-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DhJ+dn20Zfi/f6MuueOrqFxTTtNJsyTSXpm2mNBKUbfgbS5Ob74Sdcb6HBXH989f qVRdtHyozvTvLED9I7DSjA== /in/edgar/work/20000814/0000719241-00-000023/0000719241-00-000023.txt : 20000921 0000719241-00-000023.hdr.sgml : 20000921 ACCESSION NUMBER: 0000719241-00-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSECO INC CENTRAL INDEX KEY: 0000719241 STANDARD INDUSTRIAL CLASSIFICATION: [6321 ] IRS NUMBER: 351468632 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09250 FILM NUMBER: 699516 BUSINESS ADDRESS: STREET 1: 11825 N PENNSYLVANIA ST CITY: CARMEL STATE: IN ZIP: 46032 BUSINESS PHONE: 3178176100 MAIL ADDRESS: STREET 1: 11825 N PENNSYLVANIA ST CITY: CARMEL STATE: IN ZIP: 46032 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY NATIONAL OF INDIANA CORP DATE OF NAME CHANGE: 19840207 10-Q 1 0001.txt 6/30/00 FORM 10-Q OF CONSECO, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 1-9250 Conseco, Inc. Indiana No. 35-1468632 ---------------------- ------------------------------- State of Incorporation IRS Employer Identification No. 11825 N. Pennsylvania Street Carmel, Indiana 46032 (317) 817-6100 ------------------------------- ------------- Address of principal executive offices Telephone Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Shares of common stock outstanding as of July 31, 2000: 325,292,186 ================================================================================ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in millions) ASSETS June 30, December 31, 2000 1999 ---- ---- (unaudited) Investments: Actively managed fixed maturities at fair value (amortized cost: 2000 - $23,429.9; 1999 - $23,690.4)........................................................................ $21,574.1 $22,203.8 Interest-only securities at fair value (amortized cost: 2000 - $897.4; 1999 - $916.2)...... 852.8 905.0 Equity securities at fair value (cost: 2000 - $316.0; 1999 - $323.7)....................... 305.4 312.7 Mortgage loans............................................................................. 1,470.4 1,274.5 Policy loans............................................................................... 660.5 664.1 Venture capital investments at fair value (cost: 2000 - $140.8; 1999 - $142.5)............. 561.7 527.5 Other invested assets ..................................................................... 607.4 544.0 --------- --------- Total investments...................................................................... 26,032.3 26,431.6 Cash and cash equivalents..................................................................... 1,515.8 1,686.9 Accrued investment income..................................................................... 480.4 436.0 Finance receivables........................................................................... 5,680.6 5,104.1 Finance receivables - securitized............................................................. 8,942.1 4,730.5 Cost of policies purchased.................................................................... 2,103.5 2,258.5 Cost of policies produced..................................................................... 2,423.7 2,087.4 Reinsurance receivables....................................................................... 707.4 728.6 Income tax assets............................................................................. 389.9 209.8 Goodwill...................................................................................... 3,874.4 3,927.8 Assets held in separate accounts and investment trust ........................................ 2,750.6 2,231.4 Cash held in segregated accounts for investors in securitizations............................. 731.6 853.0 Cash held in segregated accounts related to servicing agreements and securitization transactions............................................................................... 982.8 274.0 Other assets.................................................................................. 1,436.3 1,226.3 --------- --------- Total assets........................................................................... $58,051.4 $52,185.9 ========= =========
(continued on next page) The accompanying notes are an integral part of the consolidated financial statements. 2
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET, continued (Dollars in millions) LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31, 2000 1999 ---- ---- (unaudited) Liabilities: Liabilities for insurance and asset accumulation products: Interest-sensitive products.............................................................. $16,738.4 $17,322.4 Traditional products..................................................................... 7,818.3 7,537.3 Claims payable and other policyholder funds.............................................. 1,058.2 1,042.3 Liabilities related to separate accounts and investment trust............................ 2,750.6 2,231.4 Liabilities related to certificates of deposit........................................... 1,398.9 870.5 Investor payables.......................................................................... 731.6 853.0 Other liabilities.......................................................................... 1,569.2 1,498.7 Investment borrowings...................................................................... 230.7 828.9 Notes payable and commercial paper: Corporate................................................................................ 3,628.4 2,481.8 Finance.................................................................................. 5,679.1 4,682.5 Related to securitized finance receivables structured as collateralized borrowings....... 9,136.4 4,641.8 --------- --------- Total liabilities.................................................................... 50,739.8 43,990.6 --------- --------- Minority interest: Company-obligated mandatorily redeemable preferred securities of subsidiary trusts......... 2,399.2 2,639.1 Shareholders' equity: Preferred stock............................................................................ 482.5 478.4 Common stock and additional paid-in capital (no par value, 1,000,000,000 shares authorized, shares issued and outstanding: 2000 - 325,288,857; 1999 - 327,678,638)...................................................................... 2,905.6 2,987.1 Accumulated other comprehensive loss....................................................... (970.7) (771.6) Retained earnings.......................................................................... 2,495.0 2,862.3 --------- --------- Total shareholders' equity........................................................... 4,912.4 5,556.2 --------- --------- Total liabilities and shareholders' equity........................................... $58,051.4 $52,185.9 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in millions except per share amounts) (unaudited) Three months ended Six months ended June 30, June 30, -------------------- ------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Insurance policy income........................................... $1,072.4 $1,020.0 $2,121.1 $2,027.4 Net investment income............................................. 882.4 735.9 1,943.3 1,403.6 Gain on sale: Securitization transactions..................................... - 169.4 - 368.6 Other loan sales................................................ 2.6 - 2.6 - Net investment losses ............................................ (118.2) (22.9) (153.5) (21.9) Fee revenue and other income...................................... 126.0 121.3 257.6 232.6 -------- -------- -------- -------- Total revenues................................................ 1,965.2 2,023.7 4,171.1 4,010.3 -------- -------- -------- -------- Benefits and expenses: Insurance policy benefits......................................... 1,019.2 920.5 2,086.7 1,810.2 Provision for losses.............................................. 152.7 27.2 234.7 48.5 Interest expense.................................................. 338.6 125.5 596.3 236.1 Amortization...................................................... 185.2 153.2 383.5 304.6 Other operating costs and expenses................................ 409.9 352.2 816.0 660.8 Special charges................................................... 327.2 - 327.2 - Impairment charges................................................ 9.6 71.6 12.1 83.8 --------- -------- -------- -------- Total benefits and expenses................................... 2,442.4 1,650.2 4,456.5 3,144.0 -------- -------- -------- -------- Income (loss) before income taxes, minority interest and extraordinary charge........................................ (477.2) 373.5 (285.4) 866.3 Income tax expense (benefit)......................................... (108.3) 129.9 (32.9) 304.7 -------- -------- -------- -------- Income (loss) before minority interest and extraordinary charge ....................................... (368.9) 243.6 (252.5) 561.6 Minority interest: Distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts, net of income taxes.. 35.7 30.3 74.7 60.5 -------- -------- -------- -------- Income (loss) before extraordinary charge..................... (404.6) 213.3 (327.2) 501.1 Extraordinary charge on extinguishment of debt, net of taxes...... .1 - .1 - --------- -------- -------- -------- Net income (loss)............................................. (404.7) 213.3 (327.3) 501.1 Preferred stock dividends............................................ 2.5 - 6.7 .6 --------- -------- -------- -------- Net income (loss) applicable to common stock.................. $ (407.2) $ 213.3 $ (334.0) $ 500.5 ======== ======== ======== ======== Earnings (loss) per common share: Basic: Weighted average shares outstanding.............................325,259,000 323,576,000 326,602,000 322,111,000 =========== =========== =========== =========== Net income (loss)............................................... $(1.25) $.66 $(1.02) $1.55 ====== ==== ====== ===== Diluted: Weighted average shares outstanding.............................325,259,000 331,201,000 326,602,000 331,155,000 =========== =========== =========== =========== Net income (loss)............................................... $(1.25) $.64 $(1.02) $1.51 ====== ==== ====== =====
The accompanying notes are an integral part of the consolidated financial statements. 4
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in millions) (unaudited) Common stock Accumulated other Preferred and additional comprehensive Retained Total stock paid-in capital loss earnings ----- ----- ---------------- ---- -------- Balance, January 1, 2000............................. $5,556.2 $ 478.4 $2,987.1 $(771.6) $2,862.3 Comprehensive loss, net of tax: Net loss........................................ (327.3) - - - (327.3) Change in unrealized depreciation of investments (net of applicable income tax benefit of $87.0)............................. (199.1) - - (199.1) - -------- Total comprehensive loss.................... (526.4) Issuance of shares for stock options and for employee benefit plans.......................... .1 - .1 - Issuance of convertible preferred shares.......... 4.1 4.1 - - - Issuance of warrants.............................. 21.0 - 21.0 - - Cost of shares acquired........................... (102.6) - (102.6) - - Dividends on common stock......................... (33.3) - - - (33.3) Dividends on preferred stock...................... (6.7) - - - (6.7) --------- -------- -------- ------- -------- Balance, June 30, 2000............................... $4,912.4 $ 482.5 $2,905.6 $(970.7) $2,495.0 ======== ======= ======== ======= ======== Balance, January 1, 1999............................. $5,273.6 $ 105.5 $2,736.5 $ (28.4) $2,460.0 Comprehensive income, net of tax: Net income...................................... 501.1 - - - 501.1 Change in unrealized depreciation of investments (net of applicable income tax benefit of $250.1)............................ (466.1) - - (466.1) - -------- Total comprehensive income.................. 35.0 Conversion of preferred stock into common shares .................................. - (105.5) 105.5 - - Issuance of shares for stock options and for employee benefit plans.......................... 163.5 - 163.5 - - Tax benefit related to issuance of shares under stock option plans.............................. 24.4 - 24.4 - - Cost of shares acquired........................... (89.4) - (89.4) - - Dividends on common stock......................... (90.6) - - - (90.6) Dividends on preferred stock...................... (.6) - - - (.6) --------- ------- -------- ------- -------- Balance, June 30, 1999............................... $5,315.9 $ - $2,940.5 $(494.5) $2,869.9 ======== ======= ======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements. 5
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (unaudited) Six months ended June 30, ------------------ 2000 1999 ---- ---- Cash flows from operating activities: Insurance policy income....................................................................... $ 1,949.6 $ 1,809.1 Net investment income......................................................................... 1,936.5 1,449.5 Points and origination fees................................................................... - 243.2 Fee revenue and other income.................................................................. 265.5 237.6 Insurance policy benefits..................................................................... (1,568.2) (1,442.6) Interest expense.............................................................................. (550.6) (257.8) Policy acquisition costs...................................................................... (442.8) (386.8) Special charges............................................................................... (188.4) - Other operating costs......................................................................... (860.8) (704.8) Taxes......................................................................................... (21.9) (235.2) --------- --------- Net cash provided by operating activities................................................... 518.9 712.2 --------- --------- Cash flows from investing activities: Sales of investments.......................................................................... 2,969.1 8,620.5 Maturities and redemptions of investments..................................................... 422.9 598.6 Purchases of investments...................................................................... (4,148.2) (10,687.2) Cash received from the sale of finance receivables, net of expenses........................... 1,774.6 5,737.4 Principal payments received on finance receivables............................................ 4,485.1 3,960.3 Finance receivables originated................................................................ (11,198.2) (11,793.4) Other......................................................................................... (117.6) (76.5) --------- --------- Net cash used by investing activities ...................................................... (5,812.3) (3,640.3) --------- --------- Cash flows from financing activities: Repurchase of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts........................................................................ (250.0) - Issuance of common and convertible preferred shares........................................... .5 101.5 Issuance of notes payable and commercial paper................................................ 16,077.4 10,182.7 Payments on notes payable and commercial paper................................................ (9,488.3) (8,438.0) Change in cash held in restricted accounts for settlement of collateralized borrowings.................................................................................. (749.8) - Payments for settlement of forward contract and to repurchase equity securities............... (102.6) (29.5) Investment borrowings......................................................................... (598.2) 393.1 Amounts received for deposit products......................................................... 2,595.8 1,746.4 Withdrawals from deposit products............................................................. (2,181.8) (1,425.7) Dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts............................................................. (180.7) (170.6) --------- --------- Net cash provided by financing activities................................................. 5,122.3 2,359.9 --------- --------- Net decrease in cash and cash equivalents................................................. (171.1) (568.2) Cash and cash equivalents, beginning of period................................................... 1,686.9 1,704.7 --------- --------- Cash and cash equivalents, end of period......................................................... $ 1,515.8 $ 1,136.5 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- The following notes should be read together with the notes to the consolidated financial statements included in the 1999 Form 10-K of Conseco, Inc. ("we", "Conseco" or the "Company"). Conseco is a financial services holding company with subsidiaries operating throughout the United States. Our insurance subsidiaries develop, market and administer supplemental health insurance, annuity, individual life insurance, individual and group major medical insurance and other insurance products. Our finance subsidiaries originate, purchase, sell and service consumer and commercial finance loans. Conseco's operating strategy is to grow its business by focusing its resources on the development and expansion of profitable products and strong distribution channels, to seek to achieve superior investment returns through active asset management and to control expenses. The Company has debt and guarantees at the parent company level of approximately $1.4 billion which are expected to become due on or before September 30, 2000. Because of the time required to complete the sale of assets and other contemplated activities described in the paragraph which follows, extension of the Company's bank credit facilities will be required if the Company is to meet its September debt maturities. The Company is currently in discussions with its bank lenders and management is optimistic appropriate extensions can be negotiated. However, there can be no assurance that these negotiations will be successful, or as to the amount, maturity, cost or terms associated with any such extension. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity of Conseco (parent company)." On July 27, 2000, we announced several courses of action with respect to Conseco Finance Corp. ("Conseco Finance"), a wholly owned subsidiary of Conseco, as well as an asset disposition program with respect to certain non-strategic assets held at the parent company level, which are designed to allow us to reduce parent company debt over time. These actions with respect to Conseco Finance, include: (i) the sale, closing or runoff of five units (i.e., asset-based lending, vendor finance, bankcards, transportation and park construction); (ii) efforts to better utilize existing assets so as to increase cash; and (iii) cost savings and restructuring of ongoing businesses such as the streamlining of the field force in the manufactured housing and home equity lending divisions. The Company believes these contemplated actions offer better opportunities than the previously announced plan to explore the sale of Conseco Finance and are designed to provide a business model which will result in positive cash flow at Conseco Finance. In addition, we plan to sell certain non-strategic assets, such as our investment in the wireless communication company, Tritel, Inc. ("Tritel"), our interest in the riverboat casino in Lawrenceberg, Indiana, and our subprime auto loan portfolio. The Company believes the sale of non-strategic assets and the actions contemplated at Conseco Finance will generate cash proceeds of approximately $2.0 billion over the next 12 to 15 months. We are already well underway with these actions, and have completed the sale of the bankcard business and our subprime auto loan portfolio, generating cash proceeds of over $300 million. However, no assurance can be provided as to the timing, proceeds, or other terms related to the possible disposition of assets, the timing or extent of the cost savings to be achieved, or the amount of the restructuring or other charges to be incurred with respect to these actions. Furthermore, the Company's ability to use cash generated from the actions being undertaken at Conseco Finance is substantially limited by restrictions in agreements with Lehman Brothers Holdings, Inc. and its affiliates (collectively, with its direct and indirect subsidiaries, referred to as "Lehman"). In connection with the negotiations with our banks relating to the extension of the maturity dates of our debt, we are also engaged in discussions with Lehman concerning a modification of these restrictions and are optimistic an acceptable modification can be obtained. However, there can be no assurance that these negotiations will be successful, or as to the terms of any such modification. See the note entitled "Changes in Corporate Notes Payable and Commercial Paper." BASIS OF PRESENTATION Our unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, that are necessary to present fairly Conseco's financial position and results of operations on a basis consistent with that of our prior audited consolidated financial statements. As permitted by rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). We have also reclassified certain amounts from the prior periods to conform to the 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 values for certain fixed maturity securities, interest-only securities, certain venture capital investments, the cost of policies produced, the cost of policies purchased, servicing rights, goodwill, liabilities for insurance and deposit products, liabilities related to litigation, guaranty fund assessment accruals, 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. 7 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Net income and diluted earnings per share, as previously reported in our Form 10-Q, as amended, for the three and six months ended June 30, 1999, have 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; and (iii) adjusting loan origination cost deferrals. These changes reduced previously reported net income by $84.2 million, or $.26 per diluted share, and by $93.5 million, or $.29 per diluted share, in the three and six months ended June 30, 1999, respectively. Our consolidated financial statements exclude the results of material transactions between us and our consolidated affiliates, or among our consolidated affiliates. ACCOUNTING FOR INVESTMENTS We classify our fixed maturity securities into three categories: (i) "actively managed" (which we carry at estimated fair value); (ii) "trading" (which we carry at estimated fair value); and (iii) "held to maturity" (which we carry at amortized cost). We held $78.1 million of trading securities at June 30, 2000, which we included in "other invested assets." We had no fixed maturity securities in the "held to maturity" category at June 30, 2000. Accumulated other comprehensive loss is primarily comprised of unrealized losses on actively managed fixed maturity investments. Such amounts, included in shareholders' equity as of June 30, 2000 and December 31, 1999, were as follows:
June 30, December 31, 2000 1999 ---- ---- (Dollars in millions) Unrealized losses on investments...................................................... $(1,907.4) $(1,504.3) Adjustments to cost of policies purchased and cost of policies produced............... 406.5 291.2 Deferred income tax benefit........................................................... 530.4 443.4 Other................................................................................. - (1.7) --------- --------- Net unrealized losses on investments............................................. (970.5) (771.4) Minimum pension liability adjustment, net of income tax benefit....................... (.2) (.2) ----------- --------- Accumulated other comprehensive loss............................................. $ (970.7) $ (771.6) ========= =========
VENTURE CAPITAL INVESTMENTS 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, the 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. During 1999, we invested $53.2 million in Tritel, a company in the wireless communication business. The market values of many companies in this sector increased significantly in 1999 and early 2000. 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. We recognized venture capital income of $3.2 million in the first six months of 2000 related to this investment (consisting of $105.1 million of income recognized in the first quarter of 2000 and a loss of $101.9 million in the second quarter of 2000), bringing the total carrying value of our investment to $443.3 million. 8 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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 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. 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 June 30, 2000, was approximately 11.8 percent. We classify the notes issued to investors in the securitization trusts as "notes payable related to securitized finance receivables structured as collateralized borrowings." After the March 31, 2000 announcement that we planned to explore the sale of Conseco Finance and the other events described elsewhere herein, it was difficult to complete new securitization transactions for a period of time. However, these markets eventually became available to the Company. During the second quarter of 2000, we completed five transactions, securitizing over $2.5 billion of finance receivables. In May 2000, we sold $1.3 billion of finance receivables to Lehman. The proceeds from such sale were used to repay various warehouse credit lines, creating increased warehousing capacity for Conseco Finance. Lehman also amended its repurchase and other financing facilities with Conseco Finance to expand the types of assets financed. We continue to be able to finance loans through: (i) our warehouse and bank credit facilities; (ii) the sale of securities through securitization transactions; and (iii) whole-loan sales. Finance receivables-securitized, summarized by type, were as follows at June 30, 2000 and December 31, 1999:
June 30, December 31, 2000 1999 ---- ---- (Dollars in millions) Manufactured housing.................................................................. $3,216.9 $ 953.0 Mortgage services..................................................................... 4,190.6 2,077.3 Consumer/credit card.................................................................. 256.5 1,076.9 Commercial............................................................................ 1,330.5 637.0 -------- -------- 8,994.5 4,744.2 Less allowance for credit losses...................................................... 52.4 13.7 -------- -------- Net finance receivables-securitized........................................... $8,942.1 $4,730.5 ======== ========
9 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- The other finance receivables, summarized by type, were as follows:
June 30, December 31, 2000 1999 ---- ---- (Dollars in millions) Manufactured housing.................................................................. $ 834.4 $ 795.8 Mortgage services..................................................................... 1,404.4 1,277.0 Consumer/credit card.................................................................. 1,668.2 824.7 Commercial............................................................................ 1,874.4 2,281.3 -------- ------- 5,781.4 5,178.8 Less allowance for credit losses...................................................... 100.8 74.7 -------- -------- Net other finance receivables................................................. $5,680.6 $5,104.1 ======== ========
The changes in the allowance for credit losses included in finance receivables were as follows:
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Allowance for credit losses, beginning of period..................... $119.1 $ 53.1 $ 88.4 $ 43.0 Provision for losses................................................. 84.1 27.2 142.7 48.5 Credit losses........................................................ (50.0) (25.1) (77.9) (36.3) ------ ------ ------ ------ Allowance for credit losses, end of period........................... $153.2 $ 55.2 $153.2 $ 55.2 ====== ====== ====== ======
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, $468.9 million and $714.7 million, respectively, at June 30, 2000, and were classified as "actively managed fixed maturity securities." During the first six months of 1999, the Company sold $6.5 billion of finance receivables in various securitized transactions and recognized gains of $368.6 million. We recognized no gain on sale related to securitized transactions during the first six 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 June 30, 2000 and December 31, 1999. We include the difference between estimated fair value and the amortized cost of the interest-only securities in "accumulated other comprehensive loss, net of taxes." 10 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------
Manufactured Home equity/ Consumer/ June 30, 2000 housing home improvement equipment Total - ------------- ------- ---------------- --------- ----- (Dollars in millions) Interest-only securities at fair value............. $ 522.2 $ 280.7 $ 49.9 $ 852.8 Cumulative principal balance of sold finance receivables at June 30, 2000.................... 21,451.5 7,590.6 2,386.1 31,428.2 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 June 30, 2000: Expected weighted average annual constant prepayment rate as a percentage of principal balance of related finance receivables (a).. 9.6% 21.0% 22.2% Expected nondiscounted credit losses as a percentage of principal balance of related finance receivables (a)............. 8.7% 5.9% 5.1% Weighted average discount rate ............... 14.0% 14.0% 14.0% Manufactured Home equity/ Consumer/ December 31, 1999 housing home improvement equipment Total - ----------------- ------- ---------------- --------- ----- (Dollars in millions) 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% - ---------- (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.
11 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Activity in the interest-only securities account was as follows:
Six months ended June 30, ------------------ 2000 1999 ---- ---- (Dollars in millions) Balance, beginning of period................................................................... $ 905.0 $1,305.4 Additions resulting from securitizations during the period.................................. - 266.4 Additions resulting from clean-up calls (a)................................................. 64.9 - Investment income........................................................................... 56.1 91.5 Cash received............................................................................... (126.5) (234.1) Impairment charge to reduce carrying value.................................................. (13.3) (83.2) Change in unrealized depreciation charged to shareholders' equity........................... (33.4) 3.5 ------- -------- Balance, end of period......................................................................... $ 852.8 $1,349.5 ======= ======== - ---------- (a) During the first six months of 2000, clean-up calls were exercised for five 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 five securitizations triggered a requirement for the Company to repurchase a portion of the interest-only securities.
Credit quality of managed finance receivables was as follows:
June 30, December 31, 2000 1999 --- ---- 60-days-and-over delinquencies as a percentage of managed finance receivables at period end................................................. 1.47% 1.42% ==== ==== Net credit losses incurred during the last twelve months as a percentage of average managed finance receivables during the period.................. 1.49% 1.31% ==== ==== Repossessed collateral inventory as a percentage of managed finance receivables at period end................................................. 1.41% 1.34% ==== ====
12 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- EARNINGS PER SHARE A reconciliation of income (loss) and shares used to calculate basic and diluted earnings per share is as follows:
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions and shares in thousands) Income (loss): Net income (loss).................................................. $(404.7) $213.3 $(327.3) $501.1 Preferred stock dividends.......................................... 2.5 - 6.7 .6 ------- ------ ------- ------ Income (loss) applicable to common ownership for basic earnings per share............................................. (407.2) 213.3 (334.0) 500.5 Effect of dilutive securities: Preferred stock dividends.......................................... - - - .6 ------- ------ ------- ------ Income (loss) applicable to common ownership and assumed conversions for diluted earnings per share..................... $(407.2) $213.3 $(334.0) $501.1 ======= ====== ======= ====== Shares: Weighted average shares outstanding for basic earnings per share... 325,259 323,576 326,602 322,111 Effect of dilutive securities on weighted average shares: Stock options.................................................... - 2,552 - 3,100 Employee benefit plans........................................... - 2,031 - 2,018 Convertible securities........................................... - 3,042 - 3,926 ------- ------- ----------- ------- Dilutive potential common shares............................... - 7,625 - 9,044 ------- ------- ----------- ------- Weighted average shares outstanding for diluted earnings per share.................................................. 325,259 331,201 326,602 331,155 ======= ======= ======= =======
There were no dilutive common stock equivalents during the 2000 periods because of the net loss realized by the Company during such periods. BUSINESS SEGMENTS We manage our business operations through two segments, based on the products offered, in addition to the corporate segment. 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; home equity loans; 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. 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. Fee-based activities include services performed for other companies, including: (i) investment management; and (ii) insurance product marketing. 13 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Corporate segment. Our corporate segment includes certain investment activities, such as our venture capital investment in the wireless communication company, Tritel, and our ownership interest in the riverboat casino in Lawrenceberg, Indiana. In addition, the corporate segment includes interest expense related to the Company's corporate debt, special corporate charges and other income and expenses. Corporate expenses are net of charges to our subsidiaries for services provided by the corporate operations. Segment operating information was as follows:
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Revenues: Insurance and fee-based segment: Insurance policy income: Annuities..................................................... $ 34.2 $ 30.5 $ 67.2 $ 54.1 Supplemental health........................................... 533.5 513.8 1,060.6 1,029.7 Life.......................................................... 236.3 223.5 459.6 443.1 Individual and group major medical............................ 229.7 217.5 458.8 427.2 Other......................................................... 38.7 34.7 74.9 73.3 Net investment income (a)....................................... 500.1 550.5 1,043.4 1,064.5 Fee revenue and other income (a)................................ 35.1 32.2 65.9 59.4 Net losses from sale of investments (a)......................... (118.2) (22.9) (153.5) (21.9) -------- -------- --------- -------- Total insurance and fee-based segment revenues.............. 1,489.4 1,579.8 3,076.9 3,129.4 -------- -------- --------- -------- Finance segment: Net investment income: Interest-only securities (a).................................. 28.6 47.4 56.1 91.1 Manufactured housing.......................................... 109.3 22.4 191.4 41.4 Mortgage services............................................. 154.8 25.5 284.4 46.5 Consumer/credit card.......................................... 108.0 44.5 204.4 77.8 Commercial.................................................... 62.4 29.0 115.3 49.0 Other (a)..................................................... 16.6 11.9 37.7 25.5 Gain on sale: Securitization transactions: Manufactured housing........................................ - 93.5 - 210.2 Mortgage services........................................... - 63.9 - 138.0 Consumer/credit card........................................ - 4.6 - 4.6 Commercial.................................................. - 10.2 - 18.6 Other....................................................... - (2.8) - (2.8) Other loan sales - mortgage services.......................... 2.6 - 2.6 - Fee revenue and other income.................................... 94.9 87.6 194.1 170.2 -------- -------- --------- -------- Total finance segment revenues.............................. 577.2 437.7 1,086.0 870.1 -------- -------- --------- -------- Corporate: Net investment income........................................... 14.5 11.1 23.7 20.6 Venture capital income (loss) related to investment in Tritel... (101.9) - 3.2 - Other........................................................... (2.6) (.1) (2.6) (.1) -------- -------- --------- -------- Total corporate segment revenues (losses)................... (90.0) 11.0 24.3 20.5 -------- -------- --------- --------- Eliminations...................................................... (11.4) (4.8) (16.1) (9.7) -------- -------- -------- --------- Total revenues.............................................. 1,965.2 2,023.7 4,171.1 4,010.3 -------- -------- -------- --------- Expenses: Insurance and fee-based segment: Insurance policy benefits....................................... 1,019.2 920.5 2,086.7 1,810.2 Amortization.................................................... 213.6 152.4 382.1 303.0 Interest expense................................................ 5.0 16.6 10.0 28.4 Other operating costs and expenses.............................. 210.3 191.5 433.0 373.6 -------- -------- -------- --------- Total insurance and fee-based segment expenses................ 1,448.1 1,281.0 2,911.8 2,515.2 -------- -------- -------- ---------
(continued) 14 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- (continued from previous page)
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Finance segment: Provision for losses............................................ 84.1 27.2 142.7 48.5 Interest expense................................................ 266.9 69.6 471.4 124.2 Special charges................................................. 63.4 - 63.4 - Impairment charges.............................................. 9.6 71.6 12.1 83.8 Other operating costs and expenses.............................. 198.1 156.9 408.0 317.6 -------- -------- -------- -------- Total finance segment expenses................................ 622.1 325.3 1,097.6 574.1 -------- -------- -------- -------- Corporate: Interest expense on corporate debt.............................. 75.8 44.1 127.8 93.2 Provision for losses............................................ 68.6 - 92.0 - Special charges................................................. 263.8 - 263.8 - General corporate expenses, less charges to subsidiaries for services provided......................................... (24.6) 4.6 (20.4) (28.8) -------- -------- -------- -------- Total corporate segment expenses.............................. 383.6 48.7 463.2 64.4 -------- -------- -------- -------- Eliminations...................................................... (11.4) (4.8) (16.1) (9.7) -------- -------- -------- -------- Total expenses................................................ 2,442.4 1,650.2 4,456.5 3,144.0 -------- -------- -------- -------- Income (loss) before income taxes and minority interest: Insurance operations............................................ 41.3 298.8 165.1 614.2 Finance operations.............................................. (44.9) 112.4 (11.6) 296.0 Corporate interest and other expenses........................... (473.6) (37.7) (438.9) (43.9) -------- -------- -------- -------- Income (loss) before income taxes, minority interest and extraordinary charge.................................. $ (477.2) $ 373.5 $ (285.4) $ 866.3 ======== ======== ======== ======== - -------------------- (a) It is not practicable to provide additional components of revenue by product or service.
