================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-08916
CONSECO FINANCE CORP.
Delaware No. 41-1807858
---------------------- ------------------------------
State of Incorporation IRS Employer Identification No.
1100 Landmark Towers
Saint Paul, Minnesota 55102-1639 (651) 293-3400
-------------------------------------- --------------
Address of principal executive offices Telephone
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Shares of common stock outstanding as of May 1, 2000: 101
The Registrant meets the conditions set forth in general instruction
H(1)(a) and H(1)(b) to Form 10-Q. Accordingly, the disclosures in this filing
have been reduced as permitted by such instructions.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO FINANCE CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Actively managed fixed maturities at fair value (amortized cost: 2000 - $713.7;
1999 - $712.6)............................................................................. $ 472.0 $ 694.3
Interest-only securities at fair value (amortized cost: 2000 - $929.0; 1999 - $916.2)......... 889.7 905.0
Cash and cash equivalents..................................................................... 651.7 533.4
Cash held in segregated accounts for investors................................................ 789.9 849.7
Cash held in restricted accounts.............................................................. 520.2 270.6
Fixed maturities due from subsidiaries of Conseco, Inc........................................ 191.0 104.6
Other invested assets ........................................................................ 86.5 103.9
Finance receivables........................................................................... 6,076.8 4,978.5
Finance receivables - securitized............................................................. 6,505.7 4,730.5
Receivables due from Conseco, Inc............................................................. 260.6 435.1
Servicing rights.............................................................................. 109.3 111.9
Goodwill...................................................................................... 98.9 99.7
Other assets.................................................................................. 708.5 637.5
--------- ---------
Total assets........................................................................... $17,360.8 $14,454.7
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Investor payables.......................................................................... $ 789.9 $ 853.0
Liabilities related to certificates of deposit............................................. 1,355.3 870.5
Other liabilities.......................................................................... 809.1 743.5
Income tax liabilities..................................................................... 145.2 230.4
Notes payable:
Related to securitized finance receivables structured as collateralized borrowings....... 6,520.7 4,641.8
Due to Conseco, Inc...................................................................... 2,675.1 2,116.7
Other.................................................................................... 2,887.5 2,563.8
--------- ---------
Total liabilities................................................................... 15,182.8 12,019.7
--------- ---------
Shareholder's equity:
Common stock and additional paid-in capital................................................ 1,515.6 1,641.0
Accumulated other comprehensive loss (net of applicable deferred income tax benefit:
2000 - $104.1; 1999 - $11.0)............................................................. (177.2) (18.8)
Retained earnings.......................................................................... 839.6 812.8
--------- ---------
Total shareholder's equity.......................................................... 2,178.0 2,435.0
--------- ---------
Total liabilities and shareholder's equity.......................................... $17,360.8 $14,454.7
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
<CAPTION>
Three months ended
March 31,
-------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Net investment income:
Finance receivables and other.............................................................. $391.3 $106.9
Interest-only securities................................................................... 27.5 43.7
Gain on sale of finance receivables.......................................................... - 199.2
Servicing income............................................................................. 28.8 39.3
Fee revenue and other income................................................................. 83.0 43.3
------ ------
Total revenues......................................................................... 530.6 432.4
------ ------
Expenses:
Provision for losses......................................................................... 58.6 21.3
Interest expense............................................................................. 204.5 54.6
Other operating costs and expenses........................................................... 222.1 160.7
Impairment charge............................................................................ 2.5 12.2
------ ------
Total expenses......................................................................... 487.7 248.8
------ ------
Income before income taxes............................................................. 42.9 183.6
Income tax expense.............................................................................. 16.1 55.0
------ ------
Net income............................................................................. $ 26.8 $128.6
====== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
(unaudited)
<CAPTION>
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income (loss) earnings
----- --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 2000....................................... $2,435.0 $1,641.0 $ (18.8) $ 812.8
Comprehensive income (loss), net of tax:
Net income................................................ 26.8 - - 26.8
Change in unrealized depreciation of actively managed
fixed maturity investments and interest-only securities
(net of applicable income tax benefit of $93.1)......... (158.4) - (158.4) -
--------
Total comprehensive loss.............................. (131.6)
Repurchase of shares of common stock........................ (126.0) (126.0) - -
Other ...................................................... .6 .6 - -
-------- -------- ------- --------
Balance, March 31, 2000........................................ $2,178.0 $1,515.6 $(177.2) $ 839.6
======== ======== ======= ========
Balance, January 1, 1999....................................... $2,292.2 $1,338.3 $ (11.0) $ 964.9
Comprehensive income, net of tax:
Net income................................................ 128.6 - - 128.6
