-----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, E+FcL77s/777ECnuYAgwKaMcaNU0cGoERTkJiZY0Yc5C5WTfRmhGgiSKpCumLqVo kz1qeScJsl0jSGN3mm0f4A== 0000719241-99-000045.txt : 19991117 0000719241-99-000045.hdr.sgml : 19991117 ACCESSION NUMBER: 0000719241-99-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSECO INC CENTRAL INDEX KEY: 0000719241 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [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: 99751824 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 9/30/99 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 September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-9250 Conseco, Inc. Indiana No. 35-1468632 ---------------------- ------------------------------- State of Incorporation IRS Employer Identification No. 11825 N. Pennsylvania Street Carmel, Indiana 46032 (317) 817-6100 - -------------------------------------- -------------- Address of principal executive offices Telephone Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Shares of common stock outstanding as of October 29, 1999: 327,119,340 ================================================================================ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in millions) ASSETS September 30, December 31, 1999 1998 ---- ---- (unaudited) Investments: Actively managed fixed maturities at fair value (amortized cost: 1999 - $23,322.6; 1998 - $21,848.3)........................................................................ $22,099.5 $21,827.3 Interest-only securities at fair value (amortized cost: 1999 - $1,525.9; 1998 - $1,313.6).. 1,406.9 1,305.4 Equity securities at fair value (cost: 1999 - $398.8; 1998 - $373.0)....................... 382.4 376.4 Mortgage loans............................................................................. 1,269.7 1,130.2 Policy loans............................................................................... 666.4 685.6 Other invested assets ..................................................................... 628.8 748.1 Short-term investments..................................................................... 934.5 1,704.7 Assets held in separate accounts and investment trust ..................................... 1,803.3 1,411.1 --------- --------- Total investments...................................................................... 29,191.5 29,188.8 Accrued investment income..................................................................... 486.0 383.8 Finance receivables........................................................................... 5,703.9 3,299.5 Cost of policies purchased.................................................................... 2,431.9 2,425.2 Cost of policies produced..................................................................... 1,951.7 1,453.9 Reinsurance receivables....................................................................... 990.3 734.8 Income tax assets............................................................................. 44.0 - Goodwill...................................................................................... 3,955.8 3,960.2 Cash held in segregated accounts for investors................................................ 864.8 843.7 Other assets.................................................................................. 1,367.4 1,310.0 --------- --------- Total assets........................................................................... $46,987.3 $43,599.9 ========= =========
(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 September 30, December 31, 1999 1998 ---- ---- (unaudited) Liabilities: Liabilities for insurance and asset accumulation products: Interest-sensitive products.............................................................. $17,535.1 $17,229.4 Traditional products..................................................................... 6,533.8 6,391.6 Claims payable and other policyholder funds.............................................. 1,391.3 1,491.5 Unearned premiums........................................................................ 445.0 376.6 Liabilities related to separate accounts and investment trust............................ 1,803.3 1,411.1 Liabilities related to deposit products.................................................. 744.8 30.0 Investor payables.......................................................................... 864.8 843.7 Other liabilities.......................................................................... 1,749.8 1,980.7 Income tax liabilities..................................................................... - 197.1 Investment borrowings...................................................................... 1,097.1 956.2 Notes payable and commercial paper: Corporate................................................................................ 2,393.7 2,932.2 Finance.................................................................................. 4,435.6 2,389.3 --------- --------- Total liabilities.................................................................... 38,994.3 36,229.4 --------- --------- Minority interest: Company-obligated mandatorily redeemable preferred securities of subsidiary trusts..................................................................... 2,636.4 2,096.9 Shareholders' equity: Preferred stock............................................................................ - 105.5 Common stock and additional paid-in capital (no par value, 1,000,000,000 shares authorized, shares issued and outstanding: 1999 - 327,117,740; 1998 - 315,843,609)...................................................................... 2,982.7 2,736.5 Accumulated other comprehensive loss (net of applicable deferred income taxes: 1999 - $(399.1); 1998 - $(16.3))......................................................... (732.4) (28.4) Retained earnings.......................................................................... 3,106.3 2,460.0 --------- --------- Total shareholders' equity........................................................... 5,356.6 5,273.6 --------- --------- Total liabilities and shareholders' equity........................................... $46,987.3 $43,599.9 ========= =========
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 Nine months ended September 30, September 30, -------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: Insurance policy income........................................... $1,017.5 $ 989.1 $3,044.9 $2,969.0 Net investment income............................................. 670.4 577.0 2,074.4 1,854.4 Gain on sale of finance receivables............................... 114.2 257.9 540.0 529.2 Net investment gains (losses)..................................... (74.0) 24.7 (95.9) 141.8 Fee revenue and other income...................................... 121.6 87.5 354.2 255.0 -------- -------- -------- -------- Total revenues................................................ 1,849.7 1,936.2 5,917.6 5,749.4 -------- -------- ---------- -------- Benefits and expenses: Insurance policy benefits......................................... 814.7 852.3 2,624.9 2,693.3 Provision for losses.............................................. 28.3 14.5 76.8 25.7 Interest expense.................................................. 135.2 117.5 371.3 332.8 Amortization...................................................... 168.1 164.2 472.7 515.4 Other operating costs and expenses................................ 332.2 313.5 986.1 923.2 Impairment charge................................................. - - - 549.4 Nonrecurring charges.............................................. - - - 148.0 -------- -------- -------- -------- Total benefits and expenses................................... 1,478.5 1,462.0 4,531.8 5,187.8 -------- -------- -------- -------- Income before income taxes, minority interest and extraordinary charge ................................... 371.2 474.2 1,385.8 561.6 Income tax expense................................................... 144.4 169.2 503.9 275.1 -------- -------- -------- -------- Income before minority interest and extraordinary charge ..................................................... 226.8 305.0 881.9 286.5 Minority interest - distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts, net of income taxes...................................................... 33.4 22.2 93.9 60.4 -------- -------- -------- -------- Income before extraordinary charge ........................... 193.4 282.8 788.0 226.1 Extraordinary charge on extinguishment of debt, net of income taxes............................................................. - 12.3 - 42.6 -------- -------- -------- -------- Net income.................................................... 193.4 270.5 788.0 183.5 Less preferred stock dividends....................................... - 1.8 .6 6.0 -------- -------- -------- -------- Net income applicable to common stock......................... $ 193.4 $ 268.7 $ 787.4 $ 177.5 ======== ======== ======== ======== Earnings per common share: Basic: Weighted average shares outstanding............................. 327,000,000 312,658,000 323,741,000 310,651,000 Net income before extraordinary charge.......................... $.59 $.90 $2.43 $.71 Extraordinary charge............................................ - .04 - .14 ---- ---- ----- ---- Net income.................................................... $.59 $.86 $2.43 $.57 ==== ==== ===== ==== Diluted: Weighted average shares outstanding............................. 332,849,000 332,256,000 331,720,000 327,119,000 Net income before extraordinary charge.......................... $.58 $.85 $2.38 $.67 Extraordinary charge............................................ - .04 - .13 ---- ------ ----- ---- Net income.................................................... $.58 $.81 $2.38 $.54 ==== ==== ===== ====
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 income (loss) earnings ----- ----- --------------- ------------- -------- Balance, January 1, 1999............................. $5,273.6 $ 105.5 $2,736.5 $ (28.4) $2,460.0 Comprehensive income, net of tax: Net income...................................... 788.0 788.0 Change in unrealized depreciation of investments (net of applicable income tax benefit of $382.8)............................ (704.0) - - (704.0) - -------- Total comprehensive income.................. 84.0 Issuance of common shares......................... 205.7 - 205.7 - - Tax benefit related to issuance of shares under stock option plans.............................. 24.4 - 24.4 - - Conversion of preferred stock into common shares.......................................... - (105.5) 105.5 - - Cost of shares acquired........................... (89.4) - (89.4) - - Dividends on common stock......................... (141.1) - - - (141.1) Dividends on preferred stock...................... (.6) - - - (.6) -------- -------- -------- -------- -------- Balance, September 30, 1999.......................... $5,356.6 $ - $2,982.7 $(732.4) $3,106.3 ======== ======= ======== ======= ======== Balance, January 1, 1998............................. $5,213.9 $ 115.8 $2,619.8 $ 200.6 $2,277.7 Comprehensive income, net of tax: Net income...................................... 183.5 - - - 183.5 Change in unrealized appreciation of investments (net of applicable income tax benefit of $27.7)............................. (48.0) - - (48.0) - -------- Total comprehensive income.................. 135.5 Conversion of preferred stock into common shares.......................................... - (10.2) 10.2 - - Conversion of convertible debentures into common shares................................... 27.6 - 27.6 - - Issuance of shares for stock options and for employee benefit plans.......................... 125.6 - 125.6 - - Tax benefit related to issuance of shares under stock option plans.............................. 42.8 - 42.8 - - Issuance of warrants in conjunction with financing transaction........................... 7.7 - 7.7 - - Cost of shares acquired........................... (271.2) - (152.7) - (118.5) Dividends on common stock......................... (114.3) - - - (114.3) Dividends on preferred stock...................... (6.0) - - - (6.0) -------- ------- -------- ------- -------- Balance, September 30, 1998.......................... $5,161.6 $ 105.6 $2,681.0 $ 152.6 $2,222.4 ======== ======= ======== ======= ========
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) Nine months ended September 30, ------------------------ 1999 1998 ---- ---- Cash flows from operating activities: Net income................................................................................ $ 788.0 $ 183.5 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of finance receivables..................................................... (540.0) (529.2) Points and origination fees received.................................................... 359.0 199.9 Interest-only securities investment income.............................................. (140.8) (94.0) Cash received from interest-only securities............................................. 343.0 250.3 Servicing income........................................................................ (123.7) (102.6) Cash received from servicing activities................................................. 137.0 118.0 Provision for losses.................................................................... 76.8 25.7 Amortization and depreciation........................................................... 495.4 562.3 Income taxes............................................................................ 257.8 (101.9) Insurance liabilities................................................................... 222.1 (28.9) Accrual and amortization of investment income........................................... (136.1) (40.6) Deferral of cost of policies produced and purchased..................................... (625.7) (623.8) Nonrecurring and impairment charges..................................................... - 678.9 Minority interest....................................................................... 144.5 92.2 Extraordinary charge on extinguishment of debt.......................................... - 66.4 Net investment (gains) losses........................................................... 95.9 (141.8) Other................................................................................... (67.2) 38.6 ---------- ---------- Net cash provided by operating activities before settlement of prior year taxes....... 1,286.0 553.0 Payment of taxes in settlement of prior years........................................... (85.1) - ---------- ---------- Net cash provided by operating activities............................................. 1,200.9 553.0 ---------- ---------- Cash flows from investing activities: Sales of investments...................................................................... 12,839.3 22,264.0 Maturities and redemptions of investments................................................. 821.5 1,077.0 Purchases of investments.................................................................. (15,320.0) (23,360.1) Cash received from the sale of finance receivables, net of expenses....................... 9,135.4 9,455.9 Principal payments received on finance receivables........................................ 6,777.6 4,361.8 Finance receivables originated............................................................ (18,781.8) (15,174.2) Other..................................................................................... (77.3) (121.8) ---------- ---------- Net cash used by investing activities ................................................ (4,605.3) (1,497.4) ---------- ---------- Cash flows from financing activities: Issuance of notes payable and commercial paper............................................ 14,701.6 12,806.7 Issuance of common shares................................................................. 109.6 108.8 Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts....................................................................... 534.3 488.0 Payments on notes payable and commercial paper............................................ (13,317.7) (12,026.7) Payments to repurchase common stock....................................................... (29.5) (236.0) Investment borrowings..................................................................... 140.9 (572.1) Amounts received for investments in deposit products...................................... 2,935.2 2,383.6 Withdrawals from deposit products......................................................... (2,186.9) (2,001.9) Distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts and common and preferred stock dividends.............................. (253.3) (182.1) ---------- ---------- Net cash provided by financing activities............................................. 2,634.2 768.3 ---------- ---------- Net decrease in short-term investments................................................ (770.2) (176.1) Short-term investments, beginning of period.................................................. 1,704.7 1,154.7 ---------- ---------- Short-term investments, end of period........................................................ $ 934.5 $ 978.6 ========== ==========
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 1998 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. BASIS OF PRESENTATION Our unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, that are necessary to present fairly Conseco's financial position and results of operations on a basis consistent with that of our prior audited consolidated financial statements. As permitted by rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, we have condensed or omitted certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). We have also reclassified certain amounts from the prior periods to conform to the 1999 presentation. Results for interim periods are not necessarily indicative of the results that may be expected for a full year. 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 cost of policies produced, the cost of policies purchased, interest-only securities, servicing rights, goodwill, liabilities for insurance and deposit products, liabilities related to litigation, guaranty fund assessment accruals, gain on sale of finance receivables, provision for losses and deferred income taxes. If our future experience differs from these estimates and assumptions, our financial statements could be materially affected. Consolidation issues. Our consolidated financial statements give retroactive effect to the merger (the "Merger") with Conseco Finance Corp. ("Conseco Finance", formerly Green Tree Financial Corporation prior to its name change in November 1999) in a transaction accounted for as a pooling of interests (see "The Merger"). The pooling of interests method of accounting requires the restatement of all periods presented as if Conseco and Conseco Finance had always been combined. The consolidated statement of shareholders' equity therefore reflects the accounts of the Company as if the additional shares of Conseco common stock issued in the Merger had been outstanding during all periods presented. We have eliminated intercompany transactions prior to the Merger and we have made certain reclassifications to Conseco Finance's financial statements to conform to Conseco's presentation. Our consolidated financial statements exclude the results of material transactions between us and our consolidated affiliates, or among our consolidated affiliates. 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 $163.2 million of trading securities at September 30, 1999, which we included in other invested assets. We had no fixed maturity securities in the held to maturity category at September 30, 1999. 7 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Unrealized losses included in shareholders' equity were as follows:
Net change for the nine months ended Total unrealized losses at: September 30, ---------------------------- ------------------ September 30, December 31, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Unrealized losses on investments............................. $(1,323.4) $(157.8) $(1,363.8) $(40.4) Less amounts attributed to: Cost of policies purchased and produced................... 222.7 78.2 233.1 10.4 Deferred income tax benefit............................... 385.4 27.7 399.1 13.7 Other..................................................... 6.9 3.9 (.8) (7.7) --------- ------- --------- ------ Total................................................... $ (708.4) $ (48.0) $ (732.4) $(24.0) ========= ======= ========= ======
THE MERGER On June 30, 1998, we completed the Merger. We issued a total of 128.7 million shares of Conseco common stock (including 5.0 million common equivalent shares issued in exchange for Conseco Finance's outstanding options), exchanging .9165 of a share of Conseco common stock for each share of Conseco Finance common stock. The Merger constituted a tax-free exchange and was accounted for under the pooling of interests method. We restated all prior-period consolidated financial statements to include Conseco Finance as though it had always been a subsidiary of Conseco. The results of operations for Conseco and Conseco Finance, separately and combined, for periods prior to the Merger were as follows:
Six months ended June 30, 1998 ----------------- (Dollars in millions) Revenues: Conseco........................................................................ $3,232.1 Conseco Finance................................................................ 570.7 Elimination of intercompany revenues........................................... (.8) -------- Combined..................................................................... $3,802.0 ======== Net income (loss): Conseco........................................................................ $ 274.7 (1) Conseco Finance (including nonrecurring charges)............................... (358.9)(2) Elimination of intercompany net income......................................... (2.8) -------- Combined..................................................................... $ (87.0) ======== - -------------------- (1) Includes nonrecurring charges of $40.0 million (net of income taxes) related to the Merger, including investment banking, accounting, legal and regulatory fees and other costs. (2) Includes: (i) an impairment charge of $355.8 million (net of income taxes) to reduce the carrying value of the interest-only securities and servicing rights; and (ii) nonrecurring charges of $108.0 million (net of income taxes) related to the Merger, including investment banking, accounting, legal and regulatory fees and other costs.
8 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- FINANCE RECEIVABLES AND INTEREST-ONLY SECURITIES Finance receivables, summarized by type, were as follows:
September 30, December 31, 1999 1998 ---- ---- (Dollars in millions) Manufactured housing......................................................... $ 603.8 $ 798.8 Mortgage services............................................................ 1,860.4 603.5 Consumer/credit card......................................................... 1,396.7 587.3 Commercial................................................................... 1,903.9 1,352.9 -------- -------- 5,764.8 3,342.5 Less allowance for doubtful accounts......................................... 60.9 43.0 -------- -------- Net finance receivables................................................. $5,703.9 $3,299.5 ======== ========
On September 8, 1999, we announced that we would no longer structure the securitizations of the loans we originate in a manner that results in gain-on-sale revenues. We will use the portfolio method to account for all future financings that support our lending activities. Securitization transactions completed after September 8, 1999 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 which is higher than the level considered to be a clean-up call. Pursuant to Financial Accounting Standards Board Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, such securitization transactions are accounted for as securitized borrowings rather than sales. For loans we finance through securitizations, this change, and the resulting use of the portfolio method of accounting, 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, we will recognize earnings over the life of a new loan as it generates interest. As a result, our reported earnings from each new loan under the portfolio method will be lower in the period it is securitized (compared to our historical method) and higher in later periods, as interest is earned on the loan. The securitizations completed prior to our September 8, 1999 announcement met the applicable criteria to be accounted for as sales. We sold $9.7 billion of finance receivables during 1999 prior to our September 8, 1999 announcement and recognized gains of $540.0 million. We sold $9.4 billion of finance receivables during the first nine months of 1998 and recognized gains of $529.2 million. At the time the loans were securitized and sold, we recognized a gain and recorded our residual interest in the securitization. The residual interest represents the right to receive, over the life of the pool of receivables: (i) the excess of the principal and interest received on the receivables transferred to the special purpose entity over the principal and interest paid to the holders of other interests in the securitization; and (ii) servicing fees. In some of those securitizations, we also retained certain lower-rated securities that are senior in payment priority to the interest-only securities. Such retained securities had a fair market value and amortized cost of $774.7 million and $814.0 million, respectively, at September 30, 1999, and were classified as actively managed fixed maturity securities. 9 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- The interest-only securities on our balance sheet represent an allocated portion of the cost basis of the finance receivables securitized prior to September 8, 1999 in transactions accounted for as sales. We adjust this value to estimated fair value each quarter. We used the following assumptions to adjust the amortized cost to estimated fair value at September 30, 1999. The difference between estimated fair value and the amortized cost of the interest-only securities is included in accumulated other comprehensive loss.
Manufactured Home equity/ Consumer/ housing home improvement equipment Total ------- ---------------- --------- ----- (Dollars in millions) Interest-only securities at fair value.............. $ 797.3 $ 453.5 $ 156.1 $ 1,406.9 Cumulative principal balance of sold finance receivables at September 30, 1999 (a)............ 23,676.3 9,480.2 3,999.5 37,156.0 Weighted average stated customer interest rate on sold finance receivables (a).................. 10.0% 11.5% 10.9% Assumptions to determine estimated fair value of interest-only securities at September 30, 1999: Expected weighted average annual constant prepayment rate as a percentage of principal balance of related finance receivables (a) (b) 11.4% 27.8% 23.6% Expected nondiscounted credit losses as a percentage of principal balance of related finance receivables (a) (b).......... 6.1% 3.6% 2.3% Weighted average discount rate ................ 14.0% 14.0% 14.0% - -------------------- (a) Excludes finance receivables sold in revolving-trust securitizations. (b) The valuation of interest-only securities is affected not only by the projected level of prepayments of principal and net credit losses, but also by the projected timing of such prepayments and net credit losses. Should such timing differ materially from our projections, it could have a material effect on the valuation of our interest-only securities.
We used the assumptions in the table below to determine the initial value of the interest-only securities related to new securitizations in the first nine months of 1999.
Manufactured Home equity/ Consumer/ housing home improvement equipment ------- ---------------- --------- (Dollars in millions) Related to securitizations completed in the first nine months of 1999: Weighted average stated customer interest rate on sold finance receivables (a) (b)............ 9.7% 11.7% 10.8% Assumptions to determine gain on sale during the first nine months of 1999: Expected weighted average annual constant prepayment rate as a percentage of principal balance of sold finance receivables (a) (c).. 10.6% 27.7% 18.9% Expected nondiscounted credit losses as a percentage of principal balance of sold finance receivables (a) (c).................. 8.6% 3.3% 1.7% Weighted average discount rate used for determining the gain on sale of finance receivables.................................. 15.0% 15.0% 15.0% 10 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- - -------------------- (a) Excludes finance receivables sold in revolving-trust securitizations. (b) The stated interest rate reflects reductions in rates due to collection of points. Including such points, the effective yield on manufactured housing finance receivables was approximately 10.8 percent in the first nine months of 1999. (c) The valuation of interest-only securities is affected not only by the projected level of prepayments of principal and net credit losses, but also by the projected timing of such prepayments and net credit losses. Should such timing differ materially from our projections, it could have a material effect on the valuation of our interest-only securities.
