NOTES PAYABLE AND COMMERCIAL PAPER (EXCLUDING NOTES PAYABLE RELATED TO
SECURITIZED FINANCE RECEIVABLES STRUCTURED AS COLLATERALIZED BORROWINGS)
Notes payable and commercial paper (excluding notes payable related to
securitized finance receivables structured as collateralized borrowings) at
December 31, 1999 and 1998, were as follows (interest rates as of December 31,
1999):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Bank credit facilities (6.67%).............................. $1,032.0 $1,250.0
Commercial paper (6.84%).................................... 898.4 784.4
Master repurchase agreements due on various dates in 2000
(6.22%)................................................... 1,620.9 780.6
Credit facility collateralized by retained interests in
securitizations due 2000 (8.46%).......................... 499.0 300.0
Medium term notes due April 2000 to April 2003 (6.53%)...... 226.7 238.7
7.875% notes due 2000....................................... 150.0 150.0
7.6% senior notes due 2001.................................. 118.9 --
6.4% notes due 2001 to 2003................................. 800.0 800.0
8.5% notes due 2002......................................... 450.0 --
10.25% senior subordinated notes due 2002................... 193.6 194.0
Notes payable due 2003 (6.1%)............................... 250.0 400.0
6.8% senior notes due 2005.................................. 250.0 250.0
9.0% notes due 2006......................................... 550.0 --
Other....................................................... 146.6 190.7
-------- --------
Total principal amount................................. 7,186.1 5,338.4
Unamortized net discount.................................... 21.8 16.9
-------- --------
Total notes payable and commercial paper............... $7,164.3 $5,321.5
======== ========
Total allocated to:
Corporate............................................ $2,481.8 $2,932.2
Finance segment...................................... 4,682.5 2,389.3
-------- --------
Total notes payable and commercial paper.......... $7,164.3 $5,321.5
======== ========
</TABLE>
Our current bank credit facilities allow us to borrow up to $2.3 billion,
of which $1.5 billion may be borrowed until 2003 and $.8 billion may be borrowed
until September 2000. Borrowings under these facilities averaged $1,155.3
million during 1999, at a weighted average interest rate of 5.45 percent. 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 December 31, 1999); and (ii) an interest coverage
ratio 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 5.47:1 for the period
ended December 31, 1999). We use unsecured bank credit facilities to support our
commercial paper program.
Borrowings under our commercial paper program averaged $1,058.3 million
during 1999, at a weighted average interest rate of 5.3 percent.
Notes payable due 2003 bear interest at LIBOR plus .5 percent. Such notes
are putable by the holder prior to the maturity date at a 1 to 3 percent
discount to par. The notes and accrued interest thereon are secured by standby
letters of credit.
86
<PAGE> 87
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, we had $6.9 billion of master repurchase
agreements and commercial paper conduit facilities (of which $2.9 billion was
outstanding) with various banking and investment banking firms, subject to the
availability of eligible collateral. The agreements generally provide for one
year terms, some of which can be extended each quarter by mutual agreement of
the parties for an additional year, based upon the financial performance of our
finance subsidiary.
During 1998, we repurchased various senior and senior subordinated debt
with: (i) par value of $343.5 million; (ii) interest rates of 8.125 percent to
11.25 percent; and (iii) maturity dates of 2002 to 2004. We recognized an
extraordinary charge of $42.6 million (net of income taxes of $24.1 million).
During 1997, we repurchased various senior and senior subordinated debt with:
(i) par value of $103.8 million; (ii) interest rates of 8.125 percent to 11.125
percent; and (iii) maturity dates of 2003 to 2004. We recognized an
extraordinary charge of $6.9 million (net of income taxes of $3.6 million).
The maturities of notes payable and commercial paper (excluding notes
payable related to securitized finance receivables structured as collateralized
borrowings) at December 31, 1999, were as follows (dollars in millions):
Bank credit facilities, commercial paper, master repurchase agreements and
similar credit facilities that are used for short-term funding:
<TABLE>
<S> <C>
2000................................................... $2,600.3
2003................................................... 1,500.0
Term debt:
2000................................................... 154.3
2001................................................... 671.6
2002................................................... 865.7
2003................................................... 568.4
2004................................................... 24.5
Thereafter............................................. 801.3
--------
Total par value at December 31, 1999.............. $7,186.1
========
</TABLE>
NOTES PAYABLE RELATED TO SECURITIZED FINANCE RECEIVABLES STRUCTURED AS
COLLATERALIZED BORROWINGS
Notes payable related to securitized finance receivables structured as
collateralized borrowings were $4,641.8 million at December 31, 1999. The
principal and interest on these notes are paid using the cash flows from the
underlying finance receivables which serve as collateral for the notes.
Accordingly, the timing of the principal payments on these notes is dependent on
the payments received on the underlying finance receivables which back the
notes. The average interest rate on these notes at December 31, 1999 was 7.6
percent.
87
<PAGE> 88
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OTHER DISCLOSURES:
LEASES
The Company rents office space, equipment and computer software under
noncancellable operating leases. Rental expense was $61.5 million in 1999, $50.6
million in 1998 and $48.2 million in 1997. Future required minimum rental
payments as of December 31, 1999, were as follows (dollars in millions):
<TABLE>
<S> <C>
2000........................................................ $ 61.4
2001........................................................ 45.9
2002........................................................ 34.6
2003........................................................ 26.6
2004........................................................ 16.4
Thereafter.................................................. 43.1
------
Total.................................................. $228.0
======
</TABLE>
PENSION AND POSTRETIREMENT PLANS
The Company provides certain pension, health care and life insurance
benefits for certain eligible retired employees under partially funded and
unfunded plans in existence at the date on which such subsidiaries were
acquired. Certain postretirement benefit plans are contributory, with
participants' contributions adjusted annually. Amounts related to the pension
and postretirement benefit plans were as follows:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ---------------
1999 1998 1999 1998
------ ------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Benefit obligation, beginning of year...................... $88.5 $ 72.9 $ 25.9 $ 25.6
Service cost............................................. 7.3 7.3 -- --
Interest cost............................................ 3.0 5.0 1.6 1.8
Plan participants' contributions......................... -- -- 1.9 2.7
Actuarial loss (gain).................................... (40.6) 4.3 (2.6) 2.4
Settlement and curtailment gains......................... (15.8) -- -- --
Benefits paid............................................ (21.8) (1.0) (4.9) (6.6)
----- ------ ------ ------
Benefit obligation, end of year............................ $20.6 $ 88.5 $ 21.9 $ 25.9
===== ====== ====== ======
Fair value of plan assets, beginning of year............... $15.1 $ 9.1 $ 5.1 $ 5.9
Actual return on plan assets............................. 2.5 2.6 .3 .3
Employer contributions................................... 3.7 4.4 -- --
Plan participants' contributions......................... -- -- .4 .4
Benefits paid............................................ (2.5) (1.0) (1.5) (1.5)
----- ------ ------ ------
Fair value of plan assets, end of year..................... $18.8 $ 15.1 $ 4.3 $ 5.1
===== ====== ====== ======
Funded status.............................................. $(1.8) $(73.4) $(17.6) $(20.8)
Unrecognized net actuarial loss (gain)..................... .4 43.4 (12.5) (8.7)
Unrecognized prior service cost............................ -- (.2) -- (.3)
----- ------ ------ ------
Accrued benefit liability........................ $(1.4) $(30.2) $(30.1) $(29.8)
===== ====== ====== ======
</TABLE>
We used the following weighted average assumptions to calculate benefit
obligations for our 1999 and 1998 valuations: discount rate of approximately 6.9
percent and 6.5 percent, respectively; an expected return on plan assets of
approximately 8.2 percent and 7.9 percent, respectively; and an assumed rate of
88
<PAGE> 89
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation increase of 5.5 percent in both 1999 and 1998. For measurement
purposes, we assumed a 9.0 percent annual rate of increase in the per capita
cost of covered health care benefits for 2000, decreasing gradually to 5.0
percent in 2011 and remaining level thereafter. During 1999, we amended the
pension plans of recently acquired companies to reduce future benefits accruing
under such plans. These changes resulted in the actuarial, settlement and
curtailment gains summarized above.
Components of the cost we recognized related to pension and postretirement
plans were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- -----------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost.............................. $ 7.3 $ 7.3 $ 4.8 $ -- $ -- $ .1
Interest cost............................. 3.0 5.0 3.9 1.6 1.8 2.1
Expected return of plan assets............ (1.4) (.9) (.7) (.2) (.2) (.3)
Amortization of prior service cost........ -- .2 .2 (.8) (1.6) (1.3)
Recognized net actuarial loss............. 1.0 2.2 1.8 -- (.2) (.2)
----- ----- ----- ----- ----- -----
Net periodic benefit cost....... $ 9.9 $13.8 $10.0 $ .6 $ (.2) $ .4
===== ===== ===== ===== ===== =====
</TABLE>
A one-percentage-point change in the assumed health care cost trend rates
would have an insignificant effect on the net periodic benefit cost of our
postretirement benefit obligation.
The Company has qualified defined contribution plans for which
substantially all employees are eligible. Company contributions, which match
certain voluntary employee contributions to the plan, totaled $10.3 million in
1999, $6.2 million in 1998, and $6.3 million in 1997. Matching contributions are
required to be made either in cash or in Conseco common stock.
LITIGATION
Conseco Finance was served with various related lawsuits filed in the
United States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options of Conseco Finance during alleged class
periods that generally run from February 1995 to January 1998. One action
(Florida State Board of Admin. v. Green Tree Financial Corp., Case No. 98-1162)
did not include class action claims. In addition to Conseco Finance, certain
current and former officers and directors of Conseco Finance are named as
defendants in one or more of the lawsuits. Conseco Finance and other defendants
obtained an order consolidating the lawsuits seeking class action status into
two actions, one of which pertains to a purported class of common stockholders
(In re Green Tree Financial Corp. Stock Litig., Case No. 97-2666) and the other
which pertains to a purported class action of stock option traders (In re Green
Tree Financial Corp. Options Litig., Case No. 97-2679). 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 Conseco Finance 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
Conseco Finance (particularly with respect to prepayment assumptions and
performance of certain loan portfolios of Conseco Finance) which allegedly
rendered Conseco Finance's financial statements false and misleading. On August
24, 1999, the United States District Court for the District of Minnesota issued
an order to dismiss with prejudice all claims alleged in the lawsuits. The
plaintiffs subsequently appealed the decision to the U.S. Court of Appeals for
the 8th Circuit, and the appeal is currently pending. The Company believes that
the lawsuits are without merit and intends to continue to defend them
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
Four lawsuits have been filed against Conseco in the United States District
Court for the Southern District of Indiana. The cases, captioned Luisi v.
Conseco, Inc., et al., Case No. IP00-C-0593 B/S, Sechrist v.
89
<PAGE> 90
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Conseco, Inc., et at., Case No. IP00-C-0585-M/S, Klein v. Conseco, Inc., et al.,
Case No. IP00-0602 C-M/S, and Brody v. Conseco, Inc., et at., Case No. IP00-0609
C-M/S, were filed as purported class actions on behalf of persons or entities
that purchased Conseco common stock during the alleged class periods that
generally run from April of 1999 through April of 2000. Two officers/directors
of Conseco are named as defendants in the lawsuits. In each case, the plaintiffs
assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of
1934. In each case, plaintiffs allege that Conseco and the individual defendants
violated federal securities laws by, among other things, making false and
misleading statements about the current state and future prospects of Conseco
Finance (particularly with respect to performance of certain loan portfolios of
Conseco Finance) which allegedly rendered Conseco's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend them vigorously. The ultimate outcome of these lawsuits cannot
be predicted with certainty.
Conseco, Inc. and its subsidiaries, Conseco Life Insurance Company, and
Wabash Life Insurance Company, are currently named defendants in a certified
nationwide class action lawsuit in the Superior Court for Santa Clara County
(California, cause number CV768991) and captioned "John P. Dupell and the John
P. Dupell 1992 Insurance Trust vs. Massachusetts General Life Insurance Company:
Life Partners Group, Inc., Wabash Life Insurance Company, Conseco, Inc., Donovan
R. Bolton, et al." The class, approximately 345,000 in number, consists of all
persons who purchased universal life insurance policies from Conseco Life
Insurance Company, formerly named Massachusetts General Life Insurance Company,
between January 1, 1984 and July 23, 1999 (excluding policies where death
benefits were paid). The claims involve the changing interest rate climate
between the 1980's and the comparatively lower rates in the 1990's, and the
resulting lower rates credited to universal life products. The plaintiffs
asserted claims of fraud, breach of the covenant of good faith and fair dealing,
negligence, negligent misrepresentation, unjust enrichment and related matters.
Conseco believes this lawsuit is without merit and is defending it vigorously.
The ultimate outcome of this lawsuit cannot be predicted with certainty.
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.
GUARANTY FUND ASSESSMENTS
The balance sheet at December 31, 1999, includes: (i) accruals of $29.2
million, representing our estimate of all known assessments that will be levied
against the Company's insurance subsidiaries by various state guaranty
associations based on premiums written through December 31, 1999; and (ii)
receivables of $13.1 million that we estimate will be recovered through a
reduction in future premium taxes as a result of such assessments. These
estimates are subject to change when the associations determine more precisely
the losses that have occurred and how such losses will be allocated among the
insurance companies. We recognized expense for such assessments of $5.0 million
in 1999, $16.2 million in 1998 and $3.7 million in 1997.
GUARANTEES
We have provided guarantees of approximately $1.6 billion at December 31,
1999, in conjunction with certain sales of finance receivables. We believe the
likelihood of a significant loss from such guarantees is remote.
We have guaranteed bank loans totaling $575.8 million to approximately 170
directors, officers and key employees. The funds were used by the participants
to purchase approximately 19.0 million Conseco shares in open market or
negotiated transactions with independent parties. Such shares are held by the
bank as
90
<PAGE> 91
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateral for the loans. The bank loans we have guaranteed are scheduled to
mature as follows: $150.0 million on May 31, 2000 and $425.8 million on August
30, 2001. The Company expects the banks to extend the maturity dates of these
loans when they become due. At December 31, 1999, the guaranteed bank loans
exceeded the value of the common stock collateralizing the loans by $281.0
million. All participants have agreed to indemnify Conseco for any loss incurred
on their loans. In addition, we have provided loans to participants for interest
on the bank loans totaling $44.8 million. We regularly evaluate these guarantees
and loans in light of the collateral and the creditworthiness of the
participants. In 1999 we established a noncash provision of $18.9 million ($11.9
after tax) in connection with these guarantees and loans, which was included as
a component of the provisions for losses.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
Certain wholly owned subsidiary trusts have issued preferred securities in
public offerings. The trusts used the proceeds from these offerings to purchase
subordinated debentures from Conseco. The terms of the preferred securities
parallel the terms of the debentures, which account for substantially all trust
assets. The preferred securities are to be redeemed on a pro rata basis, to the
same extent as the debentures are repaid. Under certain circumstances involving
a change in law or legal interpretation, the debentures may be distributed to
the holders of the preferred securities. Our obligations under the debentures
and related agreements, taken together, provide a full and unconditional
guarantee of payments due on the preferred securities. The debentures issued to
the subsidiary trusts and the common securities purchased by Conseco from the
subsidiary trusts are eliminated in the consolidated financial statements.
<TABLE>
<CAPTION>
YEAR CARRYING DISTRIBUTION EARLIEST/MANDATORY
ISSUED PAR VALUE VALUE RATE REDEMPTION DATES
------ ---------- --------- ------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Trust Originated Preferred
Securities........................... 1999 $ 300.0 $ 290.9 9.44% 2004/2029(d)
Redeemable Hybrid Income Overnight
Shares ("RHINOS")(a)................. 1999 250.0 244.4 (a) 2002
Trust Originated Preferred
Securities........................... 1998 500.0 487.0 8.70 2003/2028(d)
Trust Originated Preferred
Securities........................... 1998 230.0 223.7 9.00 2003/2028(d)
Capital Securities(b).................. 1997 300.0 300.0 8.80 2027
FELINE PRIDES(c)....................... 1997 503.6 493.1 6.75 2003
Trust Originated Preferred
Securities........................... 1996 275.0 275.0 9.16 2001/2026(d)
Capital Trust Pass-through
Securities(b)........................ 1996 325.0 325.0 8.70 2026
-------- --------
$2,683.6 $2,639.1
======== ========
</TABLE>
- -------------------------
(a) Each RHINOS security pays cash distributions at a floating rate equal to the
three-month LIBOR plus 225 basis points, payable quarterly (such rate was
8.35 percent at December 31, 1999). In April 2000, the Company and the
holder of the RHINOS agreed to the repurchase by the Company of the RHINOS.
In connection with the RHINOS repurchase, the Company is entering into a
bank credit facility of $125.0 million.
(b) These securities may be redeemed anytime at: (i) the principal balance; plus
(ii) a premium equal to the excess, if any, of the sum of the discounted
present value of the remaining scheduled payments of principal and interest
using a current market interest rate over the principal amount of securities
to be redeemed.
(c) Each FELINE PRIDES includes: (a) a stock purchase contract under which the
holder: (i) will purchase a number of shares of Conseco common stock on
February 16, 2001 (ranging from .9363 to 1.1268 shares per FELINE PRIDES
equivalent to $44.38 to $53.40 per common share) under the terms specified
in the stock purchase contract; and (ii) will receive a contract adjustment
payment equal to
91
<PAGE> 92
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
.25 percent of the value of the security; and (b) a beneficial ownership of
a 6.75 percent trust originated preferred security. Each holder will
receive aggregate cumulative cash distributions at the annual rate of 7
percent of the $50 stated amount per security, payable quarterly. The
applicable distribution rate on the trust originated preferred securities
that remain outstanding during the period February 16, 2001, through
February 16, 2003, will be reset so that the market value of the trust
originated preferred securities will be equal to 100.5 percent of the par
value. Conseco may limit the market rate reset to be no higher than the
rate on the two-year benchmark Treasury plus 200 basis points.
(d) The mandatory redemption dates of these securities may be extended for up to
19 years.
RECLASSIFICATION ADJUSTMENTS INCLUDED IN COMPREHENSIVE INCOME
The changes in unrealized appreciation (depreciation) included in
comprehensive income are net of reclassification adjustments for after-tax net
gains (losses) from the sale of investments included in net income of
approximately $(25) million, $475 million and $105 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
9. SHAREHOLDERS' EQUITY:
We are authorized to issue up to 20 million shares of preferred stock. On
December 15, 1999, we issued $500.0 million (2.6 million shares) of Series F
Common-Linked Convertible Preferred Stock (the "Series F Preferred Stock") to
Thomas H. Lee Company and affiliated investors. The Series F Preferred Stock is
convertible into Conseco common stock at a common equivalent rate of $19.25 per
share. The Series F Preferred Stock pays a 4 percent dividend, of which an
amount at least equal to the common dividend will be payable in cash, and the
remainder may be paid in additional Series F shares valued at $19.25 per share.
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.
Preferred stock dividends in 1997 include $13.2 million of payments made to
induce the conversion of certain preferred stock to common shares.
Changes in the number of shares of common stock outstanding during the
years ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(SHARES IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. 315,844 310,012 293,359
Stock options exercised................................... 5,130 9,125 12,825
Stock warrants exercised.................................. -- 862 --
Issuance of shares........................................ 3,582 -- --
Shares issued in conjunction with acquired companies...... -- -- 11,264
Common shares converted from convertible subordinated
debentures............................................. -- 2,246 5,139
Common shares converted from PRIDES....................... 5,904 578 8,462
Shares issued under employee benefit compensation plans... 126 46 1,498
Treasury stock purchased.................................. (2,907) (7,025) (22,535)
------- ------- -------
Balance, end of year........................................ 327,679 315,844 310,012
======= ======= =======
</TABLE>
Dividends declared on common stock for 1999, 1998 and 1997, were $.580,
$.530 and $.313 per common share, respectively. Our accrual for declared but
unpaid dividends was $49.2 million at December 31, 1999.
92
<PAGE> 93
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Such dividends were paid in January 2000. Cash dividends are paid quarterly at
an amount determined by our Board of Directors. As part of our plan to
strengthen our capital structure, the Board of Directors reduced the cash
dividend on our common stock to a quarterly rate of 5 cents per share, beginning
with the dividend to be paid in April of 2000.
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. 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 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). We
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. We
settled the contract in March 2000 by repurchasing the shares held by the Buyer.
Conseco's 1994 Stock and Incentive Plan authorizes the granting of options
to employees and directors of the Company to purchase up to 24 million shares of
Conseco common stock at a price not less than its market value on the date the
option is granted. In 1997, the Company adopted the 1997 Non-qualified Stock
Option Plan, which authorizes the granting of non-qualified options to employees
of the Company to purchase shares of Conseco common stock. The aggregate number
of shares of common stock for which options may be granted under the 1997 plan,
when added to all outstanding, unexpired options under the Company's employee
benefit plans, shall not exceed 20 percent of the total of shares of common
stock outstanding plus the number of shares issuable upon conversion of any
outstanding convertible security on the date of grant (calculated in the manner
set forth in the 1997 plan). The options may become exercisable immediately or
over a period of time. The plans also permit granting of stock appreciation
rights and certain other awards.
The stock option activity and related information includes the combined
activity and information of both Conseco and Conseco Finance for all periods. On
March 1, 1998, prior to the time the Merger was contemplated, Conseco Finance
repriced certain of its employee stock options to the current market price. A
summary of the Company's stock option activity and related information for the
years ended December 31, 1999, 1998 and 1997, is presented below (shares in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of year....... 32,085 $30.91 33,511 $24.78 37,951 $17.98
Options granted............................ 7,725 26.37 10,091 41.76 8,212 39.77
Options of Conseco Finance repriced prior
to the Merger............................ -- -- 2,594 25.10 -- --
Options assumed in connection with
mergers.................................. -- -- -- -- 1,358 20.48
Exercised.................................. (5,130) 15.83 (9,125) 19.36 (12,825) 13.59
Forfeited.................................. (930) 30.37 (2,392) 21.80 (1,185) 26.94
Terminated in repricing program............ -- -- (2,594) 37.13 -- --
------ ------ -------
Outstanding at the end of the year......... 33,750 32.15 32,085 30.91 33,511 24.78
====== ====== =======
Options exercisable at year-end............ 19,937 16,213 13,079
====== ====== =======
Available for future grant................. 37,290 32,873 17,206
====== ====== =======
</TABLE>
93
<PAGE> 94
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Merger, all options previously issued by Conseco Finance
became immediately exercisable on June 30, 1998. The following table summarizes
information about stock options outstanding at December 31, 1999 (shares in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 5.00 - 16.57................................ 3,327 3.8 $12.96 2,151 $12.59
17.88 - 26.19................................ 8,241 8.2 23.82 4,430 24.59
27.19 - 30.41................................ 2,651 12.4 30.09 969 29.65
30.73 - 45.84................................ 14,982 7.8 35.96 11,053 35.61
46.71 - 51.28................................ 4,549 8.3 49.97 1,334 48.25
------ ------
33,750 19,937
====== ======
</TABLE>
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for our stock
option plans. Since the amount an employee must pay to acquire the stock is
equal to the market price of the stock on the grant date, no compensation cost
has been recognized for our stock option plans. Had compensation cost been
determined based on the fair value at the grant dates for awards granted after
January 1, 1995, consistent with the method of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company's pro
forma net income and pro forma earnings per share for the years ended December
31, 1999, 1998 and 1997 would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net income................... $595.0 $559.9 $467.1 $389.9 $866.4 $800.6
Basic earnings per share..... 1.83 1.73 1.47 1.23 2.72 2.50
Diluted earnings per share... 1.79 1.69 1.40 1.17 2.52 2.32
</TABLE>
We estimated the fair value of each option grant used to determine the pro
forma amounts summarized above using the Black-Scholes option valuation model
with the following weighted average assumptions for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 GRANTS 1998 GRANTS 1997 GRANTS
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average risk-free interest rates.............. 5.6% 5.4% 6.4%
Weighted average dividend yields....................... 2.2% 1.2% .9%
Volatility factors..................................... 35% 35% 28%
Weighted average expected life......................... 4 years 4 years 4 years
Weighted average fair value per share.................. $ 7.34 $ 12.16 $ 12.15
</TABLE>
At December 31, 1999, a total of 131 million shares of common stock were
reserved for issuance under the FELINE PRIDES, stock option, stock bonus and
deferred compensation plans, forward underwriting agreement (entered into at the
time we issued the RHINOS), Series F Common-Linked Preferred Stock and warrants
to buy 700,000 shares of Conseco common stock for $13.8 million at anytime
through September 29, 2006.
94
<PAGE> 95
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(DOLLARS IN MILLIONS AND
SHARES IN THOUSANDS)
<S> <C> <C> <C>
Income:
Income before extraordinary charge........................ $ 595.0 $ 509.7 $ 873.3
Preferred stock dividends................................. 1.5 7.8 21.9
------- ------- -------
Income before extraordinary charge applicable to common
ownership for basic earnings per share............... 593.5 501.9 851.4
Effect of dilutive securities:
Preferred stock dividends.............................. 1.5 7.8 8.7
------- ------- -------
Income before extraordinary charge applicable to common
ownership and assumed conversions for diluted
earnings per share................................... $ 595.0 $ 509.7 $ 860.1
======= ======= =======
Shares:
Weighted average shares outstanding for basic earnings per
share.................................................. 324,635 311,785 311,050
Effect of dilutive securities on weighted average shares:
Stock options.......................................... 2,231 8,317 13,011
Employee benefit plans................................. 2,064 1,942 2,268
Preferred stock........................................ 1,643 6,141 6,936
Convertible securities................................. 1,959 4,516 5,457
Forward purchase agreement............................. 361 -- --
------- ------- -------
Weighted average shares outstanding for diluted
earnings per share................................ 332,893 332,701 338,722
======= ======= =======
</TABLE>
10. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Traditional products:
Direct premiums collected................................ $6,377.5 $6,189.5 $5,264.4
Reinsurance assumed...................................... 547.8 316.0 290.3
Reinsurance ceded........................................ (418.6) (541.3) (499.0)
-------- -------- --------
Premiums collected, net of reinsurance........... 6,506.7 5,964.2 5,055.7
Change in unearned premiums.............................. (3.9) 29.5 (2.2)
Less premiums on universal life and products without
mortality and morbidity risk which are recorded as
additions to insurance liabilities.................... (3,023.3) (2,585.7) (2,099.4)
-------- -------- --------
Premiums on traditional products with mortality
or morbidity risk, recorded as insurance policy
income......................................... 3,479.5 3,408.0 2,954.1
Fees and surrender charges on interest-sensitive
products................................................. 561.0 540.8 456.7
-------- -------- --------
Insurance policy income.......................... $4,040.5 $3,948.8 $3,410.8
======== ======== ========
</TABLE>
95
<PAGE> 96
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The four states with the largest shares of 1999 collected premiums were
California (9.8 percent), Florida (8.6 percent), Illinois (8.2 percent) and
Texas (6.9 percent). No other state accounted for more than 5 percent of total
collected premiums.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Commission expense......................................... $ 249.2 $ 229.5 $ 201.2
Salaries and wages......................................... 542.0 423.4 360.1
Other...................................................... 562.0 566.0 469.7
-------- -------- --------
Total other operating costs and expenses............ $1,353.2 $1,218.9 $1,031.0
======== ======== ========
</TABLE>
During 1997, we recorded a $41.5 million increase to claim reserves and a
$20.9 million write-off of cost of policies produced and cost of policies
purchased related to premium deficiencies on our Medicare supplement business in
Massachusetts. Regulators in that state have not allowed premium increases for
Medicare supplement products needed to avoid losses on the business. We are
currently seeking such rate increases. We are no longer writing new Medicare
supplement business in Massachusetts. Other operating costs and expenses in 1997
also included expenses of $9.3 million (net of proceeds from a life insurance
policy) related to the death of an executive officer.
Changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year................................. $2,425.2 $2,466.4 $2,015.0
Additional acquisition expense on acquired policies...... 17.9 75.0 93.9
Amortization............................................. (437.2) (369.2) (413.2)
Amounts related to fair value adjustment of actively
managed fixed maturities.............................. 203.3 167.7 (128.4)
Amounts acquired in mergers and acquisitions............. -- -- 914.2
Reinsurance and other.................................... 49.3 85.3 (15.1)
-------- -------- --------
Balance, end of year....................................... $2,258.5 $2,425.2 $2,466.4
======== ======== ========
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 13 percent of
the December 31, 1999, balance of cost of policies purchased in 2000, 11 percent
in 2001, 10 percent in 2002, 8 percent in 2003 and 7 percent in 2004. The
discount rates used to determine the amortization of the cost of policies
purchased averaged 7 percent in each of the three years ended December 31, 1999.
96
<PAGE> 97
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $1,453.9 $ 915.2 $544.3
Additions................................................. 799.0 707.0 550.7
Amortization.............................................. (242.1) (219.5) (134.8)
Amounts related to fair value adjustment of actively
managed fixed maturities............................... 77.4 50.0 (36.4)
Other..................................................... (.8) 1.2 (8.6)
-------- -------- ------
Balance, end of year........................................ $2,087.4 $1,453.9 $915.2
======== ======== ======
</TABLE>
11. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following disclosures supplement our consolidated statement of cash
flows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Additional non-cash items not reflected in the consolidated
statement of cash flows:
Issuance of common stock under stock option and
employee benefit plans............................... $ 28.2 $ 9.2 $ 70.9
Tax benefit related to the issuance of common stock
under employee benefit plans......................... 25.0 63.1 91.4
Conversion of debt and preferred stock into common
stock................................................ 105.5 77.7 301.3
Shares returned by former executive due to
recomputation of bonus............................... -- 23.4 --
Impact of acquisition transactions (described in note 2) on
the consolidated statement of cash flows:
Total investments...................................... $ -- $ -- $4,716.6
Finance receivables.................................... -- -- --
Cost of policies purchased............................. -- -- 914.2
Goodwill............................................... -- -- 1,133.9
Income taxes........................................... -- -- 6.4
Insurance liabilities.................................. -- -- (5,193.8)
Notes payable.......................................... -- -- (540.6)
Minority interest...................................... -- -- --
Common stock and additional paid-in capital............ -- -- (471.5)
Other.................................................. -- -- 194.5
------ ------ --------
Net cash used..................................... $ -- $ -- $ 759.7
====== ====== ========
</TABLE>
97
<PAGE> 98
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 595.0 $ 467.1 $ 866.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of finance receivables................. (550.6) (745.0) (779.0)
Points and origination fees received................ 390.0 298.3 179.8
Interest-only securities investment income.......... (185.1) (132.9) (125.8)
Cash received from interest-only securities......... 442.6 358.0 266.1
Servicing income.................................... (165.3) (140.0) (113.7)
Cash received from servicing activities............. 175.7 159.9 129.1
Provision for losses................................ 128.7 44.2 25.8
Amortization and depreciation....................... 844.3 775.9 639.6
Income taxes........................................ 191.3 86.7 166.2
Insurance liabilities............................... 516.3 77.8 26.4
Accrual and amortization of investment income....... (578.2) (73.3) (71.7)
Deferral of cost of policies produced and
purchased........................................ (819.4) (790.3) (699.0)
Impairment and merger-related charges............... 546.7 603.7 261.7
Minority interest................................... 204.2 137.5 75.4
Extraordinary charge on extinguishment of debt...... -- 66.4 10.6
Net investment (gains) losses....................... 156.2 (208.2) (266.5)
Other............................................... (18.7) (6.2) 18.1
Payment of taxes in settlement of prior years....... (85.1) -- --
-------- -------- --------
Net cash provided by operating activities........ $1,788.6 $ 979.6 $ 609.5
======== ======== ========
</TABLE>
12. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted by regulatory
authorities for the Company's insurance subsidiaries differ from GAAP. Our
insurance subsidiaries reported the following amounts to regulatory agencies,
after appropriate elimination of intercompany accounts:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Statutory capital and surplus............................... $2,170.5 $1,850.0
Asset valuation reserve..................................... 362.8 336.4
Interest maintenance reserve................................ 504.3 568.0
Portion of surplus debenture carried as a liability......... 33.4 65.5
-------- --------
Total............................................. $3,071.0 $2,819.9
======== ========
</TABLE>
98
<PAGE> 99
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The statutory capital and surplus shown above included investments in
up-stream affiliates, all of which were eliminated in the consolidated financial
statements prepared in accordance with GAAP, as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Securitization debt issued by special purpose entities and
guaranteed by our finance subsidiary, all of which was
purchased by our insurance subsidiaries prior to the
Merger.................................................... $ 72.6 $ 73.0
Preferred and common stock of intermediate holding
company................................................... 215.8 208.6
Common stock of Conseco (39.8 million shares)............... 59.6 102.2
Other....................................................... 2.5 425.2
------ ------
Total.................................................. $350.5 $809.0
====== ======
</TABLE>
Statutory accounting requires that all commissions be charged to expense
when incurred. Because of the significant increase in ordinary and reinsurance
premium collections in 1999, the total net commission expense charged against
statutory income was $815 million in 1999, an increase of $98.9 million compared
to 1998. In addition, the insurance subsidiaries pay fees and interest to
Conseco or its non-life subsidiaries; such amounts totaled $274.3 million,
$205.1 million and $170.6 million in 1999, 1998 and 1997, respectively. The
combined effect of increases in commission expense and fees and interest paid to
Conseco decreased the statutory after-tax net income $109.2 million in 1999
compared to 1998. The statutory net income of our life insurance subsidiaries
(after the expenses described above) was $181.1 million, $276.0 million and
$243.4 million in 1999, 1998 and 1997, respectively.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. In addition to fees and interest
described above, our insurance subsidiaries may pay dividends to Conseco in 2000
of $204.6 million without permission from state regulatory authorities. Net
assets of the Company's wholly owned insurance subsidiaries, determined in
accordance with GAAP, aggregated approximately $7.8 billion at December 31,
1999.
In 1998, the National Association of Insurance Commissioners adopted
codified statutory accounting principles, which are expected to constitute the
only source of prescribed statutory accounting practices and are effective in
2001. The changes to statutory accounting practices resulting from the
codification are not expected to have a material effect on the statutory capital
and surplus or statutory operating earnings data shown above.
13. BUSINESS SEGMENTS:
We manage our business operations through two segments, based on the
products offered.
Finance segment. Our finance segment provides a variety of finance products
including: loans for the purchase of manufactured housing, home improvements and
various consumer products; private label credit card programs; and commercial
loans such as floorplan and equipment financing. These products are primarily
marketed through intermediary channels such as dealers, vendors, contractors and
retailers. On March 31, 2000, we announced that we plan to explore the sale of
Conseco Finance. If the planned sale is completed, the Company will no longer
have finance operations.
Insurance and fee-based segment. Our insurance and fee-based segment
provides supplemental health, annuity, life, and individual and group major
medical products to a broad spectrum of customers through multiple distribution
channels, each focused on a specific market segment. These products are
primarily marketed through career agents, professional independent producers and
direct marketing. This segment also includes our venture capital investment
activity.
99
<PAGE> 100
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Insurance and fee-based segment:
Insurance policy income:
Annuities............................................ $ 102.5 $ 98.7 $ 96.8
Supplemental health.................................. 2,058.1 1,980.9 1,858.1
Life................................................. 881.7 844.1 630.5
Individual and group major medical................... 866.2 889.2 758.1
Other................................................ 132.0 135.9 67.3
Net investment income(a)............................... 2,599.5 2,081.9 1,825.3
Fee and other revenue(a)............................... 117.9 91.3 65.8
Net investment gains (losses)(a)....................... (156.2) 208.2 266.5
-------- -------- --------
Total insurance and fee-based segment revenues.... 6,601.7 6,330.2 5,568.4
-------- -------- --------
Finance segment:
Net investment income:
Interest-only securities(a).......................... 185.1 132.9 125.8
Manufactured housing................................. 101.1 21.1 10.2
Mortgage services.................................... 158.7 62.6 40.8
Consumer/credit card................................. 199.6 98.2 33.5
Commercial........................................... 112.3 62.0 55.4
Other(a)............................................. 75.4 51.6 80.5
Gain on sale of finance receivables:
Manufactured housing................................. 307.8 294.8 431.9
Mortgage services.................................... 196.2 332.5 210.2
Consumer/credit card................................. 13.6 47.7 102.3
Commercial........................................... 27.2 44.7 32.8
Other................................................ 5.8 25.3 1.8
Fee revenue and other income........................... 372.7 260.4 178.6
-------- -------- --------
Total finance segment revenues.................... 1,755.5 1,433.8 1,303.8
-------- -------- --------
Eliminations.............................................. (21.5) (3.8) --
-------- -------- --------
Total revenues.................................... 8,335.7 7,760.2 6,872.2
-------- -------- --------
Expenses:
Insurance and fee-based segment:
Insurance policy benefits.............................. 3,815.9 3,580.5 3,216.5
Amortization........................................... 749.0 730.1 610.9
Interest expense....................................... 57.9 65.3 42.0
Other operating costs and expenses..................... 637.4 614.8 559.8
-------- -------- --------
Total insurance and fee-based segment expenses.... 5,260.2 4,990.7 4,429.2
-------- -------- --------
Finance segment:
Provision for losses................................... 128.7 44.2 25.8
Interest expense....................................... 341.3 213.7 160.9
Impairment charge...................................... 554.3 549.4 190.0
Merger-related charges................................. -- 148.0 --
Other operating costs and expenses..................... 697.2 591.9 444.5
-------- -------- --------
Total finance segment expenses.................... 1,721.5 1,547.2 821.2
-------- -------- --------
</TABLE>
100
<PAGE> 101
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
(CONTINUED FROM PREVIOUS PAGE)
<S> <C> <C> <C>
Not allocated to segments:
Interest expense on corporate debt........................ 169.6 165.4 109.4
Provision for loss........................................ 18.9 -- --
Other operating costs and expenses........................ 36.1 15.0 26.7
-------- -------- --------
Total expenses not allocated to segments.......... 224.6 180.4 136.1
-------- -------- --------
Eliminations................................................ (21.5) (3.8) --
-------- -------- --------
Total expenses.................................... 7,184.8 6,714.5 5,386.5
-------- -------- --------
Income (loss) before income taxes, minority interest and
extraordinary charge:
Insurance operations................................... 1,341.5 1,339.5 1,139.2
Finance operations..................................... 34.0 (113.4) 482.6
Corporate interest and other expenses.................. (224.6) (180.4) (136.1)
-------- -------- --------
Income before income taxes, minority interest and
extraordinary charge............................ $1,150.9 $1,045.7 $1,485.7
======== ======== ========
</TABLE>
Segment balance sheet information was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Assets:
Insurance and fee-based................................... $ 37.382.5 $ 36,431.1
Finance................................................... 14,454.7 6,600.1
Corporate................................................. 13,334.9 12,003.6
Eliminate intercompany amounts............................ (12,986.2) (11,434.9)
---------- ----------
Total assets...................................... $ 52,185.9 $ 43,599.9
========== ==========
Liabilities:
Insurance and fee-based................................... $ 27,160.4 $ 28,761.8
Finance................................................... 12,019.7 4,473.9
Corporate................................................. 5,139.6 4,633.1
Eliminate intercompany accounts........................... (329.1) (1,639.4)
---------- ----------
Total liabilities................................. $ 43,990.6 $ 36,229.4
========== ==========
</TABLE>
- -------------------------
(a) It is not practicable to provide additional components of revenue by product
or services.
This segment information is prepared in conformity with Financial
Accounting Standards Board Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which we adopted in 1998. We restated
certain previously reported segment information to comply with the new standard.
101
<PAGE> 102
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
We compute earnings per common share for each quarter independently of
earnings per share for the year. The sum of the quarterly earnings per share may
not equal the earnings per share for the year because of: (i) transactions
affecting the weighted average number of shares outstanding in each quarter; and
(ii) the uneven distribution of earnings during the year.
<TABLE>
<CAPTION>
1ST QTR.(A)(B) 2ND QTR.(A)(B) 3RD QTR.(A)(B) 4TH QTR.(B)
-------------- -------------- -------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenues............................... $1,986.6 $2,023.7 $1,889.7 $2,435.7
Income before income taxes, minority
interest and extraordinary charge... 492.8 373.5 311.1 (26.5)
Net income............................. 287.8 213.3 155.6 (61.7)
Net income per common share:
Basic:
Income before extraordinary
charge......................... $ .90 $ .66 $ .48 $ (.19)
Extraordinary charge.............. -- -- -- --
-------- -------- -------- --------
Net income..................... $ .90 $ .66 $ .48 $ (.19)
======== ======== ======== ========
Diluted:
Income before extraordinary
charge......................... $ .87 $ .64 $ .47 $ (.19)
Extraordinary charge.............. -- -- -- --
-------- -------- -------- --------
Net income..................... $ .87 $ .64 $ .47 $ (.19)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1ST QTR.(C) 2ND QTR.(D) 3RD QTR. 4TH QTR.
-------------- -------------- -------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenues............................... $1,988.2 $1,825.0 $1,936.2 $2,010.8
Income (loss) before income taxes,
minority interest and extraordinary
charge.............................. 420.6 (333.2)(e) 474.2 484.1
Net income (loss)...................... 214.6 (301.6)(e) 270.5 283.6
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary
charge......................... $ .74 $ (.94) $ .90 $ .89
Extraordinary charge.............. .05 .04 .04 --
-------- -------- -------- --------
Net income (loss).............. $ .69 $ (.98) $ .86 $ .89
======== ======== ======== ========
Diluted:
Income (loss) before extraordinary
charge......................... $ .70 $ (.94)(e) $ .85 $ .86
Extraordinary charge.............. .05 .04 .04 --
-------- -------- -------- --------
Net income (loss).............. $ .65 $ (.98)(e) $ .81 $ .86
======== ======== ======== ========
</TABLE>
- -------------------------
(a) We have restated amounts previously reported for the first, second and third
quarters of 1999 to reflect adjustments, principally related to (i)
impairment charges relating to interest-only securities and servicing
rights; (ii) delaying the recognition of revenue from sales of loans to
certain commercial paper conduit trusts until the loans were subsequently
placed in their final securitization structures; (iii) the reallocation of
gain on sale revenues relating to a securitization closed over two quarters;
and
102
<PAGE> 103
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(iv) adjusting loan origination cost deferrals. These changes decreased
previously reported net income by $9.3 million ($.03 per diluted share),
$84.2 million ($.26 per diluted share) and $37.8 million ($.11 per diluted
share) in the first, second and third quarters, respectively.
(b) Included in the first, second, third and fourth quarters of 1999 are
impairment charges of $12.2 million ($7.7 million after tax), $71.6 million
($45.1 million after tax), $100.1 million ($63.1 million after tax) and
$370.4 million ($233.3 million after tax), respectively.
(c) The selected quarterly financial data give retroactive effect to the merger
with Conseco Finance in a transaction accounted for as a pooling of
interests which was completed on June 30, 1998 (see note 2). The pooling of
interests method of accounting requires the restatement of all periods
presented as if the companies had always been combined. Accordingly, amounts
previously reported differ from the amounts presented here.
(d) We have restated amounts previously reported for the second quarter of 1998
to reflect a correction to the impairment charge we previously reported.
This change increased the previously reported net loss by $19.5 million
($.06 per diluted share).
(e) Includes: (i) an impairment charge of $549.4 million ($355.8 million after
tax or $1.15 per diluted share); and (ii) merger-related expenses of $148.0
million ($148.0 million after tax or $.48 per diluted share).
15. SUBSEQUENT EVENTS
On February 7, 2000, the Company completed the public offering of $800.0
million of 8.75 percent notes due February 9, 2004. The notes are unsecured and
rank equally with all other unsecured senior indebtedness of Conseco. Proceeds
from the offering of approximately $794.3 million (after underwriting discounts
and estimated offering expenses) were used to repay outstanding indebtedness.
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance and is hiring Lehman Brothers to assist in the planned sale. If the
planned sale is completed, the Company will no longer have finance operations.
103
<PAGE> 104
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by Part III is hereby incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1999 except that
the information required by Item 10 regarding Executive Officers is included
herein under a separate caption at the end of Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See Index to Consolidated Financial Statements
on page 57 for a list of financial statements included in this
Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule II -- Condensed Financial Information of Registrant (Parent
Company)
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable,
not required, or because the information they contain is included elsewhere in
the consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits filed
with this report
(b) Reports on Form 8-K
A report on Form 8-K dated October 21, 1999, was filed with the
Commission to report under Item 5, the completion of the public offering
by Conseco of $450.0 million of 8.5 percent notes due October 15, 2002,
and $550.0 million of 9.0 percent notes due October 15, 2006.
A report on Form 8-K dated November 29, 1999, was filed with the
Commission to report under Item 5, an agreement to sell to Thomas H. Lee
Company $500.0 million (2.6 million shares) of Series F Common-Linked
Convertible Preferred Stock. Conseco also announced: (i) it plans to
reduce the cash dividend on its common stock to a quarterly rate of 5
cents per share, beginning in April of 2000; and (ii) it plans to manage
the growth of its finance receivables. In connection with these steps,
Conseco also plans to reduce its holding company leverage and the
leverage in its finance segment over time.
A report on Form 8-K dated December 15, 1999, was filed with the
Commission to report under Item 5, the completion of the sale of $500.0
million (2.6 million shares) of Series F Common-Linked Convertible
Preferred Stock. Conseco also announced that David V. Harkins, president
of Thomas H. Lee Partners, has been added to the Conseco Board of
Directors, expanding the Board to 12 members.
104
<PAGE> 105
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 13th day of April, 2000.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
------------------------------------
Stephen C. Hilbert, Chairman of the
Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE (CAPACITY) DATE
- --------- ---------------- ----
<C> <S> <C>
/s/ STEPHEN C. HILBERT Chairman of the Board, Chief April 13, 2000
- --------------------------------------------- Executive Officer and Director
Stephen C. Hilbert (Principal Executive Officer)
/s/ ROLLIN M. DICK Executive Vice President, Chief April 13, 2000
- --------------------------------------------- Financial Officer and Director
Rollin M. Dick (Principal Financial Officer)
/s/ JAMES S. ADAMS Senior Vice President, Chief April 13, 2000
- --------------------------------------------- Accounting Officer and Treasurer
James S. Adams (Principal Accounting Officer)
/s/ NGAIRE E. CUNEO Director April 13, 2000
- ---------------------------------------------
Ngaire E. Cuneo
/s/ LAWRENCE M. COSS Director April 13, 2000
- ---------------------------------------------
Lawrence M. Coss
/s/ DAVID R. DECATUR Director April 13, 2000
- ---------------------------------------------
David R. Decatur
/s/ DONALD F. GONGAWARE Director April 13, 2000
- ---------------------------------------------
Donald F. Gongaware
/s/ M. PHIL HATHAWAY Director April 13, 2000
- ---------------------------------------------
M. Phil Hathaway
/s/ JAMES D. MASSEY Director April 13, 2000
- ---------------------------------------------
James D. Massey
/s/ DENNIS E. MURRAY, SR. Director April 13, 2000
- ---------------------------------------------
Dennis E. Murray, Sr.
/s/ JOHN M. MUTZ Director April 13, 2000
- ---------------------------------------------
John M. Mutz
/s/ ROBERT S. NICKOLOFF Director April 13, 2000
- ---------------------------------------------
Robert S. Nickoloff
/s/ DAVID V. HARKINS Director April 13, 2000
- ---------------------------------------------
David V. Harkins
</TABLE>
105
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and
Board of Directors
Conseco, Inc.
Our report on the consolidated financial statements of Conseco, Inc. and
Subsidiaries is included on page 58 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 104 of this Form 10-K. In our
opinion, the financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 2000
106
<PAGE> 107
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1999 AND 1998
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1.9 $ 19.7
Actively managed fixed maturities........................... -- 45.4
Other invested assets....................................... 111.2 200.4
Investment in wholly owned subsidiaries (eliminated in
consolidation)............................................ 9,838.4 10,008.4
Notes receivable related to finance (eliminated in
consolidation)............................................ 2,142.4 877.7
Receivable from subsidiaries (eliminated in
consolidation)............................................ 1,005.4 548.8
Income taxes................................................ 210.7 269.8
Other assets................................................ 24.9 33.4
--------- ---------
Total assets...................................... $13,334.9 $12,003.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and commercial paper........................ $ 2,481.8 $ 2,932.2
Notes and other payables due to subsidiaries (eliminated
in consolidation)...................................... 329.1 761.7
Notes payable related to finance.......................... 2,142.4 877.7
Other liabilities......................................... 186.3 61.5
--------- ---------
Total liabilities................................. 5,139.6 4,633.1
--------- ---------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts........................... 2,639.1 2,096.9
Shareholders' equity:
Preferred stock........................................... 478.4 105.5
Common stock and additional paid-in capital (no par value,
1,000,000,000 shares authorized, shares issued and
outstanding:
1999 -- 327,678,638; 1998 -- 315,843,609).............. 2,987.1 2,736.5
Accumulated other comprehensive loss...................... (771.6) (28.4)
Retained earnings......................................... 2,862.3 2,460.0
--------- ---------
Total shareholders' equity........................ 5,556.2 5,273.6
--------- ---------
Total liabilities and shareholders' equity........ $13,334.9 $12,003.6
========= =========
</TABLE>
The accompanying note is an integral part
of the condensed financial information.
107
<PAGE> 108
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net investment income..................................... $ 65.6 $ 74.3 $ 46.5
Dividends from subsidiaries (eliminated in
consolidation)......................................... 294.7 173.4 185.2
Fee and interest income from subsidiaries (eliminated in
consolidation)......................................... 242.3 111.0 93.9
Net investment gains (losses)............................. (5.4) (15.3) --
Other income.............................................. 7.5 14.5 2.5
------ ------ ------
Total revenues.................................... 604.7 357.9 328.1
------ ------ ------
Expenses:
Interest expense on notes payable......................... 169.6 165.4 109.4
Provision for loss........................................ 18.9 -- --
Intercompany expenses (eliminated in consolidation)....... 118.9 47.0 31.2
Operating costs and expenses.............................. 13.2 22.1 24.4
------ ------ ------
Total expenses.................................... 320.6 234.5 165.0
------ ------ ------
Income before income taxes, equity in
undistributed earnings of subsidiaries,
distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary
trusts and extraordinary charge................. 284.1 123.4 163.1
Income tax expense (benefit)................................ (2.6) 18.9 (5.5)
------ ------ ------
Income before equity in undistributed earnings of
subsidiaries, distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts and extraordinary charge...... 286.7 104.5 168.6
Equity in undistributed earnings of subsidiaries (eliminated
in consolidation)......................................... 441.1 495.6 753.7
------ ------ ------
Income before distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts and extraordinary charge...... 727.8 600.1 922.3
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts................. 132.8 90.4 49.0
------ ------ ------
Income before extraordinary charge................ 595.0 509.7 873.3
Extraordinary charge on extinguishment of debt, net of
tax....................................................... -- 42.6 6.9
------ ------ ------
Net income........................................ 595.0 467.1 866.4
Preferred stock dividends................................... 1.5 7.8 21.9
------ ------ ------
Earnings applicable to common stock............... 593.5 $459.3 $844.5
====== ====== ======
</TABLE>
The accompanying note is an integral part
of the condensed financial information.
108
<PAGE> 109
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 595.0 $ 467.1 $ 866.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of consolidated
subsidiaries *.................................... (441.1) (495.6) (753.7)
Net investment (gains) losses........................ 5.4 15.3 --
Income taxes......................................... (78.9) (79.7) (62.0)
Extraordinary charge on extinguishment of debt....... -- 65.3 10.6
Distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary
trusts............................................ 204.2 137.5 75.4
Other................................................ (1.8) 53.1 20.2
--------- --------- ---------
Net cash provided by operating activities......... 282.8 163.0 156.9
--------- --------- ---------
Cash flows from investing activities:
Sales and maturities of investments....................... 187.9 68.8 70.0
Investments and advances to consolidated subsidiaries *... (1,806.3) (1,176.8) (884.1)
Purchases of investments.................................. (203.3) (72.4) (143.3)
Cash held by subsidiaries prior to acquisition............ -- -- 4.1
Payments from subsidiaries *.............................. 62.1 63.7 72.9
--------- --------- ---------
Net cash used by investing activities............. (1,759.6) (1,116.7) (880.4)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common and convertible preferred shares....... 588.4 121.3 57.4
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.............. 534.3 710.8 780.4
Issuance of notes payable and commercial paper............ 4,090.2 4,122.0 3,025.2
Payments on notes payable................................. (3,279.0) (3,401.1) (2,217.7)
Payments to repurchase equity securities of Conseco....... (29.5) (257.4) (738.6)
Charge related to induced conversion of convertible
preferred stock........................................ -- (13.2)
Dividends to subsidiaries *............................... (66.0) (56.7) (53.8)
Dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts...................................... (379.4) (282.9) (173.7)
--------- --------- ---------
Net cash provided by financing activities......... 1,459.0 956.0 666.0
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... (17.8) 2.3 (57.5)
Cash and cash equivalents, beginning of year.............. 19.7 17.4 74.9
--------- --------- ---------
Cash and cash equivalents, end of year.................... $ 1.9 $ 19.7 $ 17.4
========= ========= =========
</TABLE>
- -------------------------
* Eliminated in consolidation
The accompanying note is an integral part
of the condensed financial information.