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 the first six months of 2000 and 1999, net investment income included $6.6 million and $84.4 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 $103.2 million at June 30, 2000. 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 $59.9 million and $43.4 million during the first six months of 2000 and 1999, respectively. The unamortized premium of the S&P 500 Call Options was $66.7 million at June 30, 2000. 15 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- We periodically use interest-rate swaps to hedge the interest rate risk associated with our borrowed capital. At June 30, 2000, we held instruments having an aggregate notional principal amount of $1.5 billion that effectively converted a portion of our fixed-rate borrowed capital into floating-rate instruments for specified periods of time. The agreements mature in various years through 2005 and have an average remaining life of 2.9 years (the average call date is 2.1 years). We record the difference between the rates as an adjustment to interest expense. During the first six months of 2000, interest expense was increased by $6.0 million as a result of these interest-rate swap agreements. At June 30, 2000, such agreements had a fair value of $(25.8) million, which is not recognized in the consolidated balance sheet because such agreements effectively hedge the interest rate risk associated with portions of the Company's fixed rate debt. During the second quarter of 2000, ratings agencies lowered their ratings on Conseco's debt (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity of Conseco (parent company)"). These actions triggered requirements for Conseco to terminate several swap agreements, or provide cash collateral equal to the current fair value of certain swap agreements. We realized a $38.7 million net investment loss related to the termination of the swap agreements in the second quarter of 2000. In addition, Conseco provided $12.7 million of cash collateral related to certain other swap agreements. If the counterparties of these financial instruments fail to meet their obligations, Conseco may have to recognize a loss. Conseco limits its exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At June 30, 2000, all of the counterparties were rated "A" or higher by Standard & Poor's Corporation. GUARANTEES In conjunction with certain sales of finance receivables, we provided guarantees aggregating approximately $1.6 billion at June 30, 2000. We consider any potential payments related to these guarantees in the projected net cash flows used to determine the value of our interest-only securities. We believe the likelihood of a significant loss from such guarantees is remote. We have guaranteed bank loans totaling $570.2 million to approximately 170 directors, officers and key employees. The funds were used by the participants to purchase approximately 19.0 million shares of Conseco common stock in open market or negotiated transactions with independent parties. Such shares are held by the bank as collateral for the loans. During the second quarter of 2000, Conseco and certain participants in the stock purchase plan refinanced $144.4 million principal amount of the guaranteed bank loans. Conseco granted a security interest in most of its assets to secure the financing of such loans and for a new working capital facility (see "Changes in Corporate Notes Payable"). The bank loans we have guaranteed are scheduled to mature as follows: $144.4 million on September 1, 2000 and $425.8 million on August 30, 2001. The Company is currently negotiating with various financial institutions to refinance or extend the maturity dates of these loans. At June 30, 2000, the guaranteed bank loans exceeded the value of the common stock collateralizing the loans by $385.3 million. All participants have agreed to indemnify Conseco for any loss incurred on their loans. In addition, Conseco has provided loans to participants for interest on the bank loans totaling $64.8 million. We regularly evaluate these guarantees and loans in light of the collateral and the creditworthiness of the participants. In the second quarter of 2000, we established an additional noncash provision of $68.6 million in connection with these guarantees and loans, which was included as a component of the provision for losses. At June 30, 2000, the total reserve for losses on the loan guarantees was $110.9 million (which was established as follows: $68.6 million ($44.6 million after income taxes) in the second quarter of 2000; $23.4 million ($14.7 million after income taxes) in the first quarter of 2000; and $18.9 million ($11.9 million after income taxes) in the fourth quarter of 1999). REINSURANCE The cost of reinsurance ceded totaled $141.2 million and $232.7 million in the first six months of 2000 and 1999, respectively. We deducted this cost from insurance policy income. Conseco is contingently liable for claims reinsured if the assuming company is unable to pay. Reinsurance recoveries netted against insurance policy benefits totaled $141.7 million and $229.1 million in the first six months of 2000 and 1999, respectively. 16 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- INCOME TAXES A reconciliation of the U.S. statutory corporate income tax rate to the effective rate reflected in the consolidated statement of operations is as follows:
Six months ended June 30, ------------------- 2000 1999 ---- ---- U.S. statutory corporate rate.................................................................. (35.0)% 35.0% Nondeductible goodwill amortization............................................................ 6.8 2.1 Other nondeductible expenses................................................................... 5.8 - State taxes.................................................................................... 1.4 2.2 Settlement of tax issues....................................................................... - (3.3) Provision for tax issues and other............................................................. 9.5 (.8) ----- ---- Effective tax rate...................................................................... (11.5)% 35.2% ====== ====
CHANGES IN CORPORATE 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) were as follows (interest rates as of June 30, 2000):
June 30, December 31, 2000 1999 ---- ---- (Dollars in millions) $2.266 billion bank credit facilities (6.91%)................................ $2,256.0 $1,032.0 $155 million collateralized bank credit facility (9.16%)..................... 125.0 - Commercial paper (6.52%)..................................................... 51.7 898.4 Master repurchase agreements due on various dates in 2000 and 2001 (7.89%).............................................................. 2,525.3 1,620.9 Credit facility collateralized by retained interests in securitizations due 2001 (8.62%).............................................................. 525.0 499.0 Medium term notes due September 2002 and April 2003 (6.52%).................. 223.7 226.7 7.875% notes due December 2000............................................... 131.5 150.0 7.6% senior notes due 2001................................................... 118.9 118.9 6.4% notes due 2001 to 2003.................................................. 800.0 800.0 8.5% notes due 2002.......................................................... 450.0 450.0 10.25% senior subordinated notes due 2002.................................... 193.6 193.6 Notes payable due 2003 (7.18%)............................................... 250.0 250.0 8.75% notes due 2004......................................................... 788.0 - 6.8% senior notes due 2005................................................... 250.0 250.0 9.0% notes due 2006.......................................................... 550.0 550.0 Other........................................................................ 94.2 146.6 -------- -------- Total principal amount.................................................. 9,332.9 7,186.1 Unamortized net discount..................................................... 25.4 21.8 -------- -------- Total notes payable and commercial paper................................ $9,307.5 $7,164.3 ======== ======== Total allocated to: Corporate............................................................. $3,628.4 $2,481.8 Finance segment....................................................... 5,679.1 4,682.5 -------- -------- Total notes payable and commercial paper............................ $9,307.5 $7,164.3 ======== ========
17 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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 22, 2000. Borrowings under these facilities averaged $1,332.0 million during the first six months of 2000, at a weighted average interest rate of 6.58 percent. At June 30, 2000, the available borrowings under our bank credit facilities were $40 million and we held approximately $450 million of cash at the parent company level. 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 .43:1 at June 30, 2000); 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 2.86:1 for the period ended June 30, 2000). Our current plans to restructure our finance operations could adversely affect such financial ratios. The interest rates on our bank credit facilities are based on a LIBOR rate plus a margin based on the credit rating of Conseco's senior unsecured notes. During the second quarter of 2000, rating agencies lowered their ratings on Conseco's senior unsecured debt (see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity of Conseco (parent company)"). Accordingly, the weighted average interest rates under these bank credit facilities increased .15 percent. During the second quarter of 2000, we entered into a collateralized bank credit facility which allows us to borrow up to $155 million until September 1, 2000. The interest rate on the new facility is based on LIBOR plus 2.5 percent. The proceeds from the credit facility were used to repay a similar credit facility entered into in April 2000. Conseco granted a collateral interest in most of its assets to secure the new credit facility and a portion of the loans to directors, officers and key employees, guaranteed by Conseco, related to the purchase of shares of Conseco common stock (see "Guarantees"). The covenants of the collateralized bank credit facility and the guarantee related to the directors, officers and key employee loans limit additional collateralized debt of the Company to $50 million, excluding certain collateralized indebtedness (such as the collateralized finance segment indebtedness). This debt is due and is expected to be repaid or refinanced in September 2000. The parent company has debt and guarantees of approximately $1.4 billion which are expected to become due on or before September 30, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity of Conseco (parent company)" for additional information on the alternatives the Company is exploring to meet these obligations and related risks. The covenants of certain of the Company's unsecured debt agreements generally limit the amount of collateralized debt the Company can incur, issue, assume or guarantee, without providing that existing indebtedness is similarly collateralized in terms of ranking, as long as the other indebtedness is collateralized. Such limit does not apply to certain excluded collateralized indebtedness (such as the collateralized finance segment indebtedness) and is equal to 10 percent of consolidated capitalization, as defined. At June 30, 2000, the most restrictive covenant related to collateralized indebtedness (excluding: (i) the aforementioned covenant related to the collateralized bank credit facility and Conseco guarantee; and (ii) $88 million of debt which provides that it will be collateralized equally with any collateralized debt) would have permitted additional collateralized indebtedness of approximately $400 million (excluding the $325 million of collateralized debt and guarantees outstanding at June 30, 2000). The credit facility collateralized by retained interests in securitizations requires the Company's finance subsidiary to maintain various financial ratios, as defined in the agreement, including: (i) an adjusted tangible net worth of at least $1.8 billion (such amount was $2.0 billion at June 30, 2000); (ii) a fixed charge coverage ratio of not less than 1.10:1.0 (such ratio was 1.11:1 at June 30, 2000); (iii) a debt to equity ratio of not more than 12.0:1.0 (such ratio was 9.0:1.0 at June 30, 2000); and (iv) a net worth equal to averaged managed receivables ratio of not less than .0375:1 (such ratio was .0393:1 at June 30, 2000). Our current plans to restructure our finance operations could adversely affect such financial ratios. In connection with the modification of certain master repurchase agreements and other transactions with Lehman described in the note entitled "Special Charges and Recent Events", Conseco Finance agreed that it will not pay dividends until 2001 and then pay such dividends only to the extent certain financial covenants are met. In addition, Conseco Finance agreed that without Lehman's consent, it will limit additional prepayments on the intercompany note payable to 18 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Conseco (with a balance of $2,210.8 million at June 30, 2000) to $50 million, as long as certain financing arrangements with Lehman remain outstanding. Borrowings under our commercial paper program averaged $678.2 million during the first six months of 2000, at a weighted average interest rate of 6.1 percent. The actions by rating agencies which occurred after March 31, 2000 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity of Conseco"), have affected our ability to issue commercial paper. Accordingly, we have curtailed its issuance in favor of borrowing under our bank credit facilities. 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. 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, which expire on September 30, 2000. During the second quarter of 2000, we repurchased: (i) $18.5 million par value of the 7.875 percent notes due 2000 for $16.7 million; and (ii) $12 million par value of the 8.75 percent notes due 2004 for $8.7 million. We recognized an extraordinary gain of $3.2 million (net of income taxes of $1.7 million) related to these repurchases. At June 30, 2000, we had $5.7 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 June 30, 2000, we had borrowed $3.3 billion of the $5.7 billion available 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 $9,136.4 million at June 30, 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 June 30, 2000 was 8.0 percent. CHANGES IN MINORITY INTEREST In April 2000, the Company and the holder of the Redeemable Hybrid Income Overnight Shares ("RHINOS") agreed to the repurchase by the Company of the RHINOS at their $250 million par value. The Company recognized an extraordinary loss of $3.3 million (net of income taxes of $1.8 million) in the second quarter of 2000 related to the redemption. CHANGES IN 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 19 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- cash, and the remainder may be paid in additional Series F shares valued at $19.25 per share. The Series F Preferred Stock ranks senior to the common stock outstanding and has a liquidation preference of $192.50 per share plus all declared and unpaid dividends. In February 1999, we redeemed all $105.5 million (carrying value) of outstanding shares of Preferred Redeemable Increased Dividend Equity Securities, 7% PRIDES Convertible Preferred Stock ("PRIDES") in exchange for 5.9 million shares of Conseco common stock. CHANGES IN COMMON STOCK Changes in the number of shares of common stock outstanding were as follows:
Six months ended June 30, ------------------- 2000 1999 ---- ---- (Shares in thousands) Balance, beginning of period................................................................... 327,679 315,844 Stock options exercised..................................................................... 65 4,718 Issuance of shares.......................................................................... - 3,115 Common shares converted from PRIDES......................................................... - 5,904 Settlement of forward contract and common stock acquired.................................... (4,246) (2,900) Shares issued under employee benefit compensation plans..................................... 1,791 50 ------- ------- Balance, end of period......................................................................... 325,289 326,731 ======= =======
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. cash settlement, transfer of net shares to or from the Buyer, or transfer of net cash to or from the Buyer). We settled the contract in March 2000 by repurchasing the shares held by the Buyer. 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. 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 20 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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. A total of forty-five suits have been filed against the Company in the United States District Court for the Southern District of Indiana. Nineteen of these cases are putative class actions on behalf of persons or entities that purchased the Company's common stock during alleged class periods that generally run from April 1999 through April 2000. Luisi v. Conseco, Inc., et al., Case No. IP00-C-0593-Y/S; Sechrist v. Conseco, Inc., et al., Case No. IP00-C-0585-Y/S; Klein v. Conseco, Inc., et al., Case No. IP00-C-0602-Y/S; Brody v. Conseco, Inc., et al., Case No. IP00-C-0609-Y/S; Dana v. Conseco, Inc., et al., Case No. IP00-C-0623-Y/S; Krim v. Conseco, Inc., et al., Case No. IP00-C-0631-Y/S; Nadaf v. Conseco, Inc., et al., Case No. IP00-C-0628-Y/S; Greiner v. Conseco, Inc., et al., Case No. IP00-C-0639-Y/S (naming as a defendant only one officer/director); Sedgwick v. Conseco, Inc., et al., Case No. IP00-C-0657-Y/S; Irle v. Conseco, Inc., et al., Case No. IP00-C-0746-Y/S; Schwartz v. Conseco, Inc., et al., Case No. IP00-C-0770-Y/S; Leopold v. Conseco, Inc., et al., Case No. IP00-C-0843-Y/S; Slovacek v. Conseco, Inc., et al., Case No. IP00-C-0858-Y/S (naming as a defendant only one officer/director); Swei v. Conseco, Inc., et al., Case No. IP00-C-0839-Y/S (naming as a defendant only one officer/director); Nicholson v. Conseco, Inc., et al., Case No. IP00-C-0826-Y/S; Browne v. Conseco, Inc., et al., Case No. IP00-C-0897-Y/S; Chacharone v. Conseco, Inc., et al., Case No. IP00-C-0885-Y/S; Muhlenfeld v. Conseco, Inc., et al., Case No. IP00-C-0933-Y/S; Young v. Conseco, Inc., et al. (case number pending; originally filed in the United States District Court for the Eastern District Michigan, Case No. 00-72939, and now in the process of transferred by stipulation). Two cases are putative class actions on behalf of persons or entities that purchased the Company's bonds during the same alleged class periods. Waring v. Conseco, Inc., et al., Case No. IP00-C-0793-Y/S; Lutt v. Conseco, Inc., et al., Case No. IP00-C-0905-Y/S. Three cases are putative class actions on behalf of persons or entities that purchased or sold option contracts, not issued by the Company, on the Company's common stock during the same alleged class periods. Syndicated Fin. Servs., Inc. v. Conseco, Inc., et al., Case No. IP00-C-0795-Y/S (naming as a defendant only one officer/director); Joel Mandel v. Conseco, Inc., et al., Case No. IP00-C-0815-Y/S; Avi Mandel v. Conseco, Inc., et al., Case No. IP00-C-0884- Y/S. One case is a putative class action on behalf of persons or entities that purchased the Company's "Feline Pride" convertible preferred stock instruments during the same alleged class periods. Kelly v. Conseco, Inc., et al., Case No. IP00- C-0789-Y/S. With the four exceptions noted, in each of these twenty-five cases two former officers/directors of the Company are named as defendants. 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 the Company and the individual defendants violated the 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 the Company's financial statements false and misleading. The Company believes that these lawsuits are without merit and intends to defend them vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. Eleven of the cases in the United States District Court were filed as purported class actions on behalf of persons or entities that purchased preferred securities issued by various Conseco Financing Trusts, including Conseco Financing Trust V, Griffin v. Conseco, Inc., et al., Case No. IP00-C-0663-Y/S; Stifnagle v. Conseco, Inc., et al., Case No. IP00-C-0754- Y/S (Stifnagle also asserts claims regarding Conseco Financing Trust VII); Gastfriend v. Conseco, Inc., et al., Case No. IP00-C-0883-Y/S; Powers v. Conseco Financing Trust V, et al., Case No. IP00-C-0953-Y/S (also naming Conseco Financing Trusts VI and VII) (each of the preceding make allegations with respect to an August 24, 1998 offering for Conseco Financing Trust V); Gabora v. Conseco, Inc., et al., Case No. IP00-C-0852-Y/S (also naming Conseco Financing Trust VII, but containing allegations relating only to notes issued by the Company on October 18, 1999, unrelated to the Conseco Financing Trusts named); Schmidt v. Conseco, Inc., et al., Case No. IP00-C-0823-Y/S (also naming Conseco Financing Trust VII, but containing allegations relating only to Conseco Financing Trusts VI and VII), Conseco Financing Trust VI, Costello v. Conseco, Inc., et al., Case No. IP00-C-0705-Y/S (October 8, 1998 offering), and Conseco Financing Trust VII, Zinno v. Conseco, Inc., et al., Case No. IP00-C-0622-Y/S; Shapiro v. Conseco, Inc., et al., Case No. IP00-C- 21 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 0650-Y/S; Kosseff v. Conseco, Inc., et al., Case No. IP00-C-0753-Y/S; Harris v. Conseco, Inc., et al., Case No. IP00-C- 0797-Y/S (August 26, 1999 offering). Each of these complaints names as defendants the Company, the relevant trust (except Shapiro and Kosseff), two former officers/directors of the Company, and underwriters for the particular issuance (except Shapiro). The Kosseff complaint also names an officer and all of the Company's directors at the time of issuance of the preferred stock by Conseco Financing Trust VII. In each case, plaintiffs assert claims under Section 11 and Section 15 of the Securities Act of 1933, and the Zinno, Shapiro, Stifnagle, Harris, Gabora, Gastfriend, Powers and Schmidt complaints also assert claims under Section 12(a)(2) of that Act. Gabora and Gastfriend also assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Powers also asserts a claim under Section 10(b) of that Act. In each case, plaintiffs allege that the defendants violated the federal securities laws by, among other things, making false and misleading statements, in Prospectuses and/or Registration Statements related to the issuance of preferred securities by the Trust involved, regarding the current state and future prospects of Conseco Finance (particularly with respect to performance of certain loan portfolios of Conseco Finance) which allegedly rendered the disclosure documents false and misleading. The Company also intends to defend these lawsuits vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. Nine shareholder derivative suits have been filed in United States District Court. Rogney v. Decatur, et al., Case No. IP00-C-0655-Y/S; Fletcher v. Hilbert, et al., Case No. IP00-C-0693-Y/S; Gold v. Decatur, et al., Case No. IP00-C-0747- Y/S; Batcheldor v. Hilbert, Case No. IP00-C-0743-Y/S; Youssef v. Decatur, et al., Case No. IP00-C-0809-Y/S; Gintel v. Hilbert, Case No. IP00-C-0987-Y/S; Frankel v. Coss, et al. (case number pending; originally filed in the Evansville Division of United States District Court for the Southern District of Indiana, Case No. EV00-134-C-Y/H, and now in the process of transfer); Evans v. Hilbert, Case No. IP00-C-1019-Y/S; Marks v. Hilbert, Case No. IP00-C-0877-Y/S. The complaints name as defendants the current directors, certain former directors, certain non-director officers of the Company (in Fletcher), and, alleging aiding and abetting liability, certain banks which allegedly made loans in relation to the Company's "Stock Purchase Plan" (in Batcheldor, Gintel and Evans). The Company is also named as a nominal defendant in each complaint. Plaintiffs allege that the defendants breached their fiduciary duties by, among other things, intentionally disseminating false and misleading statements concerning the acquisition, performance and proposed sale of Conseco Finance, and engaged in corporate waste by causing the Company to guarantee loans that certain officers, directors and key employees of the Company used to purchase stock under the Stock Purchase Plan. Three similar cases have been filed in the Hamilton County Superior Court in Indiana. Schweitzer v. Hilbert, et al., Cause No. 29001-0004CP251; Evans v. Hilbert, et al., Cause No. 29001-0005CP308 (both Schweitzer and Evans name as defendants certain non-director officers); Gintel v. Hilbert, et al., Cause No. 29003-0006CP393 (naming as defendants, and alleging aiding and abetting liability as to, banks which allegedly made loans in relation to the Stock Purchase Plan). The Company believes that these 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 Services, LLC, Washington National Insurance Company and United Presidential Life Insurance Company are currently named defendants in a lawsuit filed in the Circuit Court of Claiborne County, Mississippi, Cause No. CV-99-0106, and captioned "Carla Beaugez, Lois Dearing, Lee Eaton and all other persons identified in the lawsuit v. Conseco, Inc., Conseco Services, Inc., Washington National Company, United Presidential Life Insurance Company and Larry Ratcliff." The claims of the eighty-seven plaintiffs arise out of allegedly wrongful increases of the cost of insurance and decrease in the credited interest rates on universal life policies issued to the plaintiffs by United Presidential Life. The plaintiffs asserted claims including negligent and intentional misrepresentation, fraudulent concealment, fraudulent inducement, common law fraud, and deceptive sales practices. Conseco believes this lawsuit is without merit and is defending it vigorously. The ultimate outcome of this lawsuit 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 1980s and the comparatively lower rates in the 1990s, and 22 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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. We intend to continue defending this action vigorously unless the current settlement discussions and procedures produce a satisfactory outcome. The ultimate outcome of this lawsuit cannot be predicted with certainty. Conseco Finance is a defendant in two arbitration proceedings in South Carolina (Lackey v. Green Tree Financial Corporation, n/k/a Conseco Finance Corp. and Bazzle v. Green Tree Financial Corporation, n/k/a Conseco Finance Corp.) where the arbitrator, over Conseco Finance's objection, allowed the plaintiffs to pursue purported class action claims in arbitration. The two purported arbitration classes consist of South Carolina residents who obtained real estate secured credit from Conseco Finance's Manufactured Housing Division (Lackey) and Home Improvement Division (Bazzle) in the early and mid 1990s, and did not receive a South Carolina specific disclosure form relating to selection of attorneys in connection with the credit transactions. The arbitrator, in separate awards issued on July 24, 2000, awarded a total of $26.8 million in penalties and attorneys' fees. Plaintiffs have filed motions in South Carolina courts to have the awards confirmed as judgments. Conseco Finance intends to vigorously challenge the awards and believes that the arbitrator erred by, among other things, conducting class action arbitrations without the authority to do so and misapplying South Carolina law when awarding the penalties. The ultimate outcome of these proceedings cannot be predicted with certainty. In addition, the Company and its subsidiaries are involved on an ongoing basis in other 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. CONSOLIDATED STATEMENT OF CASH FLOWS The following disclosures supplement our consolidated statement of cash flows:
Six months ended June 30, ------------------ 2000 1999 ---- ---- (Dollars in millions) Cash flows from operating activities: Net income (loss)........................................................................... $(327.3) $ 501.1 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of finance receivables..................................................... (2.6) (368.6) Points and origination fees received.................................................... - 243.2 Interest-only securities investment income.............................................. (56.1) (91.5) Cash received from interest-only securities............................................. 126.5 234.1 Servicing income........................................................................ (55.3) (81.1) Cash received from servicing activities................................................. 63.2 86.1 Provision for losses.................................................................... 234.7 48.5 Amortization and depreciation........................................................... 445.2 344.2 Income taxes............................................................................ (95.0) 122.1 Insurance liabilities................................................................... 347.0 149.3 Accrual and amortization of investment income........................................... (77.2) (96.7) Deferral of cost of policies produced and purchased..................................... (442.8) (386.8) Impairment charges...................................................................... 12.1 83.8 Special charges......................................................................... 138.8 - Minority interest....................................................................... 115.0 93.0 Net investment losses................................................................... 153.5 21.9 Other................................................................................... (60.8) (105.3) Payment of taxes in settlement of prior years........................................... - (85.1) ------- ------- Net cash provided by operating activities............................................... $ 518.9 $ 712.2 ======= =======
23 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------
Six months ended June 30, ------------------ 2000 1999 ---- ---- (Dollars in millions) Non-cash items not reflected in the consolidated statement of cash flows: Issuance of common stock under stock option and employee benefit plans....................... $ - $ 2.1 Issuance of convertible preferred shares..................................................... 4.1 - Issuance of warrants to Lehman............................................................... 48.1 - Issuance of warrants to General Electric Corporation......................................... 21.0 - Tax benefit related to the issuance of common stock under employee benefit plans............. - 24.4 Conversion of preferred stock into common stock.............................................. - 105.5
SPECIAL CHARGES AND RECENT EVENTS During the second quarter of 2000, the Company incurred the following charges which are further described in the paragraphs which follow (dollars in millions): Advisory fees and warrant paid and/or issued to Lehman and other investment banks................ $117.1 Exit from subprime automobile and bankcard business.............................................. 58.5 Executive termination payment.................................................................... 72.5 Chief Executive Officer signing payment.......................................................... 45.0 Warrants granted to General Electric Company..................................................... 21.0 Other .......................................................................................... 13.1 ------ Special charges before income tax benefit................................................. 327.2 Income tax benefit related to special charges.................................................... (98.6) ------ Special charges, net of income tax benefit................................................ $228.6 ======