Credit quality was as follows:
September 30, --------------------- 1999 1998 ---- ---- 60-days-and-over delinquencies as a percentage of managed finance receivables at period end............................ 1.27% 1.10% ==== ==== Net credit losses incurred during the last twelve months as a percentage of average managed finance receivables during the period................ 1.20% 1.06% ==== ==== Repossessed collateral inventory as a percentage of managed finance receivables at period end............................................... 1.20% 1.00% ==== ====
Activity in the interest-only securities account was as follows:
Nine months ended September 30, ------------------- 1999 1998 ---- ---- (Dollars in millions) Balance, beginning of period................................................ $1,305.4 $1,398.7 Additions resulting from securitizations during the period............... 414.5 566.6 Investment income........................................................ 140.8 94.0 Cash received............................................................ (343.0) (250.3) Impairment change to reduce carrying value............................... - (544.4) Change in unrealized depreciation charged to shareholders' equity........ (110.8) (43.5) -------- -------- Balance, end of period...................................................... $1,406.9 $1,221.1 ======== ========
11 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- EARNINGS PER SHARE A reconciliation of income and shares used to calculate basic and diluted earnings per share is as follows:
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions and shares in thousands) Income: Income before extraordinary charge.................................... $193.4 $282.8 $788.0 $226.1 Preferred stock dividends............................................. - 1.8 .6 6.0 ------ ------ ------ ------ Income before extraordinary charge applicable to common ownership for basic earnings per share............................ 193.4 281.0 787.4 220.1 Effect of dilutive securities: Preferred stock dividends............................................. - 1.8 .6 - ------ ------ ------ ------ Income before extraordinary charge applicable to common ownership and assumed conversions for diluted earnings per share............................................................. $193.4 $282.8 $788.0 $220.1 ====== ====== ====== ====== Shares: Weighted average shares outstanding for basic earnings per share...... 327,000 312,658 323,741 310,651 Effect of dilutive securities on weighted average shares: Stock options....................................................... 1,739 7,180 2,646 9,534 Employee stock plans................................................ 2,073 1,931 2,036 1,932 PRIDES.............................................................. - 5,909 590 - Convertible securities.............................................. 1,752 4,578 2,612 5,002 Forward purchase agreement.......................................... 285 - 95 - ------- ------- ------- ------ Dilutive potential common shares................................ 5,849 19,598 7,979 16,468 ------- ------- ------- ------- Weighted average shares outstanding for diluted earnings per share................................................. 332,849 332,256 331,720 327,119 ======= ======= ======= =======
BUSINESS SEGMENTS We manage our business operations through two segments: (i) finance; and (ii) insurance and fee-based. Finance. We provide a variety of finance products, including: consumer loans for manufactured housing, home improvements, home equity and various consumer products; private label credit card programs; and commercial loans such as revolving credit agreements, asset-backed lending and equipment financing. These products are marketed both direct to the borrower and through intermediary channels such as dealers, vendors, contractors and retailers. Insurance and fee-based. We provide supplemental health, annuity, life, and individual and group major medical products to a broad spectrum of customers through several distribution channels, including career agents, professional independent producers and direct contact. 12 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- Segment operating information was as follows:
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Revenues: Insurance and fee-based segment: Insurance policy income............................................ $1,017.5 $ 989.1 $3,044.9 $2,969.0 Net investment income.............................................. 469.7 470.3 1,551.7 1,558.6 Fee and other revenue.............................................. 25.7 21.0 88.1 67.8 Net investment gains (losses)...................................... (74.0) 24.7 (95.9) 141.8 -------- -------- -------- -------- Total insurance and fee-based segment revenues................... 1,438.9 1,505.1 4,588.8 4,737.2 -------- -------- -------- -------- Finance segment: Net investment income.............................................. 207.8 107.9 539.5 297.8 Gain on sale of finance receivables................................ 114.2 257.9 540.0 529.2 Fee revenue and other income....................................... 95.9 66.5 266.1 187.2 -------- -------- -------- -------- Total finance segment revenues................................... 417.9 432.3 1,345.6 1,014.2 -------- -------- -------- -------- Eliminations......................................................... (7.1) (1.2) (16.8) (2.0) -------- -------- -------- -------- Total revenues................................................. 1,849.7 1,936.2 5,917.6 5,749.4 -------- -------- -------- -------- Expenses: Insurance and fee-based segment: Insurance policy benefits.......................................... 814.7 852.3 2,624.9 2,693.3 Amortization....................................................... 167.3 164.2 470.3 515.4 Interest expense................................................... 14.4 14.8 42.8 51.9 Other operating costs and expenses................................. 148.3 151.3 466.1 468.1 -------- -------- -------- -------- Total insurance and fee-based segment expenses................... 1,144.7 1,182.6 3,604.1 3,728.7 -------- -------- -------- -------- Finance segment: Provision for losses............................................... 28.3 14.5 76.8 25.7 Interest expense................................................... 86.0 56.6 212.2 160.3 Other operating costs and expenses................................. 180.8 158.4 503.2 443.8 Impairment charge.................................................. - - - 549.4 Nonrecurring charges............................................... - - - 148.0 -------- -------- -------- -------- Total finance segment expenses................................... 295.1 229.5 792.2 1,327.2 -------- -------- -------- -------- Not allocated to segments: Interest expense................................................... 41.9 47.3 133.1 122.6 Other operating costs and expenses................................. 3.9 3.8 19.2 11.3 -------- -------- -------- -------- Total expenses not allocated to segments......................... 45.8 51.1 152.3 133.9 -------- -------- -------- -------- Eliminations......................................................... (7.1) (1.2) (16.8) (2.0) -------- -------- -------- -------- Total expenses................................................. 1,478.5 1,462.0 4,531.8 5,187.8 -------- -------- -------- -------- Income (loss) before income taxes, minority interest and extraordinary charge: Insurance operations............................................... 294.2 322.5 984.7 1,008.5 Finance operations................................................. 122.8 202.8 553.4 (313.0) Corporate interest and other expenses.............................. (45.8) (51.1) (152.3) (133.9) -------- -------- -------- -------- Income before income taxes, minority interest and extraordinary charge......................................... $ 371.2 $ 474.2 $1,385.8 $ 561.6 ======== ======== ======== ========
13 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- FINANCIAL INSTRUMENTS Our equity-indexed annuity products provide a guaranteed base rate of return and a higher potential return linked to the performance of the Standard & Poor's 500 Index ("S&P 500 Index"). We buy Standard & Poor's 500 Index Call Options (the "S&P 500 Call Options") in an effort to hedge potential increases to policyholder benefits resulting from increases in the S&P 500 Index to which the product's return is linked. We include the cost of the S&P 500 Call Options in the pricing of these products. 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 nine months of 1999 and 1998, net investment income included $57.8 million and $48.1 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 $90.8 million at September 30, 1999. We classify such instruments as other invested assets. We defer the premiums paid to purchase the S&P 500 Call Options and amortize them to investment income over their terms. Such amortization was $69.8 million and $32.4 million during the first nine months of 1999 and 1998, respectively. The unamortized premium of the S&P 500 Call Options was $57.2 million at September 30, 1999. We periodically use interest-rate swaps to hedge the interest rate risk associated with our borrowed capital. At September 30, 1999, we held instruments that effectively convert a portion of our fixed-rate borrowed capital into floating-rate instruments for specified periods of time. We record the difference between the rates as an adjustment to interest expense. During the first nine months of 1999, interest expense was reduced by $4.9 million as a result of these interest-rate swap agreements. At September 30, 1999, such agreements had a fair value of $(28.8) million. If the counterparties of these financial instruments fail to meet their obligations, Conseco may have to recognize a loss. Conseco limits its exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At September 30, 1999, all of the counterparties were rated "A" or higher by Standard & Poor's Corporation. In conjunction with certain sales of finance receivables, we provided guarantees aggregating approximately $1.7 billion at September 30, 1999. We believe the likelihood of a significant loss from such guarantees is remote. REINSURANCE The cost of reinsurance ceded totaled $325.2 million and $400.4 million in the first nine months of 1999 and 1998, respectively. We deducted this cost from insurance policy income. Conseco is contingently liable for claims reinsured if the assuming company is unable to pay. Reinsurance recoveries netted against insurance policy benefits totaled $342.7 million and $333.6 million in the first nine months of 1999 and 1998, respectively. 14 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- CHANGES IN CORPORATE NOTES PAYABLE AND COMMERCIAL PAPER Corporate notes payable and commercial paper (together with interest rates as of September 30, 1999) were as follows:
September 30, December 31, 1999 1998 ---- ---- (Dollars in millions) Commercial paper (5.73%)............................................................ $ 536.0 $ 784.4 Bank credit facilities.............................................................. - 372.3 Notes payable (5.9%)............................................................... 250.0 400.0 6.4% notes due 2001................................................................. 550.0 550.0 6.4% notes due 2003................................................................. 250.0 250.0 6.5% convertible subordinated notes due 2003........................................ - 86.0 6.8% senior notes due 2005.......................................................... 250.0 250.0 7.6% senior notes due 2001.......................................................... 275.0 - 7.875% notes due 2000............................................................... 150.0 150.0 8.125% senior notes due 2003........................................................ 63.5 63.5 10.5% senior notes due 2004......................................................... 24.5 24.5 Extendible commercial notes (5.6785%)............................................... 50.0 - Other............................................................................... 5.5 13.5 -------- -------- Total principal amount......................................................... 2,404.5 2,944.2 Less unamortized net discount....................................................... 10.8 12.0 -------- -------- Total.......................................................................... $2,393.7 $2,932.2 ======== ========
Our current bank credit facilities allow us to borrow up to $2.3 billion, of which $1.5 billion may be borrowed until 2003 and $.8 billion may be borrowed until September 2000. Actual borrowings at September 30, 1999, totaled $1.1 billion all of which were used to finance the funding of finance receivables and was classified as finance notes payable - see "Changes in Finance Notes Payable." The credit facility requires us to maintain various financial ratios, as defined in the agreement, including: (i) a debt-to-total capitalization ratio less than .45:1 (such ratio was .34:1 at September 30, 1999); and (ii) an interest coverage ratio greater than 2.25:1 for the period October 1, 1999 through September 30, 2001 and greater than 2.50:1 thereafter (such ratio was 5.01:1 for the period ended September 30, 1999). We use unsecured bank credit facilities to support our commercial paper program. In June 1999, the Company issued $275.0 million of senior notes. Such notes are due June 21, 2001 and bear interest at 7.6 percent. We used the net proceeds to reduce amounts outstanding under our bank credit facilities and commercial paper program. In September 1999, the Company issued $50.0 million of extendible commercial notes, which have a final maturity date of September 2000 and bear interest at a variable rate reset on a periodic basis. We used the net proceeds to reduce amounts outstanding under our bank credit facilities and commercial paper program. In July 1999, pursuant to the terms of certain notes payable, we elected to prepay $150.0 million of such notes at par plus accrued interest. The maturity date for such notes was January 2, 2003. On July 23, 1999, we called for redemption all outstanding $86 million principal amount of the 6.5 percent convertible subordinated notes. All notes not previously converted were redeemed on August 23, 1999. Borrowings under our commercial paper program averaged approximately $1,061.9 million during the first nine months of 1999, at a weighted average interest rate of 5.2 percent. Total commercial paper borrowings at September 30, 1999, were $976.8 million, of which $440.8 million funded finance receivables and was classified as finance notes payable - see "Changes in Finance Notes Payable." 15 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- CHANGES IN FINANCE NOTES PAYABLE Notes payable (together with interest rates as of September 30, 1999) related to our financing activities were as follows:
September 30, December 31, 1999 1998 ---- ---- (Dollars in millions) Bank credit facilities (5.63%)...................................................... $1,100.0 $ 877.7 Commercial paper (5.73%)............................................................ 440.8 - Master repurchase agreements due on various dates in 2000 (6.13%)................... 1,785.4 780.6 Credit facility collateralized by retained interests in securitizations due 2000 (7.38%)................................................................. 675.0 300.0 10.25% senior subordinated notes due 2002........................................... 193.6 194.0 Medium term notes due October 1999 to April 2003 (6.58%)............................ 238.7 238.7 Other............................................................................... 6.1 3.2 -------- -------- Total principal amount........................................................... 4,439.6 2,394.2 Less unamortized net discount....................................................... 4.0 4.9 -------- -------- Total............................................................................ $4,435.6 $2,389.3 ======== ========
As of September 30, 1999, we had $5.0 billion of master repurchase agreement capacity (of which $1,785.4 million was outstanding) with various investment banking firms, subject to the availability of eligible collateral. The agreements generally provide for one-year terms, which can be extended each quarter by mutual agreement of the parties for an additional year, based upon the financial performance of our finance segment. CHANGES IN PREFERRED STOCK In February 1999, we redeemed all $105.5 million (carrying value) of outstanding shares of Preferred Redeemable Increased Dividend Equity Securities, 7% PRIDES Convertible Preferred Stock ("PRIDES") in exchange for 5.9 million shares of Conseco common stock. CHANGES IN COMMON STOCK Changes in the number of shares of common stock outstanding were as follows (shares in thousands):
Nine months ended September 30, ------------------- 1999 1998 ---- ---- Balance, beginning of period................................................................... 315,844 310,012 Stock options exercised..................................................................... 5,066 6,588 Stock warrants exercised.................................................................... - 862 Issuance of shares.......................................................................... 3,115 - Common shares converted from convertible subordinated debentures............................ - 916 Common shares converted from PRIDES......................................................... 5,904 573 Common stock acquired under option exercise and repurchase programs......................... (2,900) (5,989) Shares issued under employee benefit and compensation plans................................. 89 745 Shares returned by former executive due to recomputation of bonus........................... - (698) ------- ------- Balance, end of period......................................................................... 327,118 313,009 ======= =======
16 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- On June 30, 1999, we sold 3.1 million shares of our common stock to an unaffiliated party (the "Buyer") at the then-current market value of $29.0625 per share. We used the proceeds from the sale of $89.4 million (net of issuance costs of $1.1 million) to repay certain indebtedness. Simultaneous with the issuance of the common stock, we entered into a forward transaction with the Buyer to be settled at $29.0625 per share on or before December 15, 1999, in a method of our choosing (i.e., we may select cash settlement, transfer of net shares to or from the Buyer, or transfer of net cash to or from the Buyer). We will make payments to the Buyer equivalent to a total fixed return of LIBOR plus 65 basis points for the length of time the forward transaction is outstanding. CHANGES IN MINORITY INTEREST On August 31, 1999, Conseco Financing Trust VII ("Trust VII") , a wholly owned subsidiary of Conseco, issued 12 million of the 9.44% Trust Originated Preferred Securities ("9.44% TOPrS") at $25 per security. Each 9.44% TOPrS security pays cumulative cash distributions at the annual rate of 9.44% of the stated $25 liquidation amount per security, payable quarterly commencing September 30, 1999. The 9.44% TOPrS are fully and unconditionally guaranteed by Conseco. Proceeds from the offering of $290.5 million (after underwriting discount) were used by the trust to purchase a subordinated debenture from Conseco. Conseco then used the net proceeds to repay indebtedness. Conseco has the right to redeem the debentures, and thereby cause a redemption of the 9.44% TOPrS at any time, in whole or in part, on or after August 31, 2004, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest. The 9.44% TOPrS mature on September 30, 2029. Conseco may extend the maturity date by one or more periods, but in no event later than September 30, 2048. The terms of the 9.44% TOPrS parallel the terms of Conseco's debentures held by Trust VII, which debentures account for substantially all of the assets of Trust VII. On August 20, 1999, Conseco Financing Trust XI ("Trust XI"), a wholly owned subsidiary of Conseco, issued 250,000 Redeemable Hybrid Income Overnight Shares ("RHINOS") at $1,000 per security in a private placement. Each RHINOS security pays cash distributions at a floating rate equal to the three-month LIBOR plus 225 basis points, payable quarterly. The proceeds from the issuance of the RHINOS of $243.8 million (after placement and associated costs) were used by the trust to purchase a subordinated debenture from Conseco. Conseco then used the net proceeds to repay indebtedness. The RHINOS mature on May 20, 2002. At the time of the private placement of the RHINOS, we agreed to issue $250.0 million of our common stock in one or more public offerings led by Bank of America Securities L.L.C. prior to February 20, 2002. The RHINOS are mandatorily redeemable for the face amount thereof plus accrued and unpaid distributions three months following the completion of any such public offering. The terms of the RHINOS parallel the terms of Conseco's debentures held by Trust XI, which debentures account for substantially all of the assets of Trust XI. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, ("SFAS 133") requires all derivative instruments to be recorded on the balance sheet at estimated fair value. Changes in the fair value of derivative instruments are to be recorded each period either in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, on the type of hedge transaction. We are required to implement the provisions of SFAS 133 for the year 2001. We are currently evaluating the impact of SFAS 133. At present, we believe it will not have a material effect on either our consolidated financial position or our results of operations. LITIGATION Conseco Finance has been served with various related lawsuits which were filed in the United States District Court for the District of Minnesota. These lawsuits were filed as purported class actions on behalf of persons or entities who purchased common stock or options of Conseco Finance during the alleged class periods that generally run from February 1995 to January 1998. One such action did not include class action claims. In addition to 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 have obtained an order from the United States District Court for the District of Minnesota consolidating the lawsuits seeking class action status into two actions: one which pertains to a purported class of common stockholders and the other which pertains to a purported class of stock option traders. Plaintiffs in the lawsuits assert claims under Sections 10(b) and 17 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------- 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. The Company believes that the lawsuits are without merit and intends to defend such lawsuits vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. 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 (8th Circuit). In addition, the Company and its subsidiaries are involved on an ongoing basis in lawsuits related to their operations. Although the ultimate outcome of certain of such matters cannot be predicted, such lawsuits currently pending against the Company or its subsidiaries are not expected, individually or in the aggregate, to have a material adverse effect on the Company's consolidated financial condition, cash flows or results of operations. CONSOLIDATED STATEMENT OF CASH FLOWS The following disclosures supplement our consolidated statement of cash flows:
Nine months ended September 30, ----------------- 1999 1998 ---- ---- (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........................ $ 3.7 $ 5.0 Tax benefit related to the issuance of common stock under employee benefit plans.............. 24.4 42.8 Conversion of debt and preferred stock into common stock...................................... 138.0 37.8 Shares returned by former executive due to recomputation of bonus............................. - 23.4 Issuance of stock warrants in conjunction with financing transaction.......................... - 7.7
SUBSEQUENT EVENTS On October 21, 1999, the Company completed the public offering of $450.0 million of 8.5 percent notes due October 15, 2002 (the "8.5% Notes") and $550.0 million of 9.0 percent notes due October 15, 2006 (the "9.0% Notes"). The 8.5% Notes were priced at 99.977 percent of par and the 9.0% Notes were priced at 99.510 percent of par. Interest on both the 8.5% Notes and the 9.0% Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2000. Both the 8.5% Notes and the 9.0% Notes are redeemable in whole or in part at the option of Conseco at any time at a redemption price equal to the greater of: (i) 100 percent of the principal amount of the notes to be redeemed plus accrued interest to the date of redemption; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon from the redemption date to the maturity date, computed by discounting such payments, in each case, to the redemption date on a semi-annual basis at the Treasury rate (as defined) plus 25 basis points, plus accrued interest on the principal amount thereof to the date of redemption. Both the 8.5% Notes and 9.0% Notes are unsecured and rank equally with all other unsecured senior indebtedness of Conseco. Proceeds from the offering of approximately $991 million (after underwriting discounts and estimated offering expenses) were used to reduce outstanding indebtedness. 18 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 nine months ended September 30, 1999 and 1998, and significant changes in our consolidated financial condition. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes. Consolidated results and analysis Our third quarter 1999 operating earnings were $241.5 million, or 73 cents per diluted share, both down 19 percent over the third quarter of 1998. Operating earnings during the first nine months of 1999 were $860.8 million, or $2.60 per diluted share, both up 14 percent over the first nine months of 1998. Operating earnings from the insurance segment increased as a result of the growth and increased profitability of the business in force. Operating earnings from the finance segment increased during the first nine months of 1999 primarily as a result of portfolio growth which increased income from sales of receivables, interest, servicing and commissions. Operating earnings from the finance segment decreased in the third quarter of 1999 compared to the prior year as a result of a reduction in securitizations structured as sales. Net income of $193.4 million in the third quarter of 1999, or 58 cents per diluted share, included net investment losses (including related costs, amortization and taxes) of $48.1 million, or 15 cents per share. Net income of $270.5 million in the third quarter of 1998, or 81 cents per diluted share, included: (i) net investment losses of $15.0 million, or 5 cents per share; and (ii) an extraordinary charge of $12.3 million, or 4 cents per share, related to the early retirement of debt. Net income of $788.0 million in the first nine months of 1999, or $2.38 per diluted share, included net investment losses (including related costs, amortization and taxes) of $72.8 million, or 22 cents per share. Net income of $183.5 million in the first nine months of 1998, or 54 cents per diluted share, included: (i) net investment losses of $23.6 million, or 7 cents per share; (ii) nonrecurring and impairment charges of $503.8 million, or $1.54 per share, related to the Conseco Finance Merger; and (iii) an extraordinary charge of $42.6 million, or 13 cents per share, related to the early retirement of debt. Total revenues in the third quarters of 1999 and 1998 included net investment losses of $74.0 million and net investment gains of $24.7 million, respectively. Excluding net investment gains (losses), total revenues were $1,923.7 million in the third quarter of 1999, up .6 percent from $1,911.5 million in the third quarter of 1998. Total revenues in the first nine months of 1999 and 1998 included net investment losses of $95.9 million and net investment gains of $141.8 million, respectively. Excluding net investment gains (losses), total revenues were $6,013.5 million in the first nine months of 1999, up 7.2 percent from $5,607.6 million in the first nine months of 1998. 19 CONSECO, INC. AND SUBSIDIARIES -------------------- Results of operations by segment for the three and nine months ended September 30, 1999 and 1998 The following tables and narratives summarize our results by segment.