109
<PAGE> 110
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
NOTE TO CONDENSED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The condensed financial information should be read in conjunction with the
consolidated financial statements of Conseco, Inc. The condensed financial
information includes the accounts and activity of the parent company and its
wholly owned non-insurance subsidiaries which act as the holding companies for
the Company's life insurance subsidiaries.
110
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CONSECO, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
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Life insurance in force:
Direct............................................. $126,826.7 $132,546.5 $136,711.4
Assumed............................................ 5,414.2 1,992.7 4,198.7
Ceded.............................................. (27,687.5) (30,768.1) (36,765.6)
---------- ---------- ----------
Net insurance in force..................... $104,553.4 $103,771.1 $104,144.5
========== ========== ==========
Percentage of assumed to net............... 5.2% 1.9% 4.0%
========== ========== ==========
Premiums recorded as revenue for generally accepted
accounting principles:
Direct............................................. $ 3,350.3 $ 3,633.3 $ 3,162.8
Assumed............................................ 547.8 316.0 290.3
Ceded.............................................. (418.6) (541.3) (499.0)
---------- ---------- ----------
Net premiums............................... $ 3,479.5 $ 3,408.0 $ 2,954.1
========== ========== ==========
Percentage of assumed to net............... 15.7% 9.3% 9.8%
========== ========== ==========
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EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
OF CONSECO, INC.
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2.10 Agreement and Plan of Merger dated as of April 6, 1998, as
amended, among the Registrant, Marble Acquisition Corp. and
Green Tree Financial Corporation (composite conformed copy)
was included as Annex A to the Joint Proxy
Statement -- Prospectus of Conseco, Inc. contained within
the Registration Statement on Form S-4 (File No. 333-51123),
and is incorporated herein by this reference.
3.1 Amended and Restated Articles of Incorporation and Articles
of Amendment thereto of the Registrant were filed with the
Commission as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-3 (No. 333-94683), and are incorporated
herein by this reference.
3.2 Amended and Restated By-Laws of the Registrant were filed
with the Commission as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-3 (No. 333-94683), and are
incorporated herein by this reference.
4.8 Indenture dated as of February 18, 1993, between the
Registrant and Shawmut Bank Connecticut, National
Association (to which State Street Bank and Trust Company is
successor), as Trustee, for the 8 1/8 percent Senior Notes
due 2003, was filed with the Commission as Exhibit 4.8 to
the Registrant's Annual Report on Form 10-K for 1992, and is
incorporated herein by this reference.
4.12 Indenture dated as of September 29, 1994 between ALHC Merger
Corporation and LTCB Trust Company and First Supplemental
Indenture dated as of September 29, 1994 between American
Life Holding Company and the Trustee for the 11 1/4% Senior
Subordinated Notes due 2004 were filed with the Commission
as Exhibit 4.12 to the Registrant's Report on Form 8-K dated
September 29, 1994, and are incorporated herein by this
reference.
4.13 Indenture dated as of December 15, 1994, between CCP
Insurance, Inc., and LTCB Trust Company, as Trustee, for the
$200,000,000 aggregate principal amount of 10 1/2% Senior
Notes due 2004 was filed with the Commission as Exhibit 4.13
to the Registrant's Annual Report on Form 10-K for 1995, and
is incorporated herein by this reference.
4.13.1 First Supplemental Indenture between Conseco, Inc., as
Issuer, and LTCB Trust Company as Trustee, dated as of
August 31, 1995, was filed with the Commission as Exhibit
4.13.1 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1995, and is incorporated herein
by this reference.
4.17.1 Subordinated Indenture, dated as of November 14, 1996,
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.1 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.2 First Supplemental Indenture, dated as of November 14, 1996,
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.2 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.3 9.16% Subordinated Deferrable Interest Debenture due 2006
was filed with the Commission as Exhibit 4.17.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.4 Second Supplemental Indenture, dated as of November 22,
1996, between Conseco, Inc. and Fleet National Bank, as
Trustee was filed with the Commission as Exhibit 4.17.1 to
the Registrant's Report on Form 8-K dated November 27, 1996,
and is incorporated herein by this reference.
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4.17.5 8.70% Subordinated Deferrable Interest Debenture due 2026
was filed with the Commission as Exhibit 4.17.4 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.17.6 Third Supplemental Indenture, dated as of March 26, 1997
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.6 to the
Registrant's Report on Form 8-K dated April 1, 1997, and is
incorporated herein by this reference.
4.17.7 8.796% Subordinated Deferrable Interest Debenture due 2027
was filed with the Commission as Exhibit 4.17.7 to the
Registrant's Report on Form 8-K dated April 1, 1997, and is
incorporated herein by this reference.
4.18.1 Amended and Restated Declaration of Trust of Conseco
Financing Trust I, dated as of November 14, 1996, among
Conseco, Inc., as sponsor, the Trustees named therein and
the holders from time to time of undivided beneficial
interests in the assets of Conseco Financing Trust I was
filed with the Commission as Exhibit 4.18.1 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.18.2 Global Certificate for Preferred Security of Conseco
Financing Trust I was filed with the Commission as Exhibit
4.18.2 to the Registrant's Report on Form 8-K dated November
19, 1996, and is incorporated herein by this reference.
4.18.3 Preferred Securities Guarantee Agreement, dated as of
November 19, 1996, between the Registrant and Fleet National
Bank was filed with the Commission as Exhibit 4.18.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.19.1 Amended and Restated Declaration of Trust of Conseco
Financing Trust II, dated as of November 22, 1996, among
Conseco, Inc., as sponsor, the Trustees named therein and
the holders from time to time of undivided beneficial
interests in the assets of Conseco Financing Trust II was
filed with the Commission as Exhibit 4.19.1 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.19.2 Global Certificate for Preferred Security of Conseco
Financing Trust II was filed with the Commission as Exhibit
4.19.2 to the Registrant's Report on Form 8-K dated November
27, 1996, and is incorporated herein by this reference.
4.19.3 Preferred Securities Guarantee Agreement, dated as of
November 27, 1996, between Conseco, Inc. and Fleet National
Bank was filed with the Commission as Exhibit 4.19.3 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.21.1 Amended and Restated Declaration of Trust of Conseco
Financing Trust III, dated as of March 26, 1997, among the
Registrant, as sponsor, the trustees named therein and the
holders from time to time of undivided beneficial interests
in the assets of Conseco Financing Trust III was filed with
the Commission as Exhibit 4.20.1 to the Registrant's Report
on Form 8-K dated April 1, 1997, and is incorporated herein
by this reference.
4.21.2 Global Certificate for Capital Security of Conseco Financing
Trust III was filed with the Commission as Exhibit 4.20.2 to
the Registrant's Report on Form 8-K dated April 1, 1997, and
is incorporated herein by this reference.
4.21.3 Capital Securities Guarantee Agreement, dated as of April 1,
1997 between the Registrant and Fleet National Bank was
filed with the Commission as Exhibit 4.20.3 to the
Registrant's Report on Form 8-K dated April 1, 1997, and is
incorporated herein by this reference.
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4.22.1 Senior Indenture, dated November 13, 1997, by and between
the Registrant and Bank of New York as successor in interest
to LTCB Trust Company, as Trustee (the "Senior Indenture"),
was filed with the Commission as Exhibit 4.1 to
Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-3, No. 333-27803, and is
incorporated herein by this reference.
4.22.2 6.4% Note due February 10, 2003 issued under the Senior
Indenture (one of several identical notes aggregating $250
million) was filed with the Commission as Exhibit 4.22.2 to
the Registrant's Annual Report on Form 10-K for 1997 and is
incorporated herein by this reference.
4.22.3 6.8% Note due June 15, 2005 issued under the Senior
Indenture (one of several identical notes aggregating $250
million) was filed with the Commission as Exhibit 4.22.3 to
the Registrant's Report on Form 8-K dated June 4, 1998, and
is incorporated herein by this reference.
4.22.4 6.4% Mandatory Par Put Remarketed Securities Note due June
15, 2011 issued under the Senior Indenture (one of several
identical notes aggregating $550 million) was filed with the
Commission as Exhibit 4.22.4 to the Registrant's Report on
Form 8-K dated June 4, 1998, and is incorporated herein by
this reference
4.22.5 7 7/8% Note due December 15, 2000 issued under the Senior
Indenture was filed with the Commission as Exhibit 4.22.5 to
the Registrant's Report on Form 8-K dated December 18, 1998,
and is incorporated herein by this reference.
4.23.1 Subordinated Indenture between the Registrant and The First
National Bank of Chicago, as Trustee, was filed with the
Commission as Exhibit 4.2 to the Registrant's Registration
Statement on Form S-3, No. 333-40423, and is incorporated
herein by this reference.
4.24.1 Amended and Restated Declaration of Trust of Conseco
Financing Trust IV was filed with the Commission as Exhibit
4.12 to the Registrant's Registration Statement on Form S-3,
No. 333-40423, and is incorporated herein by this reference.
4.24.2 Preferred Securities Guarantee of the Registrant for the
benefit of the holders of trust preferred securities of
Conseco Financing Trust IV was filed with the Commission as
Exhibit 4.13 to the Registrant's Registration Statement on
Form S-3, No. 333-40423, and is incorporated herein by
reference.
4.24.3 Purchase Contract Agreement between the Registrant and The
First National Bank of Chicago, as Purchase Contract Agent,
was filed with the Commission as Exhibit 4.20 to the
Registrant's Registration Statement on Form S-3, No.
333-40423, and is incorporated herein by reference.
4.24.4 Pledge Agreement among the Registrant, The Chase Manhattan
Bank, as Collateral Agent, and The First National Bank of
Chicago, as Purchase Contract Agent, was filed with the
Commission as Exhibit 4.21 to the Registrant's Registration
Statement on Form S-3, No. 333-40423, and is incorporated
herein by reference.
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 was filed with the Commission as an
exhibit to Green Tree's Registration Statement on Form S-4
(File No. 33-42249), and is incorporated herein by this
reference.
4.26.1 Fourth Supplemental Indenture dated as of August 24, 1998,
between the Registrant and State Street Bank and Trust
Company, as Trustee, was filed with the Commission as
Exhibit 4.25.1 to the Registrant's Report on Form 8-K dated
August 24, 1998, and is incorporated herein by this
reference.
4.26.2 8.70% Subordinated Deferrable Interest Debenture due 2028
was filed with the Commission as Exhibit 4.25.2 to the
Registrant's Report on Form 8-K dated August 24, 1998, and
is incorporated herein by this reference.
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4.26.3 Amended and Restated Declaration of Trust of Conseco
Financing Trust V, dated as of August 24, 1998, among
Conseco, Inc., as sponsor, the Trustees named therein and
the holders from time to time of undivided beneficial
interests in the assets of Conseco Financing Trust V was
filed with the Commission as Exhibit 4.25.3 to the
Registrant's Report on Form 8-K dated August 24, 1998, and
is incorporated herein by this reference.
4.26.4 Global Certificate for Preferred Securities of Conseco
Financing Trust V was filed with the Commission as Exhibit
4.25.4 to the Registrant's Report on Form 8-K dated August
24, 1998, and is incorporated herein by this reference.
4.26.5 Preferred Securities Guarantee Agreement, dated as of August
24, 1998, between Conseco, Inc. and State Street Bank and
Trust Company was filed with the Commission as Exhibit
4.25.5 to the Registrant's Report on Form 8-K dated August
24, 1998, and is incorporated herein by this reference.
4.27.1 Fifth Supplemental Indenture, dated as of October 14, 1998,
between Conseco, Inc. and State Street Bank and Trust
Company, as Trustee, was filed with the Commission as
Exhibit 4.26.1 to the Registrant's Report on Form 8-K dated
October 8, 1998, and is incorporated herein by this
reference.
4.27.2 9% Subordinated Deferrable Interest Debenture due 2028 was
filed with the Commission as Exhibit 4.26.2 to the
Registrant's Report on Form 8-K dated October 8, 1998, and
is incorporated herein by this reference.
4.27.3 Amended and Restated Declaration of Trust of Conseco
Financing Trust VI, dated as of October 14, 1998, among
Conseco, Inc., as sponsor, the Trustees named therein and
the holders from time to time of undivided beneficial
interests in the assets of Conseco Financing Trust VI was
filed with the Commission as Exhibit 4.26.3 to the
Registrant's Report on Form 8-K dated October 8, 1998, and
is incorporated herein by this reference.
4.27.4 Global certificate for Preferred Securities of Conseco
Financing Trust VI was filed with the Commission as Exhibit
4.26.4 to the Registrant's Report on Form 8-K dated October
8, 1998, and is incorporated herein by this reference.
4.27.5 Preferred Securities Guarantee Agreement, dated as of
October 14, 1998, between Conseco, Inc. and State Street
Bank and Trust Company was filed with the Commission as
Exhibit 4.26.5 to the Registrant's Report on Form 8-K dated
October 8, 1998, and is incorporated herein by this
reference.
4.28.1 Sixth Supplemental Indenture, dated as of August 31, 1999,
between the Registrant and State Street Bank and Trust
Company, as Trustee, was filed with the Commission as
Exhibit 4.27.1 to the Registrant's Report on Form 8-K dated
August 31, 1999, and is incorporated herein by this
reference.
4.28.2 9.44% Subordinated Deferrable Interest Debenture was filed
with the Commission as Exhibit 4.27.2 to the Registrant's
Report on Form 8-K dated August 31, 1999, and is
incorporated herein by this reference
4.28.3 Amended and Restated Declaration of Trust of Conseco
Financing Trust VII, dated as of August 31, 1999, among the
Registrant, as sponsor, the Trustees named therein and the
holders from time to time of undivided beneficial interests
in the assets of Conseco Financing Trust VII was filed with
the Commission as Exhibit 4.27.3 to the Registrant's Report
on Form 8-K dated August 31, 1999, and is incorporated
herein by this reference.
4.28.4 Global Certificates for Preferred Securities of Conseco
Financing Trust VII were filed with the Commission as
Exhibit 4.27.4 to the Registrant's Report on Form 8-K dated
August 31, 1999, and are incorporated herein by this
reference.
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4.28.5 Preferred Securities Guarantee Agreement, dated as of August
31, 1999, between the Registrant and State Street Bank and
Trust Company was filed with the Commission as Exhibit
4.27.5 to the Registrant's Report on Form 8-K dated August
31, 1999, and is incorporated herein by this reference.
4.29.1 8.5% Note due October 15, 2002 (one of several notes with
identical terms aggregating $450 million) was filed with the
Commission as Exhibit 4.1 to the Registrant's Report on Form
8-K dated October 21, 1999, and is incorporated herein by
this reference.
4.29.2 9.0% Note due October 15, 2006 (one of several notes with
identical terms aggregating $550 million) was filed with the
Commission as Exhibit 4.2 to the Registrant's Report on Form
8-K dated October 21, 1999, and is incorporated herein by
this reference.
The Registrant agrees to furnish the Commission upon its
request a copy of any instrument defining the rights of
holders of long-term debt of the Company and its
consolidated subsidiaries.
*10.1.2 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Stephen C. Hilbert.
*10.1.3 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Rollin M. Dick.
10.1.9 Unsecured Promissory Note of Stephen C. Hilbert dated May
13, 1996 was filed with the Commission as Exhibit 10.1.9 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, and is incorporated herein by this
reference.
*10.1.10 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Ngaire E. Cuneo.
*10.1.11 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and John J. Sabl.
*10.1.12 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Thomas J. Kilian.
10.1.13 Employment Agreement, dated February 9, 1996 between Green
Tree and Lawrence Coss and related Noncompetition agreement
dated February 9, 1996, as amended by the Amendment
Agreement dated April 6, 1998 were filed with the Commission
as an exhibit to Green Tree's Registration Statement on Form
S-3, and are incorporated herein by this reference.
*10.1.14 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Maxwell E. Bublitz.
*10.1.15 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and James S. Adams.
10.1.16 Description of incentive compensation and severance
arrangement with Edward M. Berube was filed with the
Commission as Exhibit 10.1.15 to the Registrant's Report on
Form 10-Q for the quarter ended September 30, 1999, and is
incorporated herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the
Commission as Exhibit B to its definitive Proxy Statement
dated December 10, 1983; Amendment No. 1 thereto was filed
with the Commission as Exhibit 10.8.1 to its Report on Form
10-Q for the quarter ended June 30, 1985; Amendment No. 2
thereto was filed with the Commission as Exhibit 10.8.2 to
its Registration Statement on Form S-1, No. 33-4367;
Amendment No. 3 thereto was filed with the Commission as
Exhibit 10.8.3 to the Registrant's Annual Report on Form
10-K for 1986; Amendment No. 4 thereto was filed with the
Commission as Exhibit 10.8 to the Registrant's Annual Report
on Form 10-K for 1987; Amendment No. 5 thereto was filed
with the Commission as Exhibit 10.8 to the Registrant's
Report on Form 10-Q for the quarter ended September 30,
1991; and are incorporated herein by this reference.
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10.8.3 The Registrant's Cash Bonus Plan was filed with the
Commission as Exhibit 10.8.3 to the Registrant's Report on
Form 10-Q for the quarter ended March 31, 1989, and is
incorporated herein by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program was filed with the Commission as
Exhibit 10.8.4 to the Registrant's Annual Report on Form
10-K for 1992, and is incorporated herein by this reference.
10.8.6 Conseco Performance-Based Compensation Plan for Executive
Officers was filed with the Commission as Exhibit 10.8.15 to
the Registrant's Report on Form 10-Q for the quarter ended
March 31, 1998, and is incorporated herein by this
reference.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation
Plan was filed with the Commission as Exhibit A to the
Registrant's definitive Proxy Statement dated April 26,
1995, and is incorporated herein by this reference.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus
and Deferred Compensation Program was filed with the
Commission as Exhibit 10.8.8 to the Registrant's Annual
Report on Form 10-K for 1994, and is incorporated herein by
this reference.
10.8.9 Conseco 1994 Stock and Incentive Plan was filed as Exhibit A
to the Registrant's definitive Proxy Statement dated April
29, 1994 and is incorporated herein by this reference.
10.8.10 Amendment Number 2 to the Amended and Restated Conseco Stock
Bonus and Deferred Compensation Program was filed with the
Commission as Exhibit 10.8.10 to the Registrant's Annual
Report on Form 10-K for 1995 and is incorporated herein by
reference.
10.8.11 Amended and Restated Director, Officer and Key Employee
Stock Purchase Plan of Conseco was filed with the Commission
as Exhibit 10.8.11 to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1999, and is
incorporated herein by this reference.
10.8.12 Guaranty dated as of August 21, 1998 regarding Director,
Officer and Key Employee Stock Purchase Plan was filed with
the Commission as Exhibit 10.8.12 to the Registrant's Report
on Form 10-Q for the quarter ended March 31, 1999, and is
incorporated herein by this reference.
10.8.13 Form of Promissory Note payable to the Registrant relating
to the Registrant's Director, Officer and Key Employee Stock
Purchase Plan was filed with the Commission as Exhibit
10.8.13 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.
10.8.14 Conseco, Inc. Amended and Restated 1997 Non-qualified Stock
Option Plan was filed with the Commission as Exhibit 10.8.14
to the Registrant's Annual Report on Form 10-K for 1997, and
is incorporated herein by this reference.
10.8.15 Green Tree Financial Corporation 1987 Stock Option Plan was
filed with the Commission as an exhibit to Green Tree's
Registration Statement on Form S-4 (File No. 33-42249) and
is incorporated herein by this reference.
10.8.16 Green Tree Financial Corporation Key Executive Stock Bonus
Plan was filed with the Commission as an exhibit to Green
Tree's Registration Statement on Form S-4 (File No.
33-42249) and is incorporated herein by this reference.
10.8.17 Green Tree Financial Corporation Restated 1992 Supplemental
Stock Option Plan was filed with the Commission as Exhibit
10.8.17 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1992, and is incorporated herein by
this reference.
10.8.18 Green Tree Financial Corporation Chief Executive Cash Bonus
and Stock Option Plan and related Stock Option Agreement
dated February 9, 1996 were filed with the Commission as an
exhibit to Green Tree's Report on Form 10-Q for the quarter
ended June 30, 1996, and are incorporated herein by this
reference.
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10.8.19 Green Tree Financial Corporation 1996 restated Supplemental
Pension Plan dated May 15, 1996 was filed with the
Commission as an exhibit to Green Tree's Annual Report on
Form 10-K for 1997, and is incorporated herein by this
reference.
10.8.20 Retention Agreement dated as of July 1, 1998 between Green
Tree Financial Corporation and Bruce A. Crittenden was filed
with the Commission as Exhibit 10.8.20 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998 and is incorporated herein by this reference.
10.8.21 Amended and Restated 1999 Director and Executive Officer
Stock Purchase Plan of Conseco was filed with the Commission
as Exhibit 10.8.21 to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1999 and is incorporated
herein by this reference.
10.8.22 Guaranty regarding 1999 Director and Executive Officer Stock
Purchase Plan was filed with the Commission as Exhibit
10.8.22 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1999 and is incorporated herein
by this reference.
10.8.23 Form of Borrower Pledge Agreement dated as of September 15,
1999 with The Chase Manhattan Bank relating to the 1999
Director and Executive Officer Stock Purchase Plan was filed
with the Commission as Exhibit 10.8.23 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1999
and is incorporated herein by this reference.
10.8.24 Form of note payable to the Registrant relating to the 1999
Director and Executive Officer Stock Purchase Plan was filed
with the Commission as Exhibit 10.8.24 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1999
and is incorporated herein by this reference.
10.38 Split-Dollar Agreement dated December 18, 1998 among the
Registrant, Rollin M. Dick and Lawrence E. Dick, Trustee was
filed with the Commission as Exhibit 10.38 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and is incorporated herein by this
reference.
10.39 Split-Dollar Agreement dated December 18, 1998 among the
Registrant, Stephen C. Hilbert and Rollin M. Dick, Trustee
was filed with the Commission as Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and is incorporated herein by this
reference.
10.40 Split-Dollar Agreement dated December 18, 1998 among the
Registrant, Stephen C. Hilbert and Rollin M. Dick, Trustee
was filed with the Commission as Exhibit 10.40 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and is incorporated herein by this
reference.
10.41 Split-Dollar Agreement among the Registrant, Stephen C.
Hilbert and Rollin M. Dick, Trustee was filed with the
Commission as Exhibit 10.41 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 and
is incorporated herein by this reference.
10.42 Split-Dollar Agreement among the Registrant, Stephen C.
Hilbert and Rollin M. Dick, Trustee was filed with the
Commission as Exhibit 10.42 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 and
is incorporated herein by this reference.
10.43 Amended and Restated Securities Purchase Agreement dated as
of December 15, 1999 between the Registrant and the
purchasers named therein was filed with the Commission as
Exhibit 10.43 to the Registrant's Report on Form 8-K dated
December 15, 1999, as is incorporated herein by this
reference.
*12.1 Computation of Ratio of Earnings to Fixed Charges, Preferred
Dividends and Distributions on Company-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts.
*21 List of Subsidiaries.
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*23.1 Consent of PricewaterhouseCoopers LLP with respect to the
financial statements of Conseco, Inc.
*23.2 Consent of KPMG LLP with respect to the financial statements
of Conseco Finance Corp.
*27 Financial data schedule for Conseco, Inc. dated December 31,
1998.
*99.1 Report of KPMG LLP with respect to historical financial
statements of Conseco Finance Corp.
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* Filed herewith
COMPENSATION PLANS AND ARRANGEMENTS
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*10.1.2 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Stephen C. Hilbert.
*10.1.3 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Rollin M. Dick.
10.1.9 Unsecured Promissory Note of Stephen C. Hilbert.
*10.1.10 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and Ngaire E. Cuneo.
*10.1.11 Employment Agreement, amended and restated as of December
15, 1999, between the Registrant and John J. Sabl.
*10.1.12 Employment Agreement, amended and restated as of December
15, 1999 between the Registrant and Thomas J. Kilian.
10.1.13 Employment Agreement, dated February 9, 1996 between Green
Tree and Lawrence Coss and related Noncompetition Agreement
dated February 9, 1996, as amended by Amendment Agreement
dated April 6, 1998.
*10.1.14 Employment Agreement, amended and restated as of December
15, 1999 between the Registrant and Maxwell E. Bublitz.
*10.1.15 Employment Agreement, amended and restated as of December
15, 1999 between the Registrant and James S. Adams.
10.1.16 Description of incentive compensation and severance
arrangement with Edward M. Berube.
10.8 The Registrant's Stock Option Plan; Amendment No. 1 thereto;
Amendment No. 2 thereto; Amendment No. 3 thereto; Amendment
No. 4 thereto; and Amendment No. 5 thereto.
10.8.3 The Registrant's Cash Bonus Plan.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program.
10.8.6 Conseco Performance -- Based Compensation Plan for Executive
officers.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation
Plan.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus
and Deferred Compensation Program.
10.8.9 Conseco 1994 Stock and Incentive Plan.
10.8.10 Amendment No. 2 to the Amended and Restated Stock Bonus and
Deferred Compensation Program.
10.8.11 Amended and Restated Director, Officer and Key Employee
Stock Purchase Plan.
10.8.12 Guaranty dated as of August 21, 1998 regarding Director,
Officer and Key Employee Stock Purchase Plan.
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ------- --------
<C> <S>
10.8.13 Form of Promissory Note Payable to the Registrant relating
to the Registrant's Director, Officer and Key Employee Stock
Purchase Plan.
10.8.14 Conseco, Inc. Amended and Restated 1997 Non-qualified Stock
Option Plan.
10.8.15 Green Tree Financial Corporation 1987 Stock Option Plan.
10.8.16 Green Tree Financial Corporation Key Executive Stock Bonus
Plan.
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.
10.8.19 Green Tree Financial Corporation 1996 restated Supplemental
Pension Plan dated May 15, 1996.
10.8.20 Retention Agreement dated as of July 1, 1998 between Green
Tree Financial Corporation and Bruce A. Crittenden.