Lehman transactions In May 2000, we sold approximately $1.3 billion of finance receivables to Lehman and its affiliates for cash and a right to share in future profits from a subsequent sale or securitization of the assets sold. We paid a $25.0 million transaction fee to Lehman in conjunction with the sale, which was included in special charges. Such loans were sold to Lehman at a value which approximated net book value, less the fee paid to Lehman. During the second quarter of 2000, we repurchased approximately $.7 billion of the finance receivables sold to Lehman. These finance receivables were subsequently included in securitization transactions structured as financings. The cost of the finance receivables purchased from Lehman did not differ materially from the book value of the loans prior to their sale to Lehman. Lehman has also amended its master repurchase financing facilities with our finance operations to expand the types of assets financed. As partial consideration for the financing transaction, Lehman received a warrant, with a nominal exercise price, for five percent of the common stock of Conseco Finance. 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 warrant permits cash settlement at fair value at the option of the holder of the warrant, it has been 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 Conseco Finance. The initial $48.1 million estimated value of the warrant was recognized as an expense during the second quarter of 2000. 24 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- We also paid Lehman $20.0 million in fees for its efforts to form an investor group to purchase Conseco Finance. In addition, the Company paid other investment banks and financial institutions $24.0 million in advisory fees related to the potential sale of Conseco Finance and consultation regarding various other transactions. In connection with the transaction with Lehman, the intercompany demand note from Conseco Finance to Conseco was replaced with a one-year term note and Conseco Finance repaid $450.0 million of this note. At June 30, 2000, the one-year term note had a balance of $2,210.8 million. Conseco Finance agreed that without Lehman's consent, it will limit additional prepayments on this note to $50 million, as long as certain financing arrangements with Lehman remain outstanding. In addition, Conseco Finance has agreed that it will not pay dividends until 2001 and then pay such dividends only to the extent certain financial covenants are met. In 1999, the parent company contributed certain assets then having a book value of approximately $300 million to a subsidiary of Conseco Finance in exchange for additional shares of Conseco Finance common stock. The stock of this subsidiary was distributed back to Conseco in 2000 concurrently with the Lehman transaction at book value. Exit from subprime automobile and bankcard business Late in the second quarter of 2000, we decided to terminate the operations of our subprime automobile financing and servicing companies. A binding sale agreement for the operation's finance receivables was entered into on June 28, 2000. In addition, the Company sold substantially all of its bankcard (Visa and Mastercard) portfolio. We recognized a net loss on these sales of $58.5 million. Executive Termination On April 28, 2000, Conseco and Stephen C. Hilbert, the Company's former Chairman and Chief Executive Officer, entered into an agreement pursuant to which Mr. Hilbert's employment was terminated. As contemplated by the terms of his employment agreement, Mr. Hilbert received: (i) $72.5 million (prior to required withholdings for taxes), an amount equal to five times his salary and the non-discretionary bonus amount (as defined in his employment agreement) for this year; less (ii) the amount due under a secured loan of $23 million, plus accrued interest, made to Mr. Hilbert on April 6, 2000. Mr. Hilbert also received the bonus of $3,375,000 payable under his employment agreement for the first quarter of 2000. Conseco agreed to continue to treat Mr. Hilbert as though he were an employee/participant for purposes of the guaranteed bank loans and the loans for interest on such loans pursuant to the stock purchase program. Conseco also entered into a consulting agreement with Mr. Hilbert pursuant to which Mr. Hilbert has agreed to provide consulting services up to an average of 25 hours per month for a period of three years. Mr. Hilbert also agreed not to compete with Conseco during the term of the consulting agreement. On April 27, 2000, Mr. Hilbert was granted options to purchase an aggregate of 2,000,000 shares of Conseco common stock at a price of $5.75 per share (the average of the high and low sales prices on the New York Stock Exchange on such date). The options expire on April 26, 2003. On April 28, 2000, Conseco and Rollin M. Dick, the Company's former Chief Financial Officer, entered into an agreement pursuant to which Mr. Dick's employment was terminated. As contemplated by the terms of his employment agreement, Conseco agreed to pay Mr. Dick his salary of $250,000 per year through December 31, 2001, and he also received the bonus of $187,500 payable under his employment agreement for the first quarter of 2000. Conseco also agreed to continue to treat Mr. Dick as though he were an employee/participant for purposes of the guaranteed bank loans and the loans for interest on such loans pursuant to the stock purchase program. Conseco also entered into a consulting agreement with Mr. Dick pursuant to which Mr. Dick has agreed to provide consulting services up to an average of 25 hours per month for a period of three years. Mr. Dick also agreed not to compete with Conseco during the term of the consulting agreement. On April 27, 2000, Mr. Dick was granted options to purchase an aggregate of 600,000 shares of Conseco common stock at a price of $5.75 per share. The options expire on April 26, 2003. Executive Hiring On June 28, 2000, the Company hired Gary C. Wendt as its Chief Executive Officer. Pursuant to the terms of his employment agreement, Mr. Wendt received a payment of $45 million (prior to required withholdings for taxes) and was 25 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- granted options to purchase an aggregate of 10,000,000 shares of Conseco common stock at a price of $5.875 per share (the average of the high and low sales price on the New York Stock Exchange on the date on which the substantial terms of Mr. Wendt's employment were agreed to). The options vest over the next five years and expire on June 28, 2010. The Company also issued 3,200,000 shares of restricted stock to Mr. Wendt. The restrictions on the stock lapse if Mr. Wendt remains employed by Conseco through June 30, 2002, or upon a "change in control" of the Company. The value of the restricted shares ($18.8 million) will be recognized as an expense to the Company over the two year period ending June 30, 2002. Mr. Wendt is also being provided certain supplemental retirement, insurance and other benefits under the terms of his employment agreement. In conjunction with Mr. Wendt's hiring and his release from noncompete provisions of a prior agreement, the Company issued a warrant to a subsidiary of General Electric Company to purchase 10,500,000 shares of Conseco common stock at a purchase price of $5.75 per share. The estimated value of the warrant ($21.0 million) was recognized as a special charge in the second quarter of 2000. 26 CONSECO, INC. AND SUBSIDIARIES -------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In this section, we review Conseco's consolidated results of operations for the three and six months ended June 30, 2000 and 1999, and significant changes in our consolidated financial condition. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes. The parent company has debt and guarantees of approximately $1.4 billion which are expected to become due on or before September 30, 2000. Because of the time required to complete the sale of assets and other contemplated activities described in the paragraph which follows, extension of the Company's bank credit facilities will be required if the Company is to meet its September debt maturities. The Company is currently in discussions with its bank lenders and management is optimistic appropriate extensions can be negotiated. However, there can be no assurance that these negotiations will be successful, or as to the amount, maturity, cost or terms associated with any such extension. See "Liquidity of Conseco (parent company)." On July 27, 2000, we announced several courses of action with respect to Conseco Finance, as well as an asset disposition program with respect to certain non-strategic assets held at the parent company level, which are designed to allow us to reduce parent company debt over time. These actions with respect to Conseco Finance, include: (i) the sale, closing or runoff of five units (i.e., asset-based lending, vendor finance, bankcards, transportation and park construction); (ii) efforts to better utilize existing assets so as to increase cash; and (iii) cost savings and restructuring of ongoing businesses such as the streamlining of the field force in the manufactured housing and home equity lending divisions. The Company believes these contemplated actions offer better opportunities than the previously announced plan to explore the sale of Conseco Finance and are designed to provide a business model which will result in positive cash flow at Conseco Finance. In addition, we plan to sell certain non-strategic assets, such as our investment in the wireless communication company, Tritel, our interest in the riverboat casino in Lawrenceberg, Indiana, and our subprime auto loan portfolio. The Company believes the sale of non-strategic assets and the actions contemplated at Conseco Finance will generate cash proceeds of approximately $2.0 billion over the next 12 to 15 months. We are already well underway with these actions, and we have completed the sale of the bankcard business and our subprime auto loan portfolio, generating cash proceeds of over $300 million. However, no assurance can be provided as to the timing, proceeds, or other terms related to the possible disposition of assets, the timing or extent of the cost savings to be achieved, or the amount of the restructuring or other charges to be incurred with respect to these actions. Furthermore, the Company's ability to use cash generated from the actions being undertaken at Conseco Finance is substantially limited by restrictions in agreements with Lehman. In connection with the negotiations with our banks relating to the extension of the maturity dates of our debt, we are also engaged in discussions with Lehman concerning a modification of these restrictions and are optimistic an acceptable modification can be obtained. However, there can be no assurance that these negotiations will be successful, or as to the terms of any such modification. See the note entitled "Changes in Corporate Notes Payable and Commercial Paper." Consolidated results and analysis The net loss of $404.7 million in the second quarter of 2000, or $1.25 per diluted share, included: (i) net investment losses (including related costs, amortization and taxes) of $71.3 million, or 22 cents per share; (ii) special and impairment charges of $304.7 million, or 94 cents per share; and (iii) an extraordinary charge (net of taxes) of $.1 million, or nil cents per share, related to the early retirement of debt. Net income of $213.3 million in the second quarter of 1999, or 64 cents per diluted share, included: (i) net investment losses of $18.8 million, or 6 cents per share; and (ii) an impairment charge of $45.1 million, or 14 cents per share, to reduce the value of interest-only securities and servicing rights. The aforementioned special and impairment charges are explained in more detail in the notes to the accompanying consolidated financial statements. The net loss of $327.3 million in the first six months of 2000, or $1.02 per diluted share, included: (i) net investment losses (including related costs, amortization and taxes) of $84.6 million, or 26 cents per share; (ii) special and impairment charges of $321.0 million, or 98 cents per share; and (iii) an extraordinary charge (net of taxes) of $.1 million, or nil cents per share, related to the early retirement of debt. Net income of $501.1 million in the first six months of 1999, or $1.51 per diluted share, included: (i) net investment losses of $24.7 million, or 8 cents per share; and (ii) an impairment charge of $52.8 million, or 16 cents per share, to reduce the value of interest-only securities and servicing rights. The aforementioned special and impairment charges are explained in more detail in the notes to the accompanying consolidated financial statements. Total revenues in the second quarters of 2000 and 1999 included net investment losses of $118.2 million and $22.9 million, respectively. Excluding net investment losses, total revenues were $2,083.4 million in the second quarter of 2000, up 1.8 percent from $2,046.6 million in the second quarter of 1999. Total revenues in the first six months of 2000 and 27 CONSECO, INC. AND SUBSIDIARIES -------------------- 1999 included net investment losses of $153.5 million and $21.9 million, respectively. Excluding net investment losses, total revenues were $4,324.6 million in the first six months of 2000, up 7.3 percent from $4,032.2 million in the first six months of 1999. 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 and six months ended June 30, 2000 and 1999 The following tables and narratives summarize our results by segment.
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Operating earnings (loss): Operating income of segments before income taxes and minority interest: Insurance and fee-based operations............................ $ 150.5 $327.8 $ 295.3 $ 652.2 Finance operations............................................ 28.1 184.0 63.9 379.8 ------- ------ ------- -------- Subtotal for: (i) insurance and fee-based operations; and (ii) finance operations................................ 178.6 511.8 359.2 1,032.0 ------- ------ ------- -------- Corporate operations: Venture capital income (loss) related to investment in Tritel, net of amortization and other expenses............ (75.5) - .6 - Interest expense on corporate debt.......................... (75.8) (44.1) (127.8) (93.2) Other, net.................................................. 10.1 6.4 44.1 49.3 ------- ------ ------- -------- Subtotal for corporate operations......................... (141.2) (37.7) (83.1) (43.9) ------- ------ ------- -------- Operating income before income taxes and minority interest...................................... 37.4 474.1 276.1 988.1 Income taxes related to operating income.......................... 30.3 166.6 123.0 349.0 ------- ------ ------- -------- Operating income before minority interest................. 7.1 307.5 153.1 639.1 Minority interest................................................. 35.7 30.3 74.7 60.5 ------- ------ ------- -------- Operating earnings (loss)................................. (28.6) 277.2 78.4 578.6 Nonoperating items: Net investment losses, net of tax and other items................. (71.3) (18.8) (84.6) (24.7) Special and impairment charges, net of taxes...................... (304.7) (45.1) (321.0) (52.8) Extraordinary charge, net of taxes................................ (.1) - (.1) - ------- ------ ------- -------- Net income (loss)......................................... $(404.7) $213.3 $(327.3) $ 501.1 ======= ====== ======= ========
28 CONSECO, INC. AND SUBSIDIARIES -------------------- Insurance and fee-based operations
Three months ended Six months ended June 30, June 30, ------------------- ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Premiums and asset accumulation product collections: Annuities........................................................... $ 633.6 $ 772.3 $1,279.2 $1,283.3 Supplemental health................................................. 574.5 553.2 1,160.7 1,108.9 Life................................................................ 245.0 224.5 487.2 466.1 Individual and group major medical.................................. 240.2 206.9 473.7 416.0 Mutual funds........................................................ 143.1 82.8 432.7 165.0 -------- -------- -------- -------- Total premiums and asset accumulation product collections....... $1,836.4 $1,839.7 $3,833.5 $3,439.3 ======== ======== ======== ======== Average liabilities for insurance and asset accumulation products: Annuities: Mortality based................................................... $ 451.1 $ 691.5 $ 453.5 $ 689.3 Equity-linked..................................................... 2,562.2 1,581.1 2,483.5 1,485.8 Deposit based..................................................... 9,812.2 10,856.5 10,022.9 10,949.2 Separate accounts and investment trust liabilities.................. 2,718.5 1,622.5 2,588.7 1,546.8 Health.............................................................. 5,220.4 4,711.4 5,151.3 4,706.7 Life: Interest sensitive................................................ 4,269.8 4,076.2 4,257.5 4,103.9 Non-interest sensitive............................................ 2,703.7 2,855.3 2,716.8 2,846.8 --------- --------- --------- ---------- Total average liabilities for insurance and asset accumulation products, net of reinsurance ceded............... $27,737.9 $26,394.5 $27,674.2 $26,328.5 ========= ========= ========= ========= Revenues: Insurance policy income............................................. $ 1,072.4 $ 1,020.0 $ 2,121.1 $ 2,027.4 Net investment income: General account invested assets................................... 489.3 506.1 994.2 993.9 Equity-indexed products based on S&P 500 Index.................... (16.1) 50.8 6.6 84.4 Amortization of cost of S&P 500 Call Options...................... (31.1) (23.3) (59.9) (43.4) Separate account assets........................................... 58.0 16.9 102.5 29.6 Fee revenue and other income........................................ 35.1 32.2 65.9 59.4 --------- --------- --------- --------- Total revenues (a).............................................. 1,607.6 1,602.7 3,230.4 3,151.3 --------- --------- --------- --------- Expenses: Insurance policy benefits........................................... 832.5 681.0 1,664.2 1,350.6 Amounts added to policyholder account balances: Annuity products other than those listed below.................... 151.2 173.4 319.1 347.5 Equity-indexed products based on S&P 500 Index.................... (22.5) 49.2 .9 82.5 Separate account liabilities...................................... 58.0 16.9 102.5 29.6 Amortization related to operations.................................. 222.6 146.3 405.4 286.9 Interest expense on investment borrowings........................... 5.0 16.6 10.0 28.4 Other operating costs and expenses.................................. 210.3 191.5 433.0 373.6 --------- --------- --------- --------- Total benefits and expenses (a)................................. 1,457.1 1,274.9 2,935.1 2,499.1 --------- --------- ---------- ---------- Operating income before income taxes and minority interest...... 150.5 327.8 295.3 652.2 Net investment losses, including related costs and amortization........................................................ (109.2) (29.0) (130.2) (38.0) --------- --------- --------- --------- Income before income taxes and minority interest................ $ 41.3 $ 298.8 $ 165.1 $ 614.2 ========= ========= ========= =========
29 CONSECO, INC. AND SUBSIDIARIES -------------------- (continued from previous page)
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) 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 (b)................... 4.72% 4.71% 4.75% 4.57% 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........................................... 2.96% 2.92% 3.06% 2.90% Health loss ratios: All health lines: Insurance policy benefits....................................... $652.6 $514.9 $1,287.2 1,018.0 Loss ratio...................................................... 81.49% 67.07% 80.63% 66.38% Medicare Supplement: Insurance policy benefits....................................... $170.5 $162.4 $351.1 $321.6 Loss ratio...................................................... 72.21% 68.76% 74.59% 68.68% Long-Term Care: Insurance policy benefits....................................... $191.8 $119.6 $343.6 $235.1 Loss ratio...................................................... 94.15% 65.22% 85.17% 63.33% Specified Disease: Insurance policy benefits....................................... $64.4 $55.0 $141.9 $110.9 Loss ratio...................................................... 68.75% 58.28% 76.07% 58.30% Major Medical: Insurance policy benefits....................................... $193.2 $152.6 $390.7 $300.5 Loss ratio...................................................... 84.84% 71.30% 86.09% 71.46% Other: Insurance policy benefits....................................... $32.7 $25.3 $59.9 $49.9 Loss ratio...................................................... 84.40% 73.16% 79.95% 68.08% - ---------- (a) Revenues exclude net investment gains (losses); benefits and expenses exclude amortization related to realized gains. (b) Investment income includes income from general account assets only. Average insurance liabilities exclude liabilities related to separate accounts, investment trust and reinsurance ceded.
Premiums and asset accumulation product collections were $1.8 billion in the second quarter of 2000, down .2 percent from 1999. Premiums and asset accumulation product collections were $3.8 billion in the first six months of 2000, up 11 percent over 1999. Recent rating actions have adversely affected the marketing of our insurance products. See "Premium and Asset Accumulation Product Collections" for further analysis. Average liabilities for insurance and asset accumulation products, net of reinsurance receivables, were $27.7 billion in the second quarter of 2000, up 5.1 percent over 1999. Average liabilities for insurance and asset accumulation products, net of reinsurance receivables, were $27.7 billion in the first six months of 2000, up 5.1 percent over 1999. 30 CONSECO, INC. AND SUBSIDIARIES -------------------- 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; and the income (loss), cost and change in the fair value of S&P 500 Call Options related to equity- indexed products) was $489.3 million in the second quarter of 2000, down 3.3 percent from the same period in 1999 and was $994.2 million in the first six months of 2000, virtually equal with the same period in 1999. The average balance of general account invested assets in the second quarter of 2000 was comparable to the same period in 1999. The yield on these assets was 7.4 percent in 2000 and 7.7 percent in 1999. The average balance of general account invested assets increased by 1.4 percent in the first six months of 2000 to $26.4 billion compared to the same period in 1999. The yield on these assets decreased by .2 percentage points to 7.4 percent during the first six months of 2000. 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 the second quarter of 2000, we recorded losses from the S&P 500 Options of $16.1 million and deducted amounts from policyholders' account balances of the equity- indexed products of $22.5 million. During the first six months of 2000, we recorded income from the S&P 500 Options of $6.6 million and added amounts to policyholders' account balances of the equity-indexed products of $.9 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 be 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 as a result of growth in both of these businesses. Insurance policy benefits increased in the first six months of 2000 as a result of the factors summarized in the explanations for loss ratio fluctuations related to specific products which follows. Loss ratios for Medicare supplement products increased in 2000 for the following reasons: (i) our year end reserves developed adversely; (ii) the mix of our Medicare supplement business in 2000 includes a higher percent of less profitable standard Medicare supplement policies than the prior year (and a lower percent of more profitable nonstandard policies that we are no longer able to offer to new policyholders); and (iii) Medicare supplement business has recently experienced higher persistency among older blocks of business. While the Company benefits from the additional profits earned on the larger blocks of business, the loss ratio will generally increase since the older policies have higher claim costs. 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 2000, reflecting: (i) unfavorable claims experience; (ii) refinements made to the reserve estimation process; and (iii) the effects of the asset accumulation phase of these products. The net cash flows from our long-term care products generally result in the accumulation of amounts in the early 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 31 CONSECO, INC. AND SUBSIDIARIES -------------------- accumulated. In order to improve the profitability of the long-term care product line, we are currently selling products with higher margins and we have continued to apply for appropriate rate increases on older blocks of business. As a result of recent unfavorable claim experience in our long-term care insurance lines, we closely reviewed our reserving methodologies. Certain changes in estimates were made that adversely affected the loss ratio in the second quarter of 2000. The 2000 loss ratios for our specified disease policies reflect refinements we made to the reserve estimation process during the first quarter of 2000 and changes in estimates of period end claim liabilities. The 2000 loss ratios for major medical policies reflects unfavorable claims experience. We plan to increase our sales focus on the individual major medical product lines while decreasing our group blocks of business. Since individual products are expected to be more profitable than group products, this 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 other products fluctuate due to the smaller size of these blocks of business. While the increase in the second quarter of 2000 reflects worse than expected experience, the loss ratios on this business over longer periods of time have generally been within our expectations. Amounts added to policyholder account balances for annuity products decreased by 13 percent in the second quarter of 2000 to $151.2 million and decreased by 8.2 percent in the first six months of 2000 to $319.1 million, primarily due to a smaller block of this type of annuity business in force, on the average, in the first six months of 2000. In addition, the average crediting rate on these annuities decreased slightly. The weighted average crediting rate for these annuity liabilities was 4.5 percent and 4.6 percent in the first six months of 2000 and 1999, respectively. Amortization related to operations includes amortization of: (i) the cost of policies produced; (ii) the cost of policies purchased; and (iii) goodwill. Amortization has increased in relationship to the total account balances subject to amortization. In addition, amortization increased in the second quarter of 2000 as a result of adjustments to the surrender and lapse assumptions to reflect our current estimate of future experience related to certain blocks of business. Interest expense on investment borrowings decreased along with our investment borrowing activities. Investment borrowings averaged approximately $369.3 million during the first six months of 2000 compared to $1,111.9 million during the same period of 1999. Borrowing rates increased 30 basis points to 5.4 percent during the first six months of 2000. Other operating costs and expenses increased in 2000 primarily as a result of our increased business and marketing initiatives. Such increased expenses are consistent with the increase in the ratio of operating 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 (3.06 percent for the six months ended June 30, 2000, compared to 2.90 percent for the same period in 1999). Net investment gains (losses), including related costs and amortization, fluctuate from period to period. During the first six months of 2000, we recorded $68.2 million of writedowns of fixed maturity securities and other invested assets as a result of conditions which caused us to conclude a decline in fair value of the investment was other than temporary. In addition, as described in the note to the consolidated financial statements entitled "Standard & Poor's 500 Index Call Options and Interest Rate Swap Agreements" we realized a $38.7 million loss related to the termination of certain swap agreements during the first six months of 2000. When we sell securities at a gain (loss) and reinvest the proceeds at a different yield, we increase (reduce) the amortization of cost of policies purchased and cost of policies produced in order to reflect the change in future yields. Sales of fixed maturity investments resulted in a reduction in the amortization of the cost of policies purchased and the cost of policies produced of $9.0 million and $23.3 million in the second quarter of 2000 and the first six months of 2000, respectively, and resulted in additional amortization of $6.1 million and $16.1 million in the second quarter of 1999 and the first six months of 1999, respectively. 32 CONSECO, INC. AND SUBSIDIARIES -------------------- Finance operations
Three months ended Six months ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Contract originations: Manufactured housing............................................... $ 1,478.7 $ 1,983.6 $ 2,662.4 $ 3,394.7 Mortgage services.................................................. 1,471.1 1,931.7 3,015.3 3,369.3 Consumer/credit card............................................... 1,066.4 742.6 1,840.9 1,281.2 Commercial......................................................... 1,404.1 2,152.0 2,910.8 4,138.9 --------- --------- --------- --------- Total............................................................ $ 5,420.3 $ 6,809.9 $10,429.4 $12,184.1 ========= ========= ========= ========= Sales of finance receivables: Manufactured housing............................................... $ 597.8 $ 1,681.1 $ 597.8 $ 3,481.1 Home equity/home improvement....................................... 824.0 1,687.7 824.0 2,648.8 Consumer/equipment................................................. - 600.0 - 600.0 Commercial and retail revolving credit............................. 409.0 92.5 409.0 92.5 Retained bonds..................................................... - (348.2) - (371.4) --------- --------- --------- --------- Total............................................................ $ 1,830.8 $ 3,713.1 $ 1,830.8 $ 6,451.0 ========= ========= ========= ========= Managed receivables (average): Manufactured housing............................................... $25,518.4 $22,362.8 $25,198.3 $21,905.1 Mortgage services.................................................. 13,340.2 9,725.0 12,962.4 9,205.3 Consumer/credit card............................................... 3,971.6 3,101.0 3,924.2 3,044.7 Commercial......................................................... 5,043.2 5,551.5 5,082.4 5,336.4 --------- --------- --------- --------- Total............................................................ $47,873.4 $40,740.3 $47,167.3 $39,491.5 ========= ========= ========= ========= Revenues: Net investment income: Finance receivables and other.................................... $ 451.1 $ 133.3 $ 833.2 $ 240.2 Interest-only securities......................................... 28.6 47.4 56.1 91.1 Gain on sale: Securitization transactions...................................... - 169.4 - 368.6 Whole-loan sales................................................. 2.6 - 2.6 - Fee revenue and other income....................................... 94.9 87.6 194.1 170.2 --------- --------- --------- --------- Total revenues................................................... 577.2 437.7 1,086.0 870.1 --------- --------- --------- --------- Expenses: Provision for losses............................................... 84.1 27.2 142.7 48.5 Finance interest expense........................................... 266.9 69.6 471.4 124.2 Other operating costs and expenses................................. 198.1 156.9 408.0 317.6 --------- --------- --------- --------- Total expenses................................................... 549.1 253.7 1,022.1 490.3 --------- --------- --------- --------- Operating income before special charges, impairment charges and income taxes............................................... 28.1 184.0 63.9 379.8 Special charges....................................................... 63.4 - 63.4 - Impairment charges.................................................... 9.6 71.6 12.1 83.8 --------- --------- --------- --------- Income (loss) before income taxes................................ $ (44.9) $ 112.4 $ (11.6) $ 296.0 ========= ========= ========= =========