Three months ended Nine months ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Operating earnings: Operating income of segments before income taxes and minority interest: Insurance and fee-based operations............................... $368.2 $338.7 $1,096.7 $1,022.2 Finance operations............................................... 122.8 202.8 553.4 384.4 Corporate interest and other expenses............................ (45.8) (51.1) (152.3) (133.9) ------ ------ -------- -------- Operating income before income taxes and minority interest .... 445.2 490.4 1,497.8 1,272.7 Income taxes related to operating income............................. 170.3 170.4 543.1 458.8 ------ ------ -------- -------- Operating income before minority interest...................... 274.9 320.0 954.7 813.9 Minority interest in consolidated subsidiaries....................... 33.4 22.2 93.9 60.4 ------ ------ -------- -------- Operating earnings............................................. 241.5 297.8 860.8 753.5 Nonoperating items: Net investment losses, net of tax and including other items.......... (48.1) (15.0) (72.8) (23.6) Impairment charge, net of taxes...................................... - - - (355.8) Nonrecurring charges, net of taxes................................... - - - (148.0) ------ ------ -------- -------- Income before extraordinary charge............................. 193.4 282.8 788.0 226.1 Extraordinary charge, net of taxes...................................... - 12.3 - 42.6 ------ ------ -------- -------- Net income..................................................... $193.4 $270.5 $ 788.0 $ 183.5 ====== ====== ======== ========
20 CONSECO, INC. AND SUBSIDIARIES -------------------- Insurance and fee-based operations
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Premiums and deposits collected: Annuities ......................................................... $ 592.5 $ 488.4 $ 1,875.8 $ 1,538.5 Supplemental health.................................................. 538.0 518.4 1,646.9 1,574.8 Life................................................................. 270.1 223.2 736.2 680.6 Individual and group major medical................................... 220.2 219.8 636.2 666.3 Mutual funds......................................................... 78.3 17.4 243.3 52.8 Certificates of deposit.............................................. 433.1 - 853.1 - --------- --------- --------- --------- Total premiums and deposits collected............................ $ 2,132.2 $ 1,467.2 $ 5,991.5 $ 4,513.0 ========= ========= ========= ========= Average liabilities for insurance and asset accumulation products: Annuities: Mortality based.................................................... $ 567.0 $ 689.3 $ 648.5 $ 687.1 Equity-linked...................................................... 1,785.7 1,006.6 1,585.8 800.6 Deposit based...................................................... 10,865.9 11,516.6 10,921.4 11,801.7 Separate accounts and investment trust liabilities................... 1,758.6 966.4 1,617.4 785.3 Health............................................................... 4,745.4 4,582.4 4,719.6 4,391.0 Life: Interest sensitive................................................. 4,084.2 4,158.3 4,097.3 4,136.4 Non-interest sensitive............................................. 2,775.6 2,764.0 2,823.1 2,744.5 --------- --------- --------- --------- Total average liabilities for insurance and asset accumulation products, net of reinsurance ceded................ $26,582.4 $25,683.6 $26,413.1 $25,346.6 ========= ========= ========= ========= Insurance policy income................................................. $ 1,017.5 $ 989.1 $ 3,044.9 $ 2,969.0 Net investment income: General account invested assets...................................... 511.4 506.2 1,522.8 1,503.4 Equity-indexed products based on S&P 500 Index....................... (26.6) (23.9) 57.8 48.1 Amortization of cost of S&P 500 Call Options......................... (26.4) (13.8) (69.8) (32.4) Separate account assets.............................................. 11.3 1.8 40.9 39.5 Fee revenue and other income............................................ 25.7 21.0 88.1 67.8 --------- --------- --------- --------- Total revenues (a)............................................... 1,512.9 1,480.4 4,684.7 4,595.4 --------- --------- --------- --------- Insurance policy benefits............................................... 666.4 694.1 2,017.0 2,055.9 Amounts added to policyholder account balances: Annuity products other than those listed below....................... 163.3 183.3 510.8 553.9 Equity-indexed products based on S&P 500 Index....................... (26.3) (26.9) 56.2 44.0 Separate account liabilities......................................... 11.3 1.8 40.9 39.5 Amortization related to operations...................................... 167.3 123.3 454.2 359.9 Interest expense on investment borrowings............................... 14.4 14.8 42.8 51.9 Other operating costs and expenses...................................... 148.3 151.3 466.1 468.1 --------- --------- --------- --------- Total benefits and expenses (a).................................. 1,144.7 1,141.7 3,588.0 3,573.2 --------- --------- --------- --------- Operating income before income taxes, minority interest and extraordinary charge........................................... 368.2 338.7 1,096.7 1,022.2 Net investment losses, including related costs and amortization......................................................... (74.0) (16.2) (112.0) (13.7) --------- --------- --------- --------- Income before income taxes, minority interest and extraordinary charge........................................... $ 294.2 $ 322.5 $ 984.7 $ 1,008.5 ========= ========= ========= =========
(continued) 21 CONSECO, INC. AND SUBSIDIARIES --------------------
Three months ended Nine months ended September 30, September 30 ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (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 excluding liabilities related to separate accounts and investment trust and reinsurance ceded (annualized)................................ 4.85% 4.60% 4.69% 4.54% Operating costs and expenses and amortization related to operations as a percentage of average liabilities for insurance and asset accumulation products excluding liabilities related to separate accounts and investment trust and reinsurance ceded (annualized)................................................ 5.09% 4.44% 4.95% 4.49% Health loss ratios: All health lines: Insurance policy benefits......................................... $535.2 $521.7 $1,553.2 $1,543.9 Loss ratio........................................................ 70.77% 70.09% 68.13% 68.85% Medicare Supplement: Insurance policy benefits......................................... $155.9 $146.4 $477.6 $450.1 Loss ratio........................................................ 68.83% 67.01% 68.73% 68.19% Long-Term Care: Insurance policy benefits......................................... $125.3 $126.2 $360.3 $358.5 Loss ratio........................................................ 65.66% 69.73% 64.12% 68.00% Specified Disease: Insurance policy benefits......................................... $64.7 $58.5 $175.7 $158.4 Loss ratio........................................................ 71.29% 60.26% 62.49% 54.88% Major Medical: Insurance policy benefits......................................... $173.1 $170.7 $473.5 $506.3 Loss ratio........................................................ 78.35% 78.39% 73.83% 76.18% Other: Insurance policy benefits......................................... $16.2 $19.9 $66.1 $70.6 Loss ratio........................................................ 59.37% 66.21% 65.72% 69.30% - -------------------- (a) Revenues exclude net investment gains (losses); benefits and expenses exclude amortization related to realized gains.
Premiums and deposits collected were $2.1 billion in the third quarter of 1999, up 45 percent over 1998. Excluding certificates of deposit, collections were $1.7 billion, up 16 percent over 1998. Premiums and deposits collected in the first nine months of 1999 were $6.0 billion, up 33 percent over 1998. Excluding certificates of deposit, collections in the first nine months of 1999 were $5.1 billion, up 14 percent over 1998. See "Sales of Insurance and Deposit Products" for further analysis. Average liabilities for insurance and asset accumulation products, net of reinsurance receivables, were $26.6 billion in the third quarter of 1999, up 3.5 percent over 1998. Average liabilities for insurance and asset accumulation products, net of reinsurance receivables, in the first nine months of 1999 were $26.4 billion, up 4.2 percent over 1998. 22 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 related to other policies. The increases in 1999 reflect higher sales of these products and higher charges against such policies. See "Sales of Insurance and Deposit Products" 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, cost and change in the fair value of S&P 500 Call Options related to equity-indexed products) was $511.4 million in the third quarter of 1999, up 1.0 percent from 1998 and was $1,522.8 million in the first nine months of 1999, up 1.3 percent from 1998. The average balance of general account invested assets increased by 2.7 percent in the third quarter of 1999 to $26.3 billion compared to the same period in 1998. The yield on these assets decreased by .13 percentage point to 7.79 percent in 1999. The average balance of general account invested assets increased by 1.9 percent in the first nine months of 1999 to $26.2 billion compared to the same period in 1998. The yield on these assets decreased by .4 percentage point to 7.76 percent during the first nine months of 1999. The changes in yield reflect the general decrease in investment interest rates over several periods and fluctuations in income from limited partnerships and other investments. 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 performance of the S&P 500 Index to which the returns on such products are linked. 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. 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. Insurance policy benefits in the third quarter of 1999 decreased by 4.0 percent in the third quarter of 1999 to $666.4 million and by 1.9 percent in the first nine months of 1999 compared to the same period in 1998 as a result of favorable claim experience. Loss ratios for Medicare supplement products have been relatively stable and within our expectations. 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 declined in 1999, reflecting favorable claims experience, partially offset by 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 policy years of a policy (accounted for as reserve increases) which are paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, the loss ratio on these policies may increase during the asset accumulation phase, but the increase in the change in reserve will be partially offset by investment income earned on the assets accumulated. The 1999 loss ratios for specified disease products were within our expectations. The 1998 ratios benefited from favorable claim developments which were not expected to continue. The loss ratios for major medical products declined in 1999, reflecting recent premium rate increases, claim management activities and favorable claim developments. The loss ratios on other products will fluctuate more than other lines due to the smaller size of these blocks of business. The 1999 ratios have been within our expectations. Amounts added to policyholder account balances for annuity products decreased by 11 percent in the third quarter of 1999 to $163.3 million and decreased by 7.8 percent in the first nine months of 1999 to $510.8 million, primarily due to a smaller block of this type of annuity business in force, on the average, in the first nine months of 1999. The weighted average crediting rate for these annuity liabilities was 4.5 percent and 4.6 percent in the first nine months of 1999 and 1998, respectively. 23 CONSECO, INC. AND SUBSIDIARIES -------------------- Amortization related to operations increased primarily as a result of an increase in our business in force. This item includes amortization of: (i) the cost of policies produced; (ii) the cost of policies purchased; and (iii) goodwill related to this segment's business. It excludes amortization related to realized gains. Interest expense on investment borrowings decreased primarily as a result of decreased investment borrowing activities and lower average borrowing rates. Investment borrowings averaged approximately $1,121.1 million during the first nine months of 1999 compared to $1,158.5 million during the same period of 1998. Borrowing rates decreased 90 basis points to 5.1 percent during the first nine months of 1999. Other operating costs and expenses were comparable to the prior periods. Net investment gains (losses), including related costs and amortization, fluctuate from period to period. 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 additional net amortization of the cost of policies purchased and the cost of policies produced of $40.9 million in the third quarter of 1998, and $16.1 million and $155.5 million in the first nine months of 1999 and 1998, respectively. There was no such amortization in the third quarter of 1999. 24 CONSECO, INC. AND SUBSIDIARIES -------------------- Finance operations
Three months ended Nine months ended September 30, September 30, ----------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Contract originations: Manufactured housing................................................. $ 1,794.5 $ 1,668.0 $ 5,189.2 $ 4,546.1 Mortgage services.................................................... 1,726.5 1,337.5 5,095.8 3,628.2 Consumer/credit card................................................. 1,123.7 746.6 2,404.9 2,011.1 Commercial........................................................... 2,367.2 1,950.4 6,506.1 5,310.8 --------- --------- --------- --------- Total ............................................................. $ 7,011.9 $ 5,702.5 $19,196.0 $15.496.2 ========= ========= ========= ========= Securitizations of receivables recorded as sales: Manufactured housing................................................. $ 1,854.5 $ 1,650.0 $ 5,335.6 $ 4,206.4 Home equity/home improvement......................................... 747.4 1,399.8 3,696.1 2,978.9 Consumer/equipment................................................... - 800.0 770.7 1,574.5 Leases............................................................... - 291.3 252.7 291.3 Commercial and retail revolving credit............................... 25.2 34.7 117.7 523.1 Retained bonds....................................................... (143.8) (115.5) (515.2) (129.8) --------- --------- --------- --------- Total ............................................................. $ 2,483.3 $ 4,060.3 $ 9,657.6 $ 9,444.4 ========= ========= ========= ========= Managed receivables (average): Manufactured housing................................................. $23,469.1 $19,903.3 $22,426.4 $19,057.6 Mortgage services.................................................... 10,810.8 6,794.7 9,740.5 5,986.6 Consumer/credit card................................................. 3,444.9 2,560.5 3,178.1 2,233.8 Commercial........................................................... 5,492.1 4,249.8 5,388.3 3,902.0 --------- --------- --------- --------- Total ............................................................. $43,216.9 $33,508.3 $40,733.3 $31,180.0 ========= ========= ========= ========= Net investment income: Finance receivables and other........................................ $158.5 $ 73.7 $ 398.7 $ 203.8 Interest-only securities............................................. 49.3 34.2 140.8 94.0 Gain on sale of finance receivables..................................... 114.2 257.9 540.0 529.2 Fee revenue and other income............................................ 95.9 66.5 266.1 187.2 ------ ------ -------- -------- Total revenues..................................................... 417.9 432.3 1,345.6 1,014.2 ------ ------ -------- -------- Provision for losses.................................................... 28.3 14.5 76.8 25.7 Finance interest expense................................................ 86.0 56.6 212.2 160.3 Other operating costs and expenses...................................... 180.8 158.4 503.2 443.8 ------ ------ -------- -------- Total expenses..................................................... 295.1 229.5 792.2 629.8 ------ ------ -------- -------- Income before impairment and nonrecurring charges, income taxes and extraordinary charge............................ 122.8 202.8 553.4 384.4 Impairment charge....................................................... - - - (549.4) Nonrecurring charges.................................................... - - - (148.0) ------ ------ -------- -------- Income (loss) before income taxes and extraordinary charge......... $122.8 $202.8 $ 553.4 $ (313.0) ====== ====== ======== ========
Contract originations in the third quarter of 1999 were $7.0 billion, up 23 percent over 1998. Contract originations in the first nine months of 1999 were $19.2 billion, up 24 percent over 1998. 25 CONSECO, INC. AND SUBSIDIARIES -------------------- Manufactured housing contract originations increased by $126.5 million, or 7.6 percent, in the third quarter of 1999 and by $643.1 million, or 14 percent, during the first nine months of 1999. The 1999 year-to-date increase was due to a 5.2 percent increase in the average contract size and a 8.6 percent increase in the number of contracts originated. Mortgage services contract originations increased by $389.0 million, or 29 percent, in the third quarter of 1999 and by $1,467.6 million, or 40 percent, during the first nine months of 1999. The increase reflects growth in both home equity and home improvement business. We have continued to expand these origination networks. Consumer/credit card contract originations increased by $377.1 million, or 51 percent, in the third quarter of 1999 and by $393.8 million, or 20 percent, during the first nine months of 1999 because of our successful marketing efforts. Commercial originations increased by $416.8 million, or 21 percent, in the third quarter of 1999 and by $1,195.3 million, or 23 percent, during the first nine months of 1999, reflecting higher production in most areas of commercial financing. Securitizations of receivables occur when the finance receivables we originate are transferred to a special purpose entity which we establish for the limited purpose of selling securities which are backed by the cash flows from the transferred loans. Prior to our September 8, 1999 announcement, these transactions were structured in a manner which required us to recognize gain-on-sale revenues. Securitizations completed after September 8, 1999 are being structured in a manner which will require us to account for the transactions as secured borrowings. The amount of receivables we securitize in a particular period depends on many factors, including: (i) the volume of recent originations; (ii) market conditions; and (iii) the availability and cost of alternative financing. The total finance receivables sold in the third quarter of 1999 decreased by 39 percent from the third quarter of 1998 reflecting the change in securitization structure announced in September 1999. The total finance receivables sold in the first nine months of 1999 increased by 2.3 percent over the same period in 1998. We held $5.7 billion of finance receivables on our balance sheet at September 30, 1999, an increase of $2.4 billion over September 30, 1998, primarily as a result of an increase in originations and the change to portfolio lending. Managed receivables include finance receivables sold through securitizations prior to our September 8, 1999 announcement, as well as the finance receivables and related interests recorded on our balance sheet. Average managed receivables increased to $43.2 billion in the third quarter of 1999, up 29 percent over 1998, and to $40.7 billion in the first nine months of 1999, up 31 percent over the same period in 1998. Net investment income on finance receivables and other consists of: (i) interest earned on unsold finance receivables; and (ii) interest income on short-term and other investments. Such income increased by 115 percent, to $158.5 million, in the third quarter of 1999 and increased by 96 percent, to $398.7 million, in the first nine months of 1999. The increase is consistent with the increase in average finance receivables during the 1999 periods. The weighted average yields earned on finance receivables and other investments were 11.7 percent and 10.5 percent during the third quarters of 1999 and 1998, respectively, and such weighted average yields were 12.2 percent and 10.9 percent during the first nine months of 1999 and 1998, respectively. Net investment income on interest-only securities is the accretion recognized on the interest-only securities we retain after we sell finance receivables. Such income increased by 44 percent, to $49.3 million, in the third quarter of 1999 and by 50 percent, to $140.8 million, in the first nine months of 1999. The increase is consistent with the change in the average balance of interest-only securities and the increase in the discount rate assumption we use to value our interest-only securities. The weighted average yields earned on interest-only securities were 13.6 percent and 9.7 percent during the first nine months of 1999 and 1998, respectively. As a result of the change in the structure of our securitizations, we will account for future transactions as secured borrowings and we will not recognize gain-on-sale revenue or additions to interest-only securities. As a result, future investment income accreted on the interest-only security will decrease, as cash remittances from the gain-on-sale securitizations reduce the interest-only security balances. 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 would decrease in future periods. See Gain on sale of finance receivables below for further discussion of how the September 8, 1999 change will affect our future earnings. 26 CONSECO, INC. AND SUBSIDIARIES -------------------- Gain on sale of finance receivables is the difference between the proceeds from the sale of receivables (net of related transaction costs) and the allocated carrying amount of the receivables sold. The amount relates to the securitizations structured as sales which occurred prior to our September 8, 1999 announcement previously discussed. In those securitizations, we determined the allocated carrying amount by allocating the total carrying amount of the receivables between the portion sold and any retained interests (securities classified as fixed maturities, interest-only securities and servicing rights), based on their relative fair values at the time of sale. Assumptions used in calculating the estimated fair value of such retained interests are subject to volatility that could materially affect operating results. Prepayment rates may vary from expected rates as a result of competition, obligor mobility, general and regional economic conditions and changes in interest rates. In addition, actual losses incurred as a result of loan defaults may vary from projected performance. Our gain on sale decreased by 56 percent, to $114.2 million, in the third quarter of 1999 and increased by 2.0 percent, to $540.0 million, in the first nine months of 1999. The decrease in the third quarter primarily reflects the decrease in securitizations structured as sales and to a lesser extent, the lower ratio of gain on sale to loans sold. Securitizations completed in future periods will be structured as secured borrowings and no gain on sale will be recognized. The gain recognized for our previous securitizations fluctuated when changes occurred in: (i) the amount of loans sold; (ii) market conditions (such as the market interest rates available on securities sold in these securitizations); (iii) the amount and type of interest we retained in the receivables sold; and (iv) assumptions used to calculate the gain. The gain recognized in the first quarter of 1998 was reduced by $47 million for an interest-only security valuation adjustment. In response to higher prepayment rates and higher market yields on publicly traded securities similar to our interest-only securities, we increased the assumed prepayment and discount rates used to calculate the gain on sale of finance receivables for sales completed after June 30, 1998. Late in the second quarter of 1999 and continuing into the third quarter of 1999, the general level of interest rates increased, causing us to incur higher interest costs on securitizations completed at that time. Accordingly, the amount of gain (before valuation adjustments) as a percentage of closed-end loans sold decreased to 4.6 percent in the third quarter of 1999 from 6.4 percent in the third quarter of 1998 and decreased to 5.7 percent in the first nine months of 1999 compared to 5.9 percent in the first nine months of 1998. In recent periods, the Company has emphasized the inclusion of points and origination fees in finance receivables originated, which increases the amount of cash received when such receivables are securitized. Points and origination fees collected upon the securitization of finance receivables increased to $115.8 million (or 101 percent of the gain on sale recognized) in the third quarter of 1999 compared to $89.7 million (or 35 percent of the gain on sale recognized) in the third quarter of 1998; and increased to $359.0 million (or 66 percent of the gain on sale recognized) in the first nine months of 1999 compared to $199.9 million (or 38 percent of the gain on sale recognized) in the comparable period of 1998. In recent periods, conditions in the credit markets have resulted in less-attractive pricing of certain lower-rated securities in our securitization structure. As a result, we have chosen to reduce the amount of securities sold by the securitization trusts, particularly securities having corporate guarantee provisions. Prior to our September 8, 1999 announcement, these securities were treated as retained interests in the securitization trusts. We recognize no gain on the sale on such securities, but we recognize greater interest income, net of related interest expense, over the term we hold them. At September 30, 1999, we held $774.7 million of such securities which are classified as actively managed fixed maturities. The change to the structure of our future 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 future securitizations which are structured as secured borrowings), we will recognize: (i) earnings over the life of new loans as interest revenues are generated; and (ii) interest expense on the securities which are sold to investors in the loan securitization trusts. 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. Fee revenue and other income includes servicing income, commissions earned on insurance policies written in conjunction with the financing transactions and other income from late fees. Such income increased by 44 percent, to $95.9 million, in the third quarter of 1999 and by 42 percent, to $266.1 million, in the first nine months of 1999. Our servicing portfolio (on which we earn servicing income) and our net written insurance premiums both grew along with managed receivables. As a result of the change in the structure of our future securitizations announced on September 8, 1999, we will no longer record an asset for servicing rights at the time of our securitizations, nor will we record servicing fee revenue; instead, the entire 27 CONSECO, INC. AND SUBSIDIARIES -------------------- amount of interest income will be recorded as investment income. Accordingly, the amount of servicing income will decline in subsequent periods. Provision for losses increased by 95 percent, to $28.3 million, in the third quarter of 1999 and by 199 percent, to $76.8 million, in the first nine months of 1999. The increase is principally due to the increase of loans held on our balance sheet. Under the portfolio method which will be used for future securitizations, we will recognize the credit losses on the loans on our balance sheet as the losses are incurred. For loans previously recorded on the gain-on-sale basis, 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 52 percent, to $86.0 million, in the third quarter of 1999 and by 32 percent, to $212.2 million, in the first nine months of 1999. Our borrowings grew in order to fund the increase in finance receivables. These increases were offset somewhat by a decrease in our average borrowing rate to 6.5 percent in the third quarter of 1999 from 6.9 percent in the third quarter of 1998. Our average borrowing rate during the first nine months of 1999 was 6.4 percent compared to 7.5 percent during the first nine months of 1998. Under the portfolio method which will be used for future securitizations, we will recognize interest expense on the securities issued to investors in the securitization trusts. 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 14 percent, to $180.8 million, in the third quarter of 1999 and by 13 percent, to $503.2 million, in the first nine months of 1999 reflecting: (i) the growth in our servicing portfolio; and (ii) the growth in our loan origination offices and infrastructure. An impairment charge of $549.4 million was recognized in the first nine months of 1998 to reduce the carrying value of the interest-only securities and servicing rights. Nonrecurring charges of $148.0 million were recognized in the first nine months of 1998 and include various costs related to the Merger (including investment banking, accounting, legal and regulatory fees). Other components of income before income taxes, minority interest and extraordinary charge: Corporate interest and other expenses were $45.8 million in the third quarter of 1999 and $51.1 million in the third quarter of 1998. Such expenses were $152.3 million in the first nine months of 1999 and $133.9 million in the first nine months of 1998. Interest expense was $41.9 million in the third quarter of 1999, $47.3 million in the third quarter of 1998, $133.1 million in the first nine months of 1999 and $122.6 million in the first nine months of 1998. Such expense fluctuates in relationship to the average debt outstanding and the average interest rate thereon. SALES OF INSURANCE AND DEPOSIT PRODUCTS In accordance with GAAP, insurance policy income shown in our consolidated statement of operations consists of premiums received for policies that have life contingencies or morbidity features. For annuity and universal life contracts without such features, premiums collected are not reported as revenues, but as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges. 28 CONSECO, INC. AND SUBSIDIARIES -------------------- Total premiums and deposits collected were as follows:
Three months ended Nine months ended September 30, September 30, ------------------- ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in millions) Premiums collected by our insurance subsidiaries: Annuities: Equity-indexed (first-year)........................................ $ 209.8 $ 221.4 $ 647.8 $ 595.1 Equity-indexed (renewal)........................................... 7.0 3.5 34.3 12.9 -------- -------- -------- -------- Subtotal - equity-indexed annuities.............................. 216.8 224.9 682.1 608.0 -------- -------- -------- -------- Other fixed (first-year)........................................... 214.1 162.2 731.5 636.6 Other fixed (renewal).............................................. 13.1 9.8 47.6 49.8 -------- -------- -------- -------- Subtotal - other fixed annuities................................. 227.2 172.0 779.1 686.4 -------- -------- -------- -------- Variable (first-year).............................................. 131.4 77.1 350.9 190.3 Variable (renewal)................................................. 17.1 14.4 63.7 53.8 -------- -------- -------- -------- Subtotal - variable annuities.................................... 148.5 91.5 414.6 244.1 -------- -------- -------- -------- Total annuities.................................................. 592.5 488.4 1,875.8 1,538.5 -------- -------- -------- -------- Supplemental health: Medicare supplement (first-year)................................... 26.6 26.4 80.9 80.4 Medicare supplement (renewal)...................................... 198.5 190.6 602.4 573.0 -------- -------- -------- -------- Subtotal - Medicare supplement................................... 225.1 217.0 683.3 653.4 -------- -------- -------- -------- Long-term care (first-year)........................................ 32.6 31.8 91.8 91.7 Long-term care (renewal)........................................... 164.9 152.3 499.3 448.3 -------- -------- -------- -------- Subtotal - long-term care........................................ 197.5 184.1 591.1 540.0 -------- -------- -------- -------- Specified disease (first-year)..................................... 9.6 10.2 29.0 31.4 Specified disease (renewal)........................................ 83.1 85.2 254.2 261.8 -------- -------- -------- -------- Subtotal - specified disease..................................... 92.7 95.4 283.2 293.2 -------- -------- -------- -------- Other health (first-year).......................................... 5.0 3.2 16.6 9.6 Other health (renewal)............................................. 17.7 18.7 72.7 78.6 -------- -------- -------- -------- Subtotal - other health.......................................... 22.7 21.9 89.3 88.2 -------- -------- -------- -------- Total supplemental health........................................ 538.0 518.4 1,646.9 1,574.8 -------- -------- -------- -------- Life insurance: First-year......................................................... 78.5 36.2 158.4 115.4 Renewal............................................................ 191.6 187.0 577.8 565.2 -------- -------- -------- -------- Total life insurance............................................. 270.1 223.2 736.2 680.6 -------- -------- -------- -------- Individual and group major medical: Individual (first-year)............................................ 24.5 22.4 69.8 74.8 Individual (renewal)............................................... 58.4 60.6 172.6 172.5 -------- -------- -------- -------- Subtotal - individual............................................ 82.9 83.0 242.4 247.3 -------- -------- -------- -------- Group (first-year)................................................. 16.0 13.5 38.3 46.0 Group (renewal).................................................... 121.3 123.3 355.5 373.0 -------- -------- -------- -------- Subtotal - group................................................. 137.3 136.8 393.8 419.0 -------- -------- -------- -------- Total major medical.............................................. 220.2 219.8 636.2 666.3 -------- -------- -------- -------- Total first-year premiums............................................ 748.1 604.4 2,215.0 1,871.3 Total renewal premiums............................................... 872.7 845.4 2,680.1 2,588.9 -------- -------- -------- -------- Total premiums collected by our insurance subsidiaries........... 1,620.8 1,449.8 4,895.1 4,460.2 -------- -------- -------- -------- Deposits collected by our other subsidiaries: Mutual funds......................................................... 78.3 17.4 243.3 52.8 Certificates of deposit.............................................. 433.1 - 853.1 - -------- -------- -------- -------- Total premiums and deposits collected............................ $2,132.2 $1,467.2 $5,991.5 $4,513.0 ======== ======== ======== ========
29 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 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 $216.8 million in the third quarter of 1999 compared with $224.9 million in the third quarter of 1998 and were $682.1 million in the first nine months of 1999 compared with $608.0 million in the first nine months of 1998. Other fixed rate annuity products include single-premium deferred annuities ("SPDAs"), flexible-premium deferred annuities ("FPDAs") and single-premium immediate annuities ("SPIAs"), which are credited with a guaranteed rate. SPDA and FPDA policies typically have an interest rate that is guaranteed for the first policy year, after which we have the discretionary ability to change the crediting rate to any rate not below a guaranteed rate. The interest rate credited on SPIAs is based on market conditions existing when a policy is issued and remains unchanged over the life of the SPIA. Annuity premiums on these products increased by 32 percent, to $227.2 million, in the third quarter of 1999 and by 14 percent, to $779.1 million, in the first nine months of 1999. Fixed annuity collections in the third quarter of 1999 included $48.0 million of premiums on a reinsurance contract entered into in the quarter. We intend to seek other reinsurance opportunities in future quarters, although the timing of such transactions is not predictable. Variable annuities offer contract holders the ability to direct premiums into specific investment portfolios; rates of return are based on the performance of the portfolio. Such annuities have become increasingly popular recently as a result of the desire of investors to invest in common stocks. Our profits on variable annuities come from the fees charged to contract holders. Variable annuity collected premiums increased by 62 percent, to $148.5 million, in the third quarter of 1999 and increased by 70 percent, to $414.6 million in the first nine months of 1999. Supplemental health products include Medicare supplement, long-term care and specified disease 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 3.7 percent to $225.1 million, in the third quarter of 1999 and by 4.6 percent, to $683.3 million, in the first nine months of 1999. Sales of Medicare supplement policies in recent periods have been affected by: (i) steps taken to improve profitability by increasing premium rates and changing our commission structure and underwriting criteria; (ii) increased competition from alternative providers, including HMOs; and (iii) reduced production in Massachusetts due to our decision to cease writing new business in that state (as announced in the third quarter of 1997). Premiums collected on long-term care policies increased by 7.3 percent, to $197.5 million, in the third quarter of 1999 and by 9.5 percent to $591.1 million, in the first nine months of 1999, due to increases in premium rates. Premiums collected on specified disease policies decreased by 2.8 percent to $92.7 million in the third quarter of 1999 and by 3.4 percent, to $283.2 million, in the first nine months of 1999. Other health products include various health insurance products that are not currently being actively marketed. Premiums collected in the third quarter of 1999 were $22.7 million, up 3.7 percent over the third quarter of 1998 and were $89.3 million in the first nine months of 1999, slightly higher than the comparable period in 1998. Since we no longer actively market these products, we expect collected premiums to decrease in future years. Our in-force "other health" 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 21 percent to $270.1 million in the third quarter of 1999 and by 8.2 percent, to $736.2 million, in the first nine months of 1999. Collections in the third quarter of 1999 included $38.7 million of premiums on a 30 CONSECO, INC. AND SUBSIDIARIES -------------------- reinsurance contract entered into in the quarter. We intend to seek other reinsurance opportunities in future quarters, although the timing of such transactions is not predictable. Individual and group major medical products include major medical health insurance products sold to individuals and groups. Group premiums increased by .4 percent, to $137.3 million, in the third quarter of 1999 and decreased by 6.0 percent, to $393.8 million, in the first nine months of 1999. Individual health premiums collected in the 1999 periods were comparable to the same periods in 1998. Our efforts to secure rate increases and write only profitable major medical business have improved the profitability of these products, although total premiums collected in the first nine months of 1999 decreased as expected. Mutual fund sales have been very strong in 1999, reflecting our expanded distribution. Such sales have more than doubled total mutual fund sales for all of 1998. Certificates of deposit were introduced in the fourth quarter of 1998. Sales in the first nine months of 1999 were $853.1 million. PRO FORMA DATA ASSUMING PORTFOLIO LENDING On September 8, 1999, we announced that we would no longer structure the securitization of loans we originate in a manner that results in gain-on-sale revenues. We will use the portfolio method to account for all future financings that support our lending activities. In this section, we present our estimate of our operating earnings (income before extraordinary charge and net investment gains (losses) (less that portion of amortization of cost of policies purchased and cost of policies produced and income taxes relating to such gains (losses))) on a portfolio basis; that is, as if we had accounted for the securitizations of our finance receivables as financing transactions, rather than as sales, throughout the Company's history. Accordingly, the pro forma data exclude gain on sale of finance receivables, servicing revenues and interest income on interest-only securities. The pro forma data do reflect, over the life of the loans, the spread between: (i) the interest earned on the loans included in the securitization pools; and (ii) the sum of the interest paid to the holders of the debt securities pursuant to the securitizations and credit losses in the portfolio. The provision for credit losses reflected each period represents actual losses incurred in the period plus an addition to the allowance for doubtful accounts equal to 15 basis points times the average finance receivables for the period. This section is intended to assist you in analyzing our operating results. It is not intended to, and does not, represent the results of the Company's operations prepared in accordance with GAAP. This presentation assumes that the Company had been a portfolio lender since its inception. Although we intend to account for all future financings that support our lending activities under the portfolio method, our actual earnings will initially be substantially lower than the pro forma earnings presented here (since the portion of our managed portfolio accounted for under the portfolio method will initially be very small). See "Finance Operations - Gain on Sale of Finance Receivables" and "Liquidity for Finance Operations." 31 CONSECO, INC. AND SUBSIDIARIES --------------------
Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- (Amounts in millions except per share amounts) PRO FORMA OPERATING EARNINGS DATA Margin on interest spread products: Finance income....................................................... $1,176.3 $ 888.0 $ 3,269.1 $ 2,492.3 Investment income from insurance product investments................. 469.7 470.3 1,551.7 1,558.6 Provision for credit losses.......................................... (158.8) (97.5) (421.4) (279.7) Finance and investment borrowing interest expense.................... (733.3) (574.8) (2,084.7) (1,626.2) Amounts added to annuity and financial product account balances...... (148.3) (158.2) (607.9) (637.4) -------- ------- --------- --------- Net interest margin.............................................. 605.6 527.8 1,706.8 1,507.6 -------- ------- --------- --------- Margin on morbidity and mortality products: Insurance policy income.............................................. 992.9 960.9 2,968.8 2,890.3 Insurance policy benefits............................................ (666.4) (694.1) (2,017.0) (2,055.9) -------- ------- --------- --------- Net mortality and morbidity...................................... 326.5 266.8 951.8 834.4 -------- ------- --------- --------- Other revenues: Fee revenue and other................................................ 79.0 51.9 230.5 152.4 Policy surrender fees................................................ 24.6 28.2 76.1 78.7 -------- ------- --------- --------- Total other revenues............................................. 103.6 80.1 306.6 231.1 -------- ------- --------- --------- Corporate interest expense.............................................. 41.9 47.3 133.1 122.6 Amortization............................................................ 167.3 123.3 454.2 359.9 Other operating costs and expenses...................................... 311.3 265.8 895.4 794.7 -------- ------- --------- --------- Total costs and expenses......................................... 520.5 436.4 1,482.7 1,277.2 -------- ------- --------- --------- Pro forma operating earnings before income taxes and minority interest.............................................. 515.2 438.3 1,482.5 1,295.9 Income tax expense...................................................... 196.8 150.6 537.2 467.6 -------- ------- --------- --------- Pro forma operating earnings before minority interest............ 318.4 287.7 945.3 828.3 Minority interest....................................................... 33.4 22.2 93.9 60.4 -------- ------- --------- --------- Pro forma operating earnings..................................... $ 285.0 $ 265.5 $ 851.4 $ 767.9 ======== ======= ========= ========= Reconciliation of reported operating earnings per diluted share to pro forma operating earnings per share: Reported operating earnings per share.............................. $ .73 $ .90 $ 2.60 $ 2.30 Pro-forma adjustments: Finance income................................................. 1.95 1.58 5.50 4.41 Interest-only interest income.................................. (.09) (.07) (.26) (.18) Provision for credit losses.................................... (.25) (.16) (.65) (.48) Amortization of net deferred costs............................. (.05) (.03) (.14) (.07) Interest expense............................................... (1.18) (.95) (3.42) (2.68) Eliminate gain-on-sale......................................... (.21) (.49) (1.01) (1.00) Eliminate servicing income..................................... (.08) (.07) (.23) (.19) Deferral of net origination costs.............................. .04 .09 .18 .24 ------ ------- ------ ------ Pro forma operating income per share......................... $ .86 $ .80 $ 2.57 $ 2.35 ====== ====== ====== ======
32 CONSECO, INC. AND SUBSIDIARIES -------------------- LIQUIDITY AND CAPITAL RESOURCES Changes in our consolidated balance sheet between December 31, 1998 and September 30, 1999, reflect: (i) operating results; (ii) origination and sale of finance receivables; (iii) changes in the fair value of actively managed fixed maturity securities and interest-only securities; and (iv) various financing transactions. Financing transactions (described in the notes to the consolidated financial statements) include: (i) the issuance and repurchase of common stock; (ii) the issuance and repayment of notes payable and commercial paper; and (iii) the issuance of trust preferred securities. In accordance with GAAP, we record our actively managed fixed maturity investments, interest-only securities and equity securities at estimated fair value. At September 30, 1999, 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 $1,363.8 million as a result of this fair value adjustment. The fair value adjustment resulted in a $40.4 million decrease in carrying value at year-end 1998. Total capital shown below excludes notes payable of the finance segment used to fund finance receivables. Such capital, before the fair value adjustment recorded in accumulated other comprehensive loss, increased $788.0 million, or 7.6 percent, to $11.1 billion.
September 30, December 31, 1999 1998 ---- ---- (Dollars in millions) Total capital, excluding accumulated other comprehensive loss: Corporate notes payable and commercial paper.......................... $ 2,393.7 $ 2,932.2 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts.................................... 2,636.4 2,096.9 Shareholders' equity: Preferred stock.................................................... - 105.5 Common stock and additional paid-in capital........................ 2,982.7 2,736.5 Retained earnings.................................................. 3,106.3 2,460.0 --------- --------- Total shareholders' equity, excluding accumulated other comprehensive loss..................................... 6,089.0 5,302.0 --------- --------- Total capital, excluding accumulated other comprehensive loss... 11,119.1 10,331.1 Accumulated other comprehensive loss...................................... (732.4) (28.4) --------- --------- Total capital................................................... $10,386.7 $10,302.7 ========= =========
Corporate notes payable and commercial paper decreased during the first nine months of 1999 primarily due to the repayment of debt using the proceeds from the issuance of $300.0 million of 9.44% TOPrS and $250.0 million of RHINOS. Company-obligated mandatorily redeemable preferred securities of subsidiary trusts increased during the first nine months of 1999 due to the aforementioned issuances of 9.44% TOPrS and RHINOS. Shareholders' equity, excluding accumulated other comprehensive loss, increased by $787.0 million in the first nine months of 1999, to $6.1 billion. Significant components of the increase included: (i) net income of $788.0 million; (ii) the issuance of $205.7 million of common stock; and (iii) the tax benefit of $24.4 million related to the issuance of shares under stock option plans. These increases were partially offset by: (i) repurchases of $89.4 million of common stock; and (ii) $141.7 million of common and preferred stock dividends. The accumulated other comprehensive loss increased by $704.0 million, principally related to the decreasing fair value of our insurance companies' investment portfolio as interest rates rose. Book value per common share outstanding increased to $16.38 at September 30, 1999, from $16.37 at December 31, 1998, primarily due to the factors discussed in the previous paragraph. Excluding accumulated other comprehensive loss, book value per common share outstanding increased to $18.61 at September 30, 1999, from $16.46 at December 31, 1998. 33 CONSECO, INC. AND SUBSIDIARIES -------------------- Dividends declared on common stock for the nine months ended September 30, 1999, were 43 cents per share. In July 1999, Conseco's Board of Directors increased the quarterly cash dividend on the Company's common stock to 15 cents per share from 14 cents per share, effective with the dividend payment to be made October 1, 1999. The following table summarizes certain financial ratios as of and for the nine months ended September 30, 1999, and as of and for the year ended December 31, 1998:
September 30, December 31, 1999 1998 ---- ---- Book value per common share: As reported............................................................................... $16.38 $16.37 Excluding accumulated other comprehensive loss (a)........................................ 18.61 16.46 Ratio of earnings to fixed charges: As reported............................................................................... 4.62X 3.30X Excluding interest expense on debt related to finance receivables and other investments (b)................................................... 11.23X 6.79X Ratio of operating earnings to fixed charges (c): As reported............................................................................... 4.91X 4.89X Excluding interest expense on debt related to finance receivables and other investments (b)................................................... 12.06X 10.81X Ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts: As reported............................................................................. 3.35X 2.47X Excluding interest expense on debt related to finance receivables and other investments (b)................................................. 5.42X 3.68X Ratio of operating earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts (c): As reported............................................................................. 3.56X 3.66X Excluding interest expense on debt related to finance receivables and other investments (b)................................................. 5.82X 5.86X Rating agency ratios (a) (d) (e) (f): Debt to total capital..................................................................... 19% 26% Debt and Company-obligated mandatorily redeemable preferred securities of subsidiary trusts to total capital (g)............................................... 37% 42% ____________________ (a) Excludes accumulated other comprehensive 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. 34 CONSECO, INC. AND SUBSIDIARIES -------------------- (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) nonrecurring charges. Such ratios are not intended to, and do not, represent the following ratios prepared in accordance with GAAP: the ratio of earnings to fixed charges; and the ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts. (d) Excludes debt of 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) Corporate debt is reduced by cash and investments held by non-life companies other than finance companies. (g) Total Company-obligated mandatorily redeemable preferred securities of subsidiary trusts exclude: (i) amounts related to FELINE PRIDES which require the holders to purchase a number of shares of the Company's common stock under the terms specified in the stock purchase contracts; and (ii) amounts related to RHINOS. Concurrent with the sale of the RHINOS, the Company agreed to issue $250 million of its common stock in one or more public offerings prior to February 20, 2002. Total capital includes amounts for the purchase of common shares pursuant to the stock purchase contracts and the stock sale agreement described in the preceding sentence, as if such shares had been purchased.