10.8.21 Amended and Restated 1999 Director and Executive Officer
Stock Purchase Plan of Conseco.
10.8.22 Guaranty regarding 1999 Director and Executive Officer Stock
Purchase Plan.
10.8.23 Form of Borrower Pledge Agreement dated as of September 15,
1999 with The Chase Manhattan Bank relating to the 1999
Director and Executive Officer Stock Purchase Plan.
10.8.24 Form of note payable to the Registrant relating to the 1999
Director and Executive Officer Stock Purchase Plan.
</TABLE>
<PAGE> 1
EXHIBIT-10.1.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998, as amended and
restated as of May 26, 1999, and as further amended and restated as of December
15, 1999, between CONSECO, INC. (hereinafter called the "Company"), and STEPHEN
C. HILBERT (hereinafter called "Executive").
RECITALS
WHEREAS, the Company and Executive were parties to an Employment
Agreement dated January 1, 1987, as amended by Amendment No. 1 dated February
28, 1988 (as amended, the "Prior Employment Agreement"); and
WHEREAS, the Prior Employment Agreement was replaced by a new
employment agreement dated as of January 1, 1998 and subsequently amended as of
May 14, 1999 and as amended and restated as of May 26, 1999 (as so amended, the
"Existing Employment Agreement") and the Company and Executive desire to make
certain modifications to the Existing Employment Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree that the Existing Employment
Agreement be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive, and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. This Agreement shall be deemed to have become effective (and
the Prior Employment Agreement terminated) as of January 1, 1998. On May 14,
1998 (the "Approval Date") the Company's shareholders approved the
performance-based compensation provisions hereof (i.e., Section 5(b)) as then in
effect. Subject to provisions for termination as provided in Section 9 hereof,
the term of this Agreement shall be five (5) years from and after January 1,
1998, and it shall be automatically renewed for successive five (5) year periods
on January 1 of each year thereafter, unless either party elects not to renew
this Agreement by serving written notice of such intention not to renew on the
other party at least one hundred eighty (180) days prior to January 1 of each
year. If such an election is made, this Agreement shall be in full force and
effect for the remaining portion of the then current five (5) year period,
subject to the provisions for termination as provided in Section 9 hereof. The
term Basic Employment Period as used in this Agreement shall mean the five (5)
year period commencing with the most recent annual renewal pursuant to this
section.
3. Duties. Executive is engaged by the Company in an executive capacity
as its chief executive officer. Executive's position with the Company shall be
Chairman of the Board of Directors, President and Chief Executive Officer, and
such other positions (not inconsistent with the aforementioned responsibilities)
as may be determined from time to time by the Board of Directors of the Company.
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4. Extent of Services. Executive, subject to the direction and control
of the Board of Directors of the Company, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of his positions with the
Company and adequate for the performance of his duties. Executive shall devote
substantially all of his employable time, attention and best efforts to the
business of the Company, and shall not, without the consent of the Company,
during the term of this Agreement be actively engaged in any other business
activity, whether or not such business activity is pursued for gain, profit or
other pecuniary advantage; but this shall not be construed as preventing
Executive from investing his assets in such form or manner as will not require
any material services on the part of Executive in the operation of the affairs
of the companies in which such investments are made. For purposes of this
Agreement, full-time employment shall be the normal work week for individuals in
senior executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary of One Million Dollars
($1,000,000) per year payable in equal installments in accordance with
the Company's payroll procedure for its salaried employees (but in no
event less than twice a month), it being understood that for 1998 a
lump sum payment shall be made promptly after the approval of this
Agreement by the shareholders of the Company to cause the salary
payments to Executive in 1998 to such date in 1998 to at least equal
the pro rata portion (based on the number of days in 1998 then elapsed
through the end of the most recent pay period then ended) of One
Million Dollars ($1,000,000). Salary payments shall be subject to
withholding of taxes and other appropriate and customary amounts. In
addition to the base salary above, Executive may receive additional
annual salary increases based upon his performance in his executive and
management capacity. The amounts of such salary increases shall be
determined by the Board of Directors of the Company or the Compensation
Committee thereof (the "Compensation Committee").
(b) In addition to base salary, Executive shall be entitled to
receive annually a bonus to be calculated and paid for each fiscal year
as follows:
(i) First, the maximum potential bonus to Executive for such
year (the "Maximum Bonus") shall be computed. The Maximum Bonus for
a fiscal year shall be equal to three percent (3%) of the annual Net
Profits (as defined below) for such fiscal year of the Company. The
bonus shall be calculated from the books and records of the Company
which shall be kept in accordance with generally accepted accounting
principles applied by the Company in the preparation of its
financial statements. The Maximum Bonus for a fiscal year shall be
payable, without reference to any other tests, to the extent it does
not exceed the Non-Discretionary Amount (as determined pursuant to
clause (v) below, the "Non-Discretionary Amount") applicable to such
year. "Net Profits" shall mean the Company's Income from Continuing
Operations (as defined below), as adjusted to add back, in each case
to the extent such items were deducted in
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<PAGE> 3
the computation of Income from Continuing Operations, (x) income
taxes and (y) bonuses to Executive and the Company's Executive Vice
Presidents. "Income from Continuing Operations" shall mean the
Company's income from continuing operations, which shall exclude for
this computation the effect (in each case net of applicable tax) of
(i) extraordinary items, (ii) discontinued operations and (iii) the
cumulative effects of changes in accounting principles.
(ii) If the Maximum Bonus exceeds the Non-Discretionary Amount
for such fiscal year a separate calculation shall be made to
determine what portion, if any, of the Maximum Bonus in excess of
the Non-Discretionary Amount could be paid and still permit the
Company's ROE (as determined pursuant to clause (iii) below, the
"ROE") for such fiscal year to be at least 15% for such fiscal year
(such amount exceeding the Maximum Bonus and meeting such 15% ROE
test for such fiscal year being referred to as the "Additional
Potential Bonus"). The Additional Potential Bonus for a fiscal year
would then be payable to Executive for such fiscal year subject to
the discretion of the Compensation Committee to reduce or eliminate
(in whole or in part) the payment of the Additional Potential Bonus
for such year in its discretion.
(iii) The ROE for a fiscal year shall be determined by dividing
(x) the Company's Income from Continuing Operations for such fiscal
year, reduced by any dividends paid with respect to such fiscal year
on the Company's preferred stock (it being understood that any
amounts paid to induce the conversion of preferred stock are not to
be considered dividends on preferred stock) by (y) the arithmetic
average of the Company's Average Common Equity (as defined below)
for the four quarters of such fiscal year. The "Average Common
Equity" of the Company for a quarter shall mean the arithmetic
average of the common shareholders equity of the Company shown on
its financial statements (adjusted to exclude unrealized
appreciation or depreciation of fixed maturity securities net of any
applicable deferred income taxes, as so adjusted "Common
Shareholders Equity") as of the end of such fiscal quarter (as
adjusted as provided below, the "Quarter End Equity") and the end of
the preceding quarter (the "Quarter Start Equity"); provided, that
if one or more Significant Transactions (as defined below) has
occurred during the fiscal quarter as to which Average Common Equity
is being determined, then the impact of each such Significant
Transaction on the Quarter End Equity shall be reduced by a
fraction, the numerator of which shall be the number of days in such
quarter elapsed before said Significant Transaction occurred (it
being understood that with respect to a Significant Transaction
which includes a series of transactions which closed or were
otherwise consummated over a period of time the Company shall select
a reasonable midpoint for purposes of this calculation) and the
denominator of which shall be the total number of days in such
quarter, and the Quarter End Equity shall be computed taking into
account such reductions. "Significant Transaction" with respect to a
quarter shall mean any event (such as a share issuance, share
repurchase, conversion, acquisition, disposition, merger,
consolidation or change in accounting principles) the effect of
which event, or series of related events, is to cause the Quarter
End Equity to change by at least 10% of the Quarter Start Equity
from what it would otherwise have been absent such event or series
of related events.
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<PAGE> 4
(iv) The Company agrees to give notice to the Compensation
Committee as promptly as practicable after the end of each fiscal
year of the respective amounts of Maximum Bonus, Additional
Potential Bonus and, if it has been adjusted with respect to such
fiscal year, Non-Discretionary Amount for such fiscal year. The
Compensation Committee shall then have fifteen (15) days from the
date such notice is sent by the Company to determine the extent, if
any, to which the Additional Potential Bonus with respect to such
fiscal year shall have been reduced or eliminated. The Company shall
give notice to Executive not later than five (5) days after the
expiration of such 15-day period of the Incremental Bonus to be paid
for such fiscal year.
(v) The Non-Discretionary Amount for each of 1998 and 1999 shall
be $13.5 million. The Non-Discretionary Amount shall be adjusted for
2000 and the last year of each consecutive three-year period that
follows (each an "Adjustment Year"), as described in the following
sentence. For an Adjustment Year the Non-Discretionary Amount shall
be adjusted to be the lesser of (i) one-half of the average of the
Maximum Bonus for the two fiscal years immediately preceding such
Adjustment year and (ii) the arithmetic average of the
Non-Discretionary Amount and the Additional Potential Bonus, in each
case regardless of the amount of bonus actually paid, for such two
fiscal years. The Non-Discretionary Amount as so adjusted shall
remain the same with respect to the two fiscal years following such
Adjustment Year.
(vi) The cumulative accrued amount of the bonus shall be
calculated as of the end of each of the first three quarters of the
Company's fiscal year based on the year-to-date Net Profits, and
such accrued bonus, minus accrued bonus payments made for previous
quarters of the same fiscal year, shall be paid to Executive as soon
as practicable, but in no event more than forty-five (45) days after
the end of the quarter; provided, that the cumulative maximum bonus
payable with respect to the (i) first quarter may not exceed 25% of
the Non-Discretionary Amount, (ii) first two quarters shall not
exceed 50% of the Non-Discretionary Amount and (iii) first three
quarters shall not exceed 75% of the Non-Discretionary Amount for
such fiscal year. The aggregate bonus for the fiscal year, minus the
quarterly accrued payments made for the year, shall be paid to
Executive soon as practicable, but in no event more than ninety (90)
days, after the fiscal year end. If the quarterly payments for the
first three quarters of any fiscal year exceed the aggregate bonus
payable for the entire year, the amount of such excess shall be
repaid to the Company by Executive.
(vii) A bonus payment of $3,375,000 with respect to the first
quarter of 1999 has been made in cash. With respect to the remainder
of 1999 the bonus (the "Remaining Bonus") shall not exceed the
lesser of (x) the remainder of the Non-Discretionary Amount (i.e.,
$10,125,000) for 1999 and (y) the difference between the Maximum
Bonus for all of 1999 and $3,375,000. At the time all or any part of
the Remaining Bonus is being determined, if the Market Price of the
Company's common stock is less than $50 per share, the payment that
would otherwise be made shall be reduced by multiplying such amount
by a fraction the numerator of which shall be such Market Price and
the denominator of which shall be $50. A portion of the resulting
payment
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<PAGE> 5
of the Remaining Bonus (whether or not reduced pursuant to the
preceding sentence) shall be paid in cash to provide for the payment
of Executive's estimated Federal, state and local income,
unemployment, social security, Medicare and similar income or
payroll taxes at maximum rates (such tax estimate to be made by
Executive subject to the approval of the Company, which approval
will not be unreasonably withheld). The remaining part of such
resulting payment shall be satisfied by the issuance to Executive of
a number of shares of the Company's common stock determined by
dividing such remaining part by the Market Price of such common
stock. The "Market Price" of the common stock for purposes of this
clause (vii) shall be the average of the high and low trading price
of the common stock on the New York Stock Exchange Composite Tape on
the day of computation or if no such trading has occurred on such
day on the last preceding day on which such trading has occurred. If
Executive subsequently is required to return any portion of the
bonus payable pursuant to the last sentence of clause (vi) of this
Section 5(b) Executive shall return cash and stock to the Company on
a last-paid, first-returned basis. This clause (vii) shall apply to
Executive's bonus only for 1999. Notwithstanding that Executive's
bonus for 1999 may be reduced below the Non-Discretionary Amount as
provided in this clause (vii) based upon the Market Price of the
common stock, Executive shall, for purposes of Sections 9(b) 9(c),
10(a) and 11 be treated as having earned the Non-Discretionary
Amount for 1999 to the extent it would have paid if such reduction
had not occurred.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt from time to time for its executive management or
supervisory personnel generally, at such time as Executive shall have
fulfilled the eligibility requirements for participation therein.
Nothing herein shall be construed so as to prevent the Company from
modifying or terminating any employee benefit plans or programs, or
employee fringe benefits, it may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600.00) and shall pay directly or shall reimburse Executive
for the cost of fuel he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay,
for each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall reimburse Executive for all such
reasonable expenses upon Executive's periodic presentation of an
itemized account of such expenditures.
(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per year of
this Agreement, reimburse
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<PAGE> 6
Executive for reasonable medical expenses incurred by Executive and
his dependents which are not otherwise covered by health insurance
provided to Executive under Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of One Million Dollars ($1,000,000),
payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least twelve (12) consecutive
calendar months, the Company may terminate Executive's employment hereunder in
which case the Company shall immediately pay Executive a lump sum payment equal
to the sum of his salary and bonus as provided herein with respect to the most
recent fiscal year then ended and, provided, further that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentional
self-inflicting injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment hereunder, he will be making use of, acquiring and/or
adding to confidential information of the Company of a special and unique nature
and value. As a material inducement to the Company to enter into this Agreement
and to pay to Executive the compensation stated in Section 5, as well as any
additional benefits stated herein, Executive covenants and agrees that he shall
not, at any time during or following the term of his employment, directly or
indirectly, divulge or disclose for any purpose whatsoever, any confidential
information that has been obtained by or disclosed to him as a result of his
employment by the Company, except to the extent that such confidential
information (a) becomes a matter of public record or is published in a
newspaper, magazine or other periodical available to the general public, other
than as a result of any act or omission of Executive, (b) is required to be
disclosed by any law, regulation or order of any court or regulatory commission,
department or agency, provided that Executive gives prompt notice of such
requirement to the Company to enable the Company to seek an appropriate
protective order or confidential treatment, or (c) is necessary to perform
properly Executive's duties under this Agreement. Upon the termination of this
Agreement, Executive shall return all materials obtained from or belonging to
the Company which Executive may have in his possession or control.
9. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive and (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company
pursuant to the first sentence of Section 9(a) and such termination
does not constitute a Control Termination as
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<PAGE> 7
defined in (d) below, Executive shall be entitled to receive (i) a
severance payment equal to five (5) times the sum of Executive's base
salary, as determined pursuant to Section 5(a) hereof for the fiscal
year in which such termination occurs, and the Non-Discretionary Amount
as defined in Section 5(a)(iv) applicable for such fiscal year
(regardless of whether the Company's results for such fiscal year would
have resulted in a bonus being paid to Executive) and (ii) all other
unpaid amounts previously accrued or awarded pursuant to any other
provision of this Agreement.
(c) In the event this Agreement is terminated upon the death of
Executive, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive his base salary as provided in Section
5(a) accrued but unpaid (i) as of the date of termination, (ii) a pro
rata share of the bonus provided for in Section 5(b) based on the
number of months during which he performed duties hereunder in the
calendar year of his death, and (iii) all other unpaid amounts
previously accrued or awarded pursuant to any other provision of this
Agreement.
(d) The term "Control Termination" as used herein shall mean (1)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (2) termination of this Agreement by Executive
following a "change in control" of the Company (as defined below) upon
the occurrence of any of the following events:
(i) a significant change in the nature or scope of Executive's
authorities or duties from those in existence immediately prior to
the change in control, a reduction in total compensation from that
in existence immediately prior to the change in control, or a breach
by the Company of any other provision of this Agreement; or
(ii) the reasonable determination by Executive that, as a result
of a change in circumstances significantly affecting his position,
he is unable to exercise Executive's authorities, powers, functions
or duties in existence immediately prior to the change in control;
or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties; or
(iv) the giving of notice of termination by Executive to the
Company during the 6-month period commencing six (6) months after
the change in control.
The term "change in control" shall mean a change in control of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the
"1934 Act") if such Item 6(e) were applicable to the Company as such Item is in
effect on May 26, 1999; provided that, without limitation, such a change in
control shall be deemed to have occurred if and when (A) any "person" (as such
term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) is or becomes a
beneficial owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the
7
<PAGE> 8
Company's then outstanding securities or (B) in connection with or as a result
of a tender offer, merger, consolidation, sale of assets or contest for election
of directors, or any combination of the foregoing transactions or events,
individuals who, as of the date hereof, constitute the Board of Directors of the
Company (the "Incumbent Board") cease to constitute at least a majority of such
Board; provided, however, that any individual who becomes a director of the
Company subsequent to the date hereof whose election was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board, shall
be deemed to have been a member of the Incumbent Board; and provided further,
that no individual who was initially elected as a director of the Company as a
result of an actual or threatened election contest, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any person
other than the Board of Directors shall be deemed to have been a member of the
Incumbent Board, or (C) any reorganization, merger or consolidation or the
issuance of shares of common stock of the Company in connection therewith unless
immediately after any such reorganization, merger or consolidation (i) more than
60% of the then outstanding shares of common stock of the corporation surviving
or resulting from such reorganization, merger or consolidation and more than 60%
of the combined voting power of the then outstanding securities of such
corporation entitled to vote generally in the election of directors are then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals or entities who were the beneficial owners, respectively, of the
outstanding shares of common stock of the Company and the outstanding voting
securities of the Company immediately prior to such reorganization, merger or
consolidation and in substantially the same proportions relative to each other
as their ownership, immediately prior to such reorganization, merger or
consolidation, of the outstanding shares of common stock of the Company and the
outstanding voting securities of the Company, as the case may be, and (ii) at
least a majority of the members of the board of directors of the corporation
surviving or resulting from such reorganization, merger or consolidation were
members of the Board of Directors of the Company at the time of the execution of
the initial agreement or action of the Board of Directors providing for such
reorganization, merger or consolidation or issuance of shares of common stock of
the Company. Upon the occurrence of a change in control, the Company shall
promptly notify Executive in writing of the occurrence of such event (such
notice, the "Change in Control Notice"). If the Change in Control Notice is not
given within 10 days after the occurrence of a change in control the period
specified in clause (d)(A) of this Section 9 shall be extended until the second
anniversary of the date such Change in Control Notice is given.
10. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his salary on a monthly basis at the
same rate as payable immediately prior to the date of termination plus
the estimated amount of any bonuses to which he would have been
entitled had he remained in the employ of the Company and a change in
control of the Company had not occurred, which estimate shall be
reasonable and made by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements
8
<PAGE> 9
applicable to the Company's executive employees. In addition, Executive
shall continue to be entitled to all benefits and service credit for
benefits under medical, insurance and other employee benefit plans,
programs and arrangements of the Company as if he were still employed
under this Agreement and a change in control of the Company had not
occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependents, beneficiaries and estate, pay or provide for payment of
such benefits and service credit for such benefits to Executive, his
dependents, beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
long-term incentive compensation arrangement shall not be provided
under any such arrangement to Executive, or his dependents,
beneficiaries and estate, because he is no longer an employee of the
Company, the Company shall, to the extent necessary, pay or provide for
payment of such benefits to Executive, his dependents, beneficiaries
and estate.
11. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 10 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following paragraphs (a) and (b):
(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate which he would have been entitled to
receive in accordance with Section 5(a) plus a pro rata share of the
estimated amount of any bonus which would have been payable for the
bonus period which includes the termination date; and
(b) an amount equal to five times the greater of (i) the highest
annual bonus payable under Section 5(b) hereof for the last three (3)
fiscal years of the company ended prior to such Control Termination, or
(ii) the estimated amount of the annual bonus payable under Section
5(b) hereof for the fiscal year of the Company which includes the date
of such Control Termination.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any retirement or pension benefit plan maintained by
the Company, the benefits he would have accrued under such benefit plan if he
had remained in the employ of the Company and such plan had remained in effect
for 60 calendar months after his termination, which benefits will be paid
concurrently with, and in addition to, the benefits provided under such benefit
plan, and (ii) the employee benefits (including, but not limited to, coverage
under any medical insurance and split-dollar life insurance arrangements or
programs)
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<PAGE> 10
to which he would have been entitled under all employee benefit plans, programs
or arrangements maintained by the Company if he had remained in the employ of
the Company and such plan, programs or arrangements had remained in effect for
60 calendar months after his termination; or the value of the amounts described
in clauses (i) and (ii) next preceding. The amount of the payments described in
the preceding sentence shall be determined and such payments shall be
distributed as soon as it is reasonably possible.
12. Tax Indemnity Payments. (a) Anything in this Agreement to the
contrary notwithstanding, in the event it shall be determined that any payment
or distribution by the Company or its affiliated companies to or for the benefit
of Executive, whether paid or payable or distributed or distributable pursuant
to the terms of the Agreement or otherwise but determined without regard to any
additional payments required under this Section 12 (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986 (as amended the "Code"), or any successor provision (collectively,
"Section 4999"), or any interest or penalties are incurred by Executive with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any Federal, state or local income and employment
taxes and Excise Tax (and any interest and penalties imposed with respect to any
such taxes) imposed upon the Gross-Up Payment, Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 12(c), all determinations
required to be made under this Section 12, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive shall appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 12, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the
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Company exhausts its remedies pursuant to Section 12(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the
payment by the Company of, or change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 12(c) shall not
impair Executive's rights under this Section 12 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 12(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free
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basis and shall indemnify and hold Executive harmless, on an after-tax basis,
from any Excise Tax or income, employment or other tax (including interest or
penalties with respect to any such taxes) imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and provided
further, that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 12(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 12(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
13. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied by the Conseco Put
Price; plus (ii) all or any portion of the number of Successor Securities which
may be acquired pursuant to options (which options were granted to Executive in
exchange or substitution for options to acquire the common stock of the Company)
held by Executive at the time of such election, multiplied by the Successor
Security Put Price; plus (iii) the number of shares of common stock of the
Company which were acquired pursuant to options granted by the Company which
were exercised, or which were discharged and satisfied by the payment to
Executive of cash or other property (other than options for Successor
Securities), in connection with the change in control subsequent to the first
public announcement of the transaction or event which led to the change in
control, multiplied by the respective per share exercise prices of such
exercised or discharged options. For purposes of calculating the above lump sum
payment, the options described in clauses (i) and (ii) shall include all such
options, whether or not then exercisable, and, to compensate Executive for the
loss of the potential future speculative value of unexercised options, there
shall not be any deduction of the respective per share exercise prices for any
of the options described in such clauses (i) and (ii). The cash payment due from
the Company pursuant to this Section 13 shall be made to Executive within ten
(10) days after the date of such election hereunder, against the execution and
delivery by
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Executive to the Company of an appropriate agreement confirming the surrender to
the Company of the options in respect of which the lump sum cash payment is
being made to Executive.
"Successor Securities" means any securities of any person received
by the holders of the common stock of the Company in exchange, substitution or
payment for, or upon conversion of, the common stock of the Company in
connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in Control
Price or (ii) the Current Market Price of the common stock of the Company.
"Successor Security Put Price" means the greater of (i) the Change
in Control Price divided by the Exchange Ratio or (ii) the Current Market Price
of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 13.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid and asked prices as
reported by NASDAQ, or if such security is not so reported, the average of the
closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment
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or substitution for, or upon conversion of, the common stock of the Company, the
price paid to such holders shall be the Price of such security at the time or
times paid or delivered to such holders.
"Exchange Ratio" means, in connection with a change in control, the
number of Successor Securities to be paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
14. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
15. Grant of Stock Option. On the Approval Date, the Company shall
grant to Executive, a nonqualified stock option under the Code to purchase One
Million Five Hundred Thousand (1,500,000) shares of common stock at the fair
market value per share of common stock on the Effective Date. Such stock option
shall expire ten (10) years after the Approval Date of grant and shall become
exercisable with respect to one-half of the shares covered on the third
anniversary of the Approval Date, with respect to one-quarter of such shares on
the fourth anniversary of the Approval Date and with respect to the remaining
one-quarter of such shares on the fifth anniversary of the Approval Date.
16. Arbitration of Disputes; Injunctive Relief.
(a) Except as specified in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from the Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with such rights, regardless
of the final outcome, unless the arbitrators shall determine that under
the circumstances recovery by Executive of all or a part of any such
fees and costs and expenses would be unjust.
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(b) Executive acknowledges that a breach or threatened breach by
Executive of Section 8 of this Agreement will give rise to irreparable
injury to the Company and that money damages will not be adequate
relief for such injury. Notwithstanding paragraph (a) above, the
Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 of this Agreement. Nothing herein shall
be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
17. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by certified registered
mail to his residence, in the case of Executive, or to its principal offices in
the case of the Company.
18. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
19. Entire Agreement. This instrument contains the entire agreement of
the parties. It may not be changed orally, but only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. This Agreement supersedes and
replaces all prior employment and compensatory agreements, understandings and
arrangements between Executive and the Company or any subsidiary of the Company.
20. Binding Agreement and Governing Law. This Agreement shall be
binding upon and shall insure to the benefit of the parties and their successors
in interest and shall be construed in accordance with and governed by the laws
of the State of Indiana. This Agreement is personal to each of the parties
hereto, and neither party may assign nor delegate any of its rights or
obligations hereunder without the prior written consent of the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Rollin M. Dick /s/ Stephen C. Hilbert
-------------------------------- -------------------------------
Rollin M. Dick Stephen C. Hilbert
"Company" "Executive"
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EXHIBIT-10.1.3
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of July 1, 1991, as amended and restated
as of May 26, 1999, and as further amended and restated as of December 15, 1999,
between CONSECO, INC., an Indiana corporation (hereinafter called the
"Company"), and Rollin M. Dick (hereinafter called "Executive").