Change in unrealized depreciation of actively managed
fixed maturity investments and interest-only
securities (net of applicable income tax benefit
of $13.3)............................................... (21.8) - (21.8) -
Change in minimum pension liability (net of
applicable income tax expense of $2.7).................. 4.4 - 4.4 -
--------
Total comprehensive income............................ 111.2
Tax benefit related to issuance of shares under stock
option plans.............................................. 2.6 2.6 - -
-------- -------- -------- --------
Balance, March 31, 1999........................................ $2,406.0 $1,340.9 $ (28.4) $1,093.5
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
<CAPTION>
Three months ended
March 31,
----------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net investment income.................................................................... $ 439.1 $ 222.7
Points and origination fees.............................................................. - 110.5
Fee revenue and other income............................................................. 112.1 85.0
Interest expense......................................................................... (161.2) (50.3)
Other operating costs.................................................................... (258.8) (199.0)
Taxes.................................................................................... (8.2) (7.0)
--------- ---------
Net cash provided by operating activities............................................ 123.0 161.9
--------- ---------
Cash flows from investing activities:
Purchases of investments................................................................. (88.7) -
Cash received from the sale of finance receivables, net of expenses...................... - 2,771.2
Principal payments received on finance receivables....................................... 2,160.0 1,644.5
Finance receivables originated........................................................... (5,054.0) (5,117.4)
Change in cash held in restricted accounts for settlement of collateralized borrowings... (196.6) -
Other.................................................................................... (51.0) (46.3)
-------- ---------
Net cash used by investing activities ............................................... (3,230.3) (748.0)
--------- ---------
Cash flows from financing activities:
Issuance of liabilities related to deposit products...................................... 670.6 121.0
Payments on liabilities related to deposit products...................................... (185.8) -
Issuance of notes payable................................................................ 5,655.8 3,443.6
Payments on notes payable................................................................ (2,789.0) (2,940.4)
Repurchase of shares of common stock .................................................... (126.0) -
--------- ---------
Net cash provided by financing activities............................................ 3,225.6 624.2
--------- ---------
Net increase in cash and cash equivalents............................................ 118.3 38.1
Cash and cash equivalents, beginning of period.............................................. 533.4 195.2
--------- ---------
Cash and cash equivalents, end of period.................................................... $ 651.7 $ 233.3
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The following notes should be read in conjunction with the notes to the
consolidated financial statements included in the 1999 Form 10-K of Conseco
Finance Corp. ("we", "Conseco Finance" or the "Company").
Conseco Finance is a financial services holding company that originates,
purchases, sells and services consumer and commercial finance loans throughout
the United States. Conseco Finance is a wholly owned subsidiary of Conseco, Inc.
("Conseco"), a financial services holding company. On March 31, 2000, Conseco
announced its plan to explore the sale of the Company. No assurance can be
provided as to the timing, price or other terms related to the possible sale of
Conseco Finance.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited consolidated financial statements reflect all adjustments,
consisting only of normal recurring items, that are necessary to present fairly
Conseco Finance's financial position and results of operations on a basis
consistent with that of our prior audited consolidated financial statements. As
permitted by rules and regulations of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-Q, we have condensed or omitted
certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP").
We have also reclassified certain amounts from the prior periods to conform to
the 2000 presentation. Results for interim periods are not necessarily
indicative of the results that may be expected for a full year.
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 interest-only securities, servicing rights,
goodwill, liabilities related to litigation, gain on sale of finance
receivables, provision for losses and deferred income taxes. If our future
experience differs from these estimates and assumptions, our financial
statements could be materially affected.
Net income, as previously reported in our Form 10-Q, as amended, for the
three months ended March 31, 1999, has been restated 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) adjusting
loan origination cost deferrals; and (iv) adjusting income tax and expense
allocations from Conseco. These changes decreased previously reported net income
by $7.5 million, in the first quarter of 1999.
Our consolidated financial statements exclude the results of material
transactions between us and our consolidated affiliates, or among our
consolidated affiliates.
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. We are currently evaluating the impact of SFAS 133, which is
required to be implemented in 2001. Because of ongoing changes to implementation
guidance, we do not plan on adopting the new standard until the first quarter of
2001.
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
6
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
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 March 31, 2000, 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".
Following Conseco's March 31, 2000, announcement regarding the plan to
explore the sale of Conseco Finance and the other events described in the note
entitled "Subsequent Events" which follows and elsewhere herein, the uncertainty
surrounding the ultimate outcome of Conseco's plan has made it more difficult to
complete new public securitization transactions. We are currently funding loans
through our warehouse and bank credit facilities and expect to commence offering
securities in public or private securitization transactions in the near future.