Consistent with discussions with rating agencies, the Company targeted the following rating agency ratios (described above): (i) the ratio of corporate debt to total capital to be at or below 25 percent; and (ii) the ratio of corporate debt and Company-obligated mandatorily redeemable preferred securities of subsidiary trusts to total capital to be at or below 40 percent. Conseco achieved these targeted ratios at September 30, 1999. 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 of our life insurance subsidiaries and the concentration of investments in high-quality, liquid securities should provide sufficient liquidity to meet foreseeable cash requirements. Liquidity for finance operations Our finance operations require cash to originate finance receivables. Our primary sources of cash are the collection of receivable balances; proceeds from the issuance of debt, certificate of deposits and securitization of loans; and cash provided by operations. The most significant source of liquidity for our finance operations has been our ability to finance the receivables we originate in the secondary markets through loan securitizations. Under certain securitization structures, we have provided a variety of credit enhancements, which generally take the form of corporate guarantees, but have also included bank letters of credit, surety bonds, cash deposits and over-collateralization or other equivalent collateral. When choosing the appropriate structure for a securitization of loans, we analyze the cash flows unique to each transaction, as well as its marketability and projected economic value. The structure of each securitized transaction depends, to a great extent, on conditions in the fixed-income markets at the time the transaction is completed, as well as on cost considerations and the availability and effectiveness of the various enhancement methods. The market for securities backed by receivables is a cost-effective source of funds. In recent periods, conditions in the credit markets have resulted in less-attractive pricing of certain lower rated securities typically included in loan securitization transactions. As a result, we have chosen to reduce the amount of securities sold by the securitization trusts, particularly securities having corporate guarantee provisions. Accordingly, we must finance a portion of the loans we originate through 35 CONSECO, INC. AND SUBSIDIARIES -------------------- sources other than the securitization markets. We believe there are adequate sources of liquidity other than securitizations to finance a portion of the loans we originate while still maintaining current levels of loan originations. Market conditions in the credit markets for loan securitizations change from time to time. For example, liquidity in the credit markets became extremely limited for many issuers during the third and fourth quarters of 1998. In addition during certain periods of 1999 (including the third quarter), 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 in the securitization markets could affect the interest rate spreads we earn on the loans we originate and the cash provided by our finance operations. We have increased interest rates on our lending products as we strive to maintain our targeted spread in the current interest rate environment. Several competing lenders have announced in recent periods that they are no longer lending in product lines in which we compete. We and other lenders have increased the interest rates charged on new loans in recent periods. We are unable to estimate the effect, if any, of these events on the amount of new loans we originate, or the level of profitability of that business. We 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. We have collected $853.1 million of such deposits in the nine months ended September 30, 1999. We received cash flows from our finance segment operating activities of approximately $750 million during the nine months ended September 30, 1999, compared to approximately $240 million in the same period of 1998. Such cash flows include cash received from the securitization trusts of $480.0 million in the 1999 period and $368.3 million in the 1998 period. 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 will require us to classify certain activities differently on our cash flow statement (e.g., certain cash flows recorded as "operating cash flows" under the gain-on-sale method must be recorded as "investing activities" under the portfolio method and vice versa). At September 30, 1999, we had $5.0 billion in master repurchase agreements (subject to the availability of eligible collateral) with various investment banking firms for the purpose of financing our consumer and commercial finance loan production. These agreements generally provide for annual terms which are extended each quarter by mutual agreement of the parties for an additional annual term based upon receipt of updated quarterly financial information. At September 30, 1999, we had $1.8 billion borrowed under the repurchase agreements. 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 common securities; (iii) payments to subsidiary trusts to be used for distributions on the Company-obligated mandatorily redeemable preferred securities of subsidiary trusts; (iv) holding company administrative expenses; (v) income taxes; and (vi) investments in subsidiaries. The primary sources of cash to meet these obligations are payments from our subsidiaries, including the statutorily permitted payments from our life insurance subsidiaries in the form of: (i) fees for services provided; (ii) tax sharing payments; (iii) dividend payments; and (iv) surplus debenture interest and principal payments. The parent company may also obtain cash by: (i) issuing debt or equity securities; (ii) borrowing additional amounts under its revolving credit agreement, as described in the notes to the consolidated financial statements; or (iii) selling all or a portion of its subsidiaries. These sources have historically provided adequate cash flow to fund the needs of the parent company's: (i) normal operations; (ii) internal expansion, acquisitions and investment opportunities; and (iii) the retirement of debt and equity. 36 CONSECO, INC. AND SUBSIDIARIES -------------------- INVESTMENTS At September 30, 1999, 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................................................ $12,997.3 $32.7 $ 760.9 $12,269.1 United States Treasury securities and obligations of United States government corporations and agencies................ 347.5 4.3 3.9 347.9 States and political subdivisions................................... 156.1 .4 7.5 149.0 Debt securities issued by foreign governments....................... 142.1 1.0 10.7 132.4 Mortgage-backed securities ......................................... 7,623.5 15.8 293.2 7,346.1 Below-investment grade (primarily corporate securities)................ 2,056.1 24.8 225.9 1,855.0 --------- ----- --------- --------- Total actively managed fixed maturities........................... $23,322.6 $79.0 $1,302.1 $22,099.5 ========= ===== ======== =========
During the first nine months of 1999 and 1998, we recorded $11.0 million and $16.5 million, respectively, of writedowns of fixed maturity and equity securities as a result of changes in conditions which caused us to conclude that a decline in fair value of the investments was other than temporary. At September 30, 1999, fixed maturity securities in default as to the payment of principal or interest had an aggregate amortized cost of $57.8 million and a carrying value of $41.2 million. Sales of invested assets (primarily fixed maturity securities) during the first nine months of 1999 generated proceeds of $12.8 billion, and net investment losses of $84.9 million. At September 30, 1999, fixed maturity investments included $7.4 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 occur more frequently, often monthly. Mortgage-backed securities are subject to risks associated with variable prepayments. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages backing the assets to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures. In general, prepayments on the underlying mortgage loans and the securities backed by these loans increase when prevailing interest rates decline significantly relative to the interest rates on such loans. The yields on mortgage-backed securities purchased at a discount to par will increase when the underlying mortgages prepay faster than expected. The yields on mortgage-backed securities purchased at a premium will decrease when they prepay faster than expected. When interest rates decline, the proceeds from the prepayment of mortgage-backed securities are likely to be reinvested at lower rates than we were earning on the prepaid securities. When interest rates increase, prepayments on mortgage-backed securities decrease as fewer underlying mortgages are refinanced. When this occurs, the average maturity and duration of the mortgage-backed securities increase, which decreases the yield on mortgage-backed securities purchased at a discount, because the discount is realized as income at a slower rate, and increases the yield on those purchased at a premium as a result of a decrease in the annual amortization of the premium. 37 CONSECO, INC. AND SUBSIDIARIES -------------------- The following table sets forth the par value, amortized cost and estimated fair value of mortgage-backed securities, summarized by interest rates on the underlying collateral at September 30, 1999:
Par Amortized Estimated value cost fair value ----- ---- ---------- (Dollars in millions) Below 7 percent..................................................................... $4,690.5 $4,643.5 $4,434.8 7 percent - 8 percent............................................................... 1,729.9 1,715.7 1,687.0 8 percent - 9 percent............................................................... 286.1 301.7 299.7 9 percent and above................................................................. 984.4 990.0 950.2 -------- -------- -------- Total mortgage-backed securities............................................. $7,690.9 $7,650.9 $7,371.7 ======== ======== ========
The amortized cost and estimated fair value of mortgage-backed securities at September 30, 1999, 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............ $3,970.8 $3,857.6 18% Planned amortization classes and accretion-directed bonds................. 1,943.0 1,847.0 8 Commercial mortgage-backed securities..................................... 728.1 698.7 3 Subordinated classes and mezzanine tranches............................... 953.4 913.9 4 Other..................................................................... 55.6 54.5 - -------- -------- --- $7,650.9 $7,371.7 33% ======== ======== ==
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). Commercial mortgage-backed securities ("CMBS") are bonds secured by commercial real estate. 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". 38 CONSECO, INC. AND SUBSIDIARIES -------------------- At September 30, 1999, the mortgage loan balance was primarily comprised of commercial loans. Less than 1 percent of the mortgage loan balance was noncurrent (loans which are two or more scheduled payments past due) at September 30, 1999. At September 30, 1999, we held $163.2 million of trading securities; we included them in other invested assets. Our investment borrowings averaged approximately $1,121.1 million during the first nine months of 1999, compared with approximately $1,158.5 million during the same period of 1998 and were collateralized by investment securities with fair values approximately equal to the loan value. The weighted average interest rates on such borrowings were 5.1 percent and 6.0 percent during the first nine months of 1999 and 1998, respectively. STATUTORY INFORMATION Statutory accounting practices prescribed or permitted for the Company's insurance subsidiaries by regulatory authorities differ from generally accepted accounting principles. The Company's life insurance subsidiaries reported the following amounts to regulatory agencies at September 30, 1999, after appropriate eliminations of intercompany accounts among such subsidiaries (dollars in millions): Statutory capital and surplus .................................. $1,915.4 Asset valuation reserve ("AVR")................................. 358.3 Interest maintenance reserve ("IMR")............................ 527.1 Portion of surplus debenture carried as a liability ............ 33.4 -------- Total........................................................ $2,834.2 ========
The ratio of such consolidated statutory account balances to consolidated statutory liabilities (excluding AVR, IMR, the portion of surplus debentures carried as a liability, liabilities from separate account business and short-term collateralized borrowings) was 11.8 percent at both September 30, 1999, and December 31, 1998. The statutory capital and surplus of the insurance subsidiaries included surplus debentures issued to the parent holding companies totaling $1,370.7 million. Payments of interest and principal on such debentures are generally subject to the approval of the insurance department of the subsidiary's state of domicile. During the first nine months of 1999, our life insurance subsidiaries made $62.1 million of scheduled principal payments on surplus debentures. State insurance laws generally restrict the ability of insurance companies to pay dividends or make other distributions. Net assets of the Company's wholly owned life insurance subsidiaries, determined in accordance with GAAP, aggregated approximately $8.2 billion at September 30, 1999. After deducting fees and interest paid to Conseco or its non-life insurance subsidiaries of $203.7 million and $148.3 million in the first nine months of 1999 and 1998, respectively, and before deducting the one-time statutory charge of $32.8 million after tax related to reinsurance assumed in 1999, the statutory operating earnings of our life insurance subsidiaries were $217.6 million and $191.0 million, respectively. During the remainder of 1999, the life insurance subsidiaries may pay additional dividends of $121.2 million without the permission of state regulatory authorities. YEAR-2000 MATTERS Many of today's computer programs were originally designed to identify each year using two digits. So, certain date- sensitive software may recognize the date "00" as the year 1900, rather than the year 2000. The failure to correct a material year-2000 problem could result in an interruption in, or failure of, a number of normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity or financial condition. Due to the general uncertainty inherent in the year-2000 problem, including uncertainty about the preparedness of our external business relationships, we are not able currently to determine whether the consequences of year-2000 failures will have a material impact on Conseco's results of operations, liquidity or financial condition. We believe, however, that Conseco's year-2000 readiness efforts (described below) will minimize the likelihood of a material adverse impact. In 1996, Conseco began a comprehensive, corporate-wide program designed to ensure that our computer programs function properly in the year 2000. A number of our employees (including several officers), as well as external consultants and contract 39 CONSECO, INC. AND SUBSIDIARIES -------------------- programmers, were assigned to work on various year-2000 projects. We analyzed our application systems, operating systems, hardware, networks, electronic data interfaces and infrastructure devices (such as facsimile machines and telephone systems). We divided each year-2000 project into three phases: (i) an audit and assessment phase, designed to identify year-2000 issues; (ii) a modification phase, designed to correct year-2000 issues; and (iii) a testing phase, designed to test the installed modifications. We have completed all three phases for our year-2000 projects. During the rest of 1999, we plan to re-review and re-test many of our critical systems and continue to assess and monitor the year-2000 readiness of the systems used by our business partners, vendors and other third parties. We believe that we have provided for sufficient time in order to complete any additional modifications, if necessary, before December 31, 1999. In the course of its year-2000 program, Conseco: (i) converted numerous older systems to more modern, year-2000-ready systems already used elsewhere in the Company; (ii) purchased and installed new, year-2000-ready systems (we capitalized these costs and are amortizing them over their expected useful lives); and (iii) modified other systems to make them year-2000- ready (we charged these costs to operating expense). We currently estimate that the total cost of our year-2000 program will be approximately $75 million, of which approximately 95 percent (related primarily to modifying existing software systems) had been incurred by September 30, 1999. This expense is not material to Conseco's financial position and we are funding it through our operating cash flows. The impact of year-2000 issues on Conseco will depend not only on the corrective actions we take, but also on the way in which year-2000 issues are addressed by governmental agencies, businesses and other third parties: (i) that provide us with capital, services, utilities or data; (ii) that receive services or data from us; or (iii) whose financial condition or operating capability is important to us. We continue to update our assessments of potential year-2000 risks associated with our third-party relationships. These assessments are necessarily limited to matters over which we can reasonably exercise control. We have been informed by our key financial institutions and utilities that they will be year-2000 ready at year-end 1999. We are also continuing to develop contingency plans designed to help us conduct business as usual in the unlikely event of a year-2000-related disruption. Our year-2000 program continues to be the highest priority for our information technology employees and others within the company. Our objective is to continue providing our clients and business partners with quality service during the century changeover. We have continued to work on other systems projects during our year-2000 program; in many cases, we have accelerated system upgrades when the new systems also address year-2000 issues. 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," 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) changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of Conseco's products; (vi) increasing competition in the sale of insurance and annuities and in the finance business; (vii) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products, and health care regulation affecting health 40 CONSECO, INC. AND SUBSIDIARIES -------------------- insurance products; (viii) the ability of Conseco and its vendors and other external parties to achieve Year 2000 readiness for significant systems and operations on a timely basis; (ix) the availability and terms of future acquisitions; and (x) 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 way we manage them, are summarized in management's discussion and analysis of financial condition and results of operations as of December 31, 1998, included in the Company's Form 10-K for the year ended December 31, 1998. There have been no material changes in the first nine months of 1999 to such risks or our management of such risks. 41 CONSECO, INC. AND SUBSIDIARIES -------------------- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Conseco Finance has been served with various related lawsuits which were filed in the United States District Court for the District of Minnesota. These lawsuits were filed as purported class actions on behalf of persons or entities who purchased common stock or options of Conseco Finance during the alleged class periods that generally run from February 1995 to January 1998. One such action did not include class action claims. In addition to 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 have obtained an order from the United States District Court for the District of Minnesota consolidating the lawsuits seeking class action status into two actions: one which pertains to a purported class of common stockholders and the other which pertains to a purported class of stock option traders. Plaintiffs in the lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege that 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. The Company believes that the lawsuits are without merit and intends to defend such lawsuits vigorously. The ultimate outcome of these lawsuits cannot be predicted with certainty. 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 (8th Circuit). In addition, the Company and its subsidiaries are involved on an ongoing basis in lawsuits related to its operations. Although the ultimate outcome of certain of such matters cannot be predicted, such lawsuits currently pending against the Company or its subsidiaries are not expected, individually or in the aggregate, to have a material adverse effect on the Company's consolidated financial condition, cash flows or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. 1.1 Distribution Agreement dated October 7, 1999 between Conseco, Inc. and the agents named therein regarding Senior Medium-Term Notes, Series C and Subordinated Medium Term Notes, Series C 1.2 Forms of Senior Medium-Term Note, Series C (fixed and floating) 1.3 Forms of Subordinated Medium-Term Note, Series C (fixed and floating) 10.1.15 Description of incentive compensation and severance arrangement with Edward M. Berube 10.8.11 Amended and Restated Director, Officer and Key Employee Stock Purchase Plan of Conseco, Inc. 10.8.21 Amended and Restated 1999 Director and Executive Officer Stock Purchase Plan of Conseco, Inc. 10.8.22 Guaranty regarding 1999 Director and Executive Officer Stock Purchase Plan 10.8.23 Form of Borrower Pledge Agreement dated as of September 15, 1999 with The Chase Manhattan Bank 10.8.24 Form of note payable to the Registrant relating to the 1999 Director and Executive Officer Stock Purchase Plan 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 42 CONSECO, INC. AND SUBSIDIARIES -------------------- b) Reports on Form 8-K. A report on Form 8-K dated August 31, 1999, was filed with the Commission to report under Item 5, the completion of the public offering by Conseco Financing Trust VII of 12 million 9.44% Trust Originated Preferred Securities. 43 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: November 15, 1999 By: /s/ ROLLIN M. DICK ------------------ Rollin M. Dick Executive Vice President and Chief Financial Officer (authorized officer and principal financial officer) 44 EX-1.1 2 EX-1.1 CONSECO, INC. Senior Medium-Term Notes, Series C Subordinated Medium-Term Notes, Series C Due Nine Months or More From Date of Issue DISTRIBUTION AGREEMENT October 7, 1999 Merrill Lynch & Co. First Union Securities, Inc. Merrill Lynch, Pierce, Fenner & Smith 301 South College Street Incorporated Charlotte, North Carolina 28288 World Financial Center North Tower, 10th Floor Goldman, Sachs & Co. New York, New York 10281 85 Broad Street New York, New York 10004 Banc of America Securities LLC 100 North Tryon Street Lehman Brothers Inc. Charlotte, North Carolina 28255 3 World Financial Center New York, New York 10285 Chase Securities Inc. 270 Park Avenue SG Cowen Securities Corporation New York, New York 10017 1211 Avenue of the Americas New York, New York 10020 Deutsche Bank Securities Inc. 31 W. 52nd Warburg Dillon Read LLC New York, New York 10019 677 Washington Boulevard Stamford, Connecticut 06901 Dear Sirs: Conseco, Inc., an Indiana corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Chase Securities Inc., Deutsche Bank Securities Inc., First Union Securities, Inc., Goldman, Sachs & Co., Lehman Brothers Inc., SG Cowen Securities Corporation and Warburg Dillon Read LLC, (each, an "Agent", and collectively, the "Agents") with respect to the issue and sale by the Company of its Senior Medium-Term Notes, Series C Due Nine Months or More From Date of Issue (the "Senior Notes") and its Subordinated Medium-Term Notes, Series C Due Nine Months or More From Date of Issue (the "Subordinated Notes" and, together with the Senior Notes, the "Notes"). The Senior Notes are to be issued pursuant to an Indenture, dated as of November 13, 1997, as amended or modified from time to time (the "Senior Indenture"), between the Company and Bank of New York, successor to LTCB Trust Company, as trustee (the "Senior Trustee"). The Subordinated Notes are to be issued pursuant to an Indenture, dated as of July 21, 1999, as amended or modified from time to time (the "Subordinated Indenture" and, together with the Senior Indenture, the "Indentures") between the Company and Harris Trust and Savings Bank, as trustee (the "Subordinated Trustee" and, together with the Senior Trustee, the "Trustees"). As of the date hereof, the Company has authorized the issuance and sale of up to U.S $3,700,000,000 aggregate initial offering price of Notes (or its equivalent, based upon the exchange rate on the 1 applicable trade date in such foreign or composite currencies as the Company shall designate at the time of issuance) to or through the Agents pursuant to the terms of this Agreement. It is understood, however, that the Company may from time to time authorize the issuance of additional Notes and that such additional Notes may be sold to or through the Agents or other agents who from time to time become parties to this Agreement or another agreement with terms that are the same in all material respects to the terms contained herein pursuant to the terms of this Agreement, all as though the issuance of such Notes were authorized as of the date hereof. This Agreement provides both for the sale of Notes by the Company to one or more Agents as principal for resale to investors and other purchasers and for the sale of Notes by the Company directly to investors (as may from time to time be agreed to by the Company and the applicable Agent), in which case the applicable Agent will act as an agent of the Company in soliciting offers for the purchase of Notes. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-83465) and a registration statement on Form S-3 (No. 333-56611) for the registration of preferred stock, depositary shares, common stock, stock purchase contracts, stock purchase units, warrants, guarantees and debt securities, including the Notes, under the Securities Act of 1933, as amended (the "1933 Act"), and the offering thereof from time to time in accordance with Rule 415 of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), and the Company has filed such post-effective amendments thereto as may be required prior to any acceptance by the Company of an offer for the purchase of Notes. Such registration statements (as so amended, if applicable) have been declared effective by the Commission and each Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). The registration statement (No. 333-83465) (as so amended, if applicable) is referred to herein as the "Registration Statement" and the registration statement (No. 333- 56611) (as so amended, if applicable) is referred to herein as the "Previous Registration Statement," and the final prospectus and all applicable amendments or supplements thereto (including the final prospectus supplement and pricing supplement relating to the offering of Notes), in the form first furnished to the applicable Agent(s), are collectively referred to herein as the "Prospectus"; provided, however, that all references to the "Registration Statement," the "Previous Registration Statement" and the "Prospectus" shall also be deemed to include all documents incorporated therein by reference pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), prior to any acceptance by the Company of an offer for the purchase of Notes; provided, further, that if the Company files a registration statement with the Commission pursuant to Rule 462(b) of the 1933 Act Regulations (the "Rule 462(b) Registration Statement"), then, after such filing, all references to the "Registration Statement" shall also be deemed to include the Rule 462(b) Registration Statement. A "preliminary prospectus" shall be deemed to refer to any prospectus used before the applicable registration statement became effective and any prospectus furnished by the Company after the registration statements became effective and before any acceptance by the Company of an offer for the purchase of Notes which omitted information to be included upon pricing in a form of prospectus filed with the Commission pursuant to Rule 424(b) of the 1933 Act Regulations. For purposes of this Agreement, all references to the Registration Statement, Previous Registration Statement, Prospectus or preliminary prospectus or to any amendment or supplement thereto shall be deemed to include any copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "disclosed", "contained," "included" or "stated" (or other references of like import) in the Registration Statement, Previous Registration Statement, Prospectus or preliminary prospectus shall be deemed to include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, Previous Registration Statement, Prospectus or preliminary prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, Prospectus or preliminary prospectus shall be deemed to include the filing of any document under the 1934 Act which is incorporated by reference in the Registration Statement, Prospectus or preliminary prospectus, as the case may be. 2 1. Appointment as Agent. (a) Appointment. Subject to the terms and conditions stated herein and subject to the reservation by the Company of the right to sell Notes directly on its own behalf, the Company hereby agrees that Notes will be sold to or through one or more of the Agents and/or to or through other agents on terms that are the same in all material respects to the terms contained herein. (b) Sale of Notes. The Company shall not sell or approve the solicitation of offers for the purchase of Notes in excess of the amount which shall be authorized by the Company from time to time or in excess of the aggregate initial offering price of Notes registered pursuant to the Registration Statement. The Agents shall have no responsibility for maintaining records with respect to the aggregate initial offering price of Notes sold, or of otherwise monitoring the availability of Notes for sale, under the Registration Statement. (c) Purchases as Principal. The Agents shall not have any obligation to purchase Notes from the Company as principal. However, absent an agreement between an Agent and the Company that such Agent shall be acting solely as an agent for the Company, such Agent shall be deemed to be acting as principal in connection with any offering of Notes by the Company through such Agent. Accordingly, the Agents, individually or in a syndicate, may agree from time to time to purchase Notes from the Company as principal for resale to investors and other purchasers determined by such Agents. Any purchase of Notes from the Company by an Agent as principal shall be made in accordance with Section 3(a) hereof. (d) Solicitations as Agent. If agreed upon between an Agent and the Company, such Agent, acting solely as an agent for the Company and not as principal, will solicit offers for the purchase of Notes. Such Agent will communicate to the Company, orally, each offer for the purchase of Notes solicited by it on an agency basis other than those offers rejected by such Agent. Such Agent shall have the right, in its discretion reasonably exercised, to reject any offer for the purchase of Notes, in whole or in part, and any such rejection shall not be deemed a breach of its agreement contained herein. The Company may accept or reject any offer for the purchase of Notes, in whole or in part. Such Agent shall make reasonable efforts to assist the Company in obtaining performance by each purchaser whose offer for the purchase of Notes has been solicited by it on an agency basis and accepted by the Company. Such Agent shall not have any liability to the Company in the event that any such purchase is not consummated for any reason. If the Company shall default on its obligation to deliver Notes to a purchaser whose offer has been solicited by such Agent on an agency basis and accepted by the Company, the Company shall (i) hold such Agent harmless against any loss, claim or damage arising from or as a result of such default by the Company and (ii) pay to such Agent any commission to which it would otherwise be entitled absent such default. (e) Reliance. The Company and the Agents agree that any Notes purchased from the Company by one or more Agents as principal shall be purchased, and any Notes the placement of which an Agent arranges as an agent of the Company shall be placed by such Agent, in reliance on the representations, warranties, covenants and agreements of the Company contained herein and on the terms and conditions and in the manner provided herein. 2. Representations and Warranties. (a) The Company represents and warrants to each Agent as of the date hereof, as of the date of each acceptance by the Company of an offer for the purchase of Notes (whether to such Agent as principal or through such Agent as agent), as of the date of each delivery of Notes (whether to such Agent as principal or through such Agent as agent) (the date of each such delivery to such Agent as principal is referred to herein as a "Settlement Date"), and as of any time that the Registration Statement or the Prospectus shall be amended or supplemented (each of the times referenced above is referred to herein as a "Representation Date"), as follows: (i) Due Incorporation, Good Standing and Due Qualification of the Company. The Company has been duly organized and is validly existing as a corporation under the laws of Indiana with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus 3 and to enter into this Agreement and consummate the transactions contemplated in the Prospectus; the Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise (a "Material Adverse Effect"); all of the issued and outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company were issued in violation of preemptive or other similar rights of any securityholder of the Company. (ii) Due Incorporation, Good Standing and Due Qualification of Significant Subsidiaries. Each significant subsidiary (as such term is defined in Rule 1-02 of Regulation S-X promulgated under the 1933 Act), if any (each, a "Significant Subsidiary") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect; except as stated in the Prospectus, all of the issued and outstanding shares of capital stock of each Significant Subsidiary has been duly authorized and is validly issued, fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any material security interest, mortgage, pledge, lien, encumbrance, claim or equity. (iii) Registration Statements and Prospectus. The Company meets the requirements for use of Form S-3 under the 1933 Act; each of the Registration Statement (including any Rule 462(b) Registration Statement) and the Previous Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement (including any Rule 462(b) Registration Statement) or the Previous Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with; each Indenture has been duly qualified under the 1939 Act; at the respective times that the Registration Statement, the Previous Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto (including the filing of the Company's most recent Annual Report on Form 10-K with the Commission (the "Annual Report on Form 10-K")) became effective and at each Representation Date, the Registration Statement (including any Rule 462(b) Registration Statement), the Previous Registration Statement and any amendments thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the Commission under the 1939 Act (the "1939 Act Regulations") and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; each preliminary prospectus and prospectus filed as part of the Registration Statement or the Previous Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations; each preliminary prospectus and the Prospectus delivered to the applicable Agent(s) for use in connection with the offering of Notes are identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T; and at the date hereof, at the date of the Prospectus and at each Representation Date, neither the Prospectus nor any amendment or supplement thereto included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to (1) statements in or omissions from the Registration Statement, the Previous Registration Statement 4 or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by the Agents expressly for use in the Registration Statement, the Previous Registration Statement or the Prospectus or (2) the Statements of Qualification and Eligibility filed as exhibits to the Registration Statement or the Previous Registration Statement (the "Form T-1"). (iv) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission under the 1934 Act (the "1934 Act Regulations"). (v) Independent Accountants. PricewaterhouseCoopers LLP, the accountants who certified the financial statements and any supporting schedules thereto of the Company included in the Registration Statement, the Previous Registration Statement and the Prospectus, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (vi) Financial Statements. The consolidated financial statements of the Company included in the Registration Statement, the Previous Registration Statement and the Prospectus, together with the related schedules and notes present fairly the consolidated financial position of the Company and its subsidiaries at the dates indicated and the consolidated statements of operations, shareholders' equity and cash flows of the Company and its subsidiaries for the periods specified; except as stated therein, such financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved; the supporting schedules, if any, included in the Registration Statement, the Previous Registration Statement and the Prospectus present fairly in accordance with GAAP the information required to be stated therein; any selected financial data and the summary financial information included in the Registration Statement, the Previous Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement, the Previous Registration Statement and the Prospectus; and any pro forma consolidated financial statements of the Company and its subsidiaries and the related notes thereto included in the Registration Statement, the Previous Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (vii) Statutory Financials. The statutory financial statements of each of the Company's insurance subsidiaries, from which certain ratios and other statistical data which may be contained in the Registration Statement or the Previous Registration Statement from time to time have been derived, have for each relevant period been prepared in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners, and with respect to each insurance subsidiary, the appropriate Insurance Department of the state of domicile of such insurance subsidiary, and such accounting practices have been applied on a consistent basis throughout the periods involved, except as disclosed therein. (viii) No Material Changes. Since the respective dates as of which information is given in the Registration Statement, the Previous Registration Statement and the Prospectus, except as otherwise stated therein, there has been no event or occurrence that would result in a Material Adverse Effect. (ix) Authorization, etc. of this Agreement, the Indentures and the Notes. This Agreement has been duly authorized, executed and delivered by the Company; each Indenture has been duly authorized, executed and delivered by the Company and is a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by (1) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' 5 rights generally, (2) general equitable principles (regardless of whether enforcement is considered in a proceeding in equity or at law), (3) requirements that a claim with respect to any debt securities issued under the Indenture that are payable in a foreign or composite currency (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law or (4) governmental authority to limit, delay or prohibit the making of payments outside the United States; the Notes have been duly authorized by the Company for offer, sale, issuance and delivery pursuant to this Agreement and, when issued, authenticated and delivered in the manner provided for in the appropriate Indenture and delivered against payment of the consideration therefor, will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by (1) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, (2) general equitable principles (regardless of whether enforcement is considered in a proceeding in equity or at law), (3) requirements that a claim with respect to any Notes payable in a foreign or composite currency (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate or exchange prevailing on a date determined pursuant to applicable law or (4) governmental authority to limit, delay or prohibit the making of payments outside the United States; the Notes will be substantially in a form previously certified to the Agents and contemplated by the appropriate Indenture; and each holder of Notes will be entitled to the benefits of the appropriate Indenture. (x) Descriptions of the Indentures and the Notes. The Indentures and the Notes conform and will conform as of the date such Notes are purchased in all material respects to the statements relating thereto contained in the Prospectus and are substantially in the form filed or incorporated by reference, as the case may be, as an exhibit to the Registration Statement and the Previous Registration Statement. (xi) Absence of Defaults and Conflicts. Neither the Company nor any of its Significant Subsidiaries is in violation of the provisions of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its Significant Subsidiaries is a party or by which it or any of them may be bound or to which any of the property or assets of the Company or any of its Significant Subsidiaries is subject (collectively, "Agreements and Instruments"), except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, each Indenture, the Notes and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated by the Prospectus, the consummation of the transactions contemplated in the Prospectus (including the issuance and sale of the Notes and the use of proceeds therefrom as described in the Prospectus) and the compliance by the Company with its obligations hereunder and under the Indentures, the Notes and such other agreements or instruments have been duly authorized by all necessary corporate action and, in each case, do not and will not, whether with or without the giving of notice or the passage of time or both, conflict with or constitute a breach of, or default or event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its Significant Subsidiaries (a "Repayment Event") under, or result in the creation or imposition of any lien, charge or encumbrance upon any assets, properties or operations of the Company or any of its Significant Subsidiaries pursuant to, any Agreements and Instruments, except, in each case, for such conflicts, breaches or defaults that would not result in a Material Adverse Effect, nor will such action result in any violation of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its Significant Subsidiaries or any of their assets, properties or operations, except for such violations that would not result in a Material Adverse Effect, or any violation of the provisions of the charter or by-laws of the Company or any of its Significant Subsidiaries. 6 (xii) Absence of Proceedings. Except as disclosed in the Company's public filings with the Commission made prior to the date hereof, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or to the knowledge of the Company threatened, against or affecting the Company or any of its Significant Subsidiaries which is required to be disclosed in the Registration Statement and the Prospectus (other than as stated therein), or which may reasonably be expected to result in a Material Adverse Effect, or which may reasonably be expected to materially and adversely affect the performance by the Company of its obligations under this Agreement, the Indentures and the Notes or the consummation of the transactions contemplated in the Prospectus. (xiii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations issued by the appropriate federal, state, local or foreign regulatory agencies or bodies (including, without limitation, insurance licenses from the insurance departments of the various states where the subsidiaries write insurance business (the "Insurance Licenses")) necessary to conduct the business now operated by them, except where the failure so to possess such permits, licenses, approvals, consents and other authorizations would not, singly or in the aggregate, result in a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Insurance Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Insurance Licenses are valid and in full force and effect, except where the invalidity of such Insurance Licenses or the failure of such Insurance Licenses to be in full force and effect would not result in a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Insurance Licenses which, singly or in the aggregate, may reasonably be expected to result in a Material Adverse Effect. (xiv) No Filings, Regulatory Approvals, etc. No filing with, or approval, authorization, consent, license, registration, qualification, order or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Company of its obligations under this Agreement, the Indentures and the Notes or in connection with the transactions contemplated in the Prospectus, except such as have been previously obtained or rendered, as the case may be, and such as may be obtained under the state securities laws of any jurisdiction in connection with the sale of the Notes as herein contemplated. (xv) Investment Company Act. The Company is not, and upon the issuance and sale of the Notes as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). (xvi) Commodity Exchange Act. The Notes, upon issuance, will be excluded or exempted under or beyond the purview of, the Commodity Exchange Act, as amended (the "Commodity Exchange Act"), and the rules and regulations of the Commodity Futures Trading Commission under the Commodity Exchange Act (the "Commodity Exchange Act Regulations"). (xvii) Ratings. The Medium-Term Note Program under which the Notes are issued (the "Program"), as well as the Notes, are rated by Duff & Phelps Credit Rating Company and by Standard & Poor's Ratings Service, or such other rating as to which the Company shall have most recently notified the Agents pursuant to Section 4(a) hereof. (b) Additional Certifications. Any certificate signed by any officer of the Company and delivered to one or more Agents or to counsel for the Agents in connection with an offering of Notes to one or more Agents as principal or through an Agent as agent shall be deemed a representation and warranty by the Company to such Agent or Agents as to the matters covered thereby on the date of such certificate and, unless subsequently amended or supplemented, 7 at each Representation Date subsequent thereto. 3. Purchases as Principal; Solicitations as Agent. (a) Purchases as Principal. Notes purchased from the Company by the Agents, individually or in a syndicate, as principal shall be made in accordance with terms agreed upon between such Agent or Agents and the Company (which terms, unless otherwise agreed, shall, to the extent applicable, include those terms specified in Exhibit A hereto and (1) shall be agreed upon orally, with written confirmation prepared by such Agent or Agents and sent to the Company, or (2) shall be set forth in a written agreement between the Company and such Agent or Agents). An Agent's commitment to purchase Notes as principal shall be deemed to have been made on the basis of the representations and warranties of the Company herein contained and shall be subject to the terms and conditions herein set forth. Unless the context otherwise requires, references herein to "this Agreement" shall include the applicable agreement of one or more Agents to purchase Notes from the Company as principal. Each purchase of Notes, unless otherwise agreed, shall be at a discount from the principal amount of each such Note equivalent to the applicable commission set forth in Schedule A hereto. The Agents may engage the services of any broker or dealer in connection with the resale of the Notes purchased by them as principal and may allow all or any portion of the discount received from the Company in connection with such purchases to such brokers or dealers. At the time of each purchase of Notes from the Company by one or more Agents as principal, such Agent or Agents shall specify the requirements for the officers' certificate, opinion of counsel and comfort letter pursuant to Sections 7(b), 7(c) and 7(d) hereof and whether Section 4(k) hereof will be required. If the Company and two or more Agents enter into an agreement pursuant to which such Agents agree to purchase Notes from the Company as principal and one or more of such Agents shall fail at the Settlement Date to purchase the Notes which it or they are obligated to purchase (the "Defaulted Notes"), then the nondefaulting Agents shall have the right, within 24 hours thereafter, to make arrangements for one of them or one or more other Agents or underwriters to purchase all, but not less than all, of the Defaulted Notes in such amounts as may be agreed upon and upon the terms herein set forth; provided, however, that if such arrangements shall not have been completed within such 24-hour period, then: (i) if the aggregate principal amount of Defaulted Notes does not exceed 10% of the aggregate principal amount of Notes to be so purchased by all of such Agents on the Settlement Date, the nondefaulting Agents shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective initial underwriting obligations bear to the underwriting obligations of all nondefaulting Agents; or (ii) if the aggregate principal amount of Defaulted Notes exceeds 10% of the aggregate principal amount of Notes to be so purchased by all of such Agents on the Settlement Date, such agreement shall terminate without liability on the part of any nondefaulting Agent. No action taken pursuant to this paragraph shall relieve any defaulting Agent from liability in respect of its default. In the event of any such default which does not result in a termination of such agreement, either the nondefaulting Agents or the Company shall have the right to postpone the Settlement Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or the Prospectus or in any other documents or arrangements. (b) Solicitations as Agent. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, when agreed by the Company and an Agent, such Agent, as an agent of the Company, will use all reasonable efforts to solicit offers for the purchase of Notes upon the terms set forth in the Prospectus. The Agents are not authorized to appoint sub-agents with respect to Notes sold through them as agent. All Notes sold through an Agent as agent will be sold at 100% of their principal amount unless otherwise agreed upon between the Company and such Agent. 8 The Company reserves the right, in its sole discretion, to suspend solicitation of offers for the purchase of Notes through an Agent, as an agent of the Company, commencing at any time for any period of time or permanently. Upon receipt of instructions from the Company, such Agent will suspend solicitation of offers for the purchase of Notes from the Company until such time as the Company has advised such Agent that such solicitation may be resumed. The Company agrees to pay each Agent a commission, in the form of a discount, equal to the applicable percentage of the principal amount of each Note sold by the Company as a result of a solicitation made by such Agent, as an agent of the Company, as set forth in Schedule A hereto. (c) Administrative Procedures. The purchase price, interest rate or formula, maturity date and other terms of the Notes specified in Exhibit A hereto (as applicable) shall be agreed upon between the Company and the applicable Agent(s) and specified in a pricing supplement to the Prospectus (each, a "Pricing Supplement") to be prepared by the Company in connection with each sale of Notes. Except as otherwise specified in the applicable Pricing Supplement, the Notes will be issued in denominations of U.S. $1,000 or any larger amount that is an integral multiple of U.S. $1,000. Administrative procedures with respect to the issuance and sale of the Notes (the "Procedures") shall be agreed upon from time to time among the Company, the Agents and the Trustees. Unless otherwise agreed, the Procedures shall be those attached hereto as Exhibit B. The Agents and the Company agree to perform, and the Company agrees to use all reasonable efforts to cause the Trustees to agree to perform, their respective duties and obligations specifically provided to be performed by them in the Procedures. 4. Covenants of the Company. The Company covenants and agrees with each Agent as follows: (a) Notice of Certain Events. The Company will notify the Agents immediately, and confirm such notice in writing, of (i) the effectiveness of any post-effective amendment to the Registration Statement or the Previous Registration Statement or the filing of any amendment or supplement to the Prospectus (other than any amendment or supplement thereto providing solely for the determination of the variable terms of the Notes or relating solely to the offering of securities other than the Notes), (ii) the receipt of any comments from the Commission relating to the Registration Statement, the Previous Registration Statement, the Prospectus or the Notes, (iii) any request by the Commission for any amendment to the Registration Statement, the Previous Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the Previous Registration Statement, or of any order preventing or suspending the use of any preliminary prospectus, or of the initiation of any proceedings for that purpose or (v) any change in the rating assigned by any nationally recognized statistical rating organization to the Program or any debt securities (including the Notes) of the Company, or the public announcement by any nationally recognized statistical rating organization that it has under surveillance or review, with possible negative implications, its rating of the Program or any such debt securities, or the withdrawal by any nationally recognized statistical rating organization of its rating of the Program or any such debt securities. The Company will make all reasonable efforts to prevent the issuance of any stop order and, if any stop order is issued, to promptly obtain the lifting thereof. (b) Filing or Use of Amendments. The Company will give the Agents advance notice of its intention to file or prepare any additional registration statement with respect to the registration of additional Notes, any amendment to the Registration Statement (including any filing under Rule 462(b) of the 1933 Act Regulations) or the Previous Registration Statement or any amendment or supplement to the prospectus included in the Registration Statement at the time it became effective or to the Prospectus (other than an amendment or supplement thereto providing solely for the determination of the variable terms of the Notes or relating solely to the offering of securities other than the Notes), whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish to the Agents copies of any such document a reasonable amount of time prior to such proposed filing or use, as the case may be. (c) Delivery of the Registration Statements. The Company has furnished to each Agent and to counsel 9 for the Agents, without charge, conformed copies of the Registration Statement and the Previous Registration Statement, each as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed and conformed copies of all consents and certificates of experts. The Registration Statement, the Previous Registration Statement and each amendment thereto furnished to the Agents will be identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of the Prospectus. The Company will deliver to each Agent, without charge, as many copies of each preliminary prospectus as such Agent may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Agent, without charge, such number of copies of the Prospectus (as amended or supplemented) as such Agent may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Agents will be identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Preparation of Pricing Supplements. The Company will prepare, with respect to any Notes to be sold to or through one or more Agents pursuant to this Agreement, a Pricing Supplement with respect to such Notes in a form previously approved by the Agents. The Company will deliver such Pricing Supplement no later than 11:00 a.m., New York City time, on the business day following the date of the Company's acceptance of the offer for the purchase of such Notes and will file such Pricing Supplement pursuant to Rule 424(b)(3) under the 1933 Act not later than the close of business of the Commission on the fifth business day after the date on which such Pricing Supplement is first used. (f) Revisions of Prospectus -- Material Changes. Except as otherwise provided in subsection (m) of this Section 4, if at any time during the term of this Agreement any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Agents or counsel for the Company, to amend the Registration Statement or the Previous Registration Statement in order that the Registration Statement or the Previous Registration Statement, as the case may be, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or to amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, or if it shall be necessary, in the opinion of either such counsel, to amend the Registration Statement or the Previous Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company shall give immediate notice, confirmed in writing, to the Agents to cease the solicitation of offers for the purchase of Notes in their capacity as agents and to cease sales of any Notes they may then own as principal, and the Company will promptly prepare and file with the Commission, subject to Section 4(b) hereof, such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement and Prospectus comply with such requirements, and the Company will furnish to the Agents, without charge, such number of copies of such amendment or supplement as the Agents may reasonably request. In addition, the Company will comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of each offering of Notes. (g) Prospectus Revisions -- Periodic Financial Information. Except as otherwise provided in subsection (m) of this Section 4, on or prior to the date on which there shall be released to the general public interim financial statement information related to the Company with respect to each of the first three quarters of any fiscal year or preliminary financial statement information with respect to any fiscal year, the Company shall furnish such information to the Agents, confirmed in writing, and shall cause the Prospectus to be amended or supplemented to include financial information with respect thereto and corresponding information for the comparable period of the preceding fiscal year, as well as such other information and explanations as shall be necessary for an understanding thereof or as shall be required by the 1933 Act or the 1933 Act Regulations. (h) Prospectus Revisions -- Audited Financial Information. Except as otherwise provided in subsection 10 (m) of this Section 4, on or prior to the date on which there shall be released to the general public financial information included in or derived from the audited consolidated financial statements of the Company for the preceding fiscal year, the Company shall furnish such information to the Agents, confirmed in writing, and shall cause the Prospectus to be amended or supplemented to include such audited consolidated financial statements and the report or reports, and consent or consents to such inclusion, of the independent accountants with respect thereto, as well as such other information and explanations as shall be necessary for an understanding of such consolidated financial statements or as shall be required by the 1933 Act or the 1933 Act Regulations. (i) Earnings Statements. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (j) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods prescribed by the 1934 Act and the 1934 Act Regulations. (k) Restriction on Offers and Sales of Securities. Unless otherwise agreed upon between one or more Agents acting as principal and the Company, between the date of the agreement by such Agent(s) to purchase the related Notes from the Company and the Settlement Date with respect thereto, the Company will not, without the prior written consent of such Agent(s), issue, sell, offer or contract to sell, grant any option for the sale of, or otherwise dispose of, any debt securities of the Company which are substantially similar to the Notes being sold (other than the Notes that are to be sold pursuant to such agreement or commercial paper in the ordinary course of business). (l) Use of Proceeds. The Company will use the net proceeds received by it from the issuance and sale of the Notes in the manner specified in the Prospectus. (m) Suspension of Certain Obligations. The Company shall not be required to comply with the provisions of subsections (f), (g) or (h) of this Section 4 during any period from the time (i) the Agents shall have suspended solicitation of offers for the purchase of Notes in their capacity as agents pursuant to a request from the Company and (ii) no Agent shall then hold any Notes purchased from the Company as principal, as the case may be, until the time the Company shall determine that solicitation of offers for the purchase of Notes should be resumed or an Agent shall subsequently purchase Notes from the Company as principal. 5. Conditions of Agents' Obligations. The obligations of one or more Agents to purchase Notes from the Company as principal and to solicit offers for the purchase of Notes as an agent of the Company, and the obligations of any purchasers of Notes sold through an Agent as an agent of the Company, will be subject to the accuracy of the representations and warranties on the part of the Company herein contained or contained in any certificate of an officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance and observance by the Company of its covenants and other obligations hereunder, and to the following additional conditions precedent: (a) Effectiveness of Registration Statements. Each of the Registration Statement (including any Rule 462(b) Registration Statement) and the Previous Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or the Previous Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Agents. (b) Legal Opinions. On the date hereof, the Agents shall have received the following legal opinions, dated as of the date hereof and in form and substance satisfactory to the Agents: 11 (i) Opinion of Counsel for the Company. The favorable opinions of John J. Sabl, general counsel for the Company, to the effect set forth in Exhibit C hereto. (ii) Opinion of Counsel for the Agents. The favorable opinion of Sidley & Austin, counsel for the Agents, with respect to the matters set forth in paragraphs 6 through 10 and the final paragraph of Exhibit C hereto. (c) Officer's Certificate. On the date hereof, there shall not have been, since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Significant Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Agents shall have received a certificate of the President or a Vice President of the Company and of the chief financial officer or chief accounting officer of the Company, dated as of the date hereof, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Company herein contained are true and correct with the same force and effect as though expressly made at and as of the date of such certificate, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the date of such certificate with respect to the Notes, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such officer's knowledge, are threatened by the Commission. (d) Comfort Letter of PricewaterhouseCoopers LLP. On the date hereof, the Agents shall have received a letter from PricewaterhouseCoopers LLP, dated as of the date hereof and in form and substance satisfactory to the Agents, to the effect set forth in Exhibit D hereto. (e) Additional Documents. On the date hereof, counsel to the Agents shall have been furnished with such documents and opinions as such counsel may reasonably require for the purpose of enabling such counsel to pass upon the issuance and sale of Notes as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of Notes as herein contemplated shall be satisfactory in form and substance to the Agents and to counsel to the Agents. If any condition specified in this Section 5 shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the applicable Agent or Agents by notice to the Company at any time and any such termination shall be without liability of any party to any other party except as provided in Section 10 hereof and except that Sections 8, 9, 11, 14 and 15 hereof shall survive any such termination and remain in full force and effect. 6. Delivery of and Payment for Notes Sold through an Agent as Agent. Delivery of Notes sold through an Agent as an agent of the Company shall be made by the Company to such Agent for the account of any purchaser only against payment therefor in immediately available funds. In the event that a purchaser shall fail either to accept delivery of or to make payment for a Note on the date fixed for settlement, such Agent shall promptly notify the Company and deliver such Note to the Company and, if such Agent has theretofore paid the Company for such Note, the Company will promptly return such funds to such Agent. If such failure has occurred for any reason other than default by such Agent in the performance of its obligations hereunder, the Company will reimburse such Agent on an equitable basis for its loss of the use of the funds for the period such funds were credited to the Company's account. 12 7. Additional Covenants of the Company. The Company further covenants and agrees with each Agent as follows: (a) Reaffirmation of Representations and Warranties. Each acceptance by the Company of an offer for the purchase of Notes (whether to one or more Agents as principal or through an Agent as agent), and each delivery of Notes (whether to one or more Agents as principal or through an Agent as agent), shall be deemed to be an affirmation that the representations and warranties of the Company herein contained and contained in any certificate theretofore delivered to the Agents pursuant hereto are true and correct at the time of such acceptance or sale, as the case may be, and an undertaking that such representations and warranties will be true and correct at the time of delivery to such Agent(s) or to the purchaser or its agent, as the case may be, of the Notes relating to such acceptance or sale, as the case may be, as though made at and as of each such time (it being understood that such representations and warranties shall relate to the Registration Statement, the Previous Registration Statement and Prospectus as amended and supplemented to each such time). (b) Subsequent Delivery of Certificates. Each time that (i) the Registration Statement, the Previous Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for the determination of the variable terms of the Notes or relating solely to the offering of securities other than the Notes or, except as provided below, an amendment or supplement by the filing of any document incorporated by reference), (ii) (if required in connection with the purchase of Notes from the Company by one or more Agents as principal) the Company sells Notes to one or more Agents as principal, (iii) the Company files with the Commission an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q, a Current Report on Form 8-K which contains financial information required to be set forth in or incorporated by reference into the Prospectus pursuant to Item 11 of Form S-3 under the Securities Act or, upon the reasonable request of the Agents, any other Report on Form 8-K, or (iv) the Company sells Notes in a form not previously certified to the Agents by the Company, the Company shall furnish or cause to be furnished to the Agent(s), forthwith a certificate dated the date of filing with the Commission or the date of effectiveness of such amendment or supplement, as applicable, or the date of such sale, as the case may be, in form satisfactory to the Agent(s) to the effect that the statements contained in the certificate referred to in Section 5(c) hereof which were last furnished to the Agents are true and correct at the time of the filing or effectiveness of such amendment or supplement, as applicable, or the time of such sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Registration Statement, the Previous Registration Statement and the Prospectus as amended and supplemented to such time) or, in lieu of such certificate, a certificate of the same tenor as the certificate referred to in Section 5(c) hereof, modified as necessary to relate to the Registration Statement, the Previous Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such certificate (it being understood that, in the case of clause (ii) above, any such certificate shall also include a certification that there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise since the date of the agreement by such Agent(s) to purchase Notes from the Company as principal). (c) Subsequent Delivery of Legal Opinions. Each time that (i) the Registration Statement, the Previous Registration Statement or the Prospectus shall be amended or supplemented (other than by an amendment or supplement providing solely for the determination of the variable terms of the Notes or relating solely to the offering of securities other than the Notes or, except as provided below, an amendment or supplement by the filing of any document incorporated by reference), (ii) (if required in connection with the purchase of Notes from the Company by one or more Agents as principal) the Company sells Notes to one or more Agents as principal, (iii) the Company files with the Commission an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q, a Current Report on Form 8-K which contains financial information required to be set forth in or incorporated by reference into the Prospectus pursuant to Item 11 of Form S-3 under the Securities Act or, upon the reasonable request of the Agents, any other Report on Form 8-K, or (iv) the Company sells Notes in a form not previously certified to the Agents by the Company, the Company shall furnish or cause to be furnished forthwith to the Agent(s) and to counsel to the Agents the written opinion of John J. Sabl, general counsel for the Company or other counsel satisfactory to the Agent(s), dated the date of filing with the 13 Commission or the date of effectiveness of such amendment or supplement, as applicable, or the date of such sale, as the case may be, in form and substance satisfactory to the Agent(s), of the same tenor as the opinion referred to in Section 5(b)(i) hereof, but modified, as necessary, to relate to the Registration Statement, the Previous Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such opinion or, in lieu of such opinion, counsel last furnishing such opinion to the Agents shall furnish the Agent(s) with a letter substantially to the effect that the Agent(s) may rely on such last opinion to the same extent as though it was dated the date of such letter authorizing reliance (except that statements in such last opinion shall be deemed to relate to the Registration Statement, the Previous Registration Statement and the Prospectus as amended and supplemented to the time of delivery of such letter authorizing reliance). (d) Subsequent Delivery of Comfort Letters. Each time that (i) the Registration Statement, the Previous Registration Statement or the Prospectus shall be amended or supplemented to include additional financial information (other than by an amendment or supplement providing solely for the determination of the variable terms of the Notes or relating solely to the issuance and/or offering of securities other than the Notes or, except as provided below, an amendment or supplement by the filing of any document incorporated by reference), (ii) (if required in connection with the purchase of Notes from the Company by one or more Agents as principal) the Company sells Notes to one or more Agents as principal, or (iii) the Company files with the Commission an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q, a Current Report on Form 8-K which contains financial information required to be set forth in or incorporated by reference into the Prospectus pursuant to Item 11 of Form S-3 under the Securities Act or, upon the reasonable request of the Agents, any other Report on Form 8-K, the Company shall cause PricewaterhouseCoopers LLP forthwith to furnish to the Agent(s) a letter, dated the date of filing with the Commission or the date of effectiveness of such amendment or supplement, as applicable, or the date of such sale, as the case may be, in form satisfactory to the Agent(s), of the same tenor as the letter referred to in Section 5(d) hereof but modified to relate to the Registration Statement, the Previous Registration Statement and Prospectus as amended and supplemented to the date of such letter. 8. Indemnification. (a) Indemnification of the Agents. The Company agrees to indemnify and hold harmless each Agent and each person, if any, who controls such Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act (a "Controlling Person") against any and all loss, liability, claim, damage and expense whatsoever, as incurred (including, to the extent provided herein, the fees and disbursements of counsel chosen by such Agent), (i) arising out of an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Previous Registration Statement (or, in each case, any amendment thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of an untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, (ii) to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, provided that (subject to Section 8(d) hereof) any such settlement is effected with the written consent of the Company, and (iii) reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (A) made in reliance upon and in conformity with written information furnished to the Company by such Agent expressly for use in the Registration Statement or the Previous Registration Statement (or, in each case, any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), (B) made in the Form T-1 or (C) made in any preliminary prospectus supplement if a copy of the final prospectus supplement (as then amended or 14 supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Agent at or prior to the confirmation of the sale of a Note or Notes to the person asserting such loss, liability, claim, damage or expense who purchased such Note or Notes which are the subject thereof from such Agent, and if the final prospectus supplement (as so amended or supplemented) had been sent or given to such person at or prior to confirmation it would have relieved the Company, the Agent and any Controlling Person of any liability for such loss, liability, claim, damage or expense; provided, further, that in the case of clause (C) above, the Company shall have delivered the final prospectus supplement in compliance with the time schedule set forth in Section 4(e) of this Agreement. (b) Indemnification of Company, Directors and Officers. Each Agent severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 8(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement or the Previous Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Agent expressly for use in the Registration Statement or the Previous Registration Statement (or, in each case, any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions Against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent that it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel as well as one local counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 8 or 9 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 8(a)(ii) effected without its 15 written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 8(a)(ii) affected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. 9. Contribution. If the indemnification provided for in Section 8 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the applicable Agent(s), on the other hand, from the offering of the Notes that were the subject of the claim for indemnification or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the applicable Agent(s), on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the applicable Agent(s), on the other hand, in connection with the offering of the Notes that were the subject of the claim for indemnification shall be deemed to be in the same respective proportions as the total net proceeds from the offering of such Notes (before deducting expenses) received by the Company and the total discount or commission received by each applicable Agent, as the case may be, bears to the aggregate initial offering price of such Notes. The relative fault of the Company, on the one hand, and the applicable Agent(s), on the other hand, shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the applicable Agent(s) and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Agents agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the applicable Agent(s) were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 9. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any applicable untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 9, (i) no Agent shall be required to contribute any amount in excess of the amount by which the total price at which the Notes that were the subject of the claim for indemnification sold through it and distributed to the public were offered to the public exceeds the amount of any damages which such Agent has otherwise been required to pay by reason of any applicable untrue or alleged untrue statement or omission or alleged omission and (ii) no person guilty of fraudulent misrepresentation (within the 16 meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In addition, in connection with an offering of Notes purchased from the Company by two or more Agents as principal, the respective obligations of such Agents to contribute pursuant to this Section 9 are several, and not joint, in proportion to the aggregate principal amount of Notes that each such Agent has agreed to purchase from the Company. For purposes of this Section 9, each person, if any, who controls an Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Agent, and each director of the Company, each officer of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. 10. Payment of Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including: (a) The preparation, filing, printing and delivery of the Registration Statement and the Previous Registration Statement as originally filed and all amendments thereto and any preliminary prospectus, the Prospectus and any amendments or supplements thereto; (b) The preparation, printing and delivery of this Agreement and the Indentures; (c) The preparation, issuance and delivery of the Notes, including any fees and expenses relating to the eligibility and issuance of Notes in book-entry form and the cost of obtaining CUSIP or other identification numbers for the Notes; (d) The fees and disbursements of the Company's accountants, counsel and other advisors or agents (including any calculation agent or exchange rate agent) and of the Trustee and its counsel; (e) The reasonable fees and disbursements of counsel to the Agents incurred in connection with the establishment of the Program and incurred from time to time in connection with the transactions contemplated hereby; (f) The fees charged by nationally recognized statistical rating organizations for the rating of the Program and the Notes; (g) The fees and expenses incurred in connection with any listing of Notes on a securities exchange; (h) The filing fees incident to, and the reasonable fees and disbursements of counsel to the Agents in connection with, the review, if any, by the National Association of Securities Dealers, Inc. (the "NASD"); and (i) Any advertising and other out-of-pocket expenses of the Agents incurred with the written approval of the Company. 11. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto or thereto shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of the Agents or any controlling person of an Agent, or by or on behalf of the Company, and shall survive each delivery of and payment for the Notes. 17 12. Termination. (a) Termination of this Agreement. This Agreement (excluding any agreement by one or more Agents to purchase Notes from the Company as principal) may be terminated for any reason, at any time by either the Company or an Agent, as to itself, upon the giving of 10 days' prior written notice of such termination to the other party hereto. (b) Termination of Agreement to Purchase Notes as Principal. The applicable Agent(s) may terminate any agreement by such Agent(s) to purchase Notes from the Company as principal, immediately upon notice to the Company, at any time prior to the Settlement Date relating thereto, if (i) there has been, since the date of such agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) there has occurred any material adverse change in the financial markets in the United States or, if such Notes are denominated and/or payable in, or indexed to, one or more foreign or composite currencies, in the international financial markets, or any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development or event involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of such Agent(s), impracticable to market such Notes or enforce contracts for the sale of such Notes, or (iii) trading in any securities of the Company has been suspended or limited by the Commission or a national securities exchange, or if trading generally on the New York Stock Exchange or the American Stock Exchange or in the Nasdaq National Market has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by either of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or (iv) a banking moratorium has been declared by either Federal or New York authorities or by the relevant authorities in the country or countries of origin of any foreign or composite currency in which such Notes are denominated and/or payable, or (v) the rating assigned by any nationally recognized statistical rating organization to the Program or any debt securities (including the Notes) of the Company as of the date of such agreement shall have been lowered or withdrawn since that date or if any such rating organization shall have publicly announced that it has under surveillance or review its rating of the Program or any such debt securities. (c) General. In the event of any such termination, neither party will have any liability to the other party hereto, except that (i) the Agents shall be entitled to any commissions earned in accordance with the third paragraph of Section 3(b) hereof, (ii) if at the time of termination (a) any Agent shall own any Notes purchased by it from the Company as principal or (b) an offer to purchase any of the Notes has been accepted by the Company but the time of delivery to the purchaser or his agent of such Notes relating thereto has not occurred, the covenants set forth in Sections 4 and 7 hereof shall remain in effect until such Notes are so resold or delivered, as the case may be, and (iii) the covenant set forth in Section 4(i) hereof, the provisions of Section 10 hereof, the indemnity and contribution agreements set forth in Sections 8 and 9 hereof, and the provisions of Sections 11, 14 and 15 hereof shall remain in effect. 13. Notices. Unless otherwise provided herein, all notices required under the terms and provisions hereof shall be in writing, either delivered by hand, by mail or by telex, telecopier or telegram, and any such notice shall be effective when received at the address specified below. If to the Company: Conseco, Inc. 11825 N. Pennsylvania Street Carmel, Indiana 46032 Attention: John J. Sabl Telecopy No.: (317) 817-6327 18 If to the Agents: Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center North Tower - 15th Floor New York, New York 10281-1315 Attention: MTN Product Management Telecopy No.: (212) 449-2234 Chase Securities Inc. 270 Park Avenue, 8th Floor New York, New York 10017 Attention: Medium-Term Note Desk-Peter Todd Telecopy No.: (212) 834-6081 Banc of America Securities LLC 100 North Tryon Street Charlotte, North Carolina 28255 Attention: Lynn McConnell Mailstop: NC1007-07-01 Telecopy No.: (704) 388-9939 Deutsche Bank Securities Inc. 31 W. 52nd Street New York, New York, 10019 Attention: Deutsche Bank Securities Legal Dept. (Attn: Pam Kendall) Telecopy No.: (212) 469-8173 First Union Securities, Inc. 301 South College Street DC8 Charlotte, North Carolina 28288 Attention: Investment Grade Syndicate Telecopy: (704) 383-9165 Goldman, Sachs & Co. 85 Broad Street, 9th Floor New York, New York 10004 Attention: Credit Department Credit Control - Medium - Term Notes Telecopy: (212) 346-2793 Lehman Brothers Inc. 3 World Financial Center New York, New York 10285 Attention: Nancy McAllister Telecopy: (212) 526-1578 19 SG Cowen Securities Corporation 1221 Avenue of the Americas New York, New York 10020 Attention: Edward Lascala, Capital Markets Telecopy: (212) 278-5099 Warburg Dillon Read LLC High Grade Debt Syndicate 677 Washington Blvd. Stamford, Connecticut 06901 Attention: Randi Nielsen Telecopy: (203) 719-0495 or at such other address as such party may designate from time to time by notice duly given in accordance with the terms of this Section 13. 14. Parties. This Agreement shall inure to the benefit of and be binding upon the Agents and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons, officers and directors referred to in Sections 8 and 9 hereof and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective successors, and said controlling persons, officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Notes shall be deemed to be a successor by reason merely of such purchase. 15. GOVERNING LAW; FORUM. THIS AGREEMENT AND ALL THE RIGHTS AND OBLIGATIONS OF THE PARTIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE COMPANY AGAINST ANY AGENT IN CONNECTION WITH OR ARISING UNDER THIS AGREEMENT SHALL BE BROUGHT SOLELY IN THE STATE OR FEDERAL COURT OF APPROPRIATE JURISDICTION LOCATED IN THE BOROUGH OF MANHATTAN, THE CITY OF NEW YORK. 16. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts hereof shall constitute a single instrument. 