RECITALS
WHEREAS, Executive has been employed by the Company for a number of
years and the services of Executive, his managerial and professional experience,
and his knowledge of the affairs of the Company are of great value to the
Company;
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated July 1, 1991, as amended on March 12, 1996, October 29, 1997 and
May 14, 1998 and as amended and restated as of May 26, 1999 (as so amended the
"Existing Employment Agreement"), and the Company and Executive desire to make
certain modifications to the Existing Employment Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree the Existing Employment Agreement
be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be July 1, 1991.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 1, 1991 and ending
December 31, 2001 (hereinafter called the "Basic Employment Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as its chief financial officer. Executive shall report to the Chief Executive
Officer regarding the performance of his duties and shall be subject to the
direction and control of the Board of Directors of the Company (sometimes
referred to herein as the "Board") and the Chief Executive Officer. Executive's
position with the Company shall initially be Executive Vice President, and such
other positions as may be determined from time to time by the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Chief Executive Officer and the Board, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to
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Executive such assistance and work accommodations as are suitable to the
character of his positions with the Company and adequate for the performance of
his duties. Executive shall devote his entire employable time, attention and
best efforts to the business of the Company, and shall not, without the consent
of the Company, during the term of this Agreement be actively engaged in any
other business activity, whether or not such business activity is pursued for
gain, profit or other pecuniary advantage; but this shall not be construed as
preventing Executive from investing his assets in such form or manner as will
not require any services on the part of Executive in the operation of the
affairs of the companies in which such investments are made. For purposes of
this Agreement, full-time employment shall be the normal work week for
individuals in comparable executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of Two
Hundred Fifty Thousand Dollars ($250,000) per year payable in equal
installments in accordance with the Company's payroll procedure for its
salaried employees. Salary payments shall be subject to withholding of
taxes and other appropriate and customary amounts. Executive may
receive increases in his Base Salary from time to time, based upon his
performance in his executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
for each year during the term hereof.
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(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall reimburse Executive for all such
reasonable expenses upon Executive's periodic presentation of an
itemized account of such expenditures.
(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and his dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least nine (9) consecutive
months, the Company may terminate Executive's employment hereunder in which case
the Company shall immediately pay Executive a lump sum payment equal to
one-quarter of the sum of his annual salary and bonus with respect to the most
recent fiscal year then ended and, provided further, that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment with the Company, he has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that he shall not, at any time during or following the term of his
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to him as a result of his employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which he may have in his possession or control.
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9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services he is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at law. In view of the
unique value to the Company of the services of Executive for which the Company
has contracted hereunder, because of the confidential information to be obtained
by, or disclosed to, Executive as hereinabove set forth, and as a material
inducement to the Company to enter into this Agreement and to pay to Executive
the compensation stated in Section 5, as well as any additional benefits stated
herein, and other good and valuable consideration, Executive covenants and
agrees that throughout the period Executive remains employed hereunder and for
one year thereafter, Executive shall not, directly or indirectly, anywhere in
the United States of America (i) render any services, as an agent, independent
contractor, consultant or otherwise, or become employed or compensated by, any
other corporation, person or entity engaged in the business of selling or
providing life, accident or health insurance products or services; (ii) render
any services, as an agent, independent contractor, consultant or otherwise, or
become employed or compensated by, any other corporation, person or entity
engaged in the business of selling or providing any lending or other financial
products or services that are competitive with the lending or other financial
products or services sold or provided by the Company or its subsidiaries, (iii)
in any manner compete with the Company or any of its subsidiaries; (iv) solicit
or attempt to convert to other insurance carriers, finance companies or other
corporations, persons or other entities providing these same or similar products
or services provided by the Company and its subsidiaries, any customers or
policyholders of the Company, or any of its subsidiaries; or (v) solicit for
employment or employ any employee of the Company or any of its subsidiaries. The
covenants of Executive in this Section 9 shall be void and unenforceable in the
event of a Control Termination of this Agreement as defined in Section 10 below.
Should any particular covenant or provision of this Section 9 be held
unreasonable or contrary to public policy for any reason, including, without
limitation, the time period, geographical area, or scope of activity covered by
any restrictive covenant or provision, the Company and Executive acknowledge and
agree that such covenant or provision shall automatically be deemed modified
such that the contested covenant or provision shall have the closest effect
permitted by applicable law to the original form and shall be given effect and
enforced as so modified to whatever extent would be reasonable and enforceable
under applicable law.
10. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
and all other unpaid amounts previously accrued or awarded pursuant to
any other provision of this Agreement.
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(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive Executive's Base Salary as provided in
Section 5(a) accrued but unpaid as of the date of termination, and all
other unpaid amounts previously accrued or awarded pursuant to any
other provision of this Agreement.
(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (B) termination of this Agreement by Executive
following a "change in control" of the Company (as defined below) upon
the occurrence of any of the following events:
(i) a significant change in the nature or scope of
Executive's authorities or duties from those in existence
immediately prior to the change in control, a reduction in his total
compensation from that in existence immediately prior to the change
in control, or a breach by the Company of any other provision of
this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting his
position, he is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation, such a change in control shall
be deemed to have occurred if and when (A) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Act) is or becomes a "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors or (B) as the result
of a tender offer, merger, consolidation, sale of assets, or contest for
election of directors, or any combination of the foregoing transactions or
events, individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease to constitute at least a
majority of such Board; provided, however, that any individual who becomes a
director of the Company subsequent to the date hereof whose election was
approved by a vote of at least a majority of the directors then
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comprising the Incumbent Board, shall be deemed to have been a member of the
Incumbent Board; and provided further, that no individual who was initially
elected as a director of the Company as a result of an actual or threatened
election contest, as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Act, or any other actual or threatened solicitation of
proxies or consents by or on behalf of any person other than the Board of
Directors shall be deemed to have been a member of the Incumbent Board, or (C)
any reorganization, merger or consolidation or the issuance of shares of common
stock of the Company in connection therewith unless immediately after any such
reorganization, merger or consolidation (i) more than 60% of the then
outstanding shares of common stock of the corporation surviving or resulting
from such reorganization, merger or consolidation and more than 60% of the
combined voting power of the then outstanding securities of such corporation
entitled to vote generally in the election of directors are then beneficially
owned, directly or indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the outstanding shares
of common stock of the Company and the outstanding voting securities of the
Company immediately prior to such reorganization, merger or consolidation and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
outstanding shares of common stock of the Company and the outstanding voting
securities of the Company, as the case may be, and (ii) at least a majority of
the members of the board of directors of the corporation surviving or resulting
from such reorganization, merger or consolidation were members of the Board of
Directors of the Company at the time of the execution of the initial agreement
or action of the Board of Directors providing for such reorganization, merger or
consolidation or issuance of shares of common stock of the Company. Upon the
occurrence of a change in control, the Company shall promptly notify Executive
in writing of the occurrence of such event (such notice, the "Change in Control
Notice"). If the Change in Control Notice is not given within 10 days after the
occurrence of a change in control the period specified in clause (d)(A) of this
Section 10 shall be extended until the second anniversary of the date such
Change in Control Notice is given.
(e) For purposes of this Agreement "just cause" shall mean:
(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case (A) willful
and deliberate on Executive's part and committed in bad faith or
without reasonable belief that such breach is in the best interests
of the Company and (B) not remedied by Executive in a reasonable
period of time after receipt of written notice from the Company
specifying such breach;
(ii) Executive's breach of any provisions of this Agreement, or
his use of alcohol or drugs which interferes with the performance of
his duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that he is guilty, of a felony or other crime involving moral
turpitude; or
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(iv) Executive's absence from his employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which he would have been entitled had he
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if he were still employed under this
Agreement and a change in control of the Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under\
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependents, beneficiaries and estate, pay or provide for payment of
such benefits and service credits for such benefits to Executive,
Executive's dependents, beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or his dependents, beneficiaries and estate,
because he is no longer an employee of the Company, the Company shall,
to the extent necessary, pay or provide for payment of such benefits to
Executive, his dependents, beneficiaries and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
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(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate of Base Salary which he would have been
entitled to receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes his termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits he would have accrued under
such benefit plan if he had remained in the employ of the Company and such plan
had remained in effect for 60 calendar months after his termination, which
benefits will be paid concurrently with, and in addition to, the benefits
provided under such benefit plan, and (ii) the employee benefits (including, but
not limited to, coverage under any medical insurance and life insurance
arrangements or programs) to which he would have been entitled under all
employee benefit plans, programs or arrangements maintained by the Company if he
had remained in the employ of the Company and such plans, programs or
arrangements had remained in effect for 60 calendar months after his
termination; or the value of the amounts described in clauses (i) and (ii) next
preceding. The amount of the payments described in the preceding sentence shall
be determined and such payments shall be distributed as soon as it is reasonably
possible.
13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as amended the "Code"), or
any successor provision (collectively, "Section 4999"), or any interest
or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any Federal, state or
local income and employment taxes and Excise Tax (and any interest and
penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required
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and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by the
Company's public accounting firm (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and
Executive within fifteen (15) business days of the receipt of notice
from Executive that there has been a Payment, or such earlier time as
is requested by the Company. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group
effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company of, or a change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
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(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim,
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income,
employment or other tax (including interest or penalties with respect to any
such taxes) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and provided further, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in
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addition to any other amounts owed to Executive under this Agreement) a lump sum
payment in cash equal to the sum of the following: (i) all or any portion of the
number of shares of common stock of the Company which may be acquired pursuant
to options granted by the Company and held by Executive at the time of such
election, multiplied by the Conseco Put Price; plus (ii) all or any portion of
the number of Successor Securities which may be acquired pursuant to options
(which options were granted to Executive in exchange or substitution for options
to acquire the common stock of the Company) held by Executive at the time of
such election, multiplied by the Successor Security Put Price; plus (iii) the
number of shares of common stock of the Company which were acquired pursuant to
options granted by the Company which were exercised, or which were discharged
and satisfied by the payment to Executive of cash or other property (other than
options for Successor Securities), subsequent to the first public announcement
of the transaction or event which led to the change in control, multiplied by
the respective per share exercise prices of such exercised or discharged
options. For purposes of calculating the above lump sum payment, the options
described in clauses (i) and (ii) shall include all such options, whether or not
then exercisable, and, to compensate Executive for the loss of the potential
future speculative value of unexercised options, there shall not be any
deduction of the respective per share exercise prices for any of the options
described in such clauses (i) and (ii). The cash payment due from the Company
pursuant to this Section 14 shall be made to Executive within ten (10) days
after the date of such election hereunder, against the execution and delivery by
Executive to the Company of an appropriate agreement confirming the surrender to
the Company of the options in respect of which the lump sum cash payment is
being made to Executive.
"Successor Securities" means any securities of any person received
by the holders of the common stock of the Company in exchange, substitution or
payment for, or upon conversion of, the common stock of the Company in
connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in Control
Price or (ii) the Current Market Price of the common stock of the Company.
"Successor Security Put Price" means the greater of (i) the
Change in Control Price divided by the Exchange Ratio or (ii) the Current Market
Price of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid
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and asked prices as reported by NASDAQ, or if such security is not so reported,
the average of the closing bid and asked prices as furnished by any securities
broker-dealer of recognized national standing selected from time to time by the
Company (or its successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, the common stock of the Company, the price paid to such holders
shall be the Price of such security at the time or times paid or delivered to
such holders.
"Exchange Ratio" means, in connection with a change in control, the
number of Successor Securities to be paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
16. Right of First Refusal to Purchase Stock. Executive agrees that the
Company shall have throughout the Basic Employment Period the right of first
refusal to purchase all or any portion of the shares of the Company's common
stock owned by him (the "Shares") at the following price:
(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's
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common stock on the last business day preceding the date on which
Executive notifies the Company of such desire.
In the event Executive shall receive a Third Party Offer which he
desires to accept, he shall deliver to the Company a written notification of the
terms thereof and the Company shall have a period of 48 hours after such
delivery in which to notify Executive of its desire to exercise its right of
first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market he shall deliver to the Company a written notification of the
amount of Shares he desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive may
proceed to complete the sale of Shares pursuant to the Third Party Offer or in
the open market in accordance with his notification to the Company, but his
failure to complete such sale within two weeks after his notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from the Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with the enforcement of any
arbitration award in court, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by
Executive of all or a part of any such fees and costs and expenses
would be unjust.
(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a)
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above, the Company and Executive agree that the Company may seek and
obtain injunctive relief, including, without limitation, temporary
restraining orders, preliminary injunctions and/or permanent
injunctions, in a court of proper jurisdiction to restrain or prohibit
a breach or threatened breach of Section 8 or 9 of this Agreement.
Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to the Company for such breach or
threatened breach, including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
his residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ Rollin M. Dick
-------------------------------
Rollin M. Dick
"Executive"
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EXHIBIT-10.1.10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 17th day of August, 1992,
as amended and restated as of May 26, 1999, and as further amended and restated
as of December 15, 1999, between CONSECO, INC., an Indiana corporation
(hereinafter called the "Company"), and Ngaire E. Cuneo (hereinafter called
"Executive").
RECITALS
WHEREAS, the services of Executive, her managerial and professional
experience, and her knowledge of the affairs of the Company are of great value
to the Company;
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated August 17, 1992, as amended on March 12, 1996 and May 14, 1998
and as amended and restated as of May 26, 1999 (as so amended the "Existing
Employment Agreement"), and the Company and Executive desire to make certain
modifications to the Existing Employment Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree the Existing Employment Agreement
be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be August 17, 1992.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning September 1, 1992 and
ending December 31, 2001 (hereinafter called the "Basic Employment Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as its executive vice president of corporate development. Executive shall report
to the Chief Executive Officer regarding the performance of her duties and shall
be subject to the direction and control of the Board of Directors of the Company
(sometimes referred to herein as the "Board") and the Chief Executive Officer.
Executive's position with the Company shall initially be Executive Vice
President, and such other positions as may be determined from time to time by
the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Chief Executive Officer and the Board, shall have the power and authority
commensurate with her executive status and necessary to perform her duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of her positions with the
Company and adequate for the performance of her duties. Executive shall devote
her entire
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employable time, attention and best efforts to the business of the Company, and
shall not, without the consent of the Company, during the term of this Agreement
be actively engaged in any other business activity, whether or not such business
activity is pursued for gain, profit or other pecuniary advantage; but this
shall not be construed as preventing Executive from investing her assets in such
form or manner as will not require any services on the part of Executive in the
operation of the affairs of the companies in which such investments are made.
For purposes of this Agreement, full-time employment shall be the normal work
week for individuals in comparable executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of Two
Hundred Fifty Thousand Dollars ($250,000) per year payable in equal
installments in accordance with the Company's payroll procedure for its
salaried employees. Salary payments shall be subject to withholding of
taxes and other appropriate and customary amounts. Executive may
receive increases in her Base Salary from time to time, based upon her
performance in her executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that she incurs in using her automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
for each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall reimburse Executive for all such
reasonable expenses upon Executive's periodic presentation of an
itemized account of such expenditures.
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(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and her dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that her ability to
perform her duties and services hereunder is materially and adversely impaired,
her salary, bonus and other compensation provided herein shall continue while
she remains employed by the Company; provided, that if such disability (as
confirmed by competent medical evidence) continues for at least nine (9)
consecutive months, the Company may terminate Executive's employment hereunder
in which case the Company shall immediately pay Executive a lump sum payment
equal to one-quarter of the sum of her annual salary and bonus with respect to
the most recent fiscal year then ended and, provided further, that no such lump
sum payment shall be required if such disability arises primarily from: (a)
chronic depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self- induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of her employment with the Company, she has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that she shall not, at any time during or following the term of her
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to her as a result of her employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which she may have in her possession or
control.
9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services she is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at law. In view of the
unique value to the Company of the services of Executive for which the Company
has contracted hereunder, because of the confidential information to be obtained
by, or disclosed to, Executive as hereinabove set forth, and as a material
inducement to the Company to enter into this Agreement and to pay to Executive
the compensation stated in Section 5, as well as any additional benefits stated
herein, and other good and valuable consideration, Executive
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covenants and agrees that throughout the period Executive remains employed
hereunder and for one year thereafter, Executive shall not, directly or
indirectly, anywhere in the United States of America (i) render any services, as
an agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing life, accident or health insurance products or services;
(ii) render any services, as an agent, independent contractor, consultant or
otherwise, or become employed or compensated by, any other corporation, person
or entity engaged in the business of selling or providing any lending or other
financial products or services that are competitive with the lending or other
financial products or services sold or provided by the Company or its
subsidiaries, (iii) in any manner compete with the Company or any of its
subsidiaries; (iv) solicit or attempt to convert to other insurance carriers,
finance companies or other corporations, persons or other entities providing
these same or similar products or services provided by the Company and its
subsidiaries, any customers or policyholders of the Company, or any of its
subsidiaries; or (v) solicit for employment or employ any employee of the
Company or any of its subsidiaries. The covenants of Executive in this Section 9
shall be void and unenforceable in the event of a Control Termination of this
Agreement as defined in Section 10 below. Should any particular covenant or
provision of this Section 9 be held unreasonable or contrary to public policy
for any reason, including, without limitation, the time period, geographical
area, or scope of activity covered by any restrictive covenant or provision, the
Company and Executive acknowledge and agree that such covenant or provision
shall automatically be deemed modified such that the contested covenant or
provision shall have the closest effect permitted by applicable law to the
original form and shall be given effect and enforced as so modified to whatever
extent would be reasonable and enforceable under applicable law.
10. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
and all other unpaid amounts previously accrued or awarded pursuant to
any other provision of this Agreement.
(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive Executive's Base Salary as provided in
Section 5(a) accrued but unpaid as of the date of termination, and all
other unpaid amounts previously accrued or awarded pursuant to any
other provision of this Agreement.
(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (B) termination of this Agreement by
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Executive following "change in control" of the Company (as defined
below) upon the occurrence of any of the following events:
(i) a significant change in the nature or scope of
Executive's authorities or duties from those in existence
immediately prior to the change in control, a reduction in
Executive's total compensation from that in existence immediately
prior to the change in control, or a breach by the Company of any
other provision of this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting her
position, she is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation,
(x) such a change in control shall be deemed to have occurred if and
when (A) except as provided in (y) below, any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities entitled to vote with respect to the
election of its Board of Directors or (B) as the result of a tender
offer, merger, consolidation, sale of assets, or contest for election
of directors, or any combination of the foregoing transactions or
events, individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease to constitute at
least a majority of such Board; provided, however, that any individual
who becomes a director of the Company subsequent to the date hereof
whose election was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board, shall be deemed to have
been a member of the Incumbent Board; and provided further, that no
individual who was initially elected as a director of the Company as a
result of an actual or threatened election contest, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Act, or any
other actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board of Directors shall be deemed
to have been a member of the Incumbent Board, or (C) any
reorganization, merger
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or consolidation or the issuance of shares of common stock of the
Company in connection therewith unless immediately after any such
reorganization, merger or consolidation (i) more than 60% of the then
outstanding shares of common stock of the corporation surviving or
resulting from such reorganization, merger or consolidation and more
than 60% of the combined voting power of the then outstanding
securities of such corporation entitled to vote generally in the
election of directors are then beneficially owned, directly or
indirectly, by all or substantially all of the individuals or entities
who were the beneficial owners, respectively, of the outstanding shares
of common stock of the Company and the outstanding voting securities of
the Company immediately prior to such reorganization, merger or
consolidation and in substantially the same proportions relative to
each other as their ownership, immediately prior to such
reorganization, merger or consolidation, of the outstanding shares of
common stock of the Company and the outstanding voting securities of
the Company, as the case may be, and (ii) at least a majority of the
members of the board of directors of the corporation surviving or
resulting from such reorganization, merger or consolidation were
members of the Board of Directors of the Company at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such reorganization, merger or consolidation or issuance
of shares of common stock of the Company, and
(y) no change of control shall be deemed to have occurred if and
when any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the
Company representing 25% or more but less than 50% of the combined
voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect", or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board of Directors of the Company, of a single
individual to serve as a member of, or observer at meetings of, the
Company's Board of Directors, shall not be considered "changing or
influencing the control of the Company" within the meaning of the
immediately preceding clause (B), so long as such individual does not
constitute at any time more than one-third of the total number of
directors serving on such Board.
Upon the occurrence of a change in control, the Company shall promptly notify
Executive in writing of the occurrence of such event (such notice, the "Change
in Control Notice"). If the Change in Control Notice is not given within 10 days
after the occurrence of a change in control the period specified in clause
(d)(A) of this Section 10 shall be extended until the second anniversary of the
date such Change in Control Notice is given.
(e) For purposes of this Agreement "just cause" shall mean:
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(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case (A) willful
and deliberate on Executive's part and committed in bad faith or
without reasonable belief that such breach is in the best interests
of the Company and (B) not remedied by Executive in a reasonable
period of time after receipt of written notice from the Company
specifying such breach;
(ii) Executive's breach of any provisions of this Agreement,
or her use of alcohol or drugs which interferes with the performance
of her duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that she is guilty, of a felony or other crime involving moral
turpitude; or
(iv) Executive's absence from her employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide her
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive her Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which she would have been entitled had she
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if she were still employed under this
Agreement and a change in control of the Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because she is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependents, beneficiaries and estate, pay or provide for payment of
such benefits and service credits for such benefits to Executive, her
dependents, beneficiaries and estate.
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(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or her dependents, beneficiaries and estate,
because she is no longer an employee of the Company, the Company shall,
to the extent necessary, pay or provide for payment of such benefits to
Executive, her dependents, beneficiaries and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
(a) an amount equal to the aggregate salary payments for 60 calendar
months at the rate of Base Salary which she would have been entitled to
receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes her termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, she shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits she would have accrued
under such benefit plan if she had remained in the employ of the Company and
such plan had remained in effect for 60 calendar months after her termination,
which benefits will be paid concurrently with, and in addition to, the benefits
provided under such benefit plan, and (ii) the employee benefits (including, but
not limited to, coverage under any medical insurance and life insurance
arrangements or programs) to which she would have been entitled under all
employee benefit plans, programs or arrangements maintained by the Company if
she had remained in the employ of the Company and such plans, programs or
arrangements had remained in effect for 60 calendar months after her
termination; or the value of the amounts described in clauses (i) and (ii) next
preceding. The amount of the payments described in the preceding sentence shall
be determined and such payments shall be distributed as soon as it is reasonably
possible.
13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as
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amended the "Code"), or any successor provision (collectively, "Section
4999"), or any interest or penalties are incurred by Executive with
respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after
payment by Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any
Federal, state or local income and employment taxes and Excise Tax (and
any interest and penalties imposed with respect to any such taxes)
imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company of, or a change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the
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extent the Company is materially prejudiced thereby. Executive shall
not pay such claim prior to the expiration of the 30-day period
following the date on which Executive gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies Executive
in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim,
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income,
employment or other tax (including interest or penalties with respect to any
such taxes) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and provided further, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
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(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied by the Conseco Put
Price; plus (ii) all or any portion of the number of Successor Securities which
may be acquired pursuant to options (which options were granted to Executive in
exchange or substitution for options to acquire the common stock of the Company)
held by Executive at the time of such election, multiplied by the Successor
Security Put Price; plus (iii) the number of shares of common stock of the
Company which were acquired pursuant to options granted by the Company which
were exercised, or which were discharged and satisfied by the payment to
Executive of cash or other property (other than options for Successor
Securities), subsequent to the first public announcement of the transaction or
event which led to the change in control, multiplied by the respective per share
exercise prices of such exercised or discharged options. For purposes of
calculating the above lump sum payment, the options described in clauses (i) and
(ii) shall include all such options, whether or not then exercisable, and, to
compensate Executive for the loss of the potential future speculative value of
unexercised options, there shall not be any deduction of the respective per
share exercise prices for any of the options described in such clauses (i) and
(ii). The cash payment due from the Company pursuant to this Section 14 shall be
made to Executive within ten (10) days after the date of such election
hereunder, against the execution and delivery by Executive to the Company of an
appropriate agreement confirming the surrender to the Company of the options in
respect of which the lump sum cash payment is being made to Executive.
"Successor Securities" means any securities of any person received
by the holders of the common stock of the Company in exchange, substitution or
payment for, or upon conversion of, the common stock of the Company in
connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in Control
Price or (ii) the Current Market Price of the common stock of the Company.
"Successor Security Put Price" means the greater of (i) the Change
in Control Price divided by the Exchange Ratio or (ii) the Current Market Price
of the Successor Securities.
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"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid and asked prices as
reported by NASDAQ, or if such security is not so reported, the average of the
closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, the common stock of the Company, the price paid to such holders
shall be the Price of such security at the time or times paid or delivered to
such holders.
"Exchange Ratio" means, in connection with a change in control, the
number of Successor Securities to be paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and her
continued service from the date hereof to the date she becomes entitled to such
payments. Executive shall have no duty to mitigate her damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
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16. Right of First Refusal to Purchase Stock. Executive agrees that the
Company shall have throughout the Basic Employment Period the right of first
refusal to purchase all or any portion of the shares of the Company's common
stock owned by her (the "Shares") at the following price:
(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's common stock on the last business day
preceding the date on which Executive notifies the Company of such
desire.
In the event Executive shall receive a Third Party Offer which she
desires to accept, she shall deliver to the Company a written notification of
the terms thereof and the Company shall have a period of 48 hours after such
delivery in which to notify Executive of its desire to exercise its right of
first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market she shall deliver to the Company a written notification of the
amount of Shares she desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive may
proceed to complete the sale of Shares pursuant to the Third Party Offer or in
the open market in accordance with her notification to the Company, but her
failure to complete such sale within two weeks after her notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
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connection with the enforcement of any and all of her rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from the Company, as the case may be) her reasonable attorneys'
fees and costs and expenses in connection with the enforcement of any
arbitration award in court, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by
Executive of all or a part of any such fees and costs and expenses
would be unjust.
(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a) above,
the Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 or 9 of this Agreement. Nothing herein
shall be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
her residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ Ngaire E. Cuneo
-------------------------------
Ngaire E. Cuneo
"Executive"
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EXHIBIT-10.1.11
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 8th day of September,
1997, as amended and restated as of May 26, 1999, and as further amended and
restated as of December 15, 1999, between CONSECO, INC., an Indiana corporation
(hereinafter called the "Company"), and John J. Sabl (hereinafter called
"Executive").
RECITALS
WHEREAS, the services of Executive, his managerial and professional
experience, and his knowledge of the affairs of the Company are of great value
to the Company;
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated as of September 8, 1997, as amended on May 14, 1998 and as
amended and restated as of May 26, 1999 (as so amended, the "Existing Employment
Agreement") and the Company and Executive desire to make certain modifications
to the Existing Employment Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree the Existing Employment Agreement
be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be September 8,
1997. Subject to the provisions for termination as provided in Section 10
hereof, the term of this Agreement shall be the period beginning September 8,
1997, and ending December 31, 2002 (hereinafter called the "Basic Employment
Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as its chief legal officer. Executive shall report to the Chief Executive
Officer regarding the performance of his duties and shall be subject to the
direction and control of the Board of Directors of the Company (sometimes
referred to herein as the "Board") and the Chief Executive Officer. Executive's
position with the Company shall be Executive Vice President, General Counsel and
Secretary, and such other positions as may be determined from time to time by
the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Chief Executive Officer and the Board, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of his positions with the
Company and adequate for the performance of his duties. Executive shall devote
his entire
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employable time, attention and best efforts to the business of the Company, and
shall not, without the consent of the Company, during the term of this Agreement
be actively engaged in any other business activity, whether or not such business
activity is pursued for gain, profit or other pecuniary advantage; but this
shall not be construed as preventing Executive from investing his assets in such
form or manner as will not require any services on the part of Executive in the
operation of the affairs of the companies in which such investments are made.