We are also exploring other possible transactions such as whole loan sales. In
May 2000, we sold $1.3 billion of finance receivables to Lehman Brothers and its
affiliates (see "Subsequent Events").
Finance receivables-securitized, summarized by type, were as follows at
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Manufactured housing.................................................................. $1,646.9 $ 953.0
Mortgage services..................................................................... 3,245.9 2,077.3
Consumer/credit card.................................................................. 1,000.5 1,076.9
Commercial............................................................................ 637.0 637.0
-------- --------
6,530.3 4,744.2
Less allowance for credit losses...................................................... 24.6 13.7
-------- --------
Net finance receivables-securitized........................................... $6,505.7 $4,730.5
======== ========
</TABLE>
The other finance receivables, summarized by type, were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Manufactured housing.................................................................. $1,318.1 $ 795.8
Mortgage services..................................................................... 1,521.9 1,277.0
Consumer/credit card.................................................................. 2,473.8 824.7
Commercial............................................................................ 857.5 2,155.7
-------- -------
6,171.3 5,053.2
Less allowance for credit losses...................................................... 94.5 74.7
-------- --------
Net finance receivables....................................................... $6,076.8 $4,978.5
======== ========
</TABLE>
7
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
The changes in the allowance for credit losses included in finance
receivables were as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Allowance for credit losses, beginning of period................................................. $ 88.4 $ 43.0
Provision for losses............................................................................. 58.6 21.3
Credit losses.................................................................................... (27.9) (11.2)
------- ------
Allowance for credit losses, end of period....................................................... $119.1 $ 53.1
====== ======
</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, $472.0 million and $713.7 million,
respectively, at March 31, 2000, and were classified as actively managed fixed
maturity securities.
During the first three months of 1999, the Company sold $2.7 billion of
finance receivables in various securitized transactions and recognized gains of
$199.2 million. There were no such sales during the first three months of 2000.
The interest-only securities on our consolidated 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 March 31, 2000, and
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/
March 31, 2000 housing home improvement equipment Total
- -------------- ------- ---------------- --------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Interest-only securities at fair value............... $ 538.1 $ 295.6 $ 56.0 $ 889.7
Cumulative principal balance of sold finance
receivables at March 31, 2000..................... 22,105.4 8,200.5 2,666.1 32,972.0
Weighted average stated customer interest rate
on sold finance receivables....................... 10.0% 11.5% 10.9%
Assumptions to determine estimated fair value
of interest-only securities at March 31, 2000:
Expected weighted average annual constant
prepayment rate as a percentage of principal
balance of related finance receivables (a).... 9.4% 21.4% 22.4%
Expected nondiscounted credit losses as a
percentage of principal balance of
related finance receivables (a)............... 8.8% 5.9% 5.1%
Weighted average discount rate ................. 14.0% 14.0% 14.0%
</TABLE>
8
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
Manufactured Home equity/ Consumer/
December 31, 1999 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%
<FN>
- --------------------
(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.
</FN>
</TABLE>
Activity in the interest-only securities account was as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Balance, beginning of period................................................ $905.0 $1,305.4
Additions resulting from securitizations during the period............... - 137.5
Additions resulting from clean-up call (a)............................... 60.7 -
Investment income........................................................ 27.5 43.7
Cash received............................................................ (70.6) (123.5)
Impairment charge to reduce carrying value............................... (4.8) (11.3)
Change in unrealized depreciation charged to shareholder's equity........ (28.1) (14.8)
------ --------
Balance, end of period...................................................... $889.7 $1,337.0
====== ========
<FN>
- --------------------
(a) During the first quarter of 2000, clean up calls were exercised for four
securitizations that were previously recognized as sales. The interest-only
securities related to these securitizations had previously been separately
securitized with other interest-only securities in transactions recognized
as sales. The repurchase of the collateral underlying the four
securitizations triggered a requirement for the Company to repurchase a
portion of the interest-only securities.