33 CONSECO, INC. AND SUBSIDIARIES -------------------- 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 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 SFAS 125, 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. After the March 31, 2000 announcement that we planned to explore the sale of Conseco Finance and other events described elsewhere herein, it was difficult to complete new public securitization transactions for a period of time. However, these markets eventually became available to the Company. During the second quarter of 2000, we completed five transactions, securitizing over $2.5 billion of finance receivables. In May 2000, we sold $1.3 billion of finance receivables to Lehman. The proceeds from such sale were used to repay various warehouse credit lines, creating increased warehousing capacity for Conseco Finance. Lehman also amended its repurchase and other financing facilities with Conseco Finance to expand the types of assets financed. See the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events" for a further description of the transactions with Lehman. We continue to be able to finance loans through: (i) our warehouse and bank credit facilities; (ii) the sale of securities through securitization transactions; and (iii) whole-loan sales. Loan originations in the second quarter of 2000 were $5.4 billion, down 20 percent from 1999. Loan originations in the first six months of 2000 were $10.4 billion, down 14 percent over 1999. We believe there are several factors which contribute to the decrease in loan originations during the second quarter of 2000. General levels of interest rates have increased, which has resulted in a decrease in the demand for certain finance products. Sales of manufactured housing have also decreased recently. The Company has also limited the origination of certain loans, reflecting the cost and the limitations of our capital and efforts to control our growth. Manufactured housing loan originations decreased by $504.9 million, or 25 percent, in the second quarter of 2000 and by $732.3 million, or 22 percent, during the first six months of 2000. The decrease was primarily due to a decrease in the number of contracts written, which is consistent with the decrease in sales of manufactured housing during the second quarter of 2000. Mortgage services loan originations decreased by $460.6 million, or 24 percent, in the second quarter of 2000 and by $354.0 million, or 11 percent, during the first six months of 2000. The decrease was primarily due to a decrease in the number of contracts written, which is generally consistent with the reduced demand for these products in the rising interest rate environment. Consumer/credit card loan originations increased by $323.8 million, or 44 percent, in the second quarter of 2000 and by $559.7 million, or 44 percent, during the first six months 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. During the second quarter of 2000, we entered into an agreement to sell our bankcard portfolio, which accounted for $203 million of our originations during the six months ended June 30, 2000. 34 CONSECO, INC. AND SUBSIDIARIES -------------------- Commercial loan originations decreased by $747.9 million, or 35 percent, in the second quarter of 2000 and by $1,228.1 million, or 30 percent, during the first six months of 2000. The decrease primarily reflects the sale of certain commercial lines in September 1999, and our decision in early 2000 to significantly limit additional transportation and certain other commercial loans. Sales of finance receivables decreased as a result of the change in the structure of our securitizations. The sales in the second quarter of 2000 include the previously described sale of finance receivables to Lehman and the sale of our bankcard portfolio. 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 $47.9 billion in the second quarter of 2000, up 18 percent over 1999, and to $47.2 billion in the first six months of 2000, up 19 percent over the same period in 1999. 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 238 percent, to $451.1 million, in the second quarter of 2000 and by 247 percent, to $833.2 million, in the first six months 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 13.0 percent and 11.0 percent during the second quarters of 2000 and 1999, respectively, and such weighted average yields were 13.0 percent and 11.3 percent during the first six months 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 40 percent, to $28.6 million, in the second quarter of 2000 and by 38 percent, to $56.1 million, in the first six months 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 12.5 percent and 13.7 percent during the first six months of 2000 and 1999, respectively. As a result of the change in the structure of our securitizations, we will account for future securitizations as secured borrowings and we will not recognize gain-on-sale revenue or additions to interest-only securities from such transactions. 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 only $83.2 million was incurred in the first six months of 1999) due to an impairment charge 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 related to securitization transactions were nil in the 2000 periods, 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 structures. 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 June 30, 2000, we held $468.9 million of such securities which are classified as actively managed fixed maturities. Gain on whole-loan sales totaled $2.6 million during the second quarter of 2000. During the second quarter of 2000, we sold approximately $1.3 billion of finance receivables to Lehman for cash and a right to share in future profits from a 35 CONSECO, INC. AND SUBSIDIARIES -------------------- subsequent sale or securitization of the assets sold. We paid a $25.0 million transaction fee to Lehman in conjunction with the sale which was included in special charges. Such loans were sold to Lehman at a value which approximated net book value, less the fee paid to Lehman. Gain on whole-loan sales excludes the gain realized on the sale of our bankcard portfolio which is included in special charges. 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 8.3 percent, to $94.9 million, in the second quarter of 2000, and by 14 percent, to $194.1 million, in the first six months of 2000. Our net written insurance premiums and other income both grew 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 related to finance operations increased by 209 percent, to $84.1 million, in the second quarter of 2000, and by 194 percent, to $142.7 million, in the first six months of 2000. The increase is principally due to the increase in loans held on our balance sheet. Under the portfolio method (which is used for securitizations structured as collateralized 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 283 percent, to $266.9 million, in the second quarter of 2000, and by 280 percent, to $471.4 million, in the first six months of 2000. Our borrowings grew in order to fund the increase in finance receivables. In addition, our average borrowing rate increased to 7.6 percent in the second quarter of 2000 from 5.4 percent in the second quarter of 1999. Our average borrowing rate during the first six months of 2000 was 7.3 percent compared to 5.6 percent during the first six months 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. 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 26 percent, to $198.1 million, in the second quarter of 2000, and by 28 percent, to $408.0 million, in the first six months of 2000, reflecting: (i) the growth in our servicing portfolio; and (ii) the growth in our loan origination offices and infrastructure. Special charges in the finance segment include: (i) the $25.0 million transaction fee paid to Lehman in conjunction with the previously described sale of $1.3 billion of finance receivables; (ii) the issuance of a warrant valued at $48.1 million related to the modification of the Lehman master repurchase financing facilities; and (iii) the $9.7 million gain realized on the sale of our bankcard portfolio and other items. 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 manuafactured housing loans are determined based on a macroeconomic model developed by the Company with the assisstance 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. 36 CONSECO, INC. AND SUBSIDIARIES -------------------- The Company continually evaluates 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 second quarters of 2000 and 1999, we recognized an impairment charge of $9.6 million and $71.6 million, respectively, to reduce the book value of the interest-only securities and servicing rights. Such impairment charge for the first six months of 2000 and 1999 was $12.1 million and $83.8 million, respectively. Corporate operations
Three months ended Six months ended June 30, June 30, -------------------- ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Corporate operations: Venture capital income (loss) related to investment in Tritel, net of related expenses................................... $ (75.5) $ - $ .6 $ - Interest expense on corporate debt.................................. (75.8) (44.1) (127.8) (93.2) Investment income................................................... 14.5 11.1 23.7 20.6 Other items......................................................... (4.4) (4.7) 20.4 28.7 -------- ------ ------- ------ Operating loss before provision for loss on loan guarantees, special charges, income taxes and minority interest............................................. (141.2) (37.7) (83.1) (43.9) Provision for loss on loan guarantees............................... (68.6) - (92.0) - Special charges..................................................... (263.8) - (263.8) - ------- ------ ------- ------ Loss before income taxes and minority interest.................. $(473.6) $(37.7) $(438.9) $(43.9) ======= ====== ======= ======
Venture capital income (loss) relates to our investment in Tritel, a company in the wireless communication business. The market values of many companies in this sector increased significantly in 1999 and early 2000. 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 the second quarter of 2000, we recognized a venture capital loss of $75.5 million related to this investment (net of a related reduction to expenses of $26.4 million). In the first six months of 2000, we recognized venture capital income of $.6 million related to this investment (net of related expenses of $12.6 million). Interest expense on corporate debt fluctuated due to the increase in the average interest rate on our outstanding debt. The average debt outstanding was $3.0 billion in both the first six months of 2000 and 1999. The average interest rate on such debt was 7.75 percent and 5.87 percent in the first six months of 2000 and 1999, respectively. General levels of interest rates have increased over the last twelve months. In addition, as a result of recent rating agency actions, the interest rates on our bank credit facility and new borrowings has increased (see the note to the consolidated financial statements entitled "Changes in Corporate Notes Payable and Commercial Paper"). Such interest expense includes affiliated interest expense (which is eliminated in consolidation) of: (i) $8.7 million and $2.9 million for the three months ended June 30, 2000 and 1999, respectively; and (ii) $11.8 million and $5.9 million for the six months ended June 30, 2000 and 1999, respectively. Investment income includes the income from our investment in a riverboat casino and miscellaneous other revenues. Other items include general corporate expenses, net of amounts charged to subsidiaries for services provided by the corporate operations. 37 CONSECO, INC. AND SUBSIDIARIES -------------------- 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 2000, we established a provision of $92.0 million (of which $68.6 million was established in the second quarter of 2000) in connection with these guarantees and loans. At June 30, 2000, the total reserve for losses on the loan guarantees was $110.9 million. Special charges in corporate operations include: (i) the advisory fees paid to investment banks of $44.0 million; (ii) the loss related to our exit from the subprime automobile business of $68.5 million; (iii) the amount paid to terminated executive pursuant to his employment agreement of $72.5 million; (iv) the amount paid to newly hired Chief Executive Officer of $45.0 million; (v) the value of warrants issued to release newly hired Chief Executive Officer from a noncompete provision of a prior agreement of $21.0 million; and (vi) other charges of $12.8 million. These charges are described in greater detail in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events". 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. 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. Following several recent events described in the note to the consolidated financial statements entitled "Special Charges and Recent Events" and elsewhere herein, rating agencies lowered their financial strength ratings, and many were placed on review as the agencies analyze the impact of the developing events. Our primary life insurance companies have received the following ratings as of August 10, 2000: (i) a "B++" rating, under review, by A.M. Best Company; (ii) an "A-" rating, from Fitch Rating Company; (iii) a "BBB" financial strength rating, watch negative, from Standard & Poor's; and (iv) a "Baa3" rating, from Moody's Investor Services. The recent rating actions are adversely affecting the marketing and persistency of our insurance products and other asset accumulation products. We are not able to predict the extent to which these or possible additional ratings actions will further affect the marketing and persistency of these products. 38 CONSECO, INC. AND SUBSIDIARIES -------------------- Total premiums and accumulation product collections were as follows:
Three months ended Six months ended June 30, June 30, ------------------- ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (Dollars in millions) Premiums collected by our insurance subsidiaries: Annuities: Equity-indexed (first-year)..................................... $ 173.2 $ 250.6 $ 394.5 $ 438.0 Equity-indexed (renewal)........................................ 10.5 10.8 28.9 27.3 -------- -------- -------- -------- Subtotal - equity-indexed annuities........................... 183.7 261.4 423.4 465.3 -------- -------- -------- -------- Other fixed (first-year)........................................ 159.2 346.7 305.6 517.4 Other fixed (renewal)........................................... 17.7 18.7 34.8 34.5 -------- -------- -------- -------- Subtotal - other fixed annuities.............................. 176.9 365.4 340.4 551.9 -------- -------- -------- -------- Variable (first-year)........................................... 225.7 128.1 443.8 219.5 Variable (renewal).............................................. 47.3 17.4 71.6 46.6 -------- -------- -------- -------- Subtotal - variable annuities................................. 273.0 145.5 515.4 266.1 -------- -------- -------- -------- Total annuities............................................... 633.6 772.3 1,279.2 1,283.3 -------- -------- -------- -------- Supplemental health: Medicare supplement (first-year)................................ 25.4 26.7 52.5 54.3 Medicare supplement (renewal)................................... 206.4 198.6 419.9 403.9 -------- -------- -------- -------- Subtotal - Medicare supplement................................ 231.8 225.3 472.4 458.2 -------- -------- -------- -------- Long-term care (first-year)..................................... 31.3 29.8 62.4 59.2 Long-term care (renewal)........................................ 179.6 171.1 363.6 334.4 -------- -------- -------- -------- Subtotal - long-term care..................................... 210.9 200.9 426.0 393.6 -------- -------- -------- -------- Specified disease (first-year).................................. 10.0 10.0 19.6 19.4 Specified disease (renewal)..................................... 86.1 84.4 172.1 171.1 -------- -------- -------- -------- Subtotal - specified disease.................................. 96.1 94.4 191.7 190.5 -------- -------- -------- -------- Other health (first-year)....................................... 10.4 6.4 18.5 11.6 Other health (renewal).......................................... 25.3 26.2 52.1 55.0 -------- -------- -------- -------- Subtotal - other health....................................... 35.7 32.6 70.6 66.6 -------- -------- -------- -------- Total supplemental health..................................... 574.5 553.2 1,160.7 1,108.9 -------- -------- -------- -------- Life insurance: First-year...................................................... 54.7 42.7 107.3 79.9 Renewal......................................................... 190.3 181.8 379.9 386.2 -------- -------- -------- -------- Total life insurance.......................................... 245.0 224.5 487.2 466.1 -------- -------- -------- -------- Individual and group major medical: Individual (first-year)......................................... 40.5 23.2 73.2 45.3 Individual (renewal)............................................ 62.0 54.8 122.0 114.2 -------- -------- -------- -------- Subtotal - individual......................................... 102.5 78.0 195.2 159.5 -------- -------- -------- -------- Group (first-year).............................................. 18.7 13.1 38.7 22.3 Group (renewal)................................................. 119.0 115.8 239.8 234.2 -------- -------- -------- -------- Subtotal - group.............................................. 137.7 128.9 278.5 256.5 -------- -------- -------- -------- Total major medical........................................... 240.2 206.9 473.7 416.0 -------- -------- -------- -------- Mutual funds (all first year, excludes variable annuities)........... 143.1 82.8 432.7 165.0 -------- -------- -------- -------- Total first-year premiums....................................... 892.2 960.1 1,948.8 1,631.9 Total renewal premiums.......................................... 944.2 879.6 1,884.7 1,807.4 -------- -------- -------- -------- Total collections............................................. $1,836.4 $1,839.7 $3,833.5 $3,439.3 ======== ======== ======== ========
39 CONSECO, INC. AND SUBSIDIARIES -------------------- 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&P 500 Index during each year of their term. We purchase S&P 500 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 were $183.7 million in the second quarter of 2000 compared with $261.4 million in the second quarter of 1999 and were $423.4 million in the first six months of 2000 compared with $465.3 million in the first six months of 1999. 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 decreased by 52 percent, to $176.9 million, in the second quarter of 2000 and by 38 percent, to $340.4 million, in the first six months of 2000. Fixed annuity collections in the second quarter of 1999 included $160.8 million of business reinsured from other insurers. 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 88 percent, to $273.0 million, in the second quarter of 2000 and by 94 percent, to $515.4 million, in the first six months of 2000. 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 increased by 2.9 percent to $231.8 million, in the second quarter of 2000 and by 3.1 percent, to $472.4 million, in the first six months of 2000. Sales of Medicare supplement policies in recent periods have been affected by steps taken to improve profitability by increasing premium rates and changing our commission structure and underwriting criteria. Premiums collected on long-term care policies increased by 5.0 percent, to $210.9 million, in the second quarter of 2000 and by 8.2 percent, to $426.0 million, in the first six months of 2000 due to increases in premium rates and increased sales volume. Premiums collected on specified disease policies in the 2000 periods were comparable to the 1999 periods. Other health products include: (i) various health insurance products that are not currently being actively marketed; and (ii) in 1999, the specialty health insurance products sold to educators. Premiums collected in the 2000 periods were slightly higher than the 1999 periods. 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. Life products are sold through career agents, professional independent producers and direct response distribution channels. Life premiums collected increased by 9.1 percent to $245.0 million in the second quarter of 2000 and by 4.5 percent, to $487.2 million, in the first six months of 2000. In the first six months of 1999, life renewal premiums included $12.6 million of single premium life business acquired in a reinsurance transaction. 40 CONSECO, INC. AND SUBSIDIARIES -------------------- Individual and group major medical products include major medical health insurance products sold to individuals and groups. Group premiums increased by 6.8 percent, to $137.7 million, in the second quarter of 2000 and by 8.6 percent, to $278.5 million, in the first six months of 2000. Individual health premiums collected in the second quarter of 2000 increased 31 percent, to $102.5 million and by 22 percent, to $195.2 million, in the first six months of 2000. Our efforts to secure rate increases and write only profitable major medical business may restrict our ability to grow these premiums in future periods. Mutual fund sales have been very strong in 2000, reflecting our expanded distribution and new marketing programs. We also believe that these sales have been positively impacted by the recent strong investment performance of our funds. LIQUIDITY AND CAPITAL RESOURCES Changes in our consolidated balance sheet between June 30, 2000 and December 31, 1999, reflect: (i) our operating results; (ii) our origination of finance receivables; (iii) the transfer of finance receivables to securitization trusts and sale of notes to investors in transactions accounted for as secured borrowings; (iv) the sale of finance receivables to Lehman; (v) the sale of assets of our subprime automobile and bankcard businesses; (vi) changes in the fair value of actively managed fixed maturity securities and interest-only securities; and (vii) various financing transactions. Financing transactions (described in the notes to the accompanying consolidated financial statements) include: (i) the issuance and repurchase of common stock; and (ii) the issuance and repayment of notes payable and commercial paper. 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 June 30, 2000, 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 $1,907.4 million as a result of this fair value adjustment. The fair value adjustment resulted in a $1,504.3 million decrease in carrying value at year-end 1999, for the same reasons. 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 $462.0 million, or 4.0 percent, to $11.9 billion.
June 30, December 31, 2000 1999 ---- ---- (Dollars in millions) Total capital, excluding accumulated other comprehensive loss: Corporate notes payable and commercial paper......................... $ 3,628.4 $ 2,481.8 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts................................... 2,399.2 2,639.1 Shareholders' equity: Preferred stock................................................... 482.5 478.4 Common stock and additional paid-in capital....................... 2,905.6 2,987.1 Retained earnings................................................. 2,495.0 2,862.3 --------- --------- Total shareholders' equity, excluding accumulated other comprehensive loss.................................... 5,883.1 6,327.8 --------- --------- Total capital, excluding accumulated other comprehensive loss........................................................ 11,910.7 11,448.7 Accumulated other comprehensive loss..................................... (970.7) (771.6) --------- --------- Total capital.................................................. $10,940.0 $10,677.1 ========= =========
Corporate notes payable and commercial paper increased during the first six months of 2000 primarily due to: (i) the settlement of a forward contract described in the note to the accompanying consolidated financial statements entitled "Changes in Common Stock"; (ii) the settlement of certain intercompany accounts with Conseco Finance; (iii) the redemption of $250 million par value of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts; (iv) the acquisition of 41 CONSECO, INC. AND SUBSIDIARIES -------------------- a long-term care insurance marketing organization for $32.9 million; (v) cash required for special charges of $163.4 million; and (vi) an increase in cash and cash equivalents held at the parent company of approximately $450 million. Shareholders' equity, excluding accumulated other comprehensive loss, decreased by $444.7 million in the first six months of 2000, to $5.9 billion. Significant components of the decrease included: (i) our net loss of $327.3 million; (ii) the settlement of the forward contract and repurchases of common stock of $102.6 million; and (iii) $40.0 million of common and preferred stock dividends. These decreases were partially offset by the issuance of warrants of $21.0 million. The accumulated other comprehensive loss increased by $199.1 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 $13.62 at June 30, 2000, from $15.50 at December 31, 1999, primarily due to the factors discussed in the previous paragraph. Excluding accumulated other comprehensive loss, book value per common share outstanding was $16.60 at June 30, 2000, and $17.85 at December 31, 1999. 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 $3,874.4 million and $3,927.8 million at June 30, 2000 and December 31, 1999, respectively. Goodwill as a percentage of shareholders' equity was 79 percent and 71 percent at June 30, 2000 and December 31, 1999, respectively. Goodwill as a percentage of total capital, excluding accumulated other comprehensive loss, was 33 percent and 34 percent at June 30, 2000 and December 31, 1999, 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 $56.6 million and $55.0 million during the first six months of 2000 and 1999, 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. Dividends declared on common stock for the six months ended June 30, 2000, were 10 cents per share. 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 paid in April of 2000. 42 CONSECO, INC. AND SUBSIDIARIES -------------------- The following table summarizes certain financial ratios as of and for the three months ended June 30, 2000, and as of and for the year ended December 31, 1999:
June 30, December 31, 2000 1999 ---- ---- Book value per common share: As reported............................................................................... $13.62 $15.50 Excluding accumulated other comprehensive income (loss) (a)............................... $16.60 $17.85 Ratio of earnings to fixed charges: As reported............................................................................... .53X(g) 2.98X Excluding interest expense on debt related to finance receivables and other investments (b)................................................... (g) 7.06X Ratio of operating earnings to fixed charges (c): As reported............................................................................... 1.44X 4.26X Excluding interest expense on debt related to finance receivables and other investments (b)................................................... 3.25X 10.99X Ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts: As reported............................................................................. .44X(h) 2.20X Excluding interest expense on debt related to finance receivables and other investments (b)................................................. (h) 3.38X Ratio of operating earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts (c): As reported............................................................................. 1.19X 3.14X Excluding interest expense on debt related to finance receivables and other investments (b)................................................. 1.56X 5.26X Rating agency ratios (a) (d) (e): Debt to total capital..................................................................... 31% 22% Debt and Company-obligated mandatorily redeemable preferred securities of subsidiary trusts to total capital (f)............................................... 51% 45% (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. 43 CONSECO, INC. AND SUBSIDIARIES -------------------- (d) Excludes debt of the finance segment used to fund finance receivables and investment borrowings of the insurance segment. (e) These ratios are calculated in a manner discussed with rating agencies. (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) at December 31, 1999, amounts related to RHINOS. In April 2000, the Company repurchased the RHINOS. (g) For such ratios, adjusted earnings were $285.4 million less than fixed charges. Adjusted earnings for the six months ended June 30, 2000, included special charges of $327.2 million as described in greater detail in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events". (h) For such ratios, adjusted earnings were $410.8 million less than fixed charges. Adjusted earnings for the six months ended June 30, 2000, included special charges of $327.2 million as described in greater detail in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events".
We continually review our capital structure, including the need and desirability of modifying our existing debt and equity. 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. We believe that the diversity of the investment portfolio and the concentration of investments in high-quality, liquid securities should provide sufficient liquidity to meet foreseeable cash requirements. Liquidity for finance operations After the March 31, 2000 announcement that we planned to explore the sale of Conseco Finance and other events described elsewhere herein, it was more difficult to complete new public securitization transactions for a period of time. However, these markets eventually became available to the Company. During the second quarter of 2000, we completed five transactions, securitizing over $2.5 billion of finance receivables. In May 2000, we sold $1.3 billion of finance receivables to Lehman. The proceeds from such sale were used to repay various warehouse credit lines, creating increased warehousing capacity for Conseco Finance. Lehman also amended its repurchase and other financing facilities with Conseco Finance to expand the types of assets financed. See the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events" for a further description of the transactions with Lehman. We continue to be able to finance loans through: (i) our warehouse and bank credit facilities; (ii) the sale of securities through securitization transactions; and (iii) whole-loan sales. At June 30, 2000, we had $5.7 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 June 30, 2000, we had borrowed $3.3 billion of the $5.7 billion available under such agreements. Our finance operations require cash to originate finance receivables. Our primary sources of cash are: (i) the collection of receivable balances; (ii) proceeds from the issuance of debt, certificates of deposit and securitization or sales of loans; (iii) cash provided by operations; and (iv) cash provided by the parent company from its credit sources. 44 CONSECO, INC. AND SUBSIDIARIES -------------------- 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. Conditions in the credit markets in certain periods during 1999 and early 2000 resulted in less-attractive pricing of certain lower-rated securities typically included in loan securitization transactions. As a result, we chose to hold rather than sell some of the securities in the securitization trusts, particularly securities having corporate guarantee provisions. Market conditions in the credit markets for loan securitizations and loan sales change from time to time. For example, during certain periods of 1999, the general levels of interest rates have increased on securities issued in securitizations, causing us to incur higher interest costs on securitizations completed during those periods. Changes in market conditions 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 in the current interest rate environment. 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 June 30, 2000, we had $1,398.9 million of such deposits outstanding which are recorded as liabilities related to certificates of deposit. The average annual rate paid on these deposits was 6.3 percent during the first six months of 2000. Our finance segment generated cash flows from operating activities of $196.0 million during the first six months of 2000, compared to approximately $266.7 million in the same period of 1999. Such cash flows include cash received from the securitization trusts of $189.7 million in the 2000 period and $320.2 million in the 1999 period, representing distributions of excess interest and servicing fees. 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). 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 29-to-1 and 22-to-1 at June 30, 2000, and December 31, 1999, respectively. 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 and other investments. 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 or its other investments. 45 CONSECO, INC. AND SUBSIDIARIES -------------------- The parent company has significant debt scheduled to become due on or before September 30, 2000, as follows (dollars in millions): Bank credit facility due September 1, 2000................................................... $ 155.0 Potential payment pursuant to guaranteed debt related to directors, officers and key employees stock purchase program due September 1, 2000.................................... 144.4 Bank credit facility due September 22, 2000.................................................. 766.0 Commercial paper due September 22, 2000...................................................... 50.0 Notes payable due 2003, but putable by the holder............................................ 250.0(a) -------- Total................................................................................... $1,365.4 ======== - ------------ (a) Such notes payable are putable by the holder prior to the maturity date. The payment of the note is secured by standby letters of credit which may be drawn upon by the holder of the note on August 16, 2000 through September 30, 2000.