For purposes of this Agreement, full-time employment shall be the normal work
week for individuals in comparable executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of One
Million Dollars ($1,000,000) per year payable in equal installments in
accordance with the Company's payroll procedure for its salaried
employees. Salary payments shall be subject to withholding of taxes and
other appropriate and customary amounts. Executive may receive
increases in his Base Salary from time to time, based upon his
performance in his executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer; provided, that Executive shall receive a cash
bonus of at least Seven Hundred Fifty Thousand Dollars ($750,000) for
each calendar year (or a pro rata portion thereof, based on the portion
of the year worked, for any part of a calendar year worked).
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
for each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall reimburse Executive for all such
reasonable expenses upon Executive's periodic presentation of an
itemized account of such expenditures.
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(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and his dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least nine (9) consecutive
months, the Company may terminate Executive's employment hereunder in which case
the Company shall immediately pay Executive a lump sum payment equal to
one-quarter of the sum of his annual salary and bonus with respect to the most
recent fiscal year then ended and, provided further, that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment with the Company, he has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that he shall not, at any time during or following the term of his
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to him as a result of his employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which he may have in his possession or control.
9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services he is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at law. In view of the
unique value to the Company of the services of Executive for which the Company
has contracted hereunder, because of the confidential information to be obtained
by, or disclosed to, Executive as hereinabove set forth, and as a material
inducement to the Company to enter into this Agreement and to pay to Executive
the compensation stated in Section 5, as well as
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any additional benefits stated herein, and other good and valuable
consideration, Executive covenants and agrees that throughout the period
Executive remains employed hereunder and for one year thereafter, Executive
shall not, directly or indirectly, anywhere in the United States of America (i)
render any services, as an agent, independent contractor, consultant or
otherwise, or become employed or compensated by, any other corporation, person
or entity engaged in the business of selling or providing life, accident or
health insurance products or services; (ii) render any services, as an agent,
independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing any lending or other financial products or services that
are competitive with the lending or other financial products or services sold or
provided by the Company or its subsidiaries, (iii) in any manner compete with
the Company or any of its subsidiaries; (iv) solicit or attempt to convert to
other insurance carriers, finance companies or other corporations, persons or
other entities providing these same or similar products or services provided by
the Company and its subsidiaries, any customers or policyholders of the Company,
or any of its subsidiaries; or (v) solicit for employment or employ any employee
of the Company or any of its subsidiaries. The covenants of Executive in this
Section 9 shall be void and unenforceable in the event of a Control Termination
of this Agreement as defined in Section 10 below. Should any particular covenant
or provision of this Section 9 be held unreasonable or contrary to public policy
for any reason, including, without limitation, the time period, geographical
area, or scope of activity covered by any restrictive covenant or provision, the
Company and Executive acknowledge and agree that such covenant or provision
shall automatically be deemed modified such that the contested covenant or
provision shall have the closest effect permitted by applicable law to the
original form and shall be given effect and enforced as so modified to whatever
extent would be reasonable and enforceable under applicable law.
10. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
and all other unpaid amounts previously accrued or awarded pursuant to
any other provision of this Agreement.
(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive Executive's Base Salary as provided in
Section 5(a) accrued but unpaid as of the date of termination, and all
other unpaid amounts previously accrued or awarded pursuant to any
other provision of this Agreement.
(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change
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in control" of the Company (as defined below), or (B) termination of
this Agreement by Executive following "change in control" of the
Company (as defined below) upon the occurrence of any of the following
events:
(i) a significant change in the nature or scope of Executive's
authorities or duties from those in existence immediately prior to
the change in control, a reduction in his total compensation from
that in existence immediately prior to the change in control or a
breach by the Company of any other provision of this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting his
position, he is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation,
(x) such a change in control shall be deemed to have occurred if and
when (A) except as provided in (y) below, any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities entitled to vote with respect to the
election of its Board of Directors or (B) as the result of a tender
offer, merger, consolidation, sale of assets, or contest for election
of directors, or any combination of the foregoing transactions or
events, individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease to constitute at
least a majority of such Board; provided, however, that any individual
who becomes a director of the Company subsequent to the date hereof
whose election was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board, shall be deemed to have
been a member of the Incumbent Board; and provided further, that no
individual who was initially elected as a director of the Company as a
result of an actual or threatened election contest, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Act, or any
other actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board of Directors shall be deemed
to have been a member of the Incumbent Board, or (C) any
reorganization, merger or consolidation or the issuance of shares of
common stock of the Company in connection
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therewith unless immediately after any such reorganization, merger or
consolidation (i) more than 60% of the then outstanding shares of
common stock of the corporation surviving or resulting from such
reorganization, merger or consolidation and more than 60% of the
combined voting power of the then outstanding securities of such
corporation entitled to vote generally in the election of directors are
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals or entities who were the
beneficial owners, respectively, of the outstanding shares of common
stock of the Company and the outstanding voting securities of the
Company immediately prior to such reorganization, merger or
consolidation and in substantially the same proportions relative to
each other as their ownership, immediately prior to such
reorganization, merger or consolidation, of the outstanding shares of
common stock of the Company and the outstanding voting securities of
the Company, as the case may be, and (ii) at least a majority of the
members of the board of directors of the corporation surviving or
resulting from such reorganization, merger or consolidation were
members of the Board of Directors of the Company at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such reorganization, merger or consolidation or issuance
of shares of common stock of the Company, and
(y) no change of control shall be deemed to have occurred if and
when any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the
Company representing 25% or more but less than 50% of the combined
voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect", or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board of Directors of the Company, of a single
individual to serve as a member of, or observer at meetings of, the
Company's Board of Directors, shall not be considered "changing or
influencing the control of the Company" within the meaning of the
immediately preceding clause (B), so long as such individual does not
constitute at any time more than one-third of the total number of
directors serving on such Board.
Upon the occurrence of a change in control, the Company shall promptly notify
Executive in writing of the occurrence of such event (such notice, the "Change
in Control Notice"). If the Change in Control Notice is not given within 10 days
after the occurrence of a change in control the period specified in clause
(d)(A) of this Section 10 shall be extended until the second anniversary of the
date such Change in Control Notice is given.
(e) For purposes of this Agreement "just cause" shall mean:
(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case
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(A) willful and deliberate on Executive's part and committed in bad
faith or without reasonable belief that such breach is in the best
interests of the Company and (B) not remedied by Executive in a
reasonable period of time after receipt of written notice from the
Company specifying such breach;
(ii) Executive's breach of any provisions of this Agreement, or
his use of alcohol or drugs which interferes with the performance of
his duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that he is guilty, of a felony or other crime involving moral
turpitude; or
(iv) Executive's absence from his employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which he would have been entitled had he
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if he were still employed under this
Agreement and a change in control of the Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependants, beneficiaries and estate, pay or provide for payment of
such benefits and service credits for such benefits to Executive,
Executive's dependents, beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or his dependents,
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beneficiaries and estate, because he is no longer an employee of the
Company, the Company shall, to the extent necessary, pay or provide for
payment of such benefits to Executive, his dependents, beneficiaries
and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate of Base Salary which he would have been
entitled to receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes his termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits he would have accrued under
such benefit plan if he had remained in the employ of the Company and such plan
had remained in effect for 60 calendar months after his termination, which
benefits will be paid concurrently with, and in addition to, the benefits
provided under such benefit plan, and (ii) the employee benefits (including, but
not limited to, coverage under any medical insurance and life insurance
arrangements or programs) to which he would have been entitled under all
employee benefit plans, programs or arrangements maintained by the Company if he
had remained in the employ of the Company and such plans, programs or
arrangements had remained in effect for 60 calendar months after his
termination; or the value of the amounts described in clauses (i) and (ii) next
preceding. The amount of the payments described in the preceding sentence shall
be determined and such payments shall be distributed as soon as it is reasonably
possible.
13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as amended the "Code"), or
any successor provision (collectively, "Section 4999"), or any interest
or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a
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"Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any Federal, state or
local income and employment taxes and Excise Tax (and any interest and
penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company, or a change in the amount of the payment by the
Company of, the Gross-Up Payment. Such notification shall be given as
soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
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(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income,
employment or other tax (including interest or penalties with respect to any
such taxes) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and provided further, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such
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denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to
the extent thereof, the amount of Gross-Up Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied by the Conseco Put
Price; plus (ii) all or any portion of the number of Successor Securities which
may be acquired pursuant to options (which options were granted to Executive in
exchange or substitution for options to acquire the common stock of the Company)
held by Executive at the time of such election, multiplied by the Successor
Security Put Price; plus (iii) the number of shares of common stock of the
Company which were acquired pursuant to options granted by the Company which
were exercised, or which were discharged and satisfied by the payment to
Executive of cash or other property (other than options for Successor
Securities), subsequent to the first public announcement of the transaction or
event which led to the change in control, multiplied by the respective per share
exercise prices of such exercised or discharged options. For purposes of
calculating the above lump sum payment, the options described in clauses (i) and
(ii) shall include all such options, whether or not then exercisable, and, to
compensate Executive for the loss of the potential future speculative value of
unexercised options, there shall not be any deduction of the respective per
share exercise prices for any of the options described in such clauses (i) and
(ii). The cash payment due from the Company pursuant to this Section 14 shall be
made to Executive within ten (10) days after the date of such election
hereunder, against the execution and delivery by Executive to the Company of an
appropriate agreement confirming the surrender to the Company of the options in
respect of which the lump sum cash payment is being made to Executive.
"Successor Securities" means any securities of any person received
by the holders of the common stock of the Company in exchange, substitution or
payment for, or upon conversion of, the common stock of the Company in
connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in Control
Price or (ii) the Current Market Price of the common stock of the Company.
"Successor Security Put Price" means the greater of (i) the Change
in Control Price divided by the Exchange Ratio or (ii) the Current Market Price
of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange,
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on the principal national securities exchange on which such security is listed
or admitted to trading) or, in case no sales take place on such day, the average
of the closing bid and asked prices on the New York Stock Exchange (or, if such
security is not listed or admitted to trading on the New York Stock Exchange, on
the principal national securities exchange on which such security is listed or
admitted to trading) or, if it is not listed or admitted to trading on any
national securities exchange, the average of the highest and lowest sales prices
of such security on such day as reported by the NASDAQ Stock Market, or in case
no sales take place on such day, the average of the closing bid and asked prices
as reported by NASDAQ, or if such security is not so reported, the average of
the closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, the common stock of the Company, the price paid to such holders
shall be the Price of such security at the time or times paid or delivered to
such holders.
"Exchange Ratio" means, in connection with a change in control, the
number of Successor Securities to be paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
16. Right of First Refusal to Purchase Stock. Executive agrees that the
Company shall have throughout the Basic Employment Period the right of first
refusal to purchase all or any portion of the shares of the Company's common
stock owned by him (the "Shares") at the following price:
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(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's common stock on the last business day
preceding the date on which Executive notifies the Company of such
desire.
In the event Executive shall receive a Third Party Offer which he
desires to accept, he shall deliver to the Company a written notification of the
terms thereof and the Company shall have a period of 48 hours after such
delivery in which to notify Executive of its desire to exercise its right of
first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market he shall deliver to the Company a written notification of the
amount of Shares he desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive may
proceed to complete the sale of Shares pursuant to the Third Party Offer or in
the open market in accordance with his notification to the Company, but his
failure to complete such sale within two weeks after his notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from the Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with the enforcement of any
arbitration award in court, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by
Executive of all or a part of any such fees and costs and expenses
would be unjust.
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(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a) above,
the Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 or 9 of this Agreement. Nothing herein
shall be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
his residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ John J. Sabl
-------------------------
John J. Sabl
"Executive"
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EXHIBIT-10.1.12
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 31st day of March, 1998,
as amended and restated as of May 26, 1999, and as further amended and restated
as of December 15, 1999, between CONSECO, INC., an Indiana corporation
(hereinafter called the "Company"), and Thomas J. Kilian (hereinafter called
"Executive").
RECITALS
WHEREAS, Executive has been employed by the Company for a number of
years, and the services of Executive, his managerial and professional
experience, and his knowledge of the affairs of the Company are of great value
to the Company; and
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated as of March 31, 1998, as amended and restated as of May 26, 1999
(as so amended, the "Existing Employment Agreement"), and the Company and
Executive desire to make certain modifications to the Existing Employment
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree that the Existing Employment be
amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be March 31, 1998.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning March 31, 1998, and ending
December 31, 2002, (hereinafter called the "Basic Employment Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as its chief operations officer. Executive shall report to the Chief Executive
Officer regarding the performance of his duties and shall be subject to the
direction and control of the Board of Directors of the Company (sometimes
referred to herein as the "Board") and the Chief Executive Officer. Executive's
position with the Company shall initially be Executive Vice President and Chief
Operations Officer and such other positions as may be determined from time to
time by the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Chief Executive Officer and the Board, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of his positions with the
Company and adequate for the performance of his duties. Executive shall devote
his entire employable time, attention and best efforts to the business of the
Company, and shall not, without the consent of the Company, during the term of
this Agreement be actively engaged in any other
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business activity, whether or not such business activity is pursued for gain,
profit or other pecuniary advantage; but this shall not be construed as
preventing Executive from investing his assets in such form or manner as will
not require any services on the part of Executive in the operation of the
affairs of the companies in which such investments are made. For purposes of
this Agreement, full- time employment shall be the normal work week for
individuals in comparable executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of Two
Hundred Fifty Thousand Dollars ($250,000) per year payable in equal
installments in accordance with the Company's payroll procedure for its
salaried employees. Salary and all other payments made pursuant to this
Agreement shall be subject to withholding of taxes. Executive may
receive increases in his Base Salary from time to time, based upon his
performance in his executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer; provided, that Executive shall receive a cash
bonus of at least Seven Hundred Fifty Thousand Dollars ($750,000) for
each of the first two calendar years (i.e., 1998 and 1999) completed
under this Agreement.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall reimburse Executive for all such
reasonable expenses upon Executive's periodic presentation of an
itemized account of such expenditures.
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(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and his dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least nine (9) consecutive
months, the Company may terminate Executive's employment hereunder in which case
the Company shall immediately pay Executive a lump sum payment equal to
one-quarter of the sum of his annual salary and bonus with respect to the most
recent fiscal year then ended and, provided further, that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment with the Company, he has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that he shall not, at any time during or following the term of his
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to him as a result of his employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which he may have in his possession or control.
9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services he is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at law. In view of the
unique value to the Company of the services of Executive for which the Company
has contracted hereunder, because of the confidential information to be obtained
by, or disclosed to, Executive as hereinabove set forth, and as a material
inducement to the Company to
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enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, and other good and
valuable consideration, Executive covenants and agrees that throughout the
period Executive remains employed hereunder and for one year thereafter,
Executive shall not, directly or indirectly, anywhere in the United States of
America (i) render any services, as an agent, independent contractor, consultant
or otherwise, or become employed or compensated by, any other corporation,
person or entity engaged in the business of selling or providing life, accident
or health insurance products or services; (ii) render any services, as an agent,
independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing any lending or other financial products or services that
are competitive with the lending or other financial products or services sold or
provided by the Company or its subsidiaries, (iii) in any manner compete with
the Company or any of its subsidiaries; (iv) solicit or attempt to convert to
other insurance carriers, finance companies or other corporations, persons or
other entities providing these same or similar products or services provided by
the Company and its subsidiaries, any customers or policyholders of the Company,
or any of its subsidiaries; or (v) solicit for employment or employ any employee
of the Company or any of its subsidiaries. The covenants of Executive in this
Section 9 shall be void and unenforceable in the event of a Control Termination
of this Agreement as defined in Section 10 below. Should any particular covenant
or provision of this Section 9 be held unreasonable or contrary to public policy
for any reason, including, without limitation, the time period, geographical
area, or scope of activity covered by any restrictive covenant or provision, the
Company and Executive acknowledge and agree that such covenant or provision
shall automatically be deemed modified such that the contested covenant or
provision shall have the closest effect permitted by applicable law to the
original form and shall be given effect and enforced as so modified to whatever
extent would be reasonable and enforceable under applicable law.
10. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
(provided, that, if such amount for the remainder of the Basic
Employment Period aggregates less than $1,000,000, Executive shall
receive an aggregate lump sum payment of $1,000,000) and all other
unpaid amounts previously accrued or awarded pursuant to any other
provision of this Agreement.
(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive Executive's Base Salary as provided in
Section 5(a) accrued but unpaid as of the date of termination, and all
other unpaid amounts previously accrued or awarded pursuant to any
other provision of this Agreement.
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(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (B) termination of this Agreement by Executive
following "change in control" of the Company (as defined below) upon
the occurrence of any of the following events:
(i) a significant change in the nature or scope of Executive's
authorities or duties from those in existence immediately prior to
the change in control, a reduction in his total compensation from
that in existence immediately prior to the change in control, or a
breach by the Company of any other provision of this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting his
position, he is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation,
(x) such a change in 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 Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities entitled to vote with respect to the
election of its Board of Directors or (B) as the result of a tender
offer, merger, consolidation, sale of assets, or contest for election
of directors, or any combination of the foregoing transactions or
events, individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease to constitute at
least a majority of such Board; provided, however, that any individual
who becomes a director of the Company subsequent to the date hereof
whose election was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board, shall be deemed to have
been a member of the Incumbent Board; and provided further, that no
individual who was initially elected as a director of the Company as a
result of an actual or threatened election contest, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Act, or any
other actual or threatened solicitation of
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proxies or consents by or on behalf of any person other than the Board
of Directors shall be deemed to have been a member of the Incumbent
Board, or (C) any reorganization, merger or consolidation or the
issuance of shares of common stock of the Company in connection
therewith unless immediately after any such reorganization, merger or
consolidation (i) more than 60% of the then outstanding shares of
common stock of the corporation surviving or resulting from such
reorganization, merger or consolidation and more than 60% of the
combined voting power of the then outstanding securities of such
corporation entitled to vote generally in the election of directors are
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals or entities who were the
beneficial owners, respectively, of the outstanding shares of common
stock of the Company and the outstanding voting securities of the
Company immediately prior to such reorganization, merger or
consolidation and in substantially the same proportions relative to
each other as their ownership, immediately prior to such
reorganization, merger or consolidation, of the outstanding shares of
common stock of the Company and the outstanding voting securities of
the Company, as the case may be, and (ii) at least a majority of the
members of the board of directors of the corporation surviving or
resulting from such reorganization, merger or consolidation were
members of the Board of Directors of the Company at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such reorganization, merger or consolidation or issuance
of shares of common stock of the Company, and
(y) no change of control shall be deemed to have occurred if and
when any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the
Company representing 25% or more but less than 50% of the combined
voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect", or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board of Directors of the Company, of a single
individual to serve as a member of, or observer at meetings of, the
Company's Board of Directors, shall not be considered "changing or
influencing the control of the Company" within the meaning of the
immediately preceding clause (B), so long as such individual does not
constitute at any time more than one-third of the total number of
directors serving on such Board.
Upon the occurrence of a change in control, the Company shall promptly notify
Executive in writing of the occurrence of such event (such notice, the "Change
in Control Notice"). If the Change in Control Notice is not given within 10 days
after the occurrence of a change in control the period specified in clause
(d)(A) of this Section 10 shall be extended until the second anniversary of the
date such Change in Control Notice is given.
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(e) For purposes of this Agreement "just cause" shall mean:
(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case (A) willful
and deliberate on Executive's part and committed in bad faith or
without reasonable belief that such breach is in the best interests
of the Company and (B) not remedied by Executive in a reasonable
period of time after receipt of written notice from the Company
specifying such breach;
(ii) Executive's breach of any provisions of this Agreement,
or his use of alcohol or drugs which interferes with the performance
of his duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that he is guilty, of a felony or other crime involving moral
turpitude; or
(iv) Executive's absence from his employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which he would have been entitled had he
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if he were still employed under this
Agreement and a change in control of the Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such
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<PAGE> 8
benefits and service credits to Executive, Executive's dependants,
beneficiaries and estate, pay or provide for payment of such benefits
and service credits for such benefits to Executive, his dependents,
beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or his dependents, beneficiaries and estate,
because he is no longer an employee of the Company, the Company shall,
to the extent necessary, pay or provide for payment of such benefits to
Executive, his dependents, beneficiaries and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate of Base Salary which he would have been
entitled to receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes his termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits he would have accrued under
such benefit plan if he had remained in the employ of the Company and such plan
had remained in effect for 60 calendar months after his termination, which
benefits will be paid concurrently with, and in addition to, the benefits
provided under such benefit plan, and (ii) the employee benefits (including, but
not limited to, coverage under any medical insurance and life insurance
arrangements or programs) to which he would have been entitled under all
employee benefit plans, programs or arrangements maintained by the Company if he
had remained in the employ of the Company and such plans, programs or
arrangements had remained in effect for 60 calendar months after his
termination; or the value of the amounts described in clauses (i) and (ii) next
preceding. The amount of the payments described in the preceding sentence shall
be determined and such payments shall be distributed as soon as it is reasonably
possible.
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13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as amended the "Code"), or
any successor provision (collectively, "Section 4999"), or any interest
or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any Federal, state or
local income and employment taxes and Excise Tax (and any interest and
penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
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<PAGE> 10
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company of, or a change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income,
employment or other tax (including interest or penalties with respect to any
such taxes) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and provided further, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to
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<PAGE> 11
be due is limited solely to such contested amount. Furthermore, the Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied, with respect to
shares subject to any such options by the difference between the Conseco Put
Price and the respective exercise price under such option with respect to such
shares; plus (ii) all or any portion of the number of Successor Securities which
may be acquired pursuant to options (which options were granted to Executive in
exchange or substitution for options to acquire the common stock of the Company)
held by Executive at the time of such election, multiplied with respect to
shares subject to any such options relating to Successor Securities, by the
difference between the Successor Security Put Price and the respective exercise
price under such option with respect to such shares. For purposes of calculating
the above lump sum payment, the options described in clauses (i) and (ii) shall
include all such options, whether or not then exercisable. The cash payment due
from the Company pursuant to this Section 14 shall be made to Executive within
ten (10) days after the date of such election hereunder, against the execution
and delivery by Executive to the Company of an appropriate agreement confirming
the surrender to the Company of the options in respect of which the lump sum
cash payment is being made to Executive.
"Successor Securities" means any securities of any person received
by the holders of the common stock of the Company in exchange, substitution or
payment for, or upon conversion of, the common stock of the Company in
connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in Control
Price or (ii) the Current Market Price of the common stock of the Company.
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<PAGE> 12
"Successor Security Put Price" means the greater of (i) the Change
in Control Price divided by the Exchange Ratio or (ii) the Current Market Price
of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid and asked prices as
reported by NASDAQ, or if such security is not so reported, the average of the
closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, the common stock of the Company, the price paid to such holders
shall be the Price of such security at the time or times paid or delivered to
such holders.
"Exchange Ratio" means, in connection with a change in control, the
number of Successor Securities to be paid or delivered to the holders of common
stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking
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other employment and, should Executive actually receive compensation from any
such other employment, the payments required hereunder shall not be reduced or
offset by any such other compensation.
16. Right of First Refusal to Purchase Stock. Executive agrees that the
Company shall have throughout the Basic Employment Period the right of first
refusal to purchase all or any portion of the shares of the Company's common
stock owned by him (the "Shares") at the following price:
(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's common stock on the last business day
preceding the date on which Executive notifies the Company of such
desire.
In the event Executive shall receive a Third Party Offer which he
desires to accept, he shall deliver to the Company a written notification of the
terms thereof and the Company shall have a period of 48 hours after such
delivery in which to notify Executive of its desire to exercise its right of
first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market he shall deliver to the Company a written notification of the
amount of Shares he desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive may
proceed to complete the sale of Shares pursuant to the Third Party Offer or in
the open market in accordance with his notification to the Company, but his
failure to complete such sale within two weeks after his notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of
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Indiana. The arbitration shall be conducted in accordance with the
rules of the American Arbitration Association, except with respect to
the selection of arbitrators which shall be as provided in this
Section. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it
shall be necessary or desirable for Executive to retain legal counsel
and/or incur other costs and expenses in connection with the
enforcement of any and all of his rights under this Agreement, the
Company shall pay (or Executive shall be entitled to recover from he
Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with the enforcement of any arbitration
award in court, regardless of the final outcome, unless the arbitrators
shall determine that under the circumstances recovery by Executive of
all or a part of any such fees and costs and expenses would be unjust.
(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a) above,
the Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 or 9 of this Agreement. Nothing herein
shall be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
his residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ Thomas J. Kilian
-------------------------
Thomas J. Kilian
"Executive"
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EXHIBIT-10.1.14
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 28th day of July, 1999, as
amended and restated as of December 15, 1999, between CONSECO, INC., an Indiana
corporation (hereinafter called the "Company"), and Maxwell E. Bublitz
(hereinafter called "Executive").
RECITALS
WHEREAS, Executive has been employed by the Company for a number of
years, and the services of Executive, his managerial and professional
experience, and his knowledge of the affairs of the Company are of great value
to the Company; and
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated as of July 28, 1999 (the "Existing Employment Agreement") and
the Company and Executive desire to make certain modifications to the Existing
Employment Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree that the Existing Employment
Agreement be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be July 28, 1999.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 28, 1999, and ending
December 31, 2002, (hereinafter called the "Basic Employment Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as the head of Conseco Capital Management, Inc. ("CCM"). Executive shall report
to the Chief Financial Officer or, if the Chief Executive Officer so designates
from time to time, the Chief Executive Officer (the officer to whom Executive
reports at any time being referred to as the "Reporting Officer") regarding the
performance of his duties and shall be subject to the direction and control of
the Board of Directors of the Company (sometimes referred to herein as the
"Board") and the Reporting Officer. Executive's position with the Company shall
initially be Senior Vice President, Investments and President of CCM and such
other positions as may be determined from time to time by the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Reporting Officer and the Board, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of his positions with the
Company and adequate for the performance of his duties. Executive shall devote
his entire employable time, attention and best efforts to the business of the
Company, and shall not, without the consent of the Company, during the term of
this Agreement be actively engaged in any other
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business activity, whether or not such business activity is pursued for gain,
profit or other pecuniary advantage; but this shall not be construed as
preventing Executive from investing his assets in such form or manner as will
not require any services on the part of Executive in the operation of the
affairs of the companies in which such investments are made. For purposes of
this Agreement, full-time employment shall be the normal work week for
individuals in comparable executive positions with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of Two
Hundred Fifty Thousand Dollars ($250,000) per year payable in equal
installments in accordance with the Company's payroll procedure for its
salaried employees. Salary and all other payments made pursuant to this
Agreement shall be subject to withholding of taxes. Executive may
receive increases in his Base Salary from time to time, based upon his
performance in his executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer; provided, that Executive shall receive a cash
bonus of at least Seven Hundred Fifty Thousand Dollars ($750,000) for
each of the first two calendar years (i.e., 1999 and 2000) completed
under this Agreement.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall
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reimburse Executive for all such reasonable expenses upon Executive's
periodic presentation of an itemized account of such expenditures.