</FN>
</TABLE>
9
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
Credit quality of managed finance receivables was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
60-days-and-over delinquencies as a percentage
of managed finance receivables at period end............................ 1.32% 1.42%
==== ====
Net credit losses incurred during the last twelve months as a percentage
of average managed finance receivables during the period................ 1.39% 1.31%
==== ====
Repossessed collateral inventory as a percentage of managed finance
receivables at period end............................................... 1.36% 1.34%
==== ====
</TABLE>
NOTES PAYABLE (EXCLUDING NOTES PAYABLE RELATED TO SECURITIZED FINANCE
RECEIVABLES STRUCTURED AS COLLATERALIZED BORROWINGS)
Notes payable (excluding notes payable related to securitized finance
receivables structured as collateralized borrowings) were as follows (interest
rates as of March 31, 2000):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Note payable to Conseco (7.54%).............................................. $2,675.1 $2,116.7
Master repurchase agreements due on various dates in 2000 (6.95%)............ 2,443.1 1,620.9
Credit facility collateralized by retained interests in securitizations due
2000 .................................................................... - 499.0
Medium term notes due April 2000 to April 2003 (6.53%)....................... 226.7 226.7
10.25% senior subordinated notes due 2002.................................... 217.3 217.3
Other........................................................................ 3.3 3.1
-------- --------
Total principal amount.................................................. 5,565.5 4,683.7
Unamortized net discount..................................................... 2.9 3.2
-------- --------
Total notes payable..................................................... $5,562.6 $4,680.5
======== ========
</TABLE>
At March 31, 2000, we had $6.7 billion in master repurchase agreements,
commercial paper conduit facilities and other facilities with various banking
and investment banking firms for the purpose of financing our consumer and
commercial finance loan production. These facilities typically provide financing
of a certain percentage of the underlying collateral and are subject to the
availability of eligible collateral and, in many cases, the willingness of the
banking firms to continue to provide financing. These agreements generally
provide for annual terms, some of which are extended either quarterly or
semi-annually by mutual agreement of the parties for an additional annual term
based upon receipt of updated quarterly financial information. At March 31,
2000, we had $3.7 billion borrowed under such agreements.
NOTES PAYABLE RELATED TO SECURITIZED FINANCE RECEIVABLES STRUCTURED AS
COLLATERALIZED BORROWINGS
Notes payable related to securitized finance receivables structured as
collateralized borrowings were $6,520.7 million at March 31, 2000. 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 March 31, 2000 was 7.0 percent.
10
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
RELATED PARTY TRANSACTIONS
In 1998, we entered into a $2 billion promissory note with Conseco. The
note bore interest at LIBOR plus a margin of .35 percent and both the principal
and interest were due on demand. On January 1, 2000, the promissory note was
amended and restated to provide for borrowings up to $5 billion and quarterly
interest payments at a rate of LIBOR plus a margin of 1.5 percent. Borrowings
under the note totaled $2,675.1 million at March 31, 2000. Interest expense
incurred under the note totaled $46.4 million and $13.4 million during the three
months ended March 31, 2000 and 1999, respectively. The note payable to Conseco
was replaced with a one-year term note in May 2000. See note entitled
"Subsequent Events".
At March 31, 2000, $23.7 million par value of the 10.25% senior
subordinated notes were held by Conseco.
In the first quarter of 2000, the Company repurchased shares of its common
stock from Conseco for $126.0 million.
The Company has entered into management and service agreements with
subsidiaries of Conseco. Fees for such services (including data processing,
executive management and investment management services) are based on Conseco's
direct and allocable costs. Total fees incurred by the Company under such
agreements were $13.9 million and $8.9 million for the three months ended March
31, 2000 and 1999, respectively.
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 to purchase common stock 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.
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.
GUARANTEES
We have provided guarantees of approximately $1.6 billion at March 31,
2000, in conjunction with certain sales of finance receivables. We believe the
likelihood of a significant loss from such guarantees is remote.
11
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
The following disclosures supplement our consolidated statement of cash
flows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................ $ 26.8 $ 128.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of finance receivables................................................... - (199.2)
Points and origination fees received.................................................. - 110.5
Interest-only securities investment income............................................ (27.5) (43.7)
Cash received from interest-only securities........................................... 70.6 123.5
Servicing income...................................................................... (28.8) (39.3)
Cash received from servicing activities............................................... 31.4 41.7
Provision for losses.................................................................. 58.6 21.3
Amortization and depreciation......................................................... 6.3 12.3
Income taxes.......................................................................... 7.9 48.0
Accrual and amortization of investment income......................................... (22.8) (7.7)
Impairment charges.................................................................... 2.5 12.2
Other ............................................................................... (2.0) (46.3)
------ -------
Net cash provided by operating activities........................................... $123.0 $ 161.9
====== =======
</TABLE>
In 1999, the tax benefit related to the issuance of shares under stock
option plans was not reflected in the consolidated statement of cash flows.
SUBSEQUENT EVENTS
On April 28, 2000, the Company's Chief Executive Officer, Stephen C.
Hilbert, and Chief Financial Officer, Rollin M. Dick, terminated their positions
with the Company.