Because of the time required to complete the sale of assets and other contemplated activities described in paragraph which follows, extension of the Company's bank credit facilities will be required if the Company is to meet its September debt maturities. The Company is currently in discussions with its bank lenders and management is optimistic appropriate extensions can be negotiated. However, there can be no assurance that these negotiations will be successful, or as to the amount, maturity, cost or terms associated with any such extension. On July 27, 2000, we announced several courses of action with respect to Conseco Finance as well as an asset disposition program with respect to certain non-strategic assets held at the parent company level, which are designed to allow us to reduce parent company debt over time. These actions with respect to Conseco Finance, include: (i) the sale, closing or runoff of five units (i.e., asset-based lending, vendor finance, bankcards, transportation and park construction); (ii) efforts to better utilize existing assets so as to increase cash; and (iii) cost savings and restructuring of ongoing businesses such as the streamlining of the field force in the manufactured housing and home equity lending divisions. The Company believes these contemplated actions offer better opportunities than the previously announced plan to explore the sale of Conseco Finance and are designed to provide a business model which will result in positive cash flow at Conseco Finance. In addition, we plan to sell certain non-strategic assets, such as our investment in the wireless communication company, Tritel, our interest in the riverboat casino in Lawrenceberg, Indiana, and our subprime auto loan portfolio. The Company believes the sale of non-strategic assets and the actions contemplated at Conseco Finance will generate cash proceeds of approximately $2.0 billion over the next 12 to 15 months. We are already well underway with these actions, and have completed the sale of the bankcard business and our subprime auto loan portfolio, generating cash proceeds of over $300 million. However, no assurance can be provided as to the timing, proceeds, or other terms related to the possible disposition of assets, the timing or extent of the cost savings to be achieved, or the amount of the restructuring or other charges to be incurred with respect to these actions. Furthermore, the Company's ability to use cash generated from the actions being undertaken at Conseco Finance is substantially limited by restrictions in agreements with Lehman. In connection with the negotiations with our banks relating to the extension of the maturity dates of our debt, we are also engaged in discussions with Lehman concerning a modification of these restrictions and are optimistic an acceptable modification can be obtained. However, there can be no assurance that these negotiations will be successful, or as to the terms of any such modification. See the note to the accompanying financial statements entitled "Changes in Corporate Notes Payable and Commercial Paper." During the first six months of 2000, our insurance subsidiaries paid dividends to Conseco of $108.1 million and our finance subsidiary repurchased shares of its common stock for $126.0 million. The cash provided by operating activities at the parent company, including dividends received from our insurance subsidiaries, plus the amount paid to us to repurchase shares of common stock of our finance subsidiary totaled approximately $110 million during the first six months of 2000. In connection with the Lehman transaction described in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events," Conseco Finance has agreed that it will not pay dividends until 2001 and then pay such dividends only to the extent certain financial covenants are met. In addition, Conseco Finance agreed that it will limit additional prepayments on the intercompany note payable to Conseco (with a balance of $2,210.8 million at June 30, 2000) to $50 million, as long as certain financing arrangements with Lehman remain outstanding. We are currently negotiating with Lehman to waive or modify this restriction to permit additional prepayments on the intercompany note. There can be no assurance as to the outcome of these negotiations. 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 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. In addition to fees and interest, during the remainder of 2000, our insurance subsidiaries may pay "ordinary" dividends to Conseco of $96.5 million without permission from state regulatory authorities. 46 CONSECO, INC. AND SUBSIDIARIES -------------------- The ratings assigned to Conseco's senior debt, trust preferred securities and commercial paper are important factors in determining the Company's ability to access the public capital markets for additional liquidity. Following our March 31, 2000, announcement that we planned to explore the sale of Conseco Finance and other events described in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events" and elsewhere herein, rating agencies lowered their ratings on Conseco's senior debt, trust preferred securities and commercial paper. As of August 10, 2000, the rating agencies have assigned the following ratings: (i) Standard & Poor's has assigned a "BB-" rating to Conseco's senior debt; a "B-" rating to trust preferred securities and a "B" rating to commercial paper; (ii) Fitch Rating Company has assigned a "BB-" rating to Conseco's senior debt; a "B" rating to trust preferred securities and a "B" rating to commercial paper; and (iii) Moody's Investor Services has assigned a "B1" rating to Conseco's senior debt; and a "ca" rating to trust preferred securities. These ratings make it difficult for the Company to issue additional securities in the public markets, although the Company does not believe additional issuances will be necessary in the near future. INVESTMENTS At June 30, 2000, the amortized cost and estimated fair value of fixed maturity securities (all of which were actively managed) were as follows:
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- (Dollars in millions) Investment grade: Corporate securities................................................ $13,452.0 $ 60.0 $1,029.5 $12,482.5 United States Treasury securities and obligations of United States government corporations and agencies................ 302.9 2.8 5.4 300.3 States and political subdivisions................................... 143.4 - 9.0 134.4 Debt securities issued by foreign governments....................... 198.4 .8 12.9 186.3 Mortgage-backed securities ......................................... 7,597.8 6.6 589.9 7,014.5 Below-investment grade (primarily corporate securities)................ 1,735.4 30.8 310.1 1,456.1 --------- ------ -------- --------- Total actively managed fixed maturities........................... $23,429.9 $101.0 $1,956.8 $21,574.1 ========= ====== ======== =========
During the first six months of 2000 and 1999, we recorded $68.2 million and $1.2 million, respectively, of writedowns of fixed maturity securities and other invested assets as a result of changes in conditions which caused us to conclude that a decline in fair value of the investments was other than temporary. At June 30, 2000, fixed maturity securities in default as to the payment of principal or interest had an aggregate amortized cost of $112.9 million and a carrying value of $73.5 million. Sales of invested assets (primarily fixed maturity securities) during the first six months of 2000 generated proceeds of $3.0 billion, resulting in net investment losses of $46.6 million. At June 30, 2000, fixed maturity investments included $7.0 billion of mortgage-backed securities (or 33 percent of all fixed maturity securities). The yield characteristics of mortgage-backed securities differ from those of traditional fixed-income securities. Interest and principal payments for mortgage-backed securities 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 47 CONSECO, INC. AND SUBSIDIARIES -------------------- 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. The following table sets forth the par value, amortized cost and estimated fair value of mortgage-backed securities, summarized by interest rates on the underlying collateral at June 30, 2000:
Par Amortized Estimated value cost fair value ----- ---- ---------- (Dollars in millions) Below 7 percent..................................................................... $4,586.6 $4,551.5 $4,273.3 7 percent - 8 percent............................................................... 1,949.5 1,933.2 1,877.6 8 percent - 9 percent............................................................... 287.6 287.1 283.9 9 percent and above................................................................. 848.1 853.5 605.5 -------- -------- -------- Total mortgage-backed securities (a)......................................... $7,671.8 $7,625.3 $7,040.3 ======== ======== ======== (a) Includes below-investment grade mortgage-backed securities with an amortized cost and estimated fair value of $27.5 million and $25.8 million, respectively.
The amortized cost and estimated fair value of mortgage-backed securities at June 30, 2000, summarized by type of security, were as follows:
Estimated fair value ----------------------- Percent Amortized of fixed Type cost Amount maturities - ---- ---- ------ ---------- (Dollars in millions) Pass-throughs and sequential and targeted amortization classes............ $3,993.7 $3,823.5 18% Planned amortization classes and accretion-directed bonds................. 1,970.7 1,847.7 9 Commercial mortgage-backed securities..................................... 788.7 748.4 3 Subordinated classes and mezzanine tranches............................... 835.5 587.5 3 Other..................................................................... 36.7 33.2 - -------- -------- -- Total mortgage-backed securities (a)............................... $7,625.3 $7,040.3 33% ======== ======== == - ---------- (a) Includes below-investment grade mortgage-backed securities with an amortized cost and estimated fair value of $27.5 million and $25.8 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 mortgaged-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). 48 CONSECO, INC. AND SUBSIDIARIES -------------------- 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. 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". At June 30, 2000, the mortgage loan balance was primarily comprised of commercial loans. Less than 1 percent of the mortgage loan balance was noncurrent (loans two or more scheduled payments past due) at June 30, 2000. At June 30, 2000, we held $78.1 million of trading securities; we included them in "other invested assets." Our investment borrowings averaged approximately $369.3 million during the first six months of 2000, compared with approximately $1,111.9 million during the same period of 1999 and were collateralized by investment securities with fair values approximately equal to the loan value. The weighted average interest rates on such borrowings were 5.4 percent and 5.1 percent during the first six months of 2000 and 1999, respectively. STATUTORY INFORMATION Statutory accounting practices prescribed or permitted by regulatory authorities for the Company's insurance subsidiaries differ from GAAP. The statutory income (loss) before net realized capital gains (losses) of our life insurance subsidiaries was $(2.5) million and $140.1 million in the first six months of 2000 and 1999, respectively. The Company's life insurance subsidiaries reported the following amounts to regulatory agencies at June 30, 2000, after appropriate eliminations of intercompany accounts among such subsidiaries (dollars in millions): Statutory capital and surplus .................................. $1,970.6 Asset valuation reserve......................................... 393.3 Interest maintenance reserve.................................... 463.0 -------- Total........................................................ $2,826.9 ========
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:
June 30, 2000 ---- (Dollars in millions) 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 (a)............................................................ $ 72.2 Preferred and common stock of intermediate holding company............................ 219.0 Common stock of Conseco (39.8 million shares)......................................... 32.4 Other ................................................................................ 2.5 ------ Total........................................................................... $326.1 ====== 49 CONSECO, INC. AND SUBSIDIARIES -------------------- - -------------------- (a) Total par value, amortized cost and fair value of securities issued by special purpose entities which hold loans originated by our finance subsidiary (including the securities that are not guaranteed by Conseco Finance, and therefore are not considered affiliated investments) were $285.1 million, $280.1 million and $256.6 million, respectively.
State insurance laws generally restrict the ability of insurance companies to pay dividends or make other distributions. During the remainder of 2000, our insurance subsidiaries may pay dividends to Conseco of $96.5 million without permission from state regulatory authorities. During the first six months of 2000, our insurance subsidiaries paid dividends to Conseco totaling $108.1 million. 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. FORWARD-LOOKING STATEMENTS 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," "optimistic" 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 Conseco's efforts to sell assets and reduce, refinance or modify indebtedness and the availability and cost of capital in connection with this process; (x) actions by rating agencies and the effects of past or future actions by these agencies on Conseco's business; and (xi) the risk factors or uncertainties listed from time to time in Conseco's filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risks, and the ways we manage them, are summarized in management's discussion and analysis of financial condition and results of operations as of December 31, 1999, included in the Company's Form 10-K for the year ended December 31, 1999. The fair value of our borrowed capital varies with credit ratings and other conditions in the capital markets. Following our March 31, 2000, announcement that we planned to explore the sale of Conseco Finance and other events described in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events," the capital markets reacted by lowering the value of our publicly traded securities. In addition, the capital markets have also lowered the value of the securities issued in previous securitization transactions of Conseco Finance. See the note to the accompanying consolidated financial statements entitled "Standard & Poor's 500 Index Call Options and Interest Rate Swap Agreements" for information about several interest rate swap agreements that were terminated during the second quarter of 2000. 50 CONSECO, INC. 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. A total of forty-five suits have been filed against the Company in the United States District Court for the Southern District of Indiana. Nineteen of these cases are putative class actions on behalf of persons or entities that purchased the Company's common stock during alleged class periods that generally run from April 1999 through April 2000. Luisi v. Conseco, Inc., et al., Case No. IP00-C-0593-Y/S; Sechrist v. Conseco, Inc., et al., Case No. IP00-C-0585-Y/S; Klein v. Conseco, Inc., et al., Case No. IP00-C-0602-Y/S; Brody v. Conseco, Inc., et al., Case No. IP00-C-0609-Y/S; Dana v. Conseco, Inc., et al., Case No. IP00-C-0623-Y/S; Krim v. Conseco, Inc., et al., Case No. IP00-C-0631-Y/S; Nadaf v. Conseco, Inc., et al., Case No. IP00-C- 0628-Y/S; Greiner v. Conseco, Inc., et al., Case No. IP00-C-0639-Y/S (naming as a defendant only one officer/director); Sedgwick v. Conseco, Inc., et al., Case No. IP00-C-0657-Y/S; Irle v. Conseco, Inc., et al., Case No. IP00-C-0746-Y/S; Schwartz v. Conseco, Inc., et al., Case No. IP00-C-0770-Y/S; Leopold v. Conseco, Inc., et al., Case No. IP00-C-0843-Y/S; Slovacek v. Conseco, Inc., et al., Case No. IP00-C-0858-Y/S (naming as a defendant only one officer/director); Swei v. Conseco, Inc., et al., Case No. IP00-C-0839-Y/S (naming as a defendant only one officer/director); Nicholson v. Conseco, Inc., et al., Case No. IP00-C-0826-Y/S; Browne v. Conseco, Inc., et al., Case No. IP00-C-0897-Y/S; Chacharone v. Conseco, Inc., et al., Case No. IP00-C-0885-Y/S; Muhlenfeld v. Conseco, Inc., et al., Case No. IP00-C-0933-Y/S; Young v. Conseco, Inc., et al. (case number pending; originally filed in the United States District Court for the Eastern District Michigan, Case No. 00-72939, and now in the process of transferred by stipulation). Two cases are putative class actions on behalf of persons or entities that purchased the Company's bonds during the same alleged class periods. Waring v. Conseco, Inc., et al., Case No. IP00-C-0793- Y/S; Lutt v. Conseco, Inc., et al., Case No. IP00-C-0905-Y/S. Three cases are putative class actions on behalf of persons or entities that purchased or sold option contracts, not issued by the Company, on the Company's common stock during the same alleged class periods. Syndicated Fin. Servs., Inc. v. Conseco, Inc., et al., Case No. IP00-C-0795-Y/S (naming as a defendant only one officer/director); Joel Mandel v. Conseco, Inc., et al., Case No. IP00-C-0815-Y/S; Avi Mandel v. Conseco, Inc., et al., Case No. IP00-C-0884-Y/S. One case is a putative class action on behalf of persons or entities that purchased the Company's "Feline Pride" convertible preferred stock instruments during the same alleged class periods. Kelly v. Conseco, Inc., et al., Case No. IP00-C-0789-Y/S. With the four exceptions noted, in each of these twenty-five cases two former officers/directors of the Company are named as defendants. 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 the Company and the individual defendants violated the 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 the Company's financial statements false and misleading. The Company believes that these lawsuits are without merit and intends to defend them vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. 51 CONSECO, INC. AND SUBSIDIARIES -------------------- Eleven of the cases in the United States District Court were filed as purported class actions on behalf of persons or entities that purchased preferred securities issued by various Conseco Financing Trusts, including Conseco Financing Trust V, Griffin v. Conseco, Inc., et al., Case No. IP00-C-0663-Y/S; Stifnagle v. Conseco, Inc., et al., Case No. IP00-C-0754-Y/S (Stifnagle also asserts claims regarding Conseco Financing Trust VII); Gastfriend v. Conseco, Inc., et al., Case No. IP00-C-0883-Y/S; Powers v. Conseco Financing Trust V, et al., Case No. IP00-C-0953-Y/S (also naming Conseco Financing Trusts VI and VII) (each of the preceding make allegations with respect to an August 24, 1998 offering for Conseco Financing Trust V); Gabora v. Conseco, Inc., et al., Case No. IP00-C-0852-Y/S (also naming Conseco Financing Trust VII, but containing allegations relating only to notes issued by the Company on October 18, 1999, unrelated to the Conseco Financing Trusts named); Schmidt v. Conseco, Inc., et al., Case No. IP00-C-0823-Y/S (also naming Conseco Financing Trust VII, but containing allegations relating only to Conseco Financing Trusts VI and VII), Conseco Financing Trust VI, Costello v. Conseco, Inc., et al., Case No. IP00-C-0705-Y/S (October 8, 1998 offering), and Conseco Financing Trust VII, Zinno v. Conseco, Inc., et al., Case No. IP00- C-0622-Y/S; Shapiro v. Conseco, Inc., et al., Case No. IP00-C-0650-Y/S; Kosseff v. Conseco, Inc., et al., Case No. IP00-C- 0753-Y/S; Harris v. Conseco, Inc., et al., Case No. IP00-C-0797-Y/S (August 26, 1999 offering). Each of these complaints names as defendants the Company, the relevant trust (except Shapiro and Kosseff), two former officers/directors of the Company, and underwriters for the particular issuance (except Shapiro). The Kosseff complaint also names an officer and all of the Company's directors at the time of issuance of the preferred stock by Conseco Financing Trust VII. In each case, plaintiffs assert claims under Section 11 and Section 15 of the Securities Act of 1933, and the Zinno, Shapiro, Stifnagle, Harris, Gabora, Gastfriend, Powers and Schmidt complaints also assert claims under Section 12(a)(2) of that Act. Gabora and Gastfriend also assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Powers also asserts a claim under Section 10(b) of that Act. In each case, plaintiffs allege that the defendants violated the federal securities laws by, among other things, making false and misleading statements, in Prospectuses and/or Registration Statements related to the issuance of preferred securities by the Trust involved, regarding the current state and future prospects of Conseco Finance (particularly with respect to performance of certain loan portfolios of Conseco Finance) which allegedly rendered the disclosure documents false and misleading. The Company also intends to defend these lawsuits vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. Nine shareholder derivative suits have been filed in United States District Court. Rogney v. Decatur, et al., Case No. IP00- C-0655-Y/S; Fletcher v. Hilbert, et al., Case No. IP00-C-0693-Y/S; Gold v. Decatur, et al., Case No. IP00-C-0747-Y/S; Batcheldor v. Hilbert, Case No. IP00-C-0743-Y/S; Youssef v. Decatur, et al., Case No. IP00-C-0809-Y/S; Gintel v. Hilbert, Case No. IP00-C-0987-Y/S; Frankel v. Coss, et al. (case number pending; originally filed in the Evansville Division of United States District Court for the Southern District of Indiana, Case No. EV00-134-C-Y/H, and now in the process of transfer); Evans v. Hilbert, Case No. IP00-C-1019-Y/S; Marks v. Hilbert, Case No. IP00-C-0877-Y/S. The complaints name as defendants the current directors, certain former directors, certain non-director officers of the Company (in Fletcher), and, alleging aiding and abetting liability, certain banks which allegedly made loans in relation to the Company's "Stock Purchase Plan" (in Batcheldor, Gintel and Evans). The Company is also named as a nominal defendant in each complaint. Plaintiffs allege that the defendants breached their fiduciary duties by, among other things, intentionally disseminating false and misleading statements concerning the acquisition, performance and proposed sale of Conseco Finance, and engaged in corporate waste by causing the Company to guarantee loans that certain officers, directors and key employees of the Company used to purchase stock under the Stock Purchase Plan. Three similar cases have been filed in the Hamilton County Superior Court in Indiana. Schweitzer v. Hilbert, et al., Cause No. 29001-0004CP251; Evans v. Hilbert, et al., Cause No. 29001- 0005CP308 (both Schweitzer and Evans name as defendants certain non-director officers); Gintel v. Hilbert, et al., Cause No. 29003-0006CP393 (naming as defendants, and alleging aiding and abetting liability as to, banks which allegedly made loans in relation to the Stock Purchase Plan). The Company believes that these 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 Services, LLC, Washington National Insurance Company and United Presidential Life Insurance Company are currently named defendants in a lawsuit filed in the Circuit Court of Claiborne County, Mississippi, Cause No. CV-99-0106, and captioned "Carla Beaugez, Lois Dearing, Lee Eaton and all other persons identified in the lawsuit vs. Conseco, Inc., Conseco Services, Inc., Washington National Company, United Presidential Life Insurance Company and Larry Ratcliff." The claims of the eighty seven plaintiffs arise out of allegedly wrongful increases of the cost of insurance and decrease in the credited interest rates on universal life policies issued to the plaintiffs by United Presidential Life. The plaintiffs asserted claims including negligent and intentional misrepresentation, fraudulent concealment, fraudulent inducement, common law fraud, and deceptive sales practices. Conseco believes this lawsuit is without merit and is defending it vigorously. The ultimate outcome of this lawsuit cannot be predicted with certainty. 52 CONSECO, INC. AND SUBSIDIARIES -------------------- 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 1980s and the comparatively lower rates in the 1990s, 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. We intend to continue defending this action vigorously unless the current settlement discussions and procedures produce a satisfactory outcome. The ultimate outcome of this lawsuit cannot be predicted with certainty. Conseco Finance is a defendant in two arbitration proceedings in South Carolina (Lackey v. Green Tree Financial Corporation, n/k/a Conseco Finance Corp. and Bazzle v. Green Tree Financial Corporation, n/k/a Conseco Finance Corp.) where the arbitrator, over Conseco Finance's objection, allowed the plaintiffs to pursue purported class action claims in arbitration. The two purported arbitration classes consist of South Carolina residents who obtained real estate secured credit from Conseco Finance's Manufactured Housing Division (Lackey) and Home Improvement Division (Bazzle) in the early and mid 1990s, and did not receive a South Carolina specific disclosure form relating to selection of attorneys in connection with the credit transactions. The arbitrator, in separate awards issued on July 24, 2000, awarded a total of $26.8 million in penalties and attorneys' fees. Plaintiffs have filed motions in South Carolina courts to have the awards confirmed as judgments. Conseco Finance intends to vigorously challenge the awards and believes that the arbitrator erred by, among other things, conducting class action arbitrations without the authority to do so and misapplying South Carolina law when awarding the penalties. The ultimate outcome of these proceedings cannot be predicted with certainty. In addition, the Company and its subsidiaries are involved on an ongoing basis in other 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. At the Company's annual meeting on June 23, 2000, the shareholders elected Lawrence M. Coss, Thomas M. Hagerty, James D. Massey and Dennis E. Murray, Sr. to serve as directors for terms ending in 2003. Directors whose class was not up for election and whose term of office continued after the meeting are Ngaire E. Cuneo, David R. Decatur, Donald F. Gongaware, David V. Harkins, M. Phil Hathaway, John M. Mutz, and Robert S. Nickoloff. Gary C. Wendt was added to the Board of Directors on June 28, 2000. The results of the voting were as follows (there were no broker non-votes):
Lawrence M. Thomas M. James D. Dennis E. Coss Hagerty Massey Murray, Sr. ---- ------- ------ ----------- For 286,536,272 285,341,409 289,043,360 288,934,684 Withheld 16,800,538 17,995,401 14,293,450 14,402,126
At the annual meeting, the shareholders also defeated an advisory proposal advocating the elimination of the classification of the Board of Directors (there were 85,716,319 shares voted for the proposal, 130,095,934 shares voted against the proposal, 3,452,508 abstentions and 58,769,995 broker non-votes). 53 CONSECO, INC. AND SUBSIDIARIES -------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. 10.45 Warrant to Purchase Common Stock of Conseco Finance Corp., dated May 11, 2000, by and between Conseco Finance Corp. and Lehman Brothers Holdings Inc. 10.46 Agreement, dated May 11, 2000, by and among Conseco, Inc., CIHC, Incorporated and Lehman Brothers Holdings Inc. 12.1 Computation of Ratio of Earnings to Fixed Charges, Preferred Dividends and Distributions on Company- obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts 27.0 Financial Data Schedule b) Reports on Form 8-K - None. 54 CONSECO, INC. AND SUBSIDIARIES -------------------- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSECO, INC. Dated: August 14, 2000 By: /S/ JAMES S. ADAMS --------------------- James S. Adams Senior Vice President and Chief Accounting Officer (authorized officer and chief accounting officer) 55 EX-10.45 2 0002.txt EX-10.45 WARRANT To Purchase Common Stock of CONSECO FINANCE CORP. Warrant No. 1 No. of Shares of Common Stock: 5.42 TABLE OF CONTENTS Page 1. DEFINITIONS..............................................................1 2. EXERCISE OF WARRANT......................................................4 2.1. Manner of Exercise............................................4 2.2. Payment of Taxes..............................................5 2.3. Fractional Shares.............................................5 2.4. Continued Validity............................................5 3. TRANSFER, DIVISION AND COMBINATION.......................................6 3.1. Transfer......................................................6 3.2. Division and Combination......................................6 3.3. Expenses......................................................6 3.4. Maintenance of Books..........................................6 4. ANTIDILUTION PROVISIONS..................................................7 4.1. Stock Dividends, Subdivisions and Combinations................7 4.2. Certain Other Distributions...................................7 4.3. Issuance of Additional Shares of Common Stock.................8 4.4. Issuance of Warrants or Other Rights..........................9 4.5. Issuance of Convertible Securities............................9 4.6. Superseding Adjustment........................................10 4.7. Other Provisions Applicable to Adjustments under this Section.....................................................10 4.8. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets; Sale of Controlling Interest.........14 4.9. Other Action Affecting Common Stock...........................15 4.10. No Adjustment Required........................................15 5. NOTICES TO WARRANT HOLDERS...........................................15 5.1. Notice of Adjustments.........................................15 5.2. Notice of Corporate Action....................................16 5.3. Notice to Stockholders........................................16 6. NO IMPAIRMENT........................................................16 i 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY..........................17 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS...................18 9. RESTRICTIONS ON TRANSFERABILITY......................................18 9.1. Restrictive Legend............................................18 9.2. Notice of Proposed Transfers; Requests for Registration.......19 9.3. Incidental Registration.......................................20 9.4. Registration Procedures.......................................20 9.5. Expenses......................................................21 9.6. Indemnification and Contribution..............................22 9.7. Termination of Restrictions...................................24 9.8. Listing on Securities Exchange................................24 9.9. Certain Limitations on Registration Rights....................24 10. SUPPLYING INFORMATION................................................25 11. LOSS OR MUTILATION...................................................25 12. OFFICE OF THE COMPANY................................................25 13. FINANCIAL AND BUSINESS INFORMATION...................................25 13.1. Quarterly Information.........................................25 13.2. Annual Information............................................25 13.3. Filings.......................................................26 13.4. Access........................................................26 13.5. EDGAR Filings.................................................26 14. REPURCHASE BY THE COMPANY OF WARRANT AND WARRANT STOCK...............26 14.1. Obligation to Repurchase Warrant and Warrant Stock............26 14.2. Determination and Payment of Repurchase Price.................27 14.3. Option to Repurchase Warrant and Warrant Stock................28 15. APPRAISAL............................................................28 16. LIMITATION OF LIABILITY..............................................28 17. MISCELLANEOUS........................................................29 ii 17.1. Nonwaiver and Expenses........................................29 17.2. Notice Generally..............................................29 17.3. Indemnification...............................................30 17.4. Remedies......................................................30 17.5. Successors and Assigns........................................30 17.6. Amendment.....................................................30 17.7. Severability..................................................30 17.8. Headings......................................................30 17.9. Governing Law.................................................31 17.10. Effective Date................................................31 EXHIBITS Exhibit A - Subscription Form Exhibit B - Assignment Form iii THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT. No. of Shares of Common Stock: 5.42 Warrant No. 1 WARRANT To Purchase Common Stock of CONSECO FINANCE CORP. THIS IS TO CERTIFY THAT LEHMAN BROTHERS HOLDINGS INC. "Lehman", or registered assigns, is entitled, at any time prior to the Expiration Date (as hereinafter defined), to purchase from Conseco Finance Corp., a Delaware corporation (the "Company"), 5.42 shares of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price of $0.01 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. This warrant is being issued in connection with the transactions contemplated in the Amended and Restated Master Repurchase Agreement dated May 9, 2000 by and between Lehman Commercial Paper Inc. and Green Tree Finance Corp. - Five. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below: "Additional Shares of Common Stock" means any shares of Common Stock issued by the Company after the Closing Date other than Warrant Stock. "Appraised Value" means, in respect of any share of Common Stock on any date herein specified, the fair saleable value of such share of Common Stock (determined without giving effect to the discount for (i) a minority interest or (ii) any lack of liquidity of the Common Stock or to the fact that the Company may have no class of equity registered under the Exchange Act) as of the last day of the most recent fiscal month end prior to such date specified, based on the value of the Company, as determined by an investment banking firm selected in accordance with the terms of Section 15, divided by the number of Fully Diluted Outstanding shares of Common Stock. "Business Day" means any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Closing Date" means May 11, 2000. "Commission" means the Securities and Exchange Commission or any 1 other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" means (except where the context otherwise indicates) the Common Stock, $.01 par value, of the Company as constituted on the Closing Date, and any capital stock into which such Common Stock may thereafter be changed, and shall also include (i) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets on liquidation over any other class of stock of the Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.8) received by or distributed to the holders of Common Stock of the Company in the circumstances contemplated by Section 4.8. "Convertible Securities" means evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" means, in respect of any share of Common Stock on any date herein specified, if there shall not then be a public market for the Common Stock, the Appraised Value per share of Common Stock as at such date, or if there shall then be a public market for the Common Stock, the average of the daily market prices for 30 consecutive Business Days commencing 45 days before such date. The daily market price for each such Business Day shall be (i) the last sale price on such day on the principal stock exchange on which such Common Stock is then listed or admitted to trading, (ii) if no sale takes place on such day on any such exchange, the average of the last reported closing bid and asked prices on such day as officially quoted on any such exchange, (iii) if the Common Stock is not then listed or admitted to trading on any stock exchange, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (iv) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by any similar firm then engaged in such business, or (v) if there is no such firm, as furnished by any member of the NASD selected mutually by Holder and the Company or, if they cannot agree upon such selection, an investment banking firm of recognized national standing as selected by two such members of the NASD, one of which shall be selected by Holder and one of which shall be selected by the Company. "Current Warrant Price" means, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date. As of the date hereof, the Current Warrant Price shall be $.01 per share. "Exchange Act" means the Securities Exchange Act of 1934, as amended, 2 or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" means the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" means the earlier of (i) May 11, 2005 and (ii) the occurrence of an event described in Section 4.8(b). "Fully Diluted Outstanding" means, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of the Warrants and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date whether or not then exercisable or convertible. "GAAP" means generally accepted accounting principles in the United States of America as from time to time in effect. "Holder" means the Person in whose name the Warrant set forth herein is registered on the books of the Company maintained for such purpose. "NASD" means the National Association of Securities Dealers, Inc., or any successor corporation thereto. "Other Property" has the meaning set forth in Section 4.8. "Outstanding" means, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Repurchase Price" has the meaning specified in Section 14.2. "Restricted Common Stock" means shares of Common Stock which are, or which upon their issuance on the exercise of any Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Securities Act" means the Securities Act of 1933, as amended, or any 3 similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Transfer" means any sale, exchange, transfer, pledge, hypothecation or other disposition, directly or indirectly (including, without limitation, by means of a derivative security) of any Warrant or Warrant Stock or of any interest in either thereof. "Transfer Notice" has the meaning specified in Section 9.2. "Warrant Price" means an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price, rounded (if including a fraction of a penny) to the next highest penny. "Warrant Stock" means the shares of Common Stock purchased by the holders of the Warrants upon the exercise thereof. "Warrants" means this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. 2. EXERCISE OF WARRANT 2.1. Manner of Exercise. From and after the Closing Date and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at 1100 Landmark Towers, 345 Saint Peters Street, Saint Paul, Minnesota 55102-1639 or at the office or agency designated by the Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) payment of the Warrant Price and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt thereof, the Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of shares of Common Stock issuable upon such exercise, together (if the Company elects to pay cash in lieu of fractional shares) with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall 4 be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the cash or check or checks and this Warrant, is received by the Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request o Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Payment of the Warrant Price may be made by cash or certified or official bank check. 2.2. Payment of Taxes. All shares of Common Stock issuable upon the exercise of this Warrant pursuant to the terms hereof shall be validly issued and, upon payment of the Warrant Price, fully paid and nonassessable and without any preemptive rights. The Company shall pay all expenses in connection with, and all taxes and other governmental charges that may be imposed with respect to, the issue or delivery thereof. The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case the Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of the Company that no such tax or other charge is due. 2.3. Fractional Shares. The Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which Holder of one or more Warrants, the rights under which are exercised in the same transaction, would otherwise be entitled to purchase upon such exercise, the Company shall (if it elects not to issue a fractional share) pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the Current Market Price per share of Common Stock on the date of exercise. 2.4. Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a Registration Statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with respect to such shares to all rights, and shall be subject to all obligations, to which it would have been entitled or subject as Holder under Sections 9, 10, 13, 14 and 17 of this Warrant. The Company will, at the time of each exercise of this Warrant, in whole or in part, upon the request of the holder of the shares of Common Stock issued upon such exercise hereof, acknowledge in writing, in a form reasonably satisfactory to 5 such holder, its continuing obligation to afford to such holder all such rights, and such holder, at the request of the Company, shall acknowledge in writing, in a form reasonably acceptable to the Company, its continuing obligations to the Company; provided, however, that if such holder or the Company shall fail to make any such request, such failure shall not affect the continuing obligation of the Company or such holder, as the case may be. 3. TRANSFER, DIVISION AND COMBINATION 3.1. Transfer. Subject to compliance with Sections 9 and 14, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company referred to in Section 2.1 or the office or agency designated by the Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney and if such transfer is not to be made pursuant to Section 14, funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants each dated the same dates as the surrendered Warrant in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued. 3.2. Division and Combination. Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3. Expenses. The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. 3.4. Maintenance of Books. The Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 6 4. ANTIDILUTION PROVISIONS The number of shares of Common Stock for which this Warrant is exercisable, and the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. The Company shall give Holder notice of any event described below which requires an adjustment pursuant to this Section 4 in accordance with Sections 5.1 and 5.2. 4.1. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock, (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) subject to Section 4.10, the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment. 4.2. Certain Other Distributions. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution (in each case other than a dividend or other distribution permitted by Item 4 of Exhibit B to the Agreement, dated May 11, 2000, among Conseco, Inc., the Company, Lehman and CIHC, Incorporated) of: (a) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Company), (b) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), or (c) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other 7 securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment by a fraction (A) the numerator of which shall be the Current Market Price per share of Common Stock at the date of taking such record and (B) the denominator of which shall be such Current Market Price per share of Common Stock minus the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of the Company and supported by an opinion from an investment banking firm of recognized national standing acceptable to Holder (which acceptance shall not be unreasonably withheld or delayed)) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable, and (ii) subject to Section 4.10, the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment. 4.3. Issuance of Additional Shares of Common Stock. (a) If at any time the Company shall issue or sell any Additional Shares of Common Stock in exchange for consideration in an amount per Additional Share of Common Stock less than the Current Market Price at the time the Additional Shares of Common Stock are issued or sold, then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after such issue or sale plus the number of shares of Common Stock issuable pursuant to all Warrants outstanding immediately following such issuance or sale, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to such issue or sale plus the number of shares of Common Stock issuable pursuant to all Warrants outstanding immediately prior to such issuance or sale plus the number of shares which the aggregate offering price of the total number of such Additional Shares of Common Stock would purchase at the then Current Market Price; and (ii) subject to Section 4.10, the Current Warrant Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be adjusted by multiplying such Current Warrant Price by a fraction (X) the numerator of which shall be the number of shares for which this Warrant is exercisable immediately prior to such issue or sale; and (Y) the denominator of which shall be the number of shares of Common Stock purchasable immediately after such issue or sale. (b) The provisions of paragraph (a) of Section 4.3 shall not apply to any issuance of Additional Shares of Common Stock for which an 8 adjustment is provided under Section 4.1 or 4.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) of Section 4.3 upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 4.4 or Section 4.5. 4.4. Issuance of Warrants or Other Rights. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such warrants or other rights or upon conversion or exchange of such Convertible Securities shall be less than the Current Market Price in effect immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of such warrants or other rights. No further adjustments of the Current Warrant Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 4.5. Issuance of Convertible Securities. If at any time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Current Market Price in effect immediately prior to the time of such issue or sale, then the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall 9 have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No further adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be made under this Section 4.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4.4. No further adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 4.6. Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall have been made pursuant to Section 4.4 or Section 4.5 as the result of any issuance of warrants, other rights or Convertible Securities, (a) such warrants or other rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or other rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or other rights, or the terms of such other Convertible Securities, shall be increased by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event or otherwise, then for each outstanding Warrant such previous adjustment shall be recomputed as if such event specified in paragraph (a) or (b) of this Section 4.6 had been known at the time of such previous adjustment. 4.7. Other Provisions Applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: (a) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by the Company therefor shall be the amount of the cash received by the Company therefor, or, if such Additional Shares of Common 10 Stock or Convertible Securities are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and without taking into account any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any consideration, such determination shall, if requested by Holder, be supported by an opinion of an investment banking firm of recognized national standing selected by the Company and acceptable to Holder (such acceptance not to be unreasonably withheld or delayed). (b) When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event 11 requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 4.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 1% of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/100th of a share. (d) When Adjustment Not Required. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (e) Escrow of Warrant Stock. If after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, and Holder exercises this Warrant, any shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any other provision to the contrary herein) and such shares or other property shall be held in escrow for Holder by the Company to be issued to Holder upon and to the extent that the event actually takes place, upon payment of the Current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be cancelled by the Company and escrowed property returned. (f) Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Section 4 in a situation in 12 which an opinion supporting such determination issued by an investment banking firm acceptable to the Holder was not required to be delivered to the Holder, such determination may be challenged in good faith by Holder, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by the Company and acceptable to Holder. 13 4.8. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets; Sale of Controlling Interest. (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event; provided that, if any portion of the Other Property shall consist of an interest in the Company, any purchaser or successor thereof, or any affiliate thereof, the Company or such successor or affiliate shall have the option to substitute for such portion of Other Property, cash equal to the fair value thereof determined in good faith by the Board of Directors of the Company and supported by an opinion of an investment banking firm of recognized national standing acceptable to Holder (which acceptance shall not be unreasonably withheld or delayed). In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.8 "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets on liquidation over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.8 shall similarly apply to successive reorganizations reclassifications, mergers, consolidations or disposition of assets. (b) Notwithstanding paragraph (a) of this Section 4.8 or any 14 other provision of this Agreement, in the case that Lehman, any affiliate of Lehman or any Person or group in which Lehman or any affiliate has an interest acquires, directly or indirectly, a majority of the property, assets, business or capital stock of the Company (x) this Warrant shall be immediately cancelled and be of no further effect and (y) if any shares of Common Stock have been issued pursuant to this Warrant, such shares shall be immediately repurchased by the Company or its designee for a cash purchase price equal to the exercise price paid upon such issuance. 4.9. Other Action Affecting Common Stock. In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than the payment of dividends permitted by Section 4.2(a) or any other action described in this Section 4, then, unless such action will not have a materially adverse effect upon the rights of Holder, the number of shares of Common Stock or other stock for which this Warrant is exercisable and/or the purchase price thereof shall b adjusted in such manner as may be equitable in the circumstances. 4.10. No Adjustment Required. Notwithstanding any provision in this Warrant to the contrary, the Current Warrant Price shall in no event be less than the par value of the Common Stock; provided, however, that the foregoing minimum Current Warrant Price shall not be applicable for purposes of determining adjustments to the number of shares issuable upon exercise of the Warrant. 5. NOTICES TO WARRANT HOLDERS 5.1. Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of this Warrant, shall be adjusted pursuant to Section 4, the Company shall forthwith prepare a certificate to be executed by the chief financial or accounting officer of the Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of the Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2 or 4.7(a)), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.8 or 4.9) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to Holder in accordance with Section 17.2. The Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by Holder or any prospective purchaser of this Warrant designated by Holder. 15 5.2. Notice of Corporate Action. If at any time (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Company) or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation, or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17.2. 5.3. Notice to Stockholders. The Holder shall be entitled to the same rights to receive notice of corporate action as any holder of Common Stock. 6. NO IMPAIRMENT The Company shall not by any action including, without limitation, 16 amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Upon the request of Holder, the Company will at any time during the period this Warrant is outstanding acknowledge in writing, in form satisfactory to Holder, the continuing validity of this Warrant and the obligations of the Company hereunder. 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. If any shares of Common Stock required to be reserved for issuance upon exercise of Warrants require registration or qualification with any governmental authority 17 under any federal or state law (otherwise than as provided in Section 9) before such shares may be so issued, the Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered. 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by the Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up of the Company, close its stock transfer books or Warrant transfer books so a to result in preventing or delaying the exercise or transfer of any Warrant. 9. RESTRICTIONS ON TRANSFERABILITY The Warrants and the Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. Prior to May 11, 2001, the Holder agrees not to Transfer this Warrant, any shares o Warrant Stock or any interest in any of the foregoing to any Person other than Lehman or a Person, the majority of the common stock of which is owned by Lehman. In addition, Holder, by acceptance of this Warrant, and any transferee or purchaser of Warrant Stock, by acceptance thereof, shall be bound by the terms and conditions of Section 5 of the Agreement dated May 11, 2000 by and among the Company, Conseco, Inc., CIHC, Incorporated and Lehman Brothers Holdings Inc. 9.1. Restrictive Legend. (a) Except as otherwise provided in this Section 9, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and are subject to the conditions specified in a certain Warrant dated May 11, 2000, originally issued by Conseco Finance Corp. No transfer of the shares represented by this certificate shall be valid or effective until such conditions have been fulfilled. A copy of the form of said Warrant is on file with the Secretary of Conseco Finance Corp. The holder of this certificate, by acceptance of this certificate, agrees to be bound by the provisions of such Warrant. Such provisions include, among other things, the obligation to sell 18 sell these shares to Conseco Finance Corp. or its designee under certain circumstances at the original exercise price of the Warrant. In addition, the shares represented by this certificate are subject to certain drag-along and tag-along rights and obligations specified in a certain Agreement dated May 11, 2000 by and among Conseco Finance Corp., Conseco, Inc., CIHC, Incorporated and Lehman Brothers Holdings Inc. A copy of the form of said Agreement is on file with the Secretary of Conseco Finance Corp. The holder of this certificate, by acceptance of this certificate, agrees to be bound by the provisions of Section 5 of such Agreement. Such provisions include, among other things, the obligation to sell these shares under certain circumstances to persons acquiring all or a portion of the stock of Conseco Finance Corp." (b) Except as otherwise provided in this Section 9, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and the securities represented hereby have not been registered under the Securities Act of 1933, as amended, and may not be transferred in violation of such Act, the rules and regulations thereunder or the provisions of this Warrant." 9.2. Notice of Proposed Transfers; Requests for Registration. Prior to any Transfer or attempted Transfer of any Warrant or any Restricted Common Stock, the holder of such Warrant or Restricted Common Stock shall give 10 days' prior written notice (a "Transfer Notice") to the Company of such holder's intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to such holder who shall be reasonably satisfactory to the Company, an opinion that the proposed Transfer of such Warrant or Restricted Common Stock may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within 5 days thereof, so notify the holder of such Warrant or Restricted Common Stock and such holder shall thereupon be entitled to Transfer such Warrant or Restricted Common Stock, in accordance with the terms of the Transfer Notice. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The holder of the Warrant or Restricted Common Stock, as the case may be, giving the Transfer Notice shall not be entitled to transfer such Warrant or Restricted Common Stock until receipt of notice from the Company under this Section 9.2. 19 9.3. Incidental Registration. If the Company at any time proposes to file on its behalf and/or on behalf of any of its security holders ("the demanding security holders") a registration statement under the Securities Act on any form (other than a registration statement on Form S-4 or S-8 or any successor form for securities to be offered in a transaction of the type referred to in Rule 145 under the Securities Act or to employees of the Company pursuant to any employee benefit plan, respectively) for the general registration of securities to be sold to the public for cash with respect to its Common Stock or any other class of equity security (as defined in Section 3(a)(11) of the Exchange Act) of the Company, it will give written notice to all holders of Warrants or Warrant Stock at least 15 days before the initial filing with the Commission of such registration statement, which notice shall set forth the intended method of disposition of the securities proposed to be registered by the Company. The notice shall offer to include in such filing the aggregate number of shares of Warrant Stock, and the number of shares of Common Stock for which Warrants are exercisable, as such holders may request. Each holder of a Warrant or Warrant Stock desiring to have Warrant Stock registered under this Section 9.3 shall advise the Company in writing within 15 days after the date of receipt of such offer from the Company, setting forth the amount of Warrant Stock for which registration is requested. The Company shall thereupon include in such filing the number of shares of Warrant Stock for which registration is so requested, subject to the next sentence, and shall use all reasonable efforts to effect registration under the Securities Act of such shares. If the managing underwriter of a proposed public offering shall advise the Company in writing that, in its opinion, the distribution of the Warrant Stock requested to be included in the registration concurrently with the securities being registered by the Company or the demanding security holder or holders would materially and adversely affect the distribution of such securities by the Company or the demanding security holder or holders, the all selling security holders shall reduce the amount of securities each intended to distribute through such offering on a pro rata basis. Except as otherwise provided in Section 9.5, all expenses of such registration shall be borne by the Company. 9.4. Registration Procedures. If the Company is required by the provisions of this Section 9 to use all reasonable efforts to effect the registration of any of its securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for a period of time required for the disposition of such securities by the holders thereof, but not to exceed 180 days; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the 20 sale or other disposition of all securities covered by such registration statement until the earlier of such time as all of such securities have been disposed of in a public offering o the expiration of 180 days; (c) furnish to such selling security holders such number of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such selling security holders may reasonably request; (d) use all reasonable efforts to register or qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions within the United States and Puerto Rico as each holder of such securities shall request (provided, however, the Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any jurisdiction in which it is not then qualified or to file any general consent to service or process), and do such other reasonable acts and things as may be required of it to enable such holder to consummate the disposition in such jurisdiction of the securities covered by such registration statement; (e) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such registrable securities; and (f) otherwise use all reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, but not later than 18 months after the effective date of the registration statement, an earnings statement covering the period of at least 12 months beginning with the first full month after the effective date of such registration statement, which earnings statements shall satisfy the provisions of Section 11(a) of the Securities Act. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 9 in respect of the securities which are to be registered at the request of any holder of a Warrant or Warrant Stock that such holder shall furnish to the Company such information regarding the securities held by such holder and the intended method of disposition thereof as the Company shall reasonably request and as shall be required in connection with the action taken by the Company. 9.5. Expenses. All expenses incurred in complying with Section 9, including, without limitation, all registration and filing fees (including all expenses incident to filing with the NASD), printing expenses, fees and disbursements of counsel for the Company, the reasonable fees and expenses of one counsel for the selling security holders (selected by those holding a majority of the shares being registered), expenses of any special audits incident to or required by any such registration and expenses of 21 complying with the securities or blue sky laws of any jurisdictions pursuant to Section 9.4(d), shall be paid by the Company, except that: (a) all such expenses in connection with any amendment or supplement to the registration statement or the prospectus filed more than 180 days after the effective date of such registration statement because any holder of Warrant Stock has not effected the disposition of the securities requested to be registered shall be paid by such holder; and (b) the Company shall not be liable for any fees, discounts or commissions to any underwriter or any fees or disbursements of counsel for any underwriter in respect of the securities sold by any holder of Warrant Stock. 9.6. Indemnification and Contribution. (a) In the event of any registration of any Warrant Stock under the Securities Act pursuant to this Section 9, the Company shall indemnify and hold harmless the holder of such Warrant Stock, such holder's directors and officers, and each other Person (including each underwriter) who participated in the offering of such Warrant Stock and each other Person, if any, who controls such holder or such participating Person within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or participating Person or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (ii) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such holder or such director, officer or participating Person or controlling Person for any legal or any other expenses reasonably incurred by such holder or such director, officer or participating Person or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission made in such registration statement, preliminary prospectus, prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such holder specifically for use therein or so furnished for such purposes by any underwriter. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or such director, officer or participating Person or controlling Person, and shall survive the transfer of such securities by such holder. 22 (b) Each holder of Warrant Stock, by acceptance thereof, agrees to indemnify and hold harmless the Company, its directors and officers and each other Person, if any, who controls the Company within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director or officer or any such Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon information in writing provided to the Company by such holder of Warrant Stock contained, on the effective date thereof, in any registration statement under which securities were registered under the Securities Act at the request of such holder, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto; provided, however, that the indemnification obligations of such holder shall be limited to the gross proceeds from the offering of Warrant Stock received by such holder. (c) If the indemnification provided for in this Section 9.6 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or allege omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding provided, however, that the contribution obligation of any holder shall be limited to the gross proceeds from the offering of the Warrant Stock received by any such holder. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.6(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 23 Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 9.7. Termination of Restrictions. Notwithstanding the foregoing provisions of Section 9, the securities law restrictions imposed by this Section 9 upon the transferability of the Warrants and the Restricted Common Stock and the legend requirements of Section 9.1 insofar as they relate to securities law compliance shall terminate as to any particular Warrant or Restricted Common Stock (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever any restriction imposed by Section 9 shall terminate as to this Warrant, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company, at the expense of the Company, a new Warrant bearing the following legend in place of the restrictive legend set forth hereon: "THE RESTRICTIONS ON TRANSFERABILITY WITH RESPECT TO SECURITIES LAW COMPLIANCE OF THE WITHIN WARRANT CONTAINED IN SECTION 9.2 HEREOF TERMINATED ON ______________, 2000, AND ARE OF NO FURTHER FORCE AND EFFECT." All Warrants issued upon registration of transfer, division or combination of, or in substitution for, any Warrant or Warrants entitled to bear such legend shall have a similar legend endorsed thereon. Whenever the restrictions imposed by this Section 9 shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). 9.8. Listing on Securities Exchange. If the Company shall list any shares of Common Stock on any securities exchange, it will, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of the Warrants so long as any shares of Common Stock shall be so listed during any such Exercise Period. 9.9. Certain Limitations on Registration Rights. Notwithstanding the other provisions of Section 9, the Company shall not be obligated to register Warrant Stock of any holder if, in the opinion of counsel to the Company reasonably satisfactory to such holder and its counsel (or, if such holder has engaged an investment banking firm, to such investment banking firm and its counsel), the sale or other disposition of such holder's Warrant Stock, in the manner and under the conditions proposed by such holder (or by such investment banking firm), may be effected without registering such Warrant Stock under the Securities Act. 24 10. SUPPLYING INFORMATION The Company shall cooperate with Holder and each holder of Restricted Common Stock in supplying such information as may be reasonably necessary for such holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the registration requirements of the Securities Act for the sale of any Warrant or Restricted Common Stock. 11. LOSS OR MUTILATION Upon receipt by the Company from Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of the original Holder shall be sufficient indemnity) and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, however, that in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 12. OFFICE OF THE COMPANY As long as any of the Warrants remain outstanding, the Company shall maintain an office or agency (which may be the principal executive offices of the Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. 13. FINANCIAL AND BUSINESS INFORMATION 13.1. Quarterly Information. Subject to Section 13.5, the Company will deliver to Holder or any holder of Warrant Stock, as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, one copy of an unaudited consolidated balance sheet of the Company and its subsidiaries as at the end of such quarter, and the related unaudited consolidated statements of income, retained earnings and cash flow of the Company and its subsidiaries for such quarter and, in the case of the second and third quarters, for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year. Such financial statements shall be prepared by the Company in accordance with GAAP and accompanied by the certification of the Company's chief executive officer or chief financial officer that such financial statements present fairly the consolidated financial position, results of operations and cash flow of the Company and its subsidiaries as at the end of such quarter and for such year-to-date period, as the case may be. 13.2. Annual Information. Subject to Section 13.5, the Company will 25 deliver to Holder or any holder of Warrant Stock as soon as available and in any event within 120 days after the end of each fiscal year of the Company, one copy of an audited consolidated balance sheet of the Company and its subsidiaries as at the end of such year, and audited consolidated statements of income, retained earnings and cash flow of the Company and its subsidiaries for such year; setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year; all prepared in accordance with GAAP, and which audited financial statements shall be accompanied by (i) an opinion thereon of the independent certified public accountants regularly retained by the Company, or any other firm of independent certified public accountants of recognized national standing selected by the Company and (ii) a report of such independent certified public accountants confirming any adjustment made pursuant to Section 4 during such year. 13.3. Filings. Subject to Section 13.5, the Company will file on or before the required date all regular or periodic reports (pursuant to the Exchange Act) with the Commission and will deliver to Holder and any holder of Warrant Stock promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to its stockholders generally, and of each regular or periodic report (pursuant to the Exchange Act) and any registration statement, prospectus or written communication (other than transmittal letters) (pursuant to the Securities Act), filed by the Company with (i) the Commission or (ii) any securities exchange on which shares of Common Stock are listed. 