(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and his dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least nine (9) consecutive
months, the Company may terminate Executive's employment hereunder in which case
the Company shall immediately pay Executive a lump sum payment equal to
one-quarter of the sum of his annual salary and bonus with respect to the most
recent fiscal year then ended and, provided further, that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment with the Company, he has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that he shall not, at any time during or following the term of his
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to him as a result of his employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which he may have in his possession or control.
9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services he is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at
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law. In view of the unique value to the Company of the services of Executive for
which the Company has contracted hereunder, because of the confidential
information to be obtained by, or disclosed to, Executive as hereinabove set
forth, and as a material inducement to the Company to enter into this Agreement
and to pay to Executive the compensation stated in Section 5, as well as any
additional benefits stated herein, and other good and valuable consideration,
Executive covenants and agrees that throughout the period Executive remains
employed hereunder and for one year thereafter, Executive shall not, directly or
indirectly, anywhere in the United States of America (i) render any services, as
an agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing life, accident or health insurance products or services;
(ii) render any services, as an agent, independent contractor, consultant or
otherwise, or become employed or compensated by, any other corporation, person
or entity engaged in the business of selling or providing any lending or other
financial products or services that are competitive with the lending or other
financial products or services sold or provided by the Company or its
subsidiaries, (iii) render any services, as an agent, independent contractor,
consultant or otherwise, or become employed or compensated by, any other
corporation, person or entity engaged in the business of providing investment
management or advisory services; (iv) in any manner compete with the Company or
any of its subsidiaries; (v) solicit or attempt to convert to other insurance
carriers, finance companies or other corporations, persons or other entities
(including, without limitation, investment management or advisory firms)
providing these same or similar products or services provided by the Company and
its subsidiaries, any customers or policyholders of the Company, or any of its
subsidiaries; or (vi) solicit for employment or employ any employee of the
Company or any of its subsidiaries. The covenants of Executive in this Section 9
shall be void and unenforceable in the event of a Control Termination of this
Agreement as defined in Section 10 below. Should any particular covenant or
provision of this Section 9 be held unreasonable or contrary to public policy
for any reason, including, without limitation, the time period, geographical
area, or scope of activity covered by any restrictive covenant or provision, the
Company and Executive acknowledge and agree that such covenant or provision
shall automatically be deemed modified such that the contested covenant or
provision shall have the closest effect permitted by applicable law to the
original form and shall be given effect and enforced as so modified to whatever
extent would be reasonable and enforceable under applicable law.
10. Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
(provided, that, if such amount for the remainder of the Basic
Employment Period aggregates less than $1,000,000, Executive shall
receive
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an aggregate lump sum payment of $1,000,000) and all other unpaid
amounts previously accrued or awarded pursuant to any other provision
of this Agreement.
(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and such termination does not
constitute a Control Termination as defined in (d) below, Executive
shall be entitled to receive Executive's Base Salary as provided in
Section 5(a) accrued but unpaid as of the date of termination, and all
other unpaid amounts previously accrued or awarded pursuant to any
other provision of this Agreement.
(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (B) termination of this Agreement by Executive
following "change in control" of the Company (as defined below) upon
the occurrence of any of the following events:
(i) a significant change in the nature or scope of
Executive's authorities or duties from those in existence
immediately prior to the change in control, a reduction in his total
compensation from that in existence immediately prior to the change
in control, or a breach by the Company of any other provision of
this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting his
position, he is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation,
(x) such a change in 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 Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities
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entitled to vote with respect to the election of its Board of Directors
or (B) as the result of a tender offer, merger, consolidation, sale
of assets, or contest for election of directors, or any combination of
the foregoing transactions or events, individuals who, as of the date
hereof, constitute the Board of Directors of the Company (the
"Incumbent Board") cease to constitute at least a majority of such
Board; provided, however, that any individual who becomes a director of
the Company subsequent to the date hereof whose election was approved
by a vote of at least a majority of the directors then comprising the
Incumbent Board, shall be deemed to have been a member of the Incumbent
Board; and provided further, that no individual who was initially
elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Act, or any other actual or
threatened solicitation of proxies or consents by or on behalf of any
person other than the Board of Directors shall be deemed to have been a
member of the Incumbent Board, or (C) any reorganization, merger or
consolidation or the issuance of shares of common stock of the Company
in connection therewith unless immediately after any such
reorganization, merger or consolidation (i) more than 60% of the then
outstanding shares of common stock of the corporation surviving or
resulting from such reorganization, merger or consolidation and more
than 60% of the combined voting power of the then outstanding
securities of such corporation entitled to vote generally in the
election of directors are then beneficially owned, directly or
indirectly, by all or substantially all of the individuals or entities
who were the beneficial owners, respectively, of the outstanding shares
of common stock of the Company and the outstanding voting securities of
the Company immediately prior to such reorganization, merger or
consolidation and in substantially the same proportions relative to
each other as their ownership, immediately prior to such
reorganization, merger or consolidation, of the outstanding shares of
common stock of the Company and the outstanding voting securities of
the Company, as the case may be, and (ii) at least a majority of the
members of the board of directors of the corporation surviving or
resulting from such reorganization, merger or consolidation were
members of the Board of Directors of the Company at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such reorganization, merger or consolidation or issuance
of shares of common stock of the Company, and
(y) no change of control shall be deemed to have occurred if and
when any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the
Company representing 25% or more but less than 50% of the combined
voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect", or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board
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of Directors of the Company, of a single individual to serve as a
member of, or observer at meetings of, the Company's Board of
Directors, shall not be considered "changing or influencing the control
of the Company" within the meaning of the immediately preceding clause
(B), so long as such individual does not constitute at any time more
than one-third of the total number of directors serving on such Board.
Upon the occurrence of a change in control, the Company shall promptly notify
Executive in writing of the occurrence of such event (such notice, the "Change
in Control Notice"). If the Change in Control Notice is not given within 10 days
after the occurrence of a change in control the period specified in clause
(d)(A) of this Section 10 shall be extended until the second anniversary of the
date such Change in Control Notice is given.
(e) For purposes of this Agreement "just cause" shall mean:
(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case (A) willful
and deliberate on Executive's part and committed in bad faith or
without reasonable belief that such breach is in the best interests
of the Company and (B) not remedied by Executive in a reasonable
period of time after receipt of written notice from the Company
specifying such breach;
(ii) Executive's breach of any provisions of this Agreement, or
his use of alcohol or drugs which interferes with the performance of
his duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that he is guilty, of a felony or other crime involving moral
turpitude; or
(iv) Executive's absence from his employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which he would have been entitled had he
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
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(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if he were still employed under this
Agreement and a change in control of the Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependants, beneficiaries and estate, pay or provide for payment of
such benefits and service credits for such benefits to Executive, his
dependents, beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or his dependents, beneficiaries and estate,
because he is no longer an employee of the Company, the Company shall,
to the extent necessary, pay or provide for payment of such benefits to
Executive, his dependents, beneficiaries and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate of Base Salary which he would have been
entitled to receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes his termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits he would have accrued under
such
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benefit plan if he had remained in the employ of the Company and such plan had
remained in effect for 60 calendar months after his termination, which benefits
will be paid concurrently with, and in addition to, the benefits provided under
such benefit plan, and (ii) the employee benefits (including, but not limited
to, coverage under any medical insurance and life insurance arrangements or
programs) to which he would have been entitled under all employee benefit plans,
programs or arrangements maintained by the Company if he had remained in the
employ of the Company and such plans, programs or arrangements had remained in
effect for 60 calendar months after his termination; or the value of the amounts
described in clauses (i) and (ii) next preceding. The amount of the payments
described in the preceding sentence shall be determined and such payments shall
be distributed as soon as it is reasonably possible.
13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as amended the "Code"), or
any successor provision (collectively, "Section 4999"), or any interest
or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any Federal, state or
local income and employment taxes and Excise Tax (and any interest and
penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
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Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company of, or a change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
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provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or income,
employment or other tax (including interest or penalties with respect to any
such taxes) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and provided further, that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied, with respect to
shares subject to any such options by the difference between the Conseco Put
Price and the respective exercise price under such option
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with respect to such shares; plus (ii) all or any portion of the number of
Successor Securities which may be acquired pursuant to options (which options
were granted to Executive in exchange or substitution for options to acquire the
common stock of the Company) held by Executive at the time of such election,
multiplied with respect to shares subject to any such options relating to
Successor Securities, by the difference between the Successor Security Put Price
and the respective exercise price under such option with respect to such shares.
The cash payment due from the Company pursuant to this Section 14 shall be made
to Executive within ten (10) days after the date of such election hereunder,
against the execution and delivery by Executive to the Company of an appropriate
agreement confirming the surrender to the Company of the options in respect of
which the lump sum cash payment is being made to Executive.
"Successor Securities" means any securities of any person
received by the holders of the common stock of the Company in exchange,
substitution or payment for, or upon conversion of, the common stock of the
Company in connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in
Control Price or (ii) the Current Market Price of the common stock of the
Company.
"Successor Security Put Price" means the greater of (i) the
Change in Control Price divided by the Exchange Ratio or (ii) the Current Market
Price of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid and asked prices as
reported by NASDAQ, or if such security is not so reported, the average of the
closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by
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holders of the common stock of the Company of different forms of consideration,
if the same election is offered to all of the holders of common stock of the
Company), the Price per share of the common stock of the Company on the date on
which the change in control occurs, or if such date is not a trading day, then
the trading day immediately prior to such date, or (ii) in the case of a change
in control effected through a series of related transactions, or in a single
transaction in which less than all of the outstanding shares of common stock of
the Company is acquired, the highest price paid to the holders of common stock
of the Company in the transaction or series of related transactions whereby the
change in control takes place. In determining the highest price paid to the
holders pursuant to clause (ii) of the immediately preceding sentence, in the
case of Successor Securities paid or delivered to the holders of common stock of
the Company in exchange, payment or substitution for, or upon conversion of, the
common stock of the Company, the price paid to such holders shall be the Price
of such security at the time or times paid or delivered to such holders.
"Exchange Ratio" means, in connection with a change in control,
the number of Successor Securities to be paid or delivered to the holders of
common stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
16. Right of First Refusal to Purchase Stock. Executive agrees that
the Company shall have throughout the Basic Employment Period the right
of first refusal to purchase all or any portion of the shares of the Company's
common stock owned by him (the "Shares") at the following price:
(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's common stock on the last business day
preceding the date on which Executive notifies the Company of such
desire.
In the event Executive shall receive a Third Party Offer which he
desires to accept, he shall deliver to the Company a written notification of the
terms thereof and the Company shall have a
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period of 48 hours after such delivery in which to notify Executive of its
desire to exercise its right of first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market he shall deliver to the Company a written notification of the
amount of Shares he desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive may
proceed to complete the sale of Shares pursuant to the Third Party Offer or in
the open market in accordance with his notification to the Company, but his
failure to complete such sale within two weeks after his notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
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17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from he Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with the enforcement of any
arbitration award in court, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by
Executive of all or a part of any such fees and costs and expenses
would be unjust.
(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a) above,
the Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 or 9 of this Agreement. Nothing herein
shall be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
his residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not
operate\or be construed as a waiver of any subsequent breach by either party. In
the event any provision of this Agreement is found to be invalid or
unenforceable, it may be severed from the Agreement and the remaining provisions
of the Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only
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by an instrument in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ Maxwell E. Bublitz
-------------------------------
Maxwell E. Bublitz
"Executive"
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EXHIBIT-10.1.15
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 28th day of July, 1999, as
amended and restated as of December 15, 1999, between CONSECO, INC., an Indiana
corporation (hereinafter called the "Company"), and James S. Adams (hereinafter
called "Executive").
RECITALS
WHEREAS, Executive has been employed by the Company for a number of
years, and the services of Executive, his managerial and professional
experience, and his knowledge of the affairs of the Company are of great value
to the Company; and
WHEREAS, the Company deems it to be essential for it to have the
benefit and advantage of the services of the Executive for an extended period;
and
WHEREAS, the Company and Executive are parties to an employment
agreement dated as of July 28, 1999 (the "Existing Employment Agreement") and
the Company and Executive desire to make certain modifications to the Existing
Employment Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree that the Existing Employment
Agreement be amended and restated in its entirety to be as follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. The effective date of this Agreement shall be July 28, 1999.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 28, 1999, and ending
December 31, 2002, (hereinafter called the "Basic Employment Period").
3. Duties. Executive is engaged by the Company in an executive capacity
as its chief accounting officer. Executive shall report to the Chief Financial
Officer or, if the Chief Executive Officer so designates from time to time, the
Chief Executive Officer (the officer to whom Executive reports at any time being
referred to as the "Reporting Officer") regarding the performance of his duties
and shall be subject to the direction and control of the Board of Directors of
the Company (sometimes referred to herein as the "Board") and the Reporting
Officer. Executive's position with the Company shall initially be Senior Vice
President and Chief Accounting Officer and such other positions as may be
determined from time to time by the Board.
4. Extent of Services. Executive, subject to the direction and control
of the Reporting Officer and the Board, shall have the power and authority
commensurate with his executive status and necessary to perform his duties
hereunder. The Company agrees to provide to Executive such assistance and work
accommodations as are suitable to the character of his positions with the
Company and adequate for the performance of his duties. Executive shall devote
his entire employable time, attention and best efforts to the business of the
Company, and shall not, without the consent of the Company, during the term of
this Agreement be actively engaged in any other business activity, whether or
not such business activity is pursued for gain, profit or other pecuniary
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advantage; but this shall not be construed as preventing Executive from
investing his assets in such form or manner as will not require any services on
the part of Executive in the operation of the affairs of the companies in which
such investments are made. For purposes of this Agreement, full-time employment
shall be the normal work week for individuals in comparable executive positions
with the Company.
5. Compensation.
(a) As compensation for services hereunder rendered during the term
hereof, Executive shall receive a base salary ("Base Salary") of Two
Hundred Fifty Thousand Dollars ($250,000) per year payable in equal
installments in accordance with the Company's payroll procedure for its
salaried employees. Salary and all other payments made pursuant to this
Agreement shall be subject to withholding of taxes. Executive may
receive increases in his Base Salary from time to time, based upon his
performance in his executive and management capacity. The amounts of
any such salary increases shall be approved by the Board or the
Compensation Committee of the Board upon the recommendation of the
Chief Executive Officer.
(b) In addition to Base Salary, Executive may receive such other
bonuses or incentive compensation as the Compensation Committee or the
Board may approve from time to time, upon the recommendation of the
Chief Executive Officer; provided, that Executive shall receive a cash
bonus of at least Seven Hundred Fifty Thousand Dollars ($750,000) for
each of the first two calendar years (i.e., 1999 and 2000) completed
under this Agreement.
6. Fringe Benefits.
(a) Executive shall be entitled to participate in such existing
employee benefit plans and insurance programs offered by the Company,
or which it may adopt form time to time, for its executive management
or supervisory personnel generally, in accordance with the eligibility
requirements for participation therein. Nothing herein shall be
construed so as to prevent the Company from modifying or terminating
any employee benefit plans or programs, or employee fringe benefits, it
may adopt from time to time.
(b) During the term of this Agreement, the Company shall pay
Executive a monthly automobile allowance in the amount of Six Hundred
Dollars ($600), and the Company shall pay directly or shall reimburse
Executive for the cost of fuel that he incurs in using his automobile.
(c) Executive shall be entitled to four (4) weeks vacation with pay
each year during the term hereof.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel, and
similar items. The Company shall
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reimburse Executive for all such reasonable expenses upon Executive's
periodic presentation of an itemized account of such expenditures.
(e) The Company shall, upon periodic presentation of satisfactory
evidence and to a maximum of Ten Thousand Dollars ($10,000) per each
year of this Agreement, reimburse Executive for reasonable medical
expenses incurred by Executive and his dependents which are not
otherwise covered by health insurance provided to Executive under
Section 6(a).
(f) During the term of this Agreement, the Company shall at its
expense maintain a term life insurance policy or policies on the life
of Executive in the face amount of Five Hundred Thousand Dollars
($500,000), payable to such beneficiaries as Executive may designate.
7. Disability. If Executive shall become physically or mentally
disabled during the term of this Agreement to the extent that his ability to
perform his duties and services hereunder is materially and adversely impaired,
his salary, bonus and other compensation provided herein shall continue while he
remains employed by the Company; provided, that if such disability (as confirmed
by competent medical evidence) continues for at least nine (9) consecutive
months, the Company may terminate Executive's employment hereunder in which case
the Company shall immediately pay Executive a lump sum payment equal to
one-quarter of the sum of his annual salary and bonus with respect to the most
recent fiscal year then ended and, provided further, that no such lump sum
payment shall be required if such disability arises primarily from: (a) chronic
depressive use of intoxicants, drugs or narcotics, or (b) intentionally
self-inflicted injury or intentionally self-induced sickness; or (c) a proven
unlawful act or enterprise on the part of Executive.
8. Disclosure of Information. Executive acknowledges that in and as a
result of his employment with the Company, he has been and will be making use
of, acquiring and/or adding to confidential information of the Company of a
special and unique nature and value. As a material inducement to the Company to
enter into this Agreement and to pay to Executive the compensation stated in
Section 5, as well as any additional benefits stated herein, Executive covenants
and agrees that he shall not, at any time during or following the term of his
employment, directly or indirectly, divulge or disclose for any purpose
whatsoever, any confidential information that has been obtained by or disclosed
to him as a result of his employment with the Company, except to the extent that
such confidential information (a) becomes a matter of public record or is
published in a newspaper, magazine or other periodical available to the general
public, other than as a result of any act or omission of Executive, (b) is
required to be disclosed by any law, regulation or order of any court or
regulatory commission, department or agency, provided that Executive gives
prompt notice of such requirement to the Company to enable the Company to seek
an appropriate protective order or confidential treatment, or (c) is necessary
to perform properly Executive's duties under this Agreement. Upon the
termination of this Agreement, Executive shall return all materials obtained
from or belonging to the Company which he may have in his possession or control.
9. Covenants Against Competition and Solicitation. Executive
acknowledges that the services he is to render to the Company are of a special
and unusual character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at
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law. In view of the unique value to the Company of the services of Executive for
which the Company has contracted hereunder, because of the confidential
information to be obtained by, or disclosed to, Executive as hereinabove set
forth, and as a material inducement to the Company to enter into this Agreement
and to pay to Executive the compensation stated in Section 5, as well as any
additional benefits stated herein, and other good and valuable consideration,
Executive covenants and agrees that throughout the period Executive remains
employed hereunder and for one year thereafter, Executive shall not, directly or
indirectly, anywhere in the United States of America (i) render any services, as
an agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing life, accident or health insurance products or services;
(ii) render any services, as an agent, independent contractor, consultant or
otherwise, or become employed or compensated by, any other corporation, person
or entity engaged in the business of selling or providing any lending or other
financial products or services that are competitive with the lending or other
financial products or services sold or provided by the Company or its
subsidiaries, (iii) in any manner compete with the Company or any of its
subsidiaries; (iv) solicit or attempt to convert to other insurance carriers,
finance companies or other corporations, persons or other entities providing
these same or similar products or services provided by the Company and its
subsidiaries, any customers or policyholders of the Company, or any of its
subsidiaries; or (v) solicit for employment or employ any employee of the
Company or any of its subsidiaries. The covenants of Executive in this Section 9
shall be void and unenforceable in the event of a Control Termination of this
Agreement as defined in Section 10 below. Should any particular covenant or
provision of this Section 9 be held unreasonable or contrary to public policy
for any reason, including, without limitation, the time period, geographical
area, or scope of activity covered by any restrictive covenant or provision, the
Company and Executive acknowledge and agree that such covenant or provision
shall automatically be deemed modified such that the contested covenant or
provision shall have the closest effect permitted by applicable law to the
original form and shall be given effect and enforced as so modified to whatever
extent would be reasonable and enforceable under applicable law.
10.Termination.
(a) Either the Company or Executive may terminate this Agreement at
any time for any reason upon written notice to the other. This
Agreement shall also terminate upon (i) the death of Executive or (ii)
termination by the Company pursuant to Section 7.
(b) In the event this Agreement is terminated by the Company and
such termination is not pursuant to the last sentence of (a) above or
for "just cause" as defined in (e) below and does not constitute a
Control Termination as defined in (d) below, Executive shall be
entitled to receive Executive's Base Salary, as determined pursuant to
Section 5(a) hereof, for the remainder of the Basic Employment Period
(provided, that, if such amount for the remainder of the Basic
Employment Period aggregates less than $1,000,000, Executive shall
receive an aggregate lump sum payment of $1,000,000) and all other
unpaid amounts previously accrued or awarded pursuant to any other
provision of this Agreement.
(c) In the event this Agreement is terminated by the death of
Executive, is terminated by the Company for "just cause" as defined in
(e) below, or is terminated by Executive and
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such termination does not constitute a Control Termination as defined
in (d) below, Executive shall be entitled to receive Executive's Base
Salary as provided in Section 5(a) accrued but unpaid as of the date of
termination, and all other unpaid amounts previously accrued or awarded
pursuant to any other provision of this Agreement.
(d) The term "Control Termination" as used herein shall mean (A)
termination of this Agreement by the Company in anticipation of or not
later than two years following a "change in control" of the Company (as
defined below), or (B) termination of this Agreement by Executive
following "change in control" of the Company (as defined below) upon
the occurrence of any of the following events:
(i) a significant change in the nature or scope of
Executive's authorities or duties from those in existence
immediately prior to the change in control, a reduction in his total
compensation from that in existence immediately prior to the change
in control, or a breach by the Company of any other provision of
this Agreement; or
(ii) the reasonable determination by Executive that, as a
result of a change in circumstances significantly affecting his
position, he is unable to exercise Executive's authorities, powers,
functions or duties in existence immediately prior to the change in
control, or
(iii) the Company's principal executive offices are moved
outside the geographic area comprised of Marion County, Indiana, and
the seven contiguous counties or Executive is required to work at a
location other than the Company's principal executive offices; or
(iv) the giving of notice of termination by Executive during
the 6-month period commencing six (6) months after the change in
control.
The term "change in control" shall mean a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act")
if such Item 6(e) were applicable to the Company as such Item is in effect on
May 26, 1999; provided that, without limitation,
(x) such a change in 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 Act) is or becomes a
"beneficial owner" (as such term is defined in Rule 13d-3 promulgated
under the Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities entitled to vote with respect to the
election of its Board of Directors or (B) as the result of a tender
offer, merger, consolidation, sale of assets, or contest for election
of directors, or any combination of the foregoing transactions or
events, individuals who, as of the date hereof, constitute the Board of
Directors of the Company (the "Incumbent Board") cease to constitute at
least a majority of such Board; provided, however, that any individual
who
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becomes a director of the Company subsequent to the date hereof whose
election was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board, shall be deemed to have been a
member of the Incumbent Board; and provided further, that no individual
who was initially elected as a director of the Company as a result of
an actual or threatened election contest, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Act, or any other
actual or threatened solicitation of proxies or consents by or on
behalf of any person other than the Board of Directors shall be deemed
to have been a member of the Incumbent Board, or (C) any
reorganization, merger or consolidation or the issuance of shares of
common stock of the Company in connection therewith unless immediately
after any such reorganization, merger or consolidation (i) more than
60% of the then outstanding shares of common stock of the corporation
surviving or resulting from such reorganization, merger or
consolidation and more than 60% of the combined voting power of the
then outstanding securities of such corporation entitled to vote
generally in the election of directors are then beneficially owned,
directly or indirectly, by all or substantially all of the individuals
or entities who were the beneficial owners, respectively, of the
outstanding shares of common stock of the Company and the outstanding
voting securities of the Company immediately prior to such
reorganization, merger or consolidation and in substantially the same
proportions relative to each other as their ownership, immediately
prior to such reorganization, merger or consolidation, of the
outstanding shares of common stock of the Company and the outstanding
voting securities of the Company, as the case may be, and (ii) at least
a majority of the members of the board of directors of the corporation
surviving or resulting from such reorganization, merger or
consolidation were members of the Board of Directors of the Company at
the time of the execution of the initial agreement or action of the
Board of Directors providing for such reorganization, merger or
consolidation or issuance of shares of common stock of the Company, and
(y) no change of control shall be deemed to have occurred if and
when any such person becomes, with the approval of the Board of
Directors of the Company, the beneficial owner of securities of the
Company representing 25% or more but less than 50% of the combined
voting power of the Company's then outstanding securities entitled to
vote with respect to the election of its Board of Directors and in
connection therewith represents, and at all times continues to
represent, in a filing, as amended, with the Securities and Exchange
Commission on Schedule 13D or Schedule 13G (or any successor Schedule
thereto) that "such person has acquired such securities for investment
and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant
in any transaction having such purpose or effect", or words of
comparable meaning and import. The designation by any such person, with
the approval of the Board of Directors of the Company, of a single
individual to serve as a member of, or observer at meetings of, the
Company's Board of Directors, shall not be considered "changing or
influencing the control of the Company" within the meaning of the
immediately preceding clause (B), so long as such individual does not
constitute at any time more than one-third of the total number of
directors serving on such Board.
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Upon the occurrence of a change in control, the Company shall promptly notify
Executive in writing of the occurrence of such event (such notice, the "Change
in Control Notice"). If the Change in Control Notice is not given within 10 days
after the occurrence of a change in control the period specified in clause
(d)(A) of this Section 10 shall be extended until the second anniversary of the
date such Change in Control Notice is given.