Following Conseco's March 31, 2000, announcement that it plans to explore
the sale of Conseco Finance and other events described elsewhere herein, rating
agencies lowered their ratings and placed certain ratings on review as the
agencies analyze the impact of the developing events.
In May 2000, we sold approximately $1.3 billion of finance receivables to
Lehman Brothers and its affiliates for cash and a right to share in future
profits from a subsequent sale or securitization of the assets sold. The sale of
finance receivables is not expected to result in a material gain or loss.
Lehman Brothers has also amended its repurchase and other financing
facilities to expand the types of assets financed. As partial consideration for
the financing transaction, Lehman Brothers received a warrant, with a nominal
exercise price, for five percent of our common stock. The warrant has a
five-year term. After three years, the holder of the warrant or Conseco Finance
may cause the warrant and any stock issued upon its exercise to be purchased for
cash at an appraised value. Since the terms of the warrant permits cash
settlement at fair value at the option of the holder of the warrant, the warrant
is required to be classified as a liability measured at fair value, with changes
in its value reported in earnings. The warrant would be cancelled in certain
circumstances in the event the holder thereof or an affiliate participates in a
group that purchases the Company. The initial value of the warrant will be
amortized over the expected life of the financing facilities of approximately
one year.
12
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
In connection with the transaction with Lehman Brothers, the note payable
to Conseco was replaced with a one-year term note. During May we prepaid
approximately $500 million of this note. We have agreed with Lehman Brothers
that we will not make further prepayments on this note while certain financing
arrangements with Lehman Brothers remain outstanding. In addition, we have
agreed that we will not pay dividends until 2001 and then pay such dividends
only to the extent certain financial covenants are met.
In 1999, Conseco had contributed certain assets then having book value of
approximately $300 million to our subsidiary in exchange for additional common
stock. The stock of this subsidiary was distributed to Conseco concurrently with
the Lehman Brothers transaction.
13
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting our results
of operations. This discussion should be read in conjunction with the
consolidated financial statements and notes included herein and in our 1999 Form
10-K. The Registrant meets the conditions set forth in the General Instructions
(H)(1)(a) and (b) of the Form 10-Q and is therefore omitting certain information
otherwise required by Item 2.
14
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
2000 1999
---- ----
(Dollars in millions)
<S> <C> <C>
Contract originations:
Manufactured housing.............................................................. $ 1,183.7 $ 1,411.1
Mortgage services................................................................. 1,544.2 1,437.6
Consumer/credit card.............................................................. 774.5 538.6
Commercial........................................................................ 1,506.7 1,986.9
--------- ---------
Total.......................................................................... $ 5,009.1 $ 5,374.2
========= =========
Securitizations of receivables recorded as sales:
Manufactured housing.............................................................. $ - $ 1,800.0
Home equity/home improvement...................................................... - 961.1
Consumer/equipment................................................................ - -
Leases............................................................................ - -
Commercial and retail revolving credit............................................ - -
Retained bonds.................................................................... - (23.2)
--------- ---------
Total.......................................................................... $ - $ 2,737.9
========= =========
Managed receivables (average):
Manufactured housing.............................................................. $24,936.7 $21,447.3
Mortgage services................................................................. 12,734.1 8,685.6
Consumer/credit card.............................................................. 3,885.7 2,988.5
Commercial........................................................................ 5,144.4 5,121.3
--------- ---------
Total.......................................................................... $46,700.9 $38,242.7
========= =========
Revenues:
Net investment income:
Finance receivables and other.................................................. $ 391.3 $ 106.9
Interest-only securities....................................................... 27.5 43.7
Gain on sale of finance receivables............................................... - 199.2
Fee revenue and other income...................................................... 111.8 82.6
--------- ---------
Total revenues................................................................. 530.6 432.4
--------- ---------
Expenses:
Provision for losses.............................................................. 58.6 21.3
Finance interest expense.......................................................... 204.5 54.6
Other operating costs and expenses................................................ 222.1 160.7
--------- ---------
Total expenses................................................................. 485.2 236.6
--------- ---------
Operating income before impairment charges and income taxes.................... 45.4 195.8
Impairment charges.................................................................... 2.5 12.2
---------- ---------
Income before income taxes..................................................... $ 42.9 $ 183.6
========= =========
</TABLE>
15
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
General: We 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. The Company also markets physical damage and term
mortgage life insurance and other credit protection relating to the loans it
services.
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 consolidated 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.