13.4. Access. At any reasonable time, at reasonable intervals and upon reasonable advance notice, the Company shall permit any holder of Warrants or Warrant Stock and any authorized agent or representative thereof to (a) visit the properties of the Company and any of its subsidiaries and (b) discuss the affairs, finances and accounts of the Company and any of its subsidiaries with any of their respective officers or directors. 13.5. EDGAR Filings. Notwithstanding anything in Sections 13.1, 13.2 or 13.3 to the contrary, the Company shall not be obligated to provide to Holder any documents or portions thereof required to be sent to Holder under such sections to the extent that such documents or portions thereof are filed electronically by the Company with the Securities and Exchange Commission and made available for public access through the SEC's EDGAR system. 14. REPURCHASE BY THE COMPANY OF WARRANT AND WARRANT STOCK 14.1. Obligation to Repurchase Warrant and Warrant Stock. (a) From time to time on or after the third anniversary of the Closing Date and until the Expiration Date, upon written notice from Holders and holders of Warrant Stock owning at least a majority of the total outstanding Warrants and shares of Warrant Stock, taken together as a whole, the Company shall repurchase, on the date and in the manner set forth in Section 14.2 below, 26 from all Holders and all holders of Warrant Stock all (but not less than all) of the Warrants and all (but not less than all) of any shares of Warrant Stock outstanding. The amount payable by the Company for such repurchase shall be determined (i) with respect to any Warrant, by multiplying (A) the number of shares of Common Stock subject to such Warrant by (B) the difference between the Current Market Price per share of Common Stock as of the date of such notice and the Current Warrant Price per share of Common Stock as of the date of such notice and (ii) with respect to any shares of Warrant Stock, by multiplying (A) the number of shares of Warrant Stock by (B) the Current Market Price per share of Common Stock as of the date of such notice. Nothing herein shall preclude the exercise by Holder of any portion of this Warrant exercisable at any time prior to such repurchase. (b) Notwithstanding the provisions of Section 14.1(a), if, at any time during the period between the date on which the Holders and holders of Warrant Stock (if any) shall have exercised their rights under Section 14.1 to cause the Company to repurchase all of the Warrants and any Warrant Stock outstanding and, on or prior to the date of such repurchase, the Company shall consolidate or merge with, or sell all or substantially all of its property and assets to, any Person, then Holders shall (whether or not Holder shall have previously surrendered this Warrant for repurchase by the Company pursuant to this Section 14) be entitled to receive, on the date of such repurchase, the higher of (i) the amount payable to the Holders as determined pursuant to Section 14.1(a) and (ii) an amount equal to the sum of (A) the amount of cash the Holders would have received upon such consolidation, merger or sale had all Warrants been exercised immediately prior thereto, plus (B) the amount equal to the cash value, determined in the good faith judgment of the Board of Directors of the Company, of any other consideration the Holders would have received upon such consolidation, merger or sale had the Warrants been fully exercised immediately prior thereto less the purchase price payable at such time for the purchase of the shares of Common Stock then subject to the Warrants. 14.2. Determination and Payment of Repurchase Price. (a) The purchase price for any repurchase pursuant to this Section 14 (the "Repurchase Price") shall be determined within 90 days of the date of the repurchase notice received by the Company pursuant to Section 14.1 or as of the date the repurchase notice was delivered to the Holder pursuant to Section 14.3 (as the case may be), and shall be payable in cash within 20 days following the date of such determination of the Repurchase Price. On the date of any repurchase of this Warrant and any Warrant Stock pursuant to this Section 14, the Holders and holders of Warrant Stock shall assign to the Company the Warrants and any shares of Warrant Stock, as the case may be, without any representation or warranty (other than as to title), by the surrender of the Warrants 27 and any Warrant Stock at the principal office of the Company referred to in Section 2.1 against payment therefor of the Repurchase Price by, at the option of Holder, (i) wire transfer to an account in a bank located in the United States designated by each Holder for such purpose and/or (ii) a certified or official bank check drawn on a member of the New York Clearing House payable to the order of each Holder. (b) Any repurchase by the Company of all or any portion of the Warrants pursuant to Section 14.1 or 14.3 which is delayed by the failure of the Company to determine the Repurchase Price within the time periods required in Section 14.2(a) shall be consummated within 10 days after the determination of the Repurchase Price. 14.3. Option to Repurchase Warrant and Warrant Stock. If and to the extent that the Holders and holders of Warrant Stock do not exercise their right to cause the Company to repurchase this Warrant and any Warrant Stock within 30 days after the third anniversary of the Closing Date, upon written notice from the Company, the Company may thereafter repurchase all (but not less than all) of this Warrant and all (but not less than all) shares of Warrant Stock. The amount payable by the Company shall equal the Repurchase Price, as determined in Sections 14.1 and 14.2 above. The provisions of Section 14.2 shall apply to any repurchase under this Section 14.3. 15. APPRAISAL The determination of the Appraised Value per share of Common Stock shall be made by an investment banking firm of nationally recognized standing selected by the Company and acceptable to Holder (which acceptance shall not be unreasonably withheld or delayed). If the investment banking firm selected by the Company is not acceptable to Holder and the Company and Holder cannot agree on a mutually acceptable investment banking firm, then Holder and the Company shall each choose one such investment banking firm and the respective chosen firms shall agree on another investment banking firm which shall make the determination. The Company shall retain, at its sole cost, such investment banking firm as may be necessary for the determination of Appraised Value required by the terms of this Warrant. 16. LIMITATION OF LIABILITY No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 28 17. MISCELLANEOUS 17.1. Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. If the Company fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 17.2. Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to Holder or any holder of Warrant Stock, at its last known address appearing on the books of the Company maintained for such purpose. (b) If to the Company at Conseco Finance Corp. 1100 Landmark Towers 345 Saint Peters Street Saint Paul, Minnesota 55102-1639 Attention: Corporate Secretary With a copy to: Conseco, Inc. 11825 N. Pennsylvania Street Carmel, Indiana 46032 Attention: Corporate Secretary or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, or three Business Days after the same shall have been deposited in the United States mail as provided in this Section 17.2. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person 29 designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 17.3. Indemnification. The Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of (i) Holder's exercise of this Warrant and/or ownership of any shares of Warrant Stock issued in consequence thereof, or (ii) any litigation to which Holder is made a party in its capacity as a stockholder or warrantholder of the Company; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements are found in a final non-appealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company. 17.4. Remedies. Holder, each holder of Warrant Stock and the Company, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. Holder, by acceptance of this Warrant, each holder of Warrant Stock, by acceptance of such stock, and the Company each agrees that monetary damages may not be adequate compensation for any loss incurred by reason of a breach by it of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 17.5. Successors and Assigns. Subject to compliance with the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder. 17.6. Amendment. This Warrant may be modified or amended or the provisions of this Warrant waived with the written consent of the Company and Holder. 17.7. Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 17.8. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 30 17.9. Governing Law. This Warrant shall be governed by, and be construed and interpreted in accordance with, the law of the State of New York. 17.10. Effective Date. This Warrant and any Warrant issued in exchange or substitution for or upon a transfer of this Warrant shall be dated the Closing Date and all adjustments provided for herein to the exercise price and number of shares of Common Stock for which this or such other Warrant is exercisable shall be made on the basis of transactions occurring from and after the Closing Date. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: May 11, 2000 CONSECO FINANCE CORP. By: /s/ Thomas J. Kilian --------------------------------- Name: Thomas J. Kilian Title: President Attest: By: /s/ John J. Sabl --------------------------- Name: John J. Sabl Title: Assistant Secretary 31 The undersigned holder of this Warrant agrees to be bound by the terms of this Warrant so long as the undersigned owns all or any portion of this Warrant or any shares of Warrant Stock. LEHMAN BROTHERS HOLDINGS INC. By: /s/ Karen Manson ---------------------------- Name: Karen Manson Title: Vice President 32 EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of ______ shares of Common Stock of Conseco Finance Corp., and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to ____________________ whose address is ____________________________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. ____________________________________ (Name of Registered Owner) ____________________________________ (Signature of Registered Owner) ____________________________________ (Street Address) ____________________________________ (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the Warrant in every particular, without alteration or enlargement or any change whatsoever. A-1 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Common Stock and does hereby irrevocably constitute and appoint _______ ________________ attorney-in-fact to register such transfer on the books of ______________________, maintained for the purpose, with full power of substitution in the premises. Dated: _____________________ Print Name: Signature: Witness: NOTICE: The signature on this assignment must correspond with the name as written upon the face of the Warrant in every particular, without alteration or enlargement or any change whatsoever. B-1 EX-10.46 3 0003.txt EX-10.46 AGREEMENT This Agreement (this "Agreement") is made and entered into this 11th day of May, 2000 by and among Conseco Finance Corp. (the "Company"), Conseco, Inc. ("Conseco"), CIHC, Incorporated ("CIHC"), and Lehman Brothers Holdings Inc. (collectively with its direct and indirect subsidiaries "Lehman"). WHEREAS, the parties hereto have entered into a letter agreement dated May 4, 2000 (the "Letter Agreement") pursuant to which, among other things, (i) the Company has agreed to sell certain assets to Lehman and (ii) the parties thereto have agreed to various related matters to be embodied in a definitive agreement; and WHEREAS, the parties hereto desire to hereby embody their understandings from the Letter Agreement in a definitive agreement that will survive the termination of the Letter Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Retention of Employees. The Company shall use commercially reasonable efforts to retain those members of management listed on Exhibit A hereto in their present positions with the Company. 2. Affiliate Transactions. 2.1 Repayment of Existing Intercompany Indebtedness. The Company shall not directly or indirectly repay any indebtedness for borrowed money outstanding on the date hereof owed to Conseco or any Affiliate (as defined below) thereof except as provided on Exhibit B hereto. The term "Affiliate" means any Person (as defined below) that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person specified, provided however, that for purposes of all sections of this Agreement other than Sections 8 and 11.4, the term "Affiliate" (i) shall not include any direct or indirect majority-owned subsidiaries of the Company but (ii) shall include the Transferred Companies (as defined in Exhibit B). The term "Person" means any natural person, corporation, limited liability company, general partnership, limited partnership, proprietorship, trust, union, association, court, tribunal, agency, government, department, commission, self-regulatory organization, arbitrator, board, bureau, instrumentality, or other entity, enterprise, authority, or business organization. 2.2 Dividend Restrictions. The Company shall not directly or indirectly pay any dividends or make any distributions or transfer any assets of the Company to Conseco or any of its Affiliates except as provided on Exhibit B hereto. 2.3 Restrictions on Other Affiliate Transactions. The Company shall not effect any transactions or enter into, amend, modify or waive any agreement, arrangement or understanding (including without limitation any guaranty, loan, note, or extension of credit by or to the Company) with Conseco or any of its Affiliates, or make any payments thereunder, except (i) as provided on Exhibit B hereto, (ii) that the Company may borrow funds and/or obtain extensions of credit from Conseco and any of its Affiliates at any time and from time to time during the term hereof but none of such indebtedness shall be due, payable or paid except for short-term loans made by Conseco or an Affiliate to the Company to provide the Company with liquidity pending receipt of funding from other sources which is expected to be received within seven business days of such loan provided such funding is actually received, whether or not within such period and (iii) that the Company may enter into agreements, arrangements or understandings with Conseco or any of its Affiliates (other than those covered by clause (ii) above) upon terms no less favorable to the Company than the Company could obtain from third parties in arms length transactions. Nothing in this Agreement shall be deemed to prohibit the Company from paying interest on any indebtedness incurred by the Company after the date hereof in accordance with clause (ii) above, provided that the interest rate paid shall not exceed the interest rate charged on the Intercompany Note. 2.4 Tax Sharing Agreement. Conseco shall (and shall cause its Affiliates to) pay to the Company when due any and all amounts owed to the Company by Conseco (or any Affiliate of Conseco) under the Consolidated Federal Income Tax Agreement in effect on the date hereof (the "Tax Sharing Agreement") among Conseco, the Company, and the other Conseco Affiliates party thereto. 2.5 Intercompany Receivables. Conseco shall (and shall cause its Affiliates to) pay interest on any amount owed by Conseco or any of its Affiliates to the Company or any subsidiary thereof on the date hereof at a rate per annum equal to 150 basis points in excess of the London interbank offered rate for a three-month period, as published in The Wall Street Journal. Such interest shall be paid monthly. 2.6 Maintenance of Separate and Independent Corporate Identities. The Company, CIHC and Conseco shall maintain separate and independent corporate identities and shall observe separate and independent corporate formalities related thereto. Without limiting the generality of the foregoing, each of Conseco and CIHC, on the one hand, and the Company, on the other, shall (i) maintain separate and independent (A) business locations, (B) operating accounts, (C) employees, (D) assets and liabilities, and (E) proceeds from the sale of each entity's respective stock (it being recognized that an immaterial sharing of employees and facilities may occur so long as there is an appropriate allocation of costs relating thereto) and (ii) not commingle any funds or other assets. 2.7 No Contributions to Capital. The Company shall not contribute any funds or other assets to the Transferred Companies. 2.8 No Guaranty of Indebtedness. Without limiting the generality of Section 2.3, the Company shall not assume or guaranty any indebtedness of Conseco or any Affiliate thereof. 3. Maintenance of Financing Facilities. The Company shall use commercially reasonable 2 efforts to maintain the Company's current non-Lehman warehouse financing facilities provided that the Company may replace such warehouse financing facilities with facilities having substantially similar terms. 4. Board Matters. 4.1 Independent Board Member. Concurrently herewith, Conseco shall nominate an Independent Director (as defined in the certificate of incorporation of the Company) to the Company's Board of Directors (the "Independent Board Member"). The Independent Board Member shall be subject to Lehman's consent and approval, which shall not be unreasonably delayed. Conseco and the Company agree to take all action within their respective power (including, with out limitation, the voting of capital stock of the Company owned by Conseco and any of its Affiliates) required to cause the Board of Directors of the Company to at all times include such nominee (and any replacement nominee) as a director of the Company's Board of Directors. 4.2 Vacancies. If, prior to election to the Board of Directors of the Company pursuant to Section 4.1 hereof, any Independent Board Member shall be unable or unwilling to serve as a director of the Company, Conseco shall promptly nominate a replacement in accordance with Section 4.1 hereof, who shall then be the Independent Board Member for purposes of this Section 4. If, following an election to the Board of Directors of the Company pursuant to this Section 4, any Independent Board Member shall resign or be removed or be unable to serve for any reason prior to the expiration of his term as a director of the Company, Conseco shall notify the Board of Directors of the Company in writing of a replacement Independent Board Member, and either (i) Conseco shall vote its shares of capital stock of the Company, at any regular or special meeting called for the purpose of filling positions on the Board of Directors of the Company or by written consent executed in lieu of such a meeting of stockholders, and shall take all such other actions necessary to ensure the election to the Board of Directors of the Company of such replacement Independent Board Member to fill the unexpired term of the Independent Board Member whom such new Independent Board Member is replacing or (ii) the remaining members of the Board of Directors (whether or not constituting a quorum) shall elect such replacement Independent Board Member to fill the unexpired term of the Independent Board Member who such new Independent Board Member is replacing. 4.3 Observer Designee. Lehman shall be entitled to have one designee (an "Observer Designee") attend all of the meetings of the Board of Directors (and each committee thereof) of the Company, in each case other than those portions (if any) of any meeting (a) dealing with (i) the Company's obligations to Lehman or Lehman's Affiliates, (ii) matters reasonably expected to be adverse to Lehman or (iii) matters the disclosure of which to Lehman could reasonably be expected to be adverse to the Company or (b) where necessary to protect the attorney-client privilege of any matter material to the Company. The Observer Designee shall not be entitled to vote on any matters presented to the Board of Directors or to such committees. The Company shall give notice, including, without limitation, any proposed agenda, to Lehman of each such meeting at the same time and in the same manner as the members of the Board of Directors (or any committee thereof) receive notice of such meetings. Lehman shall be entitled to receive all written 3 materials and other information given to the directors of the Company in connection with such meetings at the same time such materials are given to such directors. If the Company proposes to take action by written consent in lieu of a meeting of its Board of Directors, the Company shall give a copy of such consent to Lehman at the same time as the members of the Board of Directors. Such Observer Designee shall maintain the confidentiality of all confidential information of the Company, provided that such Observer Designee may share such information with Lehman. 4.4 Costs and Expenses. The Company shall pay all reasonable out-of-pocket expenses incurred by the Independent Board Member and the Board Observer in connection with their participation in meetings of the Board of Directors (and committees thereof) of the Company. The Company shall also pay the Independent Board Member customary and appropriate retainer and fees as may be mutually agreed upon by the Company and such Independent Board Member. The Company and such Independent Board Member shall negotiate such retainer and fees in good faith so as to ensure that such amounts are customary and appropriate. 5. Restrictions on Transfer of Stock 5.1 Tag Along Right. (a) No Stockholder (as defined below) shall Transfer (as defined below) any Stock (as defined below), if, after giving effect to all prior Transfers from and after the date hereof by such Stockholder such Transfers constitute more than ten percent (10%) of the Common Stock (as defined below) owned by all Stockholders on the date hereof, in a single transaction or related series of transactions, to any Purchaser (as defined below) unless the terms and conditions of such sale, transfer or other disposition (the "Tag Along Sale") to such Purchaser shall contain an offer to each Potential Seller (as defined below) to include in such Tag Along Sale such number of shares of Common Stock as is determined in accordance with Section 5.1(b) below. At least 15 days prior to effecting any Tag Along Sale, such selling Stockholder (the "Selling Stockholder") shall promptly cause the terms and conditions of the Tag Along Sale to be reduced to a reasonably detailed writing (which writing shall identify the Purchaser and shall include the offer to Potential Sellers to purchase or otherwise acquire their Common Stock according to the terms and subject to the conditions of this Section 5), and shall deliver, or cause the Purchaser to deliver, written notice (the "Notice") of the terms of such Tag Along Sale to each Potential Seller. The Notice shall be accompanied by a true and correct copy of the agreement, if any, embodying the terms and conditions of the proposed Tag Along Sale or such written summary thereof if there is no agreement. At any time after receipt of the Notice (but in no event later than 10 business days after receipt), each Potential Seller may accept the offer included in the Notice for up to such number of its shares of Common Stock as determined in accordance with the provisions of Section 5.1(b) below, by furnishing irrevocable written notice of such acceptance to the Selling Stockholder and to the Purchaser. (b) In the event that any Potential Seller elects to accept the offer included in the Notice described in Section 5.1(a) above, such Potential Seller (the "Included Stockholder") shall have the right to sell, transfer or otherwise dispose of such number of its shares of Common Stock pursuant to, and upon consummation of, the Tag Along Sale which is equal to the product 4 of (X) the total number of shares of Common Stock owned by the Included Stockholder and (Y) a fraction, the numerator of which shall equal the total number of shares of Common Stock to be sold to the Purchaser by the Selling Stockholder, and the denominator of which shall equal the total number of shares of Common Stock owned by the Selling Stockholder. If the Purchaser is not willing to purchase such additional shares, the number of shares to be sold by the Selling Stockholder and the Included Stockholders shall be proportionately reduced. (c) The purchase of Stock pursuant to this Section 5 shall be made on the same terms (including, without limitation, the per share consideration and method of payment, and the date of sale, transfer or other disposition), and subject to the same conditions, if any, as are provided to the Selling Stockholder and stated in the Notice. (d) Upon the consummation of the disposition of Stock to the Purchaser pursuant to the Tag Along Sale, the Selling Stockholder shall (i) cause the Purchaser to remit directly to each Included Stockholder the sales price of its Stock disposed of pursuant thereto, and (ii) furnish such other evidence of the completion and time of completion of such disposition and the terms thereof as may reasonably be requested by such Included Stockholder. (e) If a Potential Seller has not delivered to the Selling Stockholder and to the Purchaser written notice of its acceptance of the offer contained in the Notice within 10 business days after the receipt of such Notice, it shall be deemed to have waived any and all rights pursuant to this Section 5 with respect to the disposition of its Stock described in the Notice, and the Selling Stockholder shall have 45 days (calculated from the first day next succeeding the expiration of the 1 business day acceptance period described above), in which to dispose of the aggregate amount of Stock described in the Notice to the Purchaser identified in the Notice, on terms not more favorable to the Selling Stockholder than those which were set forth in the Notice. If a Potential Seller has delivered irrevocable written notice of acceptance as described in the preceding sentence and, if after 30 days following receipt of the Notice, the Selling Stockholder and the Purchaser shall not have completed the disposition of Stock to be sold in connection therewith in accordance with the terms of the Tag Along Sale, all the restrictions on the disposition of Stock contained in this Section 5 shall again be in force and effect. 5.2 Drag-Along Right. (a) If a Stockholder proposes to Transfer to any Purchaser a number of shares of Stock which represents at least a majority of the outstanding shares of Common Stock on a fully-diluted basis (the "Transferred Shares") then, at the election of such holder or holders (a "Drag Along Seller"), each other Stockholder (each, a "Drag Along Stockholder") shall be required to sell to such Purchaser (a "Drag Along Sale") a number of shares of Stock determined by the Drag Along Seller up to the total number of shares of Stock then held by such Drag Along Stockholder (the "Drag Along Shares"). If the percentage of any Drag Along Stockholder's Stock required to be sold as Drag Along Shares exceeds the percentage of the Drag Along Seller's Stock to be sold to Purchaser in a Drag Along Sale, Drag Along Seller, shall, at its sole expense, arrange for the delivery of a fairness opinion by an investment banking firm of nationally recognized standing acceptable to such Drag Along Stockholder (which acceptance 5 shall not be unreasonably withheld or delayed). Such fairness opinion shall confirm that the terms of the Drag Along Sale are fair to the Drag Along Stockholders from a financial point of view. (b) The Drag Along Seller shall deliver to each Drag Along Stockholder written notice (the "Drag Along Notice") of any sale to be made pursuant to Section 5.2(a) above, which notice shall set forth the consideration to be paid by the Purchaser for each Transferred Share, the number of Transferred Shares to be sold by the Drag Along Seller, the number of shares to be sold by each Drag Along Stockholder, and the other terms and conditions, if any, of such transaction. Pending consummation of the Drag Along Sale, the Drag Along Seller shall promptly notify each Drag Along Stockholder of any changes in the proposed timing for the Drag Along Sale and any other material developments in connection therewith. The Drag Along Sale shall be on the same terms and conditions as the sale of the Transferred Shares by the Drag Along Seller. The Drag Along Stockholder shall only be required to give representations and warranties as to its due organization, its due authorization and title to the Drag Along Shares and shall only be required to indemnify for breach of its own representations and warranties. (c) If, within 15 days after the Drag Along Seller provides the Drag Along Notice, no sale of the Transferred Shares owned by the Drag Along Seller or the Drag Along Stockholder in accordance with the provisions of this Section 5 shall have been completed, the Drag Along Sale shall be terminated for purposes hereof. (d) Simultaneously with the consummation of the sale of the Transferred Shares pursuant to this Section 5, the Drag Along Seller shall cause the Purchaser to remit directly to the Drag Along Stockholder the consideration with respect to the Drag Along Shares and shall furnish such other evidence of the completion and time of completion of such sale and terms and conditions, if any, thereof as may reasonably be requested by the Drag Along Stockholder. (e) The provisions of this Section 5, however, shall remain in effect for any subsequent proposed sale. 5.3 Permitted Dispositions of Stock. Each Stockholder shall be entitled to directly or indirectly Transfer all or any portion of its Stock to any Affiliate of such Stockholder, and no such Transfer (other than a Transfer to a Purchaser) shall give rise to any rights under Sections 5.1 or 5.2. No Transfer may be made under this Section 5.3 unless the Person acquiring the shares of Stock pursuant to such Transfer agrees in writing to be bound by the provisions of this Section 5. No Transfer permitted by this Section 5.3 shall relieve the Stockholder effecting such Transfer from its obligations hereunder. 5.4 Definitions. For the purposes of this Section 5, the following terms have the respective meanings: (a) "Common Stock" means the common stock, $.01 par value, of the Company. 6 (b) "Potential Seller(s)" means any Stockholder other than the Selling Stockholder. (c) "Purchaser" means any Person to which shares of Stock are proposed to be Transferred, but shall not include: (i) any Person 30% or more of the fully diluted capital stock or other equity or ownership interests of which are directly or indirectly owned by the Selling Stockholder(s) and/or any Affiliates thereof (in the case of a Tag Along Sale) or the Drag Along Seller(s) and/or any Affiliates thereof (in the case of a Drag Along Sale); or (ii) any Person 30% or more of the voting power of which is directly or indirectly owned by the Selling Stockholder(s) and/or any Affiliates thereof (in the case of a Tag Along Sale) or the Drag Along Seller(s) and/or any Affiliates thereof (in the case of a Drag Along Sale). (d) "Stock" means (i) Common Stock, (ii) any capital stock into which such common stock may be changed or converted, (iii) capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets on liquidation over any other class of stock of the Company and which is not subject to redemption, (iv) shares of common stock of any successor or acquiring corporation received by or distributed to the holders of Common Stock of the Company and (v) any warrant, option or other right exercisable for or convertible into capital stock of the Company (including without limitation that certain Warrant, dated the date hereof, issued by the Company to Lehman), together with any shares of capital stock of the Company issued upon the exercise or conversion thereof. For purposes of all calculations under this Section 5, any warrants, options and other right referred to in Section 5.4(c)(v) shall be assumed to have been fully vested, exercised, and converted, as the case may be, immediately prior to any such calculation, and shall be treated for purposes of such calculations as the number of shares of Common Stock into which such warrants, options and other rights are exercisable or convertible. (e) "Stockholders" means each of the parties hereto and their respective successors and assigns (other than the Company), whom on the date hereof are holders of shares of Stock (including without limitation Lehman). (f) "Transfer(s)" means to directly or indirectly, transfer, sell, assign, donate, contribute, or otherwise voluntarily or involuntarily dispose of. 5.5 Non-Cash Consideration. Notwithstanding anything in this Section 5 to the contrary, if (i) the consideration payable for shares of Stock to be sold in a Tag Along Sale or a Drag Along Sale consists of property other than cash ("Non-Cash Consideration") and (ii) the Purchaser acquiring such shares so requests in writing, each Included Stockholder or Drag Along Stockholder (collectively, "Holders") shall receive cash in lieu of Non-Cash Consideration that would otherwise be received by such Holder as consideration for the shares of Stock to be sold in 7 such Tag Along Sale or Drag Along Sale (as the case may be). The amount of such cash shall equal the Appraised Value of the Non-Cash Consideration that would otherwise be received by such Holder. The term "Appraised Value" means: (A) in respect of any share of capital stock included in the Non-Cash Consideration for which there is not a public market, the fair saleable value of such share of capital stock (determined without giving effect to the discount for (i) a minority interest or (ii) any lack of liquidity of such capital stock or to the fact that the company issuing such capital stock may have no class of equity registered under the Securities Exchange Act of 1934, as amended) as of the last day of the most recent fiscal month end based on the value of the Company, as determined by an investment banking firm of recognized national standing acceptable to the Holder (which acceptance shall not be unreasonably withheld or delayed) divided by the number of fully diluted shares of capital stock of such issuer; (B) in respect of any share of capital stock included in the Non-Cash Consideration for which there is a public market, the average of the daily market prices of such stock for 30 consecutive business days commencing 45 days before such date. The daily market price for each such business day shall be (i) the last sale price on such day on the principal stock exchange on which such capital stock is then listed or admitted to trading, (ii) if no sale takes place on such day on any such exchange, the average of the last reported closing bid and asked prices on such day as officially quoted on any such exchange, (iii) if such capital stock is not then listed or admitted to trading on any stock exchange, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (iv) if neither such corporation at the time is engage in the business of reporting such prices, as furnished by any similar firm then engaged in such business, or (v) if there is no such firm, as furnished by any member of the NASD selected mutually by the Holder and the Company or, if they cannot agree upon such selection, an investment banking firm of recognized national standing as selected by two such members of the NASD, one of which shall be selected by the Holder and one of which shall be selected by the Company; and (C) in respect of any property included in the Non-Cash Consideration other than those types described in paragraphs (A) and (B) above, the fair market value of such property as determined by an entity qualified to make such determinations acceptable to the Holder (which acceptance shall not be unreasonably withheld or delayed). 6. Representations and Warranties. 