(e) For purposes of this Agreement "just cause" shall mean:
(i) a material breach by Executive of this Agreement, the
commission of gross negligence, or willful malfeasance or fraud or
dishonesty of a substantial nature in performing Executive's
services on behalf of the Company, which is in each case (A) willful
and deliberate on Executive's part and committed in bad faith or
without reasonable belief that such breach is in the best interests
of the Company and (B) not remedied by Executive in a reasonable
period of time after receipt of written notice from the Company
specifying such breach;
(ii) Executive's breach of any provisions of this Agreement, or
his use of alcohol or drugs which interferes with the performance of
his duties hereunder or which compromises the integrity and
reputation of the Company, its employees, and products;
(iii) Executive's conviction by a court of law, or admission
that he is guilty, of a felony or other crime involving moral
turpitude; or
(iv) Executive's absence from his employment other than as a
result of Section 7 hereof, for whatever cause, for a period of more
than one (1) month, without prior written consent from the Company.
11. Payments for Control Termination. In the event of a Control
Termination of this Agreement, the Company shall pay Executive and provide him
with the following:
(a) During the remainder of the Basic Employment Period, the Company
shall continue to pay Executive his Base Salary at the same rate as
payable immediately prior to the date of termination plus the estimated
amount of any bonuses to which he would have been entitled had he
remained in the employ of the Company and a change in control of the
Company had not occurred, which estimate shall be reasonable and made
by the Company in good faith.
(b) During the remainder of the Basic Employment Period, Executive
shall continue to be treated as an employee under the provisions of all
incentive compensation arrangements applicable to the Company's
executive employees. In addition, Executive shall continue to be
entitled to all benefits and service credits for benefits under
medical, insurance and other employee benefit plans, programs and
arrangements of the Company as if he were
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still employed under this Agreement and a change in control of the
Company had not occurred.
(c) If, despite the provisions of paragraph (b) above, benefits
under any employee benefit plan shall not be payable or provided under
any such plan to Executive, or Executive's dependents, beneficiaries
and estate, because he is no longer an employee of the Company, the
Company itself shall, to the extent necessary to provide the full value
of such benefits and service credits to Executive, Executive's
dependants, beneficiaries and estate, pay or provide for payment of
such benefits and service credits for such benefits to Executive, his
dependents, beneficiaries and estate.
(d) If, despite the provisions of paragraph (b) above, benefits or
the right to accrue further benefits under any stock option or other
incentive compensation arrangement shall not be provided under any such
arrangement to Executive, or his dependents, beneficiaries and estate,
because he is no longer an employee of the Company, the Company shall,
to the extent necessary, pay or provide for payment of such benefits to
Executive, his dependents, beneficiaries and estate.
12. Severance Allowance. In the event of a Control Termination of this
Agreement, Executive may elect, within 60 days after such Control Termination,
to be paid a lump sum severance allowance, in lieu of the termination payments
provided for in Section 11 above, in an amount which is equal to the sum of the
amounts determined in accordance with the following clauses (a) and (b):
(a) an amount equal to the aggregate of salary payments for 60
calendar months at the rate of Base Salary which he would have been
entitled to receive in accordance with Section 5(a); and
(b) an amount equal to the aggregate of 60 calendar months of bonus
at the greater of (i) the monthly rate of the bonus payment for the
annual bonus period immediately prior to this termination date, or (ii)
the monthly rate of the estimated amount of the bonus for the annual
bonus period which includes his termination date.
In the event that Executive makes an election pursuant to this Section
to receive a lump sum severance allowance of the amount described in clauses (a)
and (b), then, in addition to such amount, he shall receive (i) in addition to
the benefits provided under any deferred compensation, retirement or pension
benefit plan maintained by the Company, the benefits he would have accrued under
such benefit plan if he had remained in the employ of the Company and such plan
had remained in effect for 60 calendar months after his termination, which
benefits will be paid concurrently with, and in addition to, the benefits
provided under such benefit plan, and (ii) the employee benefits (including, but
not limited to, coverage under any medical insurance and life insurance
arrangements or programs) to which he would have been entitled under all
employee benefit plans, programs or arrangements maintained by the Company if he
had remained in the employ of the Company and
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such plans, programs or arrangements had remained in effect for 60 calendar
months after his termination; or the value of the amounts described in clauses
(i) and (ii) next preceding. The amount of the payments described in the
preceding sentence shall be determined and such payments shall be distributed as
soon as it is reasonably possible.
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13. Tax Indemnity Payments.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by
the Company or its affiliated companies to or for the benefit of
Executive, whether paid or payable or distributed or distributable
pursuant to the terms of the Agreement or otherwise but determined
without regard to any additional payments required under this Section
13 (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986 (as amended the "Code"), or
any successor provision (collectively, "Section 4999"), or any interest
or penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Executive
of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any Federal, state or
local income and employment taxes and Excise Tax (and any interest and
penalties imposed with respect to any such taxes) imposed upon the
Gross-Up Payment, Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 13(c), all determinations
required to be made under this Section 13, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment
and the assumptions to be utilized in arriving at such determination,
shall be made by the Company's public accounting firm (the "Accounting
Firm") which shall provide detailed supporting calculations both to the
Company and Executive within fifteen (15) business days of the receipt
of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, Executive may appoint another
nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as
the Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 13, shall be paid by the Company to
Executive within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Executive, it shall furnish Executive with a written opinion
that failure to report the Excise Tax on Executive's applicable federal
income tax return would not result in the imposition of a negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty
in the application of Section 4999 at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should
have been made by the Company ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 13(c) and Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting
10
<PAGE> 11
Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or
for the benefit of Executive.
(c) Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require a
payment by the Company of, or a change in the amount of the payment by
the Company of, the Gross-Up Payment. Such notification shall be given
as soon as practicable after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid; provided that the
failure to give any notice pursuant to this Section 13(c) shall not
impair Executive's rights under this Section 13 except to the extent
the Company is materially prejudiced thereby. Executive shall not pay
such claim prior to the expiration of the 30-day period following the
date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies Executive in
writing prior to the expiration of such period that it desires to\
contest such claim, Executive shall:
(1) give the Company any information reasonably requested by the
Company relating to such claim,
(2) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(3) cooperate with the Company in good faith in order
effectively to contest such claim, and
(4) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income, employment or other tax
(including interest and penalties with respect thereto) imposed as a result of
such representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this Section 13(c), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided further, that if the Company directs Executive
to pay such claim and sue for a
11
<PAGE> 12
refund, the Company shall advance the amount of such payment to Executive on an
interest-free basis and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income, employment or other tax
(including interest or penalties with respect to any such taxes) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and provided further, that any extension of the statute of
limitations relating to payment of taxes for the taxable year of Executive with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Section 13(c), Executive becomes entitled to
receive, and receives, any refund with respect to such claim, Executive
shall (subject to the Company's complying with the requirements of
Section 12(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company pursuant to Section 13(c), a determination is
made that Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify Executive in writing of its
intent to contest such denial of refund prior to the expiration of
thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
14. Payment for Options. In the event of a Control Termination of this
Agreement, Executive may also elect, within sixty (60) days after such Control
Termination, to receive (in addition to any other amounts owed to Executive
under this Agreement) a lump sum payment in cash equal to the sum of the
following: (i) all or any portion of the number of shares of common stock of the
Company which may be acquired pursuant to options granted by the Company and
held by Executive at the time of such election, multiplied, with respect to
shares subject to any such options by the difference between the Conseco Put
Price and the respective exercise price under such option with respect to such
shares; plus (ii) all or any portion of the number of Successor Securities which
may be acquired pursuant to options (which options were granted to Executive in
exchange or substitution for options to acquire the common stock of the Company)
held by Executive at the time of such election, multiplied with respect to
shares subject to any such options relating to Successor Securities, by the
difference between the Successor Security Put Price and the respective exercise
price under such option with respect to such shares. For purposes of calculating
the above lump sum payment, the options described in clauses (i) and (ii) shall
include all such options, whether or not then exercisable. The cash payment due
from the Company pursuant to this Section 14 shall be made to Executive within
ten (10) days after the date of such election hereunder, against the execution
and delivery by Executive to the Company of an appropriate agreement confirming
the surrender to the Company of the options in respect of which the lump sum
cash payment is being made to Executive.
12
<PAGE> 13
"Successor Securities" means any securities of any person
received by the holders of the common stock of the Company in exchange,
substitution or payment for, or upon conversion of, the common stock of the
Company in connection with a change in control.
"Conseco Put Price" means the greater of (i) the Change in
Control Price or (ii) the Current Market Price of the common stock of the
Company.
"Successor Security Put Price" means the greater of (i) the
Change in Control Price divided by the Exchange Ratio or (ii) the Current Market
Price of the Successor Securities.
"Current Market Price" for any security means the average of the
daily Prices per security for the twenty (20) consecutive trading days ending on
the trading day which is immediately prior to Executive's election under this
Section 14.
"Price" for any security means the average of the highest and
lowest sales price of such security (regular way) on a trading day as shown on
the Composite Tape of the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, in case no sales take place on such day, the average of the closing
bid and asked prices on the New York Stock Exchange (or, if such security is not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which such security is listed or admitted to
trading) or, if it is not listed or admitted to trading on any national
securities exchange, the average of the highest and lowest sales prices of such
security on such day as reported by the NASDAQ Stock Market, or in case no sales
take place on such day, the average of the closing bid and asked prices as
reported by NASDAQ, or if such security is not so reported, the average of the
closing bid and asked prices as furnished by any securities broker-dealer of
recognized national standing selected from time to time by the Company (or its
successor in interest) for that purpose.
"Change in Control Price" means (i) in the case of a change in
control which occurs solely as a result of a change in the composition of the
Board of Directors of the Company or which occurs in a transaction, or series of
related transactions, in which the same consideration is paid or delivered to
all of the holders of common stock of the Company (or, in the event of an
election by holders of the common stock of the Company of different forms of
consideration, if the same election is offered to all of the holders of common
stock of the Company), the Price per share of the common stock of the Company on
the date on which the change in control occurs, or if such date is not a trading
day, then the trading day immediately prior to such date, or (ii) in the case of
a change in control effected through a series of related transactions, or in a
single transaction in which less than all of the outstanding shares of common
stock of the Company is acquired, the highest price paid to the holders of
common stock of the Company in the transaction or series of related transactions
whereby the change in control takes place. In determining the highest price paid
to the holders pursuant to clause (ii) of the immediately preceding sentence, in
the case of Successor Securities paid or delivered to the holders of common
stock of the Company in exchange, payment
13
<PAGE> 14
or substitution for, or upon conversion of, the common stock of the Company, the
price paid to such holders shall be the Price of such security at the time or
times paid or delivered to such holders.
"Exchange Ratio" means, in connection with a change in control,
the number of Successor Securities to be paid or delivered to the holders of
common stock of the Company in exchange, payment or substitution for, or upon
conversion of, each share of such common stock.
15. Character of Termination Payments. The amounts payable to Executive
upon any termination of this Agreement shall be considered severance pay in
consideration of past services rendered on behalf of the Company and his
continued service from the date hereof to the date he becomes entitled to such
payments. Executive shall have no duty to mitigate his damages by seeking other
employment and, should Executive actually receive compensation from any such
other employment, the payments required hereunder shall not be reduced or offset
by any such other compensation.
16. Right of First Refusal to Purchase Stock. Executive agrees that the
Company shall have throughout the Basic Employment Period the right of first
refusal to purchase all or any portion of the shares of the Company's common
stock owned by him (the "Shares") at the following price:
(a) in the event of a bona fide offer for the Shares, or any part
thereof, received by Executive from any other person (a "Third Party
Offer"), the price to be paid by the Company shall be the price set
forth in such Third Party Offer; and
(b) in the event Executive desires to sell the Shares, or any part
thereof, in the public securities market, the price to be paid by the
Company shall be the last sale price quoted on the New York Stock
Exchange (or any other exchange or national market system upon which
price quotations for the Company's common stock are regularly
available) for the Company's common stock on the last business day
preceding the date on which Executive notifies the Company of such
desire.
In the event Executive shall receive a Third Party Offer which he
desires to accept, he shall deliver to the Company a written notification of the
terms thereof and the Company shall have a period of 48 hours after such
delivery in which to notify Executive of its desire to exercise its right of
first refusal hereunder.
In the event Executive desires to sell any portion of the Shares in the
public market he shall deliver to the Company a written notification of the
amount of Shares he desires to sell, and the Company shall have a period of 24
hours after such delivery to notify Executive of its desire to exercise its
right of first refusal hereunder with respect to such amount of Shares.
Upon each exercise by the Company of its right of first refusal
hereunder, it shall make payment to Executive for the Shares in accordance with
standard practice in the securities brokerage industry. After each failure by
the Company to exercise its right of first refusal hereunder, Executive
14
<PAGE> 15
may proceed to complete the sale of Shares pursuant to the Third Party Offer or
in the open market in accordance with his notification to the Company, but his
failure to complete such sale within two weeks after his notification to the
Company shall reinstate the Company's right of first refusal with respect
thereto and require a new notification to the Company.
17. Arbitration of Disputes; Injunctive Relief.
(a) Except as provided in paragraph (b) below, any controversy or
claim arising out of or relating to this Agreement or the breach
thereof, shall be settled by binding arbitration in the City of
Indianapolis, Indiana, in accordance with the laws of the State of
Indiana by three arbitrators, one of whom shall be appointed by the
Company, one by Executive and the third of whom shall be appointed by
the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the Chief Judge of the United States District Court for
the Southern District of Indiana. The arbitration shall be conducted in
accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as
provided in this Section. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. In
the event that it shall be necessary or desirable for Executive to
retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any and all of his rights under this
Agreement, the Company shall pay (or Executive shall be entitled to
recover from he Company, as the case may be) his reasonable attorneys'
fees and costs and expenses in connection with the enforcement of any
arbitration award in court, regardless of the final outcome, unless the
arbitrators shall determine that under the circumstances recovery by
Executive of all or a part of any such fees and costs and expenses
would be unjust.
(b) Executive acknowledges that a breach or threatened breach by
Executive of Sections 8 or 9 of this Agreement will give rise to
irreparable injury to the Company and that money damages will not be
adequate relief for such injury. Notwithstanding paragraph (a) above,
the Company and Executive agree that the Company may seek and obtain
injunctive relief, including, without limitation, temporary restraining
orders, preliminary injunctions and/or permanent injunctions, in a
court of proper jurisdiction to restrain or prohibit a breach or
threatened breach of Section 8 or 9 of this Agreement. Nothing herein
shall be construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or threatened breach,
including the recovery of damages from Executive.
18. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered mail to
his residence, in the case of Executive, or to the business office of its Chief
Executive Officer, in the case of the Company.
19. Waiver of Breach and Severability. The waiver by either party of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be
15
<PAGE> 16
invalid or unenforceable, it may be severed from the Agreement and the remaining
provisions of the Agreement shall continue to be binding and effective.
20. Entire Agreement. This instrument contains the entire agreement of
the parties and supersedes all prior agreements between them. This agreement may
not be changed orally, but only by an instrument in writing signed by the party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
21. Binding Agreement and Governing Law; Assignment Limited. This
Agreement shall be binding upon and shall inure to the benefit of the parties
and their lawful successors in interest and shall be construed in accordance
with and governed by the laws of the State of Indiana. This Agreement is
personal to each of the parties hereto, and neither party may assign nor
delegate any of its rights or obligations hereunder without the prior written
consent of the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
-------------------------------
Stephen C. Hilbert
Chairman of the Board
"Company"
/s/ James S. Adams
-------------------------------
James S. Adams
"Executive"
16
<PAGE> 1
EXHIBIT 12.1
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES,
PREFERRED DIVIDENDS AND DISTRIBUTIONS ON COMPANY-OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS -- CONSOLIDATED BASIS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pretax income from operations:
Net income................................................ $ 595.0 $ 467.1 $ 866.4
Add income tax expense.................................... 423.1 445.6 560.1
Add extraordinary charge on extinguishment of debt........ -- 42.6 6.9
Add minority interest..................................... 132.8 90.4 52.3
-------- -------- --------
Pretax income from operations.......................... 1,150.9 1,045.7 1,485.7
-------- -------- --------
Add fixed charges:
Interest expense on corporate debt, including
amortization........................................... 169.6 165.4 109.4
Interest expense on finance debt.......................... 334.2 209.8 160.9
Interest expense on investment borrowings................. 57.9 65.3 42.0
Other..................................................... -- .5 .7
Portion of rental(1)...................................... 20.3 14.6 13.7
-------- -------- --------
Fixed charges.......................................... 582.0 455.6 326.7
-------- -------- --------
Adjusted earnings...................................... $1,732.9 $1,501.3 $1,812.4
======== ======== ========
Ratio of earnings to fixed charges................... 2.98X 3.30X 5.55X
======== ======== ========
Ratio of earnings to fixed charges, excluding
interest expense on finance debt and investment
borrowings........................................ 7.06X 6.79X 13.00X
Fixed charges............................................... $ 582.0 $ 455.6 $ 326.7
Add dividends on preferred stock, including dividends on
preferred stock of subsidiaries (divided by the ratio of
income before minority interest and extraordinary charge
to pretax income)......................................... 2.4 13.6 40.4
Add distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts...... 204.3 139.1 75.4
-------- -------- --------
Fixed charges.......................................... $ 788.7 $ 608.3 $ 442.5
======== ======== ========
Adjusted earnings...................................... $1,732.9 $1,501.3 $1,812.4
======== ======== ========
Ratio of earnings to fixed charges, preferred
dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts................................. 2.20X 2.47X 4.10X
======== ======== ========
Ratio of earnings to fixed charges, preferred
dividends and distributions on Company-obligated
mandatorily redeemable preferred securities of
subsidiary trusts, excluding interest expense on
finance debt and investment borrowings............ 3.38X 3.68X 6.72X
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT-21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME (1) JURISDICTION
- ----------------------- ------------
<S> <C>
CIHC, Incorporated Indiana
NAL Financial Group, Inc. Delaware
Conseco Securities, Inc. Delaware
Consumer Acceptance Corporation Indiana
Conseco Life Insurance (Bermuda) Limited Bermuda
Conseco Life Insurance Company of Texas Texas
Conseco Direct Life Insurance Company Pennsylvania
Conseco Annuity Assurance Company Illinois
Vulcan Life Insurance Company (2) Indiana
Conseco Senior Health Insurance Company Pennsylvania
Continental Life Insurance Company Texas
Conseco Life Insurance Company of New York New York
Conseco Variable Insurance Company Texas
Washington National Insurance Company Illinois
United Presidential Life Insurance Company Indiana
Pioneer Life Insurance Company Illinois
Health and Life Insurance Company of America Illinois
Manhattan National Life Insurance Company Illinois
Conseco Medical Insurance Company Illinois
Conseco Health Insurance Company Arizona
Frontier National Life Insurance Company Ohio
Wabash Life Insurance Company Indiana
Conseco Life Insurance Company Indiana
Bankers Life Insurance Company of Illinois Illinois
Bankers Life and Casualty Company Illinois
Bankers National Life Insurance Company Texas
National Fidelity Life Insurance Company Missouri
Conseco Management Services Company Texas
Conseco Services, LLC Indiana
Conseco Entertainment, Inc. Indiana
Conseco Entertainment, LLC Indiana
Conseco Equity Sales, Inc. Texas
Conseco Risk Management, Inc. Indiana
Conseco Capital Management, Inc. Pennsylvania
Conseco Finance Corp. Delaware
CFIHC, Inc. Delaware
Conseco Private Capital Group, Inc. Indiana
Performance Matters Associates, Inc. Delaware
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Performance Matters Associates of Texas, Inc. Texas
Performance Matters Associates of Kansas, Inc. Kansas
Performance Matters Associates of Ohio, Inc. Ohio
Conseco Financing Servicing Corp. Delaware
P Financial Services, Inc. Minnesota
Green Tree Retail Services Bank, Inc. South Dakota
Conseco Finance Loan Company Minnesota
Green Tree Titling Holding Company I Delaware
G.T. Titling, LLC I Delaware
G.T. Titling, LLC II Delaware
Green Tree Titling Limited Partnership I Delaware
Green Tree Titling Limited Partnership II Delaware
Conseco Finance Leasing Trust Delaware
Conseco Finance Vendor Services Corporation Delaware
Green Tree Lease Finance I, Inc. Minnesota
Green Tree Lease Finance I, LLC Delaware
Green Tree Lease Finance II, Inc. Minnesota
Green Tree Lease Finance 1997-1, LLC Delaware
Green Tree Lease Finance 1998-1, LLC Delaware
Conseco Finance Lease 2000-1, LLC Delaware
Green Tree Warehouse I, LLC Delaware
Conseco Agency, Inc. Minnesota
Conseco Agency of Alabama, Inc. Alabama
Conseco Agency of Kentucky, Inc. Kentucky
Crum-Reed General Agency, Inc. Texas
Dealer Service Trust Corporation Minnesota
Conseco Agency Reinsurance Limited Turks and Calicos Islands
Consolidated Acceptance Corporation Nevada
Woodgate Consolidated Incorporated Texas
Woodgate Utilities, Inc. Texas
Woodgate Place Owners Association Texas
Conseco Finance Canada Holding Company Delaware
Conseco Finance Canada Company Nova Scotia
MaHCS Guaranty Corporation Delaware
Conseco Finance Corp. - Alabama Delaware
Conseco Agency of Nevada, Inc. Nevada
Conseco Agency of New York, Inc. New York
Green Tree Floorplan Funding Corp. Delaware
Conseco Bank, Inc. Utah
Green Tree Financial Corp. - Texas Delaware
Green Tree Residual Finance Corp. I Minnesota
Conseco Finance Securitizations Corp. Minnesota
Conseco Finance Vehicle Securitizations Corp. Minnesota
Green Tree Manufactured Housing Net Interest Margin Finance Corp. Delaware
Green Tree Manufactured Housing Net Interest Margin Finance Corp. Delaware
Green Tree Finance Corp. - One Minnesota
Green Tree Finance Corp. - Two Minnesota
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Green Tree Finance Corp. - Three Minnesota
Green Tree Finance Corp. - Five Minnesota
Green Tree Finance Corp. - Six Minnesota
Green Tree RECS Guaranty Corporation Minnesota
Green Tree RECS II Guaranty Corporation Minnesota
Conseco Finance Credit Corp. New York
Conseco Finance Consumer Discount Company Pennsylvania
Green Tree First GP Inc. Minnesota
Green Tree Second GP Inc. Minnesota
Rice Park Properties Corporation Minnesota
Green Tree Retail Services Funding Corp. Minnesota
BizGuild, Inc. Minnesota
HIRC, Inc. Minnesota
</TABLE>
- ------------------
(1) Except otherwise indicated, each company is a direct or indirect wholly
owned subsidiary of the indicated parent.
(2) Conseco Annuity Assurance Company owns 98 percent of Vulcan Life
Insurance Company.
<PAGE> 1
EXHIBIT-23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Conseco, Inc. (File Nos. 33-57079, 33-56901, 33-57931, 33-40556,
33-58710, 33-58712, 333-10297, 333-18037, 333-18581, 333-19783, 333-23251,
333-28305, 333-32615, 333- 32617, 333-32621, 333-83607, 333-51123, 333-83465,
333-85825 and 333-94683) of our report dated April 13, 2000, on our audits of
the consolidated financial statements and financial statement schedules of
Conseco, Inc. as of December 31, 1999 and 1998, and for the years ended December
31, 1999, 1998 and 1997, which report is included in this Annual Report on Form
10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
Indianapolis, Indiana
April 13, 2000
<PAGE> 1
EXHIBIT-23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Conseco, Inc.:
We consent to the incorporation by reference of our report dated January 27,
1998, relating to the consolidated statements of operations, shareholder's
equity and cash flows for the year ended December 31, 1997, of Conseco Finance
Corp. and subsidiaries (formerly known as Green Tree Financial Corporation),
which report appears in the December 31, 1999 Form 10-K of Conseco, Inc., in the
following Registration Statements of Conseco, Inc.: Nos. 33-57079, 33-56901,
33-57931, 33-40556, 33-58710, 33-58712, 333-10297, 333-18037, 333- 18581,
333-19783, 333-23251, 333-28305, 333-32615, 333-32617, 333-51123 and 333- 83607
on Form S-8 and Nos. 333-32621, 333-83465, 333-85825 and 333-94683 on Form S-3.
Our report refers to the Company's adoption of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," in 1997.
/s/ KPMG LLP
Minneapolis, Minnesota
April 11, 2000
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 22,203,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 312,700
<MORTGAGE> 1,274,500
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,431,600
<CASH> 1,686,900
<RECOVER-REINSURE> 728,600
<DEFERRED-ACQUISITION> 4,345,900<F1>
<TOTAL-ASSETS> 52,185,900
<POLICY-LOSSES> 24,423,300
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 1,179,800
<POLICY-HOLDER-FUNDS> 298,900
<NOTES-PAYABLE> 11,806,100<F2>
2,639,100
478,400
<COMMON> 2,987,100
<OTHER-SE> 2,090,700<F3>
<TOTAL-LIABILITY-AND-EQUITY> 52,185,900
4,040,500
<INVESTMENT-INCOME> 3,411,400
<INVESTMENT-GAINS> (156,200)
<OTHER-INCOME> 1,040,000<F4>
<BENEFITS> 3,815,900
<UNDERWRITING-AMORTIZATION> 679,300<F5>
<UNDERWRITING-OTHER> 637,400
<INCOME-PRETAX> 1,150,900
<INCOME-TAX> 423,100
<INCOME-CONTINUING> 727,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 595,000
<EPS-BASIC> 1.83
<EPS-DILUTED> 1.79
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes $2,258,500 of cost of policies purchased.
<F2>Includes $4,682,500 related to finance debt and $4,641,800 related to
securitized finance receivables.
<F3>Includes retained earnings of $2,862,300 and accumulated other comprehensive
losses of $771,600.
<F4>Includes gain on sale of finance receivables of $550,600 and fee revenue and
other income of $489,400.
<F5>Includes amortization of cost of policies purchased of $437,200 and
amortization of cost of policies produced of $242,100.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT-99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Conseco Finance Corp.
Saint Paul, Minnesota:
We have audited the consolidated statements of operations, shareholder's equity
and cash flows of Conseco Finance Corp. (formerly Green Tree Financial
Corporation) and subsidiaries for the year ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Conseco Finance Corp. and subsidiaries for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in 1997.
KPMG LLP
Minneapolis, Minnesota
January 27, 1998