Following Conseco's March 31, 2000, announcement regarding the plan to
explore the sale of Conseco Finance and the other events described in the note
entitled "Subsequent Events" and elsewhere herein, the uncertainty surrounding
the ultimate outcome of Conseco's plan has made it more difficult to complete
new public securitization transactions. We are currently funding loans through
our warehouse and bank credit facilities and expect to commence offering
securities in public or private securitization transactions in the near future.
We are also exploring other possible transactions such as whole loan sales. In
May 2000, we sold $1.3 billion of finance receivables to Lehman Brothers and its
affiliates (see the note to the consolidated financial statements entitled
"Subsequent Events").
Loan originations in the first quarter of 2000 were $5.0 billion, down 6.8
percent from 1999.
Manufactured housing loan originations decreased by $227.4 million, or 16
percent, in the first quarter of 2000. The 2000 decrease was primarily due to a
decrease in the number of contracts written (the change in the average size of
contracts originated was not significant).
Mortgage services loan originations increased by $106.6 million, or 7.4
percent, in the first quarter of 2000. 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 $235.9 million, or 44
percent, in the first quarter of 2000. 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 decreased by $480.2 million, or 24 percent, in
the first quarter of 2000. The decrease primarily reflects lower production in
floorplan financing.
Securitizations of receivables recorded as sales relate to the
securitizations structured prior to our September 8, 1999, announcement. The
decrease in finance receivables sold in 2000 reflects 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 consolidated
balance sheet that have not been securitized. Average managed receivables
increased to $46.7 billion in 2000, up 22 percent over 1999.
16
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
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 266 percent, to $391.3 million,
in the first quarter of 2000, consistent with the increase in average on-balance
sheet finance receivables. The weighted average yields earned on finance
receivables and other investments were 13.3 percent and 11.8 percent during the
first quarters of 2000 and 1999, 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 decreased by 37 percent, to $27.5 million, in the first
quarter of 2000. The decrease is consistent with the change in the average
balance of interest-only securities. The weighted average yields earned on
interest-only securities were 12.2 percent and 13.2 percent during the first
three months of 2000 and 1999, 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 by $533.8 million during
1999 (of which $11.3 million was incurred in the first quarter of 1999) 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 decreased in the first quarter of 2000
reflecting our decision to no longer structure our securitizations as sales. 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.
Conditions in the credit markets have frequently 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 March 31, 2000,
we held $472.0 million 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. Such income increased by 35 percent, to $111.8 million, in the
first quarter of 2000. Our net written insurance premiums and other income 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
has declined in the current period, and will decline further in future periods.
Provision for losses increased by 175 percent, to $58.6 million, in the
first quarter of 2000. 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.
Interest expense increased by 275 percent, to $204.5 million, in the first
quarter of 2000. Our borrowings grew in order to fund the increase in finance
receivables. In addition, our average borrowing rate increased to 7.1 percent in
the first quarter of 2000 from 6.0 percent in the first quarter of 1999.
Under the portfolio method, we recognize interest expense on the securities
issued to investors in the securitization trusts. These securities typically
have higher interest rates than our other debt, which increases our average
borrowing rate as compared to prior periods.
17
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
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 38 percent, to $222.1 million,
in the first quarter of 2000 reflecting: (i) the growth in our servicing
portfolio; and (ii) the growth in 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 amortized cost 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.
The Company continually reevaluates 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 in 1999 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. In the first
quarters of 2000 and 1999, we recognized an impairment charge of $2.5 million
($1.6 million after tax) and $12.2 million ($7.7 million after tax),
respectively, to reduce the book value of the interest-only securities and
servicing rights.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by the Company with the Securities and
Exchange Commission, press releases, presentations by the Company or its
management or oral statements) relative to markets for the Company's products
and trends in the Company's operations or financial results, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," "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 and stock and credit market performance, which
may affect (among other things) the Company's ability to sell its products, its
ability to make loans and access capital resources and the costs associated
therewith, the market value of the Company's investments and the level of
defaults and prepayments of loans made by the Company; (ii) the Company's
ability to achieve anticipated synergies and levels of operational efficiencies;
(iii) customer response to new products, distribution channels and marketing
initiatives; (iv) performance of our investments; (v) changes in the Federal
income tax laws and regulations which may affect the relative tax advantages of
some of the Company's products; (vi) increasing competition in the finance
business; (vii) regulatory changes or actions, including those relating to
regulation of financial services; (viii) the outcome of the contemplated sale
process relating to the Company and the terms and availability of capital to the
Company during the sale process; (ix) the effects of actions by rating agencies
on financing transactions; and (x) the risk factors or uncertainties listed from
time to time in the filings of the Company or its parent, Conseco, Inc., with
the Securities and Exchange Commission.