6.1 Conseco and the Company. Conseco, CIHC and the Company hereby represent and warrant to Lehman as follows: (a) Organization. Each of Conseco, CIHC and the Company is a corporation duly organized, validly existing, and in good standing under the Laws (as defined below) of its jurisdiction of incorporation, and has full corporate power and authority to enter into this Agreement and to perform its obligations under this Agreement. The term "Law" shall mean all 8 laws, statutes, ordinances, Orders, and regulations of the United States of America or any state, commonwealth, city, county, or municipality thereof. The term "Order" shall mean an order, writ, ruling, judgment, directive, injunction or decree of any arbitrator, mediator or governmental or regulatory authority. Each of Conseco and the Company are operated as separate and independent corporations, and each maintains separate and independent (i) corporate books and records including but not limited to all matters related thereto and (ii) financial statements and balance sheets. (b) Authority. The execution and delivery of this Agreement by Conseco, CIHC and the Company and the performance by Conseco, CIHC and the Company of their respective obligations under this Agreement have been duly and validly authorized by all necessary corporate action on the part of Conseco, CIHC and the Company. This Agreement (i) has been duly executed and delivered by Conseco, CIHC and the Company, (ii) constitutes a legal, valid, and binding obligation of Conseco, CIHC and the Company and (iii) is enforceable against Conseco, CIHC and the Company in accordance with its terms, except to the extent that (a) enforcement may be limited by or subject to any bankruptcy, insolvency, reorganization, moratorium, or similar Laws now or hereafter in effect relating to or limiting creditors' rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court or other similar Person before which any proceeding therefor may be brought. (c) Business Structure. Conseco and CIHC, on the one hand, and the Company, on the other, being separate and independent corporations, (i) have observed separate and independent corporate formalities related thereto and have separate and independent (A) business locations, (B) operating accounts, (C) employees, (D) assets and liabilities, and (E) proceeds from the sale of each entity's respective stock (it being recognized that an immaterial sharing of employees and facilities has occurred with an appropriate allocation of costs related thereto) and (ii) do not commingle funds or other assets. (d) No Conflicts or Violations. The execution and delivery of this Agreement by Conseco, CIHC and the Company do not, and the performance by Conseco, CIHC and the Company of their respective obligations under this Agreement will not: (i) violate any term or provision of any Law applicable to Conseco, CIHC or the Company or any of their respective subsidiaries, other than such violations that would not reasonably be expected to result in a Material Adverse Effect (as defined below) on the Company, CIHC or Conseco; (ii) conflict with or result in a violation or breach of any of the provisions of the certificate of incorporation or bylaws of Conseco, CIHC or the Company or any of their respective subsidiaries; (iii) conflict with or result in a violation or breach of, or constitute a default under, any contract or other agreement to which Conseco, CIHC or the Company or any of their respective subsidiaries is a party other than such conflicts, violations, breaches or 9 defaults that would not reasonably be expected to result in a Material Adverse Effect on the Company, CIHC or Conseco; or (iv) require Conseco, CIHC or the Company or any of their respective subsidiaries to obtain any consent, approval, or action of, or make any filing with or give any notice to, any Person (except disclosure of the transactions contemplated in this Agreement in public filings as may be required by applicable securities laws or stock exchange rules), other than those the failure of which to obtain or make would not reasonably be expected to result in a Material Adverse Effect o the Company, CIHC or Conseco. The term "Material Adverse Effect" shall mean, as to any party hereto, any material adverse effect on (i) the assets, properties, business, licenses, income, condition (financial or otherwise) or results of the respective operations of such party, (ii) the transactions contemplated by this Agreement, (iii) the legality, validity or enforceability of this Agreement and the agreements and instruments to be entered into in connection herewith, or the realization of the rights and remedies thereunder, or (iv) the ability of such party to perform its respective obligations under this Agreement. (e) Capitalization of the Company. As of the date hereof, (i) the authorized capital stock of the Company consists solely of 1,000 shares of common stock, par value $.01 per share, of the Company ("Common Stock"), and (ii) there are 103 shares of Common Stock issued and outstanding. All issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid, and nonassessable and are owned beneficially and of record by CIHC. Conseco directly owns all of the issued and outstanding common stock of CIHC. There are no outstanding securities, rights (preemptive or other), subscriptions, calls, warrants, options, or other agreements (except for the warrant to be issued as of the date hereof by the Company to Lehman (the "Warrant")) that give any Person the right to purchase or otherwise receive or be issued any shares of capital stock of the Company or CIHC or any security convertible into or exchangeable for any shares of capital stock of the Company or CIHC. Immediately after issuance of the Warrant, the shares of Common Stock into which the Warrant will be exercisable will represent 5% of the fully diluted common stock of the Company (assuming full vesting, conversion, and exercise of all securities, options, warrants, and other rights). (f) Charter Documents and Bylaws. The Company has heretofore made available to Lehman true and complete copies of the certificate of incorporation and bylaws of the Company, in each case as in effect on the date hereof. (g) Intercompany Indebtedness. Schedule 6.1(g) hereto sets forth the amount and nature of all indebtedness for borrowed money owed by the Company to Conseco or any Affiliate thereof as of the date hereof. 6.2 Lehman. Lehman hereby represents and warrants to the Company, CIHC and Conseco as follows: 10 (a) Organization. Lehman is a corporation duly organized, validly existing, and in good standing under the Laws of its jurisdiction of incorporation, and has full corporate power and authority to enter into this Agreement and to perform its obligations under this Agreement. (b) Authority. The execution and delivery of this Agreement by Lehman and the performance by Lehman of its obligations under this Agreement have been duly and validly authorized by all necessary corporate action on the part of Lehman. This Agreement (i) has been duly executed and delivered by Lehman, (ii) constitutes a legal, valid, and binding obligation of Lehman and (iii) is enforceable against Lehman in accordance with its terms, except to the extent that (a) enforcement may b limited by or subject to any bankruptcy, insolvency, reorganization, moratorium, or similar Laws now or hereafter in effect relating to or limiting creditors' rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief are subject to certain equitable defenses and to the discretion of the court or other similar Person before which any proceeding therefor may be brought. (c) No Conflicts or Violations. The execution and delivery of this Agreement by Lehman do not, and the performance by Lehman of its obligations under this Agreement will not: (i) violate any term or provision of any Law applicable to Lehman or any of its subsidiaries other than such violations that would not reasonably be expected to result in a Material Adverse Effect on Lehman; (ii) conflict with or result in a violation or breach of any of the provisions of the certificate of incorporation or bylaws of Lehman or any of its subsidiaries; (iii) conflict with or result in a violation or breach of, or constitute a default under, any contract or other agreement to which Lehman or any of its subsidiaries is a party, other than such conflicts, violations, breaches or defaults that would not reasonably be expected to result in a Material Adverse Effect on Lehman. (iv) require Lehman or any of its subsidiaries to obtain any consent, approval, or action of, or make any filing with or give any notice to, any Person, other than those the failure to obtain or make would not reasonably be expected to result in a Material Adverse Effect on Lehman. 7. Survival of Representations and Warranties. 7.1 Survival. Subject to Section 7.2 hereof, the representations and warranties respectively made by the parties in this Agreement will expire on the second anniversary hereof, except that the representations and warranties set forth in Sections 6.1(e) and 6.1(g) hereof will remain in full force and effect until the expiration of all applicable statutes of limitation (including all periods of extension, whether automatic or permissive). 11 7.2 Pursuit of Claims. Any breach of any representation or warranty as to which a bona fide claim for indemnification has not been asserted in accordance with Section 8.3 hereof during the applicable survival period set forth in Section 7.1 hereof may not be pursued and is hereby irrevocably waived, except that if a claim for indemnification is made in accordance with Section 8.3 hereof before the expiration of the applicable survival period set forth in Section 7.1 hereof, then (notwithstanding such survival period) the representation or warranty applicable to such claim shall survive until, but only for purposes of, the resolution of such claim. 8. Indemnification. 8.1 Indemnification by Conseco and the Company. Subject to the provisions of Section 7 hereof, Conseco, CIHC and the Company shall jointly and severally indemnify, defend, and hold harmless the Lehman Indemnitees (as defined below) for any and all Damages (as defined below) resulting from or relating to (i) any breach by Conseco, CIHC or the Company of any covenant or agreement made by Conseco, CIHC, the Company or any Affiliate thereof that subsequently becomes a party to this Agreement, i this Agreement and (ii) any breach by Conseco, CIHC, the Company or any Affiliate thereof that subsequently becomes a party to this Agreement of any representation or warranty contained in Section 6.1 of this Agreement. The term "Lehman Indemnitee" shall mean Lehman, any Affiliate of Lehman, and any officer, director, employee, agent, or other representative of such entities. The term "Damages" shall mean any and all monetary damages, liabilities, fines, fees, penalties, interest obligations, deficiencies, losses, costs, expenses (including reasonable fees and expenses of attorneys, accountants, actuaries, and other experts). 8.2 Indemnification by Lehman. Subject to the provisions of Section 7 hereof, Lehman shall indemnify, defend, and hold harmless the Conseco Indemnitees (as defined below) for any and all Damages resulting from or relating to (i) any breach by Lehman of any covenant or agreement made by Lehman in this Agreement and (ii) any breach by Lehman of any representation or warranty contained in Section 6.2 of this Agreement. The term "Conseco Indemnitee" shall mean Conseco, any Affiliate of Conseco and any officer, director, employee, agent, or other representative of such entities. 8.3 Indemnification Procedures. (a) If an Indemnitee becomes aware of any matter that it believes is indemnifiable pursuant to Section 8.1 or 8.2 hereof and such matter involves (i) any claim made against the Indemnitee by any Person other than any Lehman Indemnitee or Conseco Indemnitee or (ii) the commencement of any action, suit, investigation, arbitration, or similar proceeding against the Indemnitee by any Person other than any Lehman Indemnitee or Conseco Indemnitee, the Indemnitee shall give the Indemnifying Party prompt written notice of such claim or the commencement of such action, suit, investigation, arbitration, or similar proceeding, which notice must (A) be given during the applicable survival period, (B) provide (with reasonable specificity) the basis on which indemnification is being asserted, (C) set forth the actual or good-faith estimated amount of Damages for which indemnification is being asserted, if known, and (D) be accompanied by copies of all relevant pleadings, demands, and other papers served on the 12 Indemnitee. Failure to provide notice shall not relieve an Indemnifying Party of any obligation to provide indemnity hereunder, except to the extent that the Indemnifying Party is prejudiced by such failure in its efforts to defend such claim (b) The Indemnifying Party shall have a period of 30 days after the delivery of each notice required by Section 8.3(a) hereof during which to respond to such notice. If the Indemnifying Party elects to defend the claim described in such notice or does not respond within such 30-day period, the Indemnifying Party shall be obligated to compromise or defend (and shall control the defense of) such claim, at its own expense and by counsel chosen by the Indemnifying Party. The Indemnitee shall cooperate fully with the Indemnifying Party and counsel for the Indemnifying Party in the defense against any such claim, and the Indemnitee shall have the right to participate at its own expense in the defense of any such claim. If the Indemnifying Party responds within such 30-day period and elects not to defend such claim, the Indemnitee shall be free to compromise or defend (and control the defense of) such claim and to pursue such remedies as may be available to the Indemnitee under applicable Law. (c) Any compromise or settlement of any claim (whether defended by the Indemnitee or by the Indemnifying Party) shall require the prior written consent of the Indemnitee and the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If, however, the Indemnitee refuses to consent to a bona fide offer of compromise or settlement that the Indemnifying Party desires to accept, the Indemnitee may continue to pursue such claim, free of any participation by the Indemnifying Party, at the sole expense of the Indemnitee. In such event, the obligation of the Indemnifying Party to the Indemnitee will equal the lesser of (i) the amount of the offer of compromise of settlement that the Indemnifying Party desired to accept, plus the reasonable out-of-pocket expenses (except for expenses resulting from the Indemnitee's participation in any defense controlled by the Indemnifying Party) incurred by the Indemnitee before the date the Indemnifying Party notified the Indemnitee of the offer of compromise or settlement, or (ii) the actual out-of-pocket amount that the Indemnitee is obligated to pay as a result of the Indemnitee's continued pursuit of such claim, plus the reasonable out-of-pocket expenses incurred by the Indemnitee after the Indemnifying Party notified the Indemnitee of the offer of compromise or settlement, minus the reasonable out-of-pocket expenses incurred by the Indemnifying Party after such notice date. (d) If an Indemnitee becomes aware of any matter that it believes is indemnifiable pursuant to Section 8.1 or 8.2 hereof and such matter involves a claim made by Lehman, Conseco or the Company, the Indemnitee shall give the Indemnifying Party prompt written notice of such claim, which notice must (i) be given during the applicable survival period, (ii) provide (with reasonable specificity) the bases for which indemnification is being asserted, and (iii) set forth the actual or good-faith estimated amount of Damages for which indemnification is being asserted. The Indemnifying Party will have a period of 30 days after the delivery of each notice required by this Section 8.3(d) during which to respond to such notice. If the Indemnifying Party accepts (in writing) full responsibility for the claim described in such notice, the Indemnifying Party shall pay upon demand to the Indemnitee the actual or estimated amount of Damages reflected in such notice. If the Indemnifying Party has disputed such claim 13 or does not respond within such 30-day period, the Indemnifying Party and the Indemnitee agree to proceed in good faith to negotiate a resolution of such dispute. If all such disputes are not resolved through negotiations within 30 days after such negotiations begin or if such negotiations are not initiated within 30 days after notice is given, either the Indemnifying Party or the Indemnitee may initiate litigation to resolve such disputes. (e) The term "Indemnitee" shall mean a Person claiming indemnification under this Section 8. The term "Indemnifying Party" shall mean a Person against whom claims of indemnification are being asserted under this Section 8. 9. Termination. 9.1 Termination Events. This Agreement shall terminate and be of no further force or effect automatically and without any action of the parties hereto at such time as (i) all indebtedness under the Asset Assignment Agreement dated as of February 13, 1998, as amended from time to time, between Green Tree Residual Finance Corp. I and Lehman ALI Inc. and the Master Repurchase Agreement dated as of September 29, 1999, as amended from time to time, between Green Tree Residual Finance Corp. I and Lehman Brothers Inc. (collectively, the "Residual Facilities") shall have been repaid in full in accordance with the terms of the Residual Facilities and (ii) the Company or an Affiliate shall have repurchased all of the Esoteric Assets (as defined in the Repurchase Agreement defined below) sold under the Amended and Restated Master Repurchase Agreement dated as of May 11, 2000, as amended from time to time, between Green Tree Finance Corp. - - Five ("Finance - Five") and Lehman Commercial Paper Inc. ("LCPI (the "Repurchase Agreement") and owned by LCPI on the repurchase date in accordance with the terms of the Repurchase Agreement and Conseco and its Affiliates shall have taken all action necessary including, without limitation, the repurchase of other assets sold under the Repurchase Agreement in accordance with the terms thereof so that immediately after giving effect to such repurchases and actions, neither the Company nor Finance - Five would be in default under the Repurchase Agreement and the aggregate amount of wet financing under Section 11(e) of the Repurchase Agreement then outstanding would not exceed $150 million. 9.2 Effect of Termination. If this Agreement terminates pursuant to Section 9.1 hereof, this Agreement shall become null and void except that, (a) the provisions of Sections 5, 9, 10, and 11 and the last sentence of Section 4.3 hereof will continue to apply following any such termination, and (b) no party hereto will be relieved of any Liability (as defined below) for Damages that such party may have to the other parties by reason of such party's breach of this Agreement (or any representation, warranty, covenant, or agreement included herein). The term "Liability" shall mean all debts, obligations, and other liabilities (including without limitation surplus relief transactions) of a person (whether known or unknown and whether absolute, accrued, contingent, fixed, or otherwise, or whether due or to become due). 10. Public Announcements. No party shall make any public announcement or media comment regarding the existence or subject matter of this Agreement without prior consultation with the other parties hereto, except as required by law, applicable regulation or the rules of any securities exchange on which a party's securities are publicly traded. Each party shall not, and 14 shall cause its direct and indirect subsidiaries to not, issue any press release or make any other public announcement or filing regarding any matter associated with this Agreement or the matters described herein unless the other parties hereto have been afforded a reasonable opportunity to review such release or announcement. 11. Miscellaneous 11.1 Notices. Any notice or other communication given pursuant to this Agreement must be in writing and (a) delivered personally, (b) sent by telefacsimile or other similar facsimile transmission, (c) delivered by overnight express, or (d) sent by registered or certified mail, postage prepaid, as follows: (a) If to Conseco, CIHC or the Company: Conseco, Inc. 11825 North Pennsylvania Street Carmel, IN 46032 Attention: David V. Harkins, Chairman of the Board Facsimile: 317-817-6327 With a copy to: Conseco, Inc. 11825 North Pennsylvania Street Carmel, IN 46032 Attention: John J. Sabl, Executive Vice President and Secretary Facsimile: 317-817-6327 (b) If to Lehman: Lehman Brothers Holdings Inc. 3 World Financial Center New York, NY 10285 Attention: Kurt Locher, Managing Director - FAS Facsimile: 212-526-8579 With a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Attention: Paul R. Lovejoy Facsimile: 212-310-8007 15 (c) All notices and other communications required or permitted under this Agreement that are addressed as provided in this Section will (A) if delivered personally or by overnight express, be deemed given upon delivery; (B) if delivered by telefacsimile or similar facsimile transmission, be deemed given when electronically confirmed; and (C) if sent by registered or certified mail, be deemed given when received. Any party from time to time may change its address for the purpose of notices to that party by giving a similar notice specifying a new address, but no such notice will be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof 11.2 Entire Agreement. Except for documents executed by Lehman, Conseco and/or the Company concurrently herewith and except for the Acquisition Letter Agreement, this Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter of this Agreement (including, without limitation, the Letter Agreement), and this Agreement contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 11.3 Expenses. Except as otherwise expressly provided in this Agreement, each of the parties hereto shall pay its own costs and expenses in connection with this Agreement and the transactions contemplated hereby. 11.4 Brokers. (a) Indemnification by Conseco and the Company. Conseco and the Company shall jointly and severally indemnify and hold harmless each Lehman Indemnitee in respect of any and all claims or demands for commission, compensation, or other Damages by any broker, finder, or other agent (whether or not a present or former employee or agent of either of Conseco or the Company) claiming to have been engaged by Conseco, the Company or any of their respective Affiliates in connection with the transactions contemplated by this Agreement, and Conseco and the Company shall bear the cost of the reasonable out-of-pocket expenses incurred by each Lehman Indemnitee in investigating, defending against, or appealing any such claim or demand. (b) Indemnification by Lehman. Lehman shall indemnify and hold harmless each Conseco Indemnitee in respect of any and all claims or demands for commission, compensation, or other Damages by any broker, finder, or other agent (whether or not a present or former employee or agent of Lehman) claiming to have been engaged by Lehman or any Affiliate of Lehman in connection with the transactions contemplated by this Agreement, and Lehman shall bear the cost of the reasonable out-of-pocket expenses incurred by each Conseco Indemnitee in investigating, defending against, or appealing any such claim or demand. 16 11.5 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof. Such waiver must be in writing and must be executed by an executive officer of such party. A waiver on one occasion will not be deemed to be a waiver of the same or any other breach or nonfulfillment on a future occasion. All remedies, either under this Agreement, or by Law or otherwise afforded, will be cumulative and not alternative. 11.6 Amendment. This Agreement may be modified or amended only by a writing duly executed by or on behalf of all of the parties hereto. 11.7 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument. 11.8 No Third Party Beneficiary. The terms and provisions of this Agreement are intended solely for the benefit of Conseco, the Company, Lehman, and their respective successors and permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person. 11.9 Governing Law; Venue. This Agreement will be governed by and construed and enforced in accordance with the laws of the State of New York applicable to a Contract executed and performable in such state. EXCLUSIVE VENUE FOR ANY ACTION RELATING TO THIS AGREEMENT SHALL BE MAINTAINED IN ANY FEDERAL OR STATE COURT SITTING IN NEW YORK COUNTY, NEW YORK. EACH PARTY HEREBY CONSENTS TO PERSONAL JURISDICTION AND SERVICE OF PROCESS IN THE STATE OF NEW YORK FOR MATTERS BETWEEN THE PARTIES HERETO THAT ARISE OUT OF THIS AGREEMENT. 11.10 Binding Effect. This Agreement is binding upon and will inure to the benefit of the parties and their respective successors and permitted assigns. 11.11 No Assignment. Neither this Agreement nor any right or obligation hereunder or part hereof may be assigned by any parties hereto without the prior written consent of the other parties hereto (and any attempt to do so will be void), except (a) as otherwise specifically provided herein and (b) that Lehman may assign all or any part of its rights or obligations hereunder to one or more of its Affiliates without the consent of Conseco or the Company provided however, that such assignment shall not relieve Lehman of its responsibilities hereunder. 11.12 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under any present or future Law, and if the rights or obligations under this Agreement of the parties hereto will not be materially and adversely affected thereby, (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and (c) the remaining provisions of this Agreement will remain in full force and effect and will not be 17 affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. 11.13 Headings. The headings of the Sections of this Agreement have been inserted for convenience of reference only, are not intended to be considered a part hereof, and shall not modify or restrict any term or provision hereof. 11.14 Specific Performance. The parties recognize that if any of the parties hereto refuses to perform under the provisions of this Agreement (each, a "Breaching Party"), monetary damages alone will not be adequate to compensate the other parties for their injury. Each party hereto that has not refused to perform under the provisions of this Agreement (each, a "Non-Breaching Party") shall therefore be entitled, in addition to any other remedies that may be available, to obtain specific performance of the terms of this Agreement. If any such action is brought by any party to enforce this Agreement, any Breaching Parties shall waive the defense that there is an adequate remedy at law. In the event of a default by any party which results in the filing of a lawsuit for damages, specific performances, or other remedies, any Non-Breaching Parties shall be entitled to reimbursement by any Breaching Parties of reasonable legal fees and expenses incurred by such Non-Breaching Party. 18 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first written above by the duly authorized representatives of the parties hereto. CONSECO, INC. By: /s/ Thomas J. Kilian ------------------------ Name: Thomas J. Kilian Title: President CONSECO FINANCE CORP. By: /s/ Thomas J. Kilian ------------------------ Name: Thomas J. Kilian Title: President LEHMAN BROTHERS HOLDINGS INC. By: /s/ ------------------------ Name: Title: CIHC, INCORPORATED By: /s/ Mark A. Ferrucci ------------------------ Name: Mark Ferrucci Title: President 19 Exhibit A Members of Management Greg Aplin Keith Anderson Jack Brandom Jim Breakey Bruce Crittenden John Durnien Shawn Gensch Dan Hall Phyllis Knight Mark Shepherd Todd Woodard A-1 Exhibit B Permitted Dividends, Distributions and Transfers The Company may pay interest and scheduled payments of principal under the Amended and Restated Promissory Note, dated the date hereof, issued by the Company to Conseco (the "Intercompany Note"), in accordance with the terms thereof. Notwithstanding the foregoing, the Company shall in no event prepay any amounts thereunder. 1. The Company may make customary and usual payments to Conseco for products and services provided by Conseco to or for the benefit of the Company consistent with past practices consistently applied, provided that the Company shall have at least ten business days in which to cure any failure to pay any such amount on the date such payment was requested. 2. The Company may make payments to Conseco under the Tax Sharing Agreement in accordance with the terms of such agreement. 3. Subject to the receipt of any required regulatory approvals or exemptions, the Company may dividend or distribute to its stockholder all of the stock of the entities identified on Schedule I hereto (the "Transferred Companies"). 4. The Company may repay up to $500 million of the principal owed by the Company to Conseco under the Intercompany Note after consummation of the sale of assets under the Seller's Warranties and Servicing Agreement dated May 11, 2000 by an among Lehman Capital, a division of Lehman, and the Company and the Seller's Warranties and Servicing Agreement dated May 11, 2000 by and between Lehman Brothers Bank, FSB and the Company. The Company may pay dividends to its stockholder(s) in accordance with the formula set forth on Schedule II hereto. B-1 Schedule I TRANSFERRED COMPANIES CFIHC, Inc. (a Delaware corporation) Schedule II PERMITTED DIVIDENDS From and after January 1, 2001, the Company may declare and pay a dividend to its stockholder(s) in any quarter (including, without limitation, the first quarter of 2001 if the tests set forth in this Schedule II are met) in which Free Cash Flow (as defined below) for the preceding 12 months exceeds $375 million. The amount of such dividend payable in any quarter shall in no event exceed the amount by which Free Cash Flow for the preceding 12 months exceeds $375 million. Notwithstanding anything in this Agreement to the contrary, no such dividend may be declared or paid if, (i) at the date of such declaration or payment, a breach, default or event of default shall have occurred and be continuing (or any event has occurred which with the passage of time or the giving of notice or both would constitute a breach, default or event of default) under (A) any material agreement or contract to which the Company or any subsidiary thereof is a party relating to financing or indebtedness or (B) any class of preferred stock of the Company or any subsidiary thereof (collectively, a "Material Contract") or (ii) such a breach, default or event of default could be reasonably expected to result from the declaration or payment of any such dividend. The term "Free Cash Flow" means, with respect to any 12-month period, (i) cash flow from operations of the Company for such period (as reported under "Cash Flow from Operations" in the Company's statements of cash flow filed with the Securities and Exchange Commission) less (ii) Capital Expenditures (as defined below) during such period less (iii) dividends and other distributions to stockholders paid by the Company during such period (other than as permitted by Item 4 of Exhibit B to this Agreement). The term "Capital Expenditures" means, with respect to any period, the aggregate of amounts that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of the Company and its majority-owned subsidiaries prepared in conformity with GAAP consistently applied. Schedule 6.1(g) Indebtedness for Borrowed Money Principal balance as of May 11, 2000 $2,660,799,080 ============== Including: Total cash advances of $5,819,200,000 Total cash payments of (3,362,266,995) Money borrowed for intercompany fees 61,279,246 Capitalized interest 142,586,829 Accrued interest at May 11, 2000 to be paid on June 1, 2000 along with accrued interest since May 11, 2000 $21,092,383.45 ============== EX-12.1 4 0004.txt EX-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 for the six months ended June 30, 2000 and the year ended December 31, 1999 (Dollars in millions) Six months ended Year ended June 30, December 31, 2000 1999 ---- ---- Pretax income (loss) from operations: Net income........................................................... $(327.3) $ 595.0 Add income tax expense (benefit)..................................... (32.9) 423.1 Add minority interest................................................ 74.7 132.8 Add extraordinary charge on extinguishment of debt................... .1 - ------- -------- Pretax income (loss) from operations....................... (285.4) 1,150.9 ------- -------- Add fixed charges: Interest expense on corporate debt, including amortization........... 116.0 169.6 Interest expense on finance debt..................................... 470.2 334.2 Interest expense on investment borrowings............................ 10.0 57.9 Portion of rental(1)................................................. 11.1 20.3 ------- -------- Fixed charges................................................... 607.3 582.0 ------- -------- Adjusted earnings............................................... $ 321.9 $1,732.9 ======= ======== Ratio of earnings to fixed charges.............................. .53X(2) 2.98X ==== ====== Ratio of earnings to fixed charges, excluding interest expense on debt related to finance receivables and other investments........................................... (2) 7.06X ======= ===== Fixed charges................................................... $ 607.3 $ 582.0 Add dividends on preferred stock, including dividends on preferred stock of subsidiaries (divided by the rate of income before minority interest and extraordinary charge to pretax income)........................................... 10.4 2.4 Add distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts........ 115.0 204.3 ------- -------- Fixed charges................................................... $ 732.7 $ 788.7 ======= ======== Adjusted earnings............................................... $ 321.9 $1,732.9 ======= ======== Ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts................... .44X(3) 2.20X ===== ======== Ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts, excluding interest expense on debt related to finance receivables and other investments................................................... (3) 3.38X ===== ====== (1) Interest portion of rental is assumed to be 33 percent. (2) For such ratios, adjusted earnings were $285.4 million less than fixed charges. Adjusted earnings for the six months ended June 30, 2000, included special charges of $327.2 million as described in greater detail in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events". (3) For such ratios, adjusted earnings were $410.8 million less than fixed charges. Adjusted earnings for the six months ended June 30, 2000, included special charges of $327.2 million as described in greater detail in the note to the accompanying consolidated financial statements entitled "Special Charges and Recent Events".
EX-27 5 0005.txt ARTICLE 7 FDS OF CONSECO, INC.
7 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. 1,000 6-MOS DEC-31-2000 JUN-30-2000 21,574,100 0 0 305,400 1,470,400 0 26,032,300 1,515,800 707,400 4,527,200 58,051,400 24,556,700 0 783,400 274,800 18,443,900 2,399,200 482,500 2,905,600 1,524,300 58,051,400 2,121,100 1,943,300 (153,500) 260,200 2,086,700 328,700 433,000 (285,400) (32,900) (252,500) 0 (100) 0 (327,300) (1.02) (1.02) 0 0 0 0 0 0 0 Includes $2,103,500 of cost of policies purchased. Includes $5,679,100 related to finance debt and $9,136,400 related to securitized finance receivables. Includes retained earnings of $2,495,000 and accumulated other comprehensive losses of $970,700. Includes gain on sale on whole-loan sales of $2,600 and fee revenue and other income of $257,600. Includes amortization of cost of policies purchased of $162,100 and amortization of cost of policies produced of $166,600.
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