18
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
PART II - OTHER INFORMATION
ITEM 1. 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 to purchase common stock 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.
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 5. OTHER INFORMATION.
None.
ITEM 6. (a) Exhibits
3(a) Restated Certificate of Incorporation of Conseco Finance Corp.,
as amended
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K - None
19
<PAGE>
CONSECO FINANCE CORP. AND SUBSIDIARIES
--------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO FINANCE CORP.
Dated: May 15, 2000 By: /S/ JAMES S. ADAMS
----------------------
James S. Adams
Senior Vice President and
Chief Accounting Officer
(authorized officer and chief
accounting officer)
20
RESTATED CERTIFICATE OF INCORPORATION
OF
GREEN TREE FINANCIAL CORPORATION
The undersigned, for the purposes of amending and restating in its
entirety the Certificate of Incorporation of Green Tree Financial Corpo ration,
a corporation existing under the General Corporation Law of the State of
Delaware, does execute this Amended and Restated Certificate of Incorporation
and does hereby certify as follows:
1. The name of the corporation is Green Tree Financial Corporation and
the name under which the corporation was originally incorporated is Green Tree
Financial Corporation.
The date of filing of its original Certificate of Incorporation with
the Secretary of State was March 24, 1995.
2. This Restated Certificate of Incorporation restates and inte grates
and further amends the Certificate of Incorporation of this corporation by
restating the Certificate of Incorporation in its entirety.
3. The text of the Certificate of Incorporation as amended or
supplemented here tofore is hereby restated without further amendments or
changes to read as herein set forth in full:
FIRST. The name of the corporation is Conseco Finance Corp.
SECOND. The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. The total number of shares of stock which the corporation shall
have authority to issue is 100. All such shares are to be Common Stock, par
value of $.01 per share, and are to be of one class.
FIFTH. Unless and except to the extent that the bylaws of the
corporation shall so require, the election of directors of the corporation need
not be by written ballot.
1
<PAGE>
SIXTH. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors of the corporation is
expressly authorized to make, alter and repeal the bylaws of the corporation,
subject to the power of the stockholders of the corporation to alter or repeal
any bylaw whether adopted by them or otherwise.
SEVENTH. A director of the corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fidu ciary
duty as a director, except to the extent such exemption from lia bility or
limitation thereof is not permitted under the General Corpora tion Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal.
EIGHTH. The corporation reserves the right at any time, and from time
to time, to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the rights reserved in this
article.
4. This Restated Certificate of Incorporation was duly adopted by vote
of the stockholders in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
5. The Restated Certificate of Incorporation shall be effective on
November 1, 1999.
IN WITNESS WHEREOF, the corporation has caused this Amended and
Restated Certificate of Incorporation to be executed by the undersigned duly
authorized officer of the corporation as of this 30 day of September, 1999.
GREEN TREE FINANCIAL CORPORATION
By: /s/ Brian F. Corey
-----------------------------
Name: Brian F. Corey
Title: Senior Vice President, General Counsel
and Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CONSECO FINANCE CORP.
Conseco Finance Corp., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, adopted a
resolution proposing and declaring advisable the following amendment to the
Restated Certificate of Incorporation of said corporation:
"The Fourth Section of the Restated Certificate of Incorporation of the
Corporation is hereby amended so as to read in its entirety as follows:
FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is 1,000. All such
shares are to be Common Stock, par value of $.01 per share, and
are to be of one class."
SECOND: That in lieu of a meeting and vote of stockholders, the
stockholders have given written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, said Conseco Finance Corp. has caused this
certificate to be signed by Karl W. Kindig, its Assistant Secretary, this 23rd
day of December, 1999.
CONSECO FINANCE CORP.
By: /s/ Karl W. Kindig
-----------------------------
Karl W. Kindig
Assistant Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
CONSECO FINANCE CORP.
THE UNDERSIGNED, being the President of Conseco Finance Corp., a
Delaware corporation (the "Corporation"), hereby certifies that:
FIRST: The name of the Corporation is Conseco Finance Corp.
SECOND: The original Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on March 24, 1995.
THIRD: The Certificate of Incorporation of the Corporation is hereby
amended to include the following:
1. "NINTH: Notwithstanding any other provision of this Certificate of
Incorporation and any provision of law that otherwise so empowers
the corporation, the corporation shall not, without the affirmative
vote of not less than 75% of the members of the fully constituted
Board of Directors of the corporation (and in any event including
the affirmative vote of all Independent Directors, as defined
herein) do any of the following:
(i) dissolve or liquidate; or
(ii) institute proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or
insolvency proceedings against it, or file a petition seeking or
consenting to reorganization or relief under any applicable federal
or state law relating to bankruptcy, or consent to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the corporation or a substantial part of
its property, or make any assignment for the benefit of creditors,
or admit in writing its inability to pay its debts generally as
they become due, or take corporate action in furtherance of any
such action.
Notwithstanding anything to the contrary contained herein or
in the corporation's by-laws, the Board of Directors shall at all
times include at least one individual who is an Independent
Director. An "Independent Director" shall be an individual who is
not at such time, (i) a director, officer, employee or affiliate of
Conseco, Inc. or any affiliate thereof or any of its subsidiaries
or affiliates other than a director of the Corporation, or (ii) the
beneficial owner at the time of such individual's appointment as an
Independent
1
<PAGE>
Director or at any time thereafter while serving as an Independent
Director, of more than 1,000 shares in the aggregate of all classes
of common stock of Conseco, Inc., or if greater, such number of
shares the value of which constitutes more than 10% of such
individual's net worth, or (iii) receiving at the time of such
individual's appointment as an Independent Director or at any time
thereafter while serving as an Independent Director more than ten
percent of such individual's net income from consideration for
providing services for Conseco, Inc. or any affiliate thereof other
than fees received in connection with serving as an Independent
Director, or (iv) a member of the immediate family of any person
described in (i), (ii) or (iii) above.
TENTH: Until such time as the Agreement dated May 11, 2000 among
Conseco Finance Corp., Conseco, Inc., CIHC, Incorporated and Lehman
Brothers Holdings Inc. shall be terminated in accordance with the
terms thereof, the corporation shall not amend, alter, change or
repeal Article Ninth or this Article Tenth without the vote of at
least 75% of the members of the fully constituted Board of
Directors (and in any event including the affirmative vote of all
Independent Directors). Subject to the foregoing limitation, the
corporation reserves the right to amend, alter, change or repeal
any provision contained in the Certificate of Incorporation, in the
manner now or hereafter prescribed by the law of the State of
Delaware, and all rights of the stockholders herein are granted
subject to this reservation."
FOURTH: The foregoing amendments have been duly adopted in accordance
with Section 242 of the General Corporation Law of the State of Delaware.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment to be issued this 11th day of May, 2000.
CONSECO FINANCE CORP.
By: /s/ Thomas J. Kilian
------------------------------
Name: Thomas J. Kilian
Title: President
3
<TABLE>
<CAPTION>
CONSECO FINANCE CORP. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
for the three months ended March 31, 2000 and the year
ended December 31, 1999
(Dollars in millions)
Three months
ended Year ended
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Pretax income (loss) from operations:
Net income (loss) $ 26.8 $ 47.9
Add income tax expense (benefit) 16.1 (16.4)
Add extraordinary charge on extinguishment of debt - 2.5
------- ------
Pretax income (loss) from operations 42.9 34.0
------- ------
Add fixed charges:
Interest expense on long-term debt 204.5 341.3
Portion of rental(a) 2.0 7.2
------- ------
Fixed charges 206.5 348.5
------- ------
Adjusted earnings $ 249.4 $382.5
======= ======
Ratio of earnings to fixed charges 1.21X 1.10X
====== ======
<FN>
(a) Interest portion of rental is assumed to be 33 percent.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,961,800 <F1>
<SECURITIES> 1,361,700 <F2>
<RECEIVABLES> 12,701,600 <F3>
<ALLOWANCES> 119,100
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 350,400
<DEPRECIATION> 156,600
<TOTAL-ASSETS> 17,360,800
<CURRENT-LIABILITIES> 0
<BONDS> 444,000
0
0
<COMMON> 1,515,600
<OTHER-SE> 662,400 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 17,360,800
<SALES> 0
<TOTAL-REVENUES> 530,600
<CGS> 0
<TOTAL-COSTS> 222,100
<OTHER-EXPENSES> 2,500 <F5>
<LOSS-PROVISION> 58,600
<INTEREST-EXPENSE> 204,500
<INCOME-PRETAX> 42,900
<INCOME-TAX> 16,100
<INCOME-CONTINUING> 26,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,800
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1> Includes $789,900 of cash held in segregated accounts for investors and
$520,200 of cash held in restricted accounts.
<F2> Includes $472,000 of actively managed fixed maturity securities and
$889,700 of interest-only securities.
<F3> Includes $6,505,700 of finance receivables - securitized.
<F4> Includes retained earnings of $839,600 and accumulated other
comprehensive losses of $177,200.
<F5> Represents an impairment charge to write down the carrying value of
interest-only securities and servicing rights.
</FN>
</TABLE>