20 If the foregoing is in accordance with the Agents' understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this Distribution Agreement, along with all counterparts, will become a binding agreement among the Agents and the Company in accordance with its terms. Very truly yours, CONSECO, INC. By: /s/ ROLLIN M. DICK ---------------------------- Rollin M. Dick Executive Vice President and Chief Financial Officer 21 CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ SCOTT G. PRIMROSE ------------------------- Scott G. Primrose BANC OF AMERICA SECURITIES LLC By: /s/ LYNN MCCONNELL ------------------------- Lynn McConnell CHASE SECURITIES INC. By: /s/ LOUIS P. DECARO ------------------------- Louis P. DeCaro DEUTSCHE BANK SECURITIES INC. By: /s/ KELLY CREEL ------------------------- Kelly Creel By: /s/ SCOTT FLIEGER ------------------------- Scott Flieger FIRST UNION SECURITIES, INC. By: /s/ WILLIAM W. INGRAM ------------------------- William W. Ingram GOLDMAN, SACHS & CO. By: /s/ GOLDMAN, SACHS & CO. ------------------------- (Goldman, Sachs & Co.) 22 LEHMAN BROTHERS INC. By: /s/ JAMES MURLI ------------------------- James Murli WARBURG DILLON READ LLC By: /s/ MICHAEL P. HYNES ------------------------- Michael P. Hynes SG COWEN SECURITIES CORPORATION By: /s/ EDWARD AHASCALA ------------------------- Edward Ahascala 23 SCHEDULE A As compensation for the services of the Agents hereunder, the Company shall pay the applicable Agent, on a discount basis, a commission for the sale of each Note equal to the principal amount of such Note multiplied by the appropriate percentage set forth below: PERCENT OF MATURITY RANGES PRINCIPAL AMOUNT - --------------- From 9 months to less than 1 year............................ .125% From 1 year to less than 18 months........................... .150 From 18 months to less than 2 years.......................... .200 From 2 years to less than 3 years............................ .250 From 3 years to less than 4 years............................ .350 From 4 years to less than 5 years............................ .450 From 5 years to less than 6 years............................ .500 From 6 years to less than 7 years............................ .550 From 7 years to less than 10 years........................... .600 From 10 years to less than 15 years.......................... .625 From 15 years to less than 20 years.......................... .700 From 20 years to 30 years.................................... .750 Greater than 30 years........................................ 1 - -------- 1 As agreed to by the Company and the applicable Agent at the time of sale. 1 EXHIBIT A PRICING TERMS Principal Amount: $_______ (or principal amount of foreign or composite currency) Interest Rate or Formula: If Fixed Rate Note, Interest Rate: Interest Payment Dates: If Floating Rate Note, Interest Rate Basis(es): If LIBOR, |_| LIBOR Reuters Page: |_| LIBOR Telerate Page: Designated LIBOR Currency: If CMT Rate, Designated CMT Telerate Page: If Telerate Page 7052: |_| Weekly Average |_| Monthly Average Designated CMT Maturity Index: Index Maturity: Spread and/or Spread Multiplier, if any: Initial Interest Rate, if any: Initial Interest Reset Date: Interest Reset Dates: Interest Reset Period: Interest Payment Dates: Maximum Interest Rate, if any: Minimum Interest Rate, if any: Fixed Rate Commencement Date, if any: Fixed Interest Rate, if any: Day Count Convention: Calculation Agent: Redemption Provisions: Initial Redemption Date: Initial Redemption Percentage: Annual Redemption Percentage Reduction, if any: Repayment Provisions: Optional Repayment Date(s): 1 Original Issue Date: Stated Maturity Date: Specified Currency: Exchange Rate Agent: Authorized Denomination: Purchase Price: ___%, plus accrued interest, if any, from ___________ Price to Public: ___%, plus accrued interest, if any, from __________ Issue Price: Settlement Date and Time: Additional/Other Terms: Also, in connection with the purchase of Notes from the Company by one or more Agents as principal, agreement as to whether the following will be required: Officers' Certificate pursuant to Section 7(b) of the Distribution Agreement. Legal Opinion pursuant to Section 7(c) of the Distribution Agreement. Comfort Letter pursuant to Section 7(d) of the Distribution Agreement. Restrictions on Offers and Sales of Securities pursuant to Section 4(k) of the Distribution Agreement. 2 Exhibit B CONSECO, INC. ADMINISTRATIVE PROCEDURES for Fixed Rate and Floating Rate Medium-Term Notes (Dated as of October 7, 1999) Senior Medium-Term Notes, Series C Due Nine Months or More From Date of Issue (the "Senior Notes") and Subordinated Medium-Term Notes, Series C Due Nine Months or More From Date of Issue (the "Subordinated Notes" and, together with the Senior Notes, the "Notes") are to be offered on a continuous basis by Conseco, Inc., an Indiana corporation (the "Company"), to or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Chase Securities Inc., Deutsche Bank Securities Inc., First Union Securities, Inc., Goldman, Sachs & Co., Lehman Brothers Inc., SG Cowen Securities Corporation and Warburg Dillon Read LLC (each, an "Agent" and, collectively, the "Agents") pursuant to a Distribution Agreement, dated October 7, 1999 (the "Distribution Agreement"), by and among the Company and the Agents. The Distribution Agreement provides both for the sale of Notes by the Company to one or more of the Agents as principal for resale to investors and other purchasers and for the sale of Notes by the Company directly to investors (as may from time to time be agreed to by the Company and the related Agent or Agents), in which case each such Agent will act as an agent of the Company in soliciting purchases of Notes. Unless otherwise agreed by the related Agent or Agents and the Company, Notes will be purchased by the related Agent or Agents as principal. Such purchases will be made in accordance with terms agreed upon by the related Agent or Agents and the Company (which terms shall be agreed upon orally, with written confirmation prepared by the related Agent or Agents and mailed to the Company). If agreed upon by any Agent or Agents and the Company, the Agent or Agents, acting solely as agent or agents for the Company and not as principal, will use reasonable efforts to solicit offers to purchase the Notes. Only those provisions in these Administrative Procedures that are applicable to the particular role to be performed by the related Agent or Agents shall apply to the offer and sale of the relevant Notes. To the extent that these Administrative Procedures are inconsistent with the particular terms of the Notes or the Distribution Agreement, the terms of such Notes or the Distribution Agreement, as the case may be, shall govern. The Senior Notes will be issued as a series of debt securities under an Indenture, dated as of November 13, 1997, as amended, supplemented or modified from time to time (the "Senior Indenture"), between the Company and Bank of New York, as successor to LTCB Trust Company, as trustee (together with any successor in such capacity, the "Senior Trustee"). The Subordinated Notes will be issued as a series of debt securities under an Indenture dated as of July 21, 1999, as amended or modified from time to time (the "Subordinated Indenture" and, together with the Senior Indenture, the "Indentures"), between the Company and Harris Trust and Savings Bank, as trustee (together with any successor in such capacity, the "Subordinated Trustee"). As used herein, the "Trustee" shall mean, with respect to any Senior Notes issued, the Senior Trustee and, with respect to any Subordinated Notes issued, the Subordinated Trustee. The Company has filed a Registration Statement with the Securities and Exchange Commission (the "Commission") registering, among other securities, debt securities (which includes the Notes) (the "Registration Statement", which term shall include any additional registration statements filed in connection with the Notes). The most recent base prospectus deemed part of the Registration Statement, as supplemented with respect to the Notes, is herein referred to as the "Prospectus". The most recent supplement to the Prospectus setting forth the purchase price, interest rate or formula, maturity date and other terms of the Notes (as applicable) is herein referred to as the "Pricing Supplement". 1 The Notes will either be issued (a) in book-entry form and represented by one or more fully registered Notes without coupons (each, a "Global Note") delivered to the Trustee, as agent for The Depository Company ("DTC"), and recorded in the book-entry system maintained by DTC, or (b) in certificated form (each, a "Certificated Note") delivered to the investor or other purchaser thereof or a person designated by such investor or other purchaser. General procedures relating to the issuance of all Notes are set forth in Part I hereof. Additionally, Notes issued in book-entry form will be issued in accordance with the procedures set forth in Part II hereof and Certificated Notes will be issued in accordance with the procedures set forth in Part III hereof. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the applicable Indenture or the Notes, as the case may be. PART I: PROCEDURES OF GENERAL APPLICABILITY Date of Issuance/ Authentication: Each Note will be dated as of the date of its authentication by the Trustee. Each Note shall also bear an original issue date (each, an "Original Issue Date"). The Original Issue Date shall remain the same for all Notes subsequently issued upon transfer, exchange or substitution of an original Note regardless of their dates of authentication. Maturities: Each Note will mature on a date nine months or months or more from its Original Issue Date (the "Stated Maturity Date") selected by the investor or other purchaser and agreed to by the Company. Registration: Unless otherwise provided in the applicable Pricing Supplement, Notes will be issued only in fully registered form. Denominations: Unless otherwise provided in the applicable Pricing Supplement, the Notes will be issued in denominations of $1,000 and integral multiples thereof. Interest Rate Bases applicable to Floating Rate Notes: Unless otherwise provided in the applicable Pricing Supplement, Floating Rate Notes will bear interest at a rate or rates determined by reference to the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate, the Treasury Rate, or such other interest rate basis or formula as may be set forth in applicable Pricing Supplement, or by reference to two or more such rates, as adjusted by the Spread and/or Spread Multiplier, if any, applicable to such Floating Rate Notes. Redemption/Repayment: The Notes will be subject to redemption by the Company in accordance with the terms of the Notes, which will be fixed at the time of sale and set forth in the applicable Pricing Supplement. If no Initial Redemption Date is indicated with respect to a Note, such Note will 2 not be redeemable prior to its Stated Maturity Date. The Notes will be subject to repayment at the option of the Holders thereof in accordance with the terms of the Notes, which will be fixed at the time of sale and set forth in the applicable Pricing Supplement. If no Optional Repayment Date is indicated with respect to a Note, such Note will not be repayable at the option of the Holder prior to its Stated Maturity Date. Calculation of Interest: In case of Fixed Rate Notes, interest (including payments for partial periods) will be calculated and paid on the basis of a 360-day year of twelve 30-day months. The interest rate on each Floating Rate Note will be calculated by reference to the specified Interest Rate Basis or Bases plus or minus the applicable Spread, if any, and/or multiplied by the applicable Spread Multiplier, if any. Unless otherwise provided in the applicable Pricing Supplement, interest on each Floating Rate Note will be calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the period for which accrued interest is being calculated. Unless otherwise provided in the applicable Pricing Supplement, the interest factor for each such day is computed by dividing the interest rate applicable to such day by 360 if the CD Rate, Commercial Paper Rate, Eleventh District Cost of Funds Rate, Federal Funds Rate, LIBOR or Prime Rate is an applicable Interest Rate Basis, or by the actual number of days in the year if the CMT Rate or Treasury Rate is an applicable Interest Rate Basis. As provided in the applicable Pricing Supplement, the interest factor for Notes for which the interest rate is calculated with reference to two or more Interest Rate Bases will be calculated in each period in the same manner as if only one of the interest rate bases applied. Interest: General. Each Note will bear interest in accordance with its terms. Unless otherwise provided in the applicable Pricing Supplement, interest on each Note will accrue from and including the Original Issue Date of such Note for the first interest period or from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for all subsequent interest periods to but excluding applicable Interest Payment Date or the Stated Maturity Date or date of earlier redemption or repayment, as the case may be (the Stated Maturity Date or date of earlier redemption or repayment is referred to herein as the "Maturity Date" with respect to the principal repayable on such date). If an Interest Payment Date or the Maturity Date with respect to any Fixed Rate Note falls on a day that is not a Business Day (as defined below), the required payment to be made on such day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such day, and no interest 3 shall accrue on such payment for the period from and after such day to the next succeeding Business Day. If an Interest Payment Date other than the Maturity Date with respect to any Floating Rate Note would otherwise fall on a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding Business Day, except that in the case of a Note for which LIBOR is an applicable Interest Rate Basis, if such Business Day falls in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. If the Maturity Date with respect to any Floating Rate Note falls on a day that is not a Business Day, the required payment to be made on such day need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such day, and no interest shall accrue on such payment for the period from and after the Maturity Date to the next succeeding Business Day. Unless otherwise provided in the applicable Pricing Supplement, "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to Notes the payment of which is to be made in a currency other than U.S. dollars or composite currencies (such currency or composite currency in which a Note is denominated is the "Specified Currency"), such day is also not a day on which banking institutions are authorized or required by law, regulation or executive order to close in the Principal Financial Center (as defined below) of the country issuing such Specified Currency (or, in the case of Euros, is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to Notes for which LIBOR is an applicable Interest Rate Basis, such day is also a London Business Day (as defined below). "London Business Day" means (i) if the currency (including composite currencies) specified in the applicable Pricing Supplement as the currency (the "Index Currency") for which LIBOR is calculated is other than Euros, any day on which dealings in such Index Currency are transacted in the London interbank market or (ii) if the Index Currency is the Euro, any day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open. It being understood that if no such currency or composite currency is specified in the applicable Pricing Supplement, the Index Currency shall be U.S. dollars. "Principal Financial Center" means the capital city of the country issuing the currency or composite currency in which any payment in respect of the Notes is to be made or, solely with respect to the calculation of LIBOR, the Index Currency, except that with respect to U.S. dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, South African rand, Swiss francs and Euros, the Principal Financial Center shall be The City of New York, Sydney and Melbourne, Toronto, Frankfurt, Amsterdam, Johannesburg, and Zurich, respectively. Regular Record Dates. Unless otherwise provided in the applicable Pricing Supplement, the "Regular Record Date" for a Note shall be the date 15 calendar days (whether or not a Business Day) preceding the applicable Interest Payment Date. 4 Interest Payment Dates. Interest payments will be made on each Interest Payment Date commencing with the first Interest Payment Date following the Original Issue Date; provided, however, the first payment of interest on any Note originally issued between a Regular Record Date and an Interest Payment Date will occur on the Interest Payment Date following the next succeeding Regular Record Date. Unless otherwise provided in the applicable Pricing Supplement, interest payments on Fixed Rate Notes will be made semiannually in arrears on January 15 and July 15 of each year and on the Maturity Date, while interest payments on Floating Rate Notes will be made as specified in the applicable Pricing Supplement. Acceptance and Rejection of Offers from Solicitation as Agents: If agreed upon by any Agent and the Company, then such Agent acting solely as agent for the Company and not as principal will solicit purchases of the Notes. Each Agent will communicate to the Company, orally or in writing, each reasonable offer to purchase Notes solicited by such Agent on an agency basis, other than those offers rejected by such Agent. Each Agent has the right, in its discretion reasonably exercised, to reject any proposed purchase of Notes, as a whole or in part, and any such rejection shall not be a breach of such Agent's agreement contained in the Distribution Agreement. The Company has the sole right to accept or reject any proposed purchase of Notes, in whole or in part, and any such rejection shall be not a breach of the Company's agreement contained in the Distribution Agreement. Each Agent has agreed to make reasonable efforts to assist the Company in obtaining performance by each purchaser whose offer to purchase Notes has been solicited by such Agent and accepted by the Company. Preparation of Pricing Supplement: If any offer to purchase a Note is accepted by the Company, the Company will promptly prepare a Pricing Supplement reflecting the terms of such Note. Information to be included in the Pricing Supplement shall include: 1. the name of the Company; 2. the title of the Notes; 3. the date of the Pricing Supplement and the date of the Prospectus to which the Pricing Supplement relates; 4. the name of the Offering Agent (as defined below); 5. whether such Notes are being sold to the Offering Agent as principal or to an investor or other purchaser through the Offering Agent acting as agent for the Company; 6. with respect to Notes sold to the Offering Agent as principal, 5 whether such Notes will be resold by the Offering Agent to investors and other purchasers at (i) a fixed public offering price of a specified percentage of their principal amount or (ii) at varying prices related to prevailing market prices at the time of resale to be determined by the Offering Agent; 7. with respect to Notes sold to an investor or other purchaser through the Offering Agent acting as agent for the Company, whether such Notes will be sold at (i) 100% of their principal amount or (ii) a specified percentage of their principal amount; 8. the Offering Agent's discount or commission; 9. Net proceeds to the Company; 10. the Principal Amount, Specified Currency (if other than U.S. dollars), Original Issue Date, Stated Maturity Date, Interest Payment Date(s), Authorized Denomination, Initial Redemption Date, if any, Initial Redemption Percentage, if any, Annual Redemption Percentage Reduction, if any, Optional Repayment Date(s), if any, Exchange Rate Agent, if any, and, in the case of Fixed Rate Notes, the Interest Rate, and whether such Fixed Rate Note is an Original Issue Discount Note (and, if so, the Issue Price), and, in the case of Floating Rate Notes, the Interest Category, the Interest Rate Basis or Bases, the Day Count Convention, Index Maturity (if applicable), Initial Interest Rate, if any, Maximum Interest Rate, if any, Minimum Interest Rate, if any, Initial Interest Reset Date, Interest Reset Dates, Spread and/or Spread Multiplier, if any, and Calculation Agent; and 11. any other additional provisions of the Notes material to investors or other purchasers of the Notes not otherwise specified in the Prospectus. The Company shall use reasonable efforts to send such Pricing Supplement by telecopy or overnight express (for delivery by the close of business on the applicable trade date, but in no event later than 11:00 a.m. New York City time, on the Business Day following the applicable trade date) to the Agent which made or presented the offer to purchase the applicable Note (in such capacity, the "Offering Agent") and the Trustee at the following applicable address: if to Merrill Lynch & Co., to: Merrill Lynch Production Technologies, 44B Colonial Drive, Piscataway, New Jersey 08854, Attention: Prospectus Operations/ Nachman Kimerling, (732) 885-2768, telecopier: (732) 885-2774/5/6; if to Banc of America Securities LLC, to: 100 North Tryon Street, Charlotte, North Carolina 28255, Attention: Lynn McConnell, Mailcode: NC1007-07-01, telecopier (704) 388-9939; if to Chase Securities Inc., to: 270 Park Avenue, 8th Floor, New York, New York 10017, Attention: Medium-Term Note Desk - Peter Todd, (212) 834-4421, telecopier: (212) 834-6081; if to Deutsche Bank Securities Inc., one copy to: Deutsche Bank Securities Inc., 1290 Avenue of the Americas, 6th Floor, New York, New York 10019, 6 Attention: Syndicate Operations, (212) 469-6359, telecopier: (212) 469-6333, and one copy to: Pam Kendall, Deutsche Bank Securities Inc., 31 W. 52nd Street, New York, New York, 10019, (212) 469-7288, telecopier: (212) 469-8173; if to First Union Securities, Inc., to: 301 South College Street DC8, Charlotte, North Carolina 28288, Attention: Investment Grade Syndicate, (704) 383- 7727, telecopier: (704) 383-9165; if to Goldman, Sachs & Co., to: 85 Broad Street, 9th Floor, New York, New York 10004, Attention: Credit Department, Credit Control - Medium-Term Notes, (212) 902- 0346, telecopier: (212) 346-2793; if to Lehman Brothers Inc. 3 World Financial Center, Debt Capital Markets - 9th Floor, New York, New York 10285, (212) 526-2301, telecopier (212) 526-1578; if to SG Cowen Securities Corporation to: 1221 Avenue of the Americas, 6th Floor, New York, New York 10020, Attention: Edward Lascala, Capital Markets, (212) 278-5718, telecopier: (212) 278-5099; if to Warburg Dillon Read LLC, to: 677 Washington Blvd., Stamford, Connecticut 06901, Attention: Debt Syndicate, (203) 719-1088, telecopier (203) 719-0495; if to the Senior Trustee, to: The Bank of New York, 101 Barclay Street, 21W, New York, New York 10286, (212) 815-6285, telecopier (212) 815-5915; and if to the Subordinated Trustee, to: Harris Trust and Savings Bank, 311 W. Monroe Street, 12th Floor, Chicago, Illinois 60603, (312) 461-2527, telecopier (312) 461-3525. For record keeping purposes, one copy of such Pricing Supplement shall also be mailed or telecopied to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, World Financial Center, North Tower, 10th Floor, New York, New York, 10281- 1310, Attention: MTN Product Management, (212) 449-7476, telecopier: (212) 449-2234, with a copy to Sidley & Austin, Bank One Plaza, 10 South Dearborn Street, Chicago, Illinois 60603, Attention: Paul L. Choi. In each instance that a Pricing Supplement is prepared, the Offering Agent will provide a copy of such Pricing Supplement to each investor or purchaser of the relevant Notes or its agent. Pursuant to Rule 434 ("Rule 434") of the Securities Act of 1933, as amended, the Pricing Supplement may be delivered separately from the Prospectus. Out dated Pricing Supplements (other than those retained for files) will be destroyed. Settlement: The receipt of immediately available funds by the Company in payment for a Note and the authentication and delivery of such Note shall, with respect to such Note, constitute "settlement". Offers accepted by the Company will be settled in three Business Days, or at such time as the purchaser, the applicable Agent and the Company shall agree, pursuant to the timetable for settlement set forth in Parts II and III hereof under "Settlement Procedure Timetable" with respect to Global Notes and Certificated Notes, respectively (each such date fixed for settlement is hereinafter referred to as a "Settlement Date"). If procedures A and B of the applicable Settlement Procedures with respect to a particular offer are not completed on or before the time set forth under the applicable "Settlement Procedures Timetable", such offer shall not be settled until the Business Day following the completion of settlement procedures A and B or such later date as the purchaser and the Company shall agree. 7 The foregoing settlement procedures may be modified with respect to any purchase of Notes by an Agent as principal if so agreed by the Company and such Agent. Procedure for Changing Rates or Other Variable Terms: When a decision has been reached to change the interest rate or any other variable term on any Notes being sold by the Company, the Company will promptly advise the Agents and the Trustee by facsimile transmission and the Agents will forthwith suspend solicitation of offers to purchase such Notes. The Agents will telephone the Company with recommendations as to the changed interest rates or other variable terms. At such time as the Company notifies the Agents and the Trustee of the new interest rates or other variable terms, the Agents may resume solicitation of offers to purchase such Notes. Until such time, only "indications of interest" may be recorded. Immediately after acceptance by the Company of an offer to purchase Notes at a new interest rate or new variable term, the Company, the Offering Agent and the Trustee shall follow the procedures set forth under the applicable "Settlement Procedures". Suspension of Solicitation; Amendment or Supplement: The Company may instruct the Agents to suspend solicitation of offers to purchase Notes at any time. Upon receipt of such instructions, the Agents will forthwith suspend solicitation of offers to purchase from the Company until such time as the Company has advised the Agents that solicitation of offers to purchase may be resumed. If the Company decides to amend or supplement the Registration Statement or the Prospectus (other than to establish or change interest rates or formulas, maturities, prices or other similar variable terms with respect to the Notes), it will promptly advise the Agents and will furnish the Agents and their counsel with copies of the amendment or supplement. Copies of such amendment or supplement will be delivered or mailed to the Agents, their counsel, the Senior Trustee and the Subordinated Trustee in quantities which such parties may reasonably request at the following respective addresses: Merrill Lynch & Co., World Financial Center, North Tower, 15th Floor, New York, New York 10281-1315, Attention: MTN Product Management, (212) 449-7476, telecopier: (212) 449-2234; if to Banc of America Securities LLC, to: 100 North Tryon Street, Charlotte, North Carolina 28255, Attention: Lynn McConnell, Mailcode: NC1007-07-01, telecopier (704) 388-9939; if to Chase Securities, Inc., to: 270 Park Avenue, 8th Floor, New York, New York 10017, Attention: Medium-Term Note Desk - Peter Todd, (212) 834-4421, telecopier: (212) 834-6081; if to Deutsche Morgan Grenfell Inc., one copy to: Deutsche Bank Securities Inc., 1290 Avenue of the Americas, 6th Floor, New York, New York 10019, ATTENTION: Syndicate Operations, (212) 469-6359, telecopier: (212) 469-6333, and one copy to: Pam Kendall, Deutsche Bank Securities Inc., 31 W. 52nd Street, New York, New York, 10019, (212) 469-7288, telecopier: (212) 469-8173; if to First Union Securities, Inc., to: 8 301 South College Street DC8, Charlotte, North Carolina 28288, Attention: Syndicate Operations, (212) 469-6359, telecopier: (212) 469-6333; if to Goldman, Sachs & Co., to: 85 Broad Street, New York, New York 10004, Attention: Credit Department - Credit Control - Medium-Term Notes, (212) 902-0346, telecopier: (212) 346-2793; if to Lehman Brothers Inc., to: 3 World Financial Center, Debt Capital Markets - 9th Floor, New York, New York 10285, (212) 526-2301, telecopier (212) 526-1578; if to SG Cowen Securities Corporation to: 1221 Avenue of the Americas, 6th Floor, New York, New York 10020, Attention: Edward Lascala, Capital Markets, (212) 278-5718, telecopier: (212) 278-5099; if to Warburg Dillon Read LLC, to: 677 Washington Blvd., Stamford, Connecticut 06901, Attention: Debt Syndicate, (203) 719-1088, telecopier (203) 719- 0495; if to the Senior Trustee, to: The Bank of New York to: 101 Barclay Street, 21W, New York, New York 10286, (212) 815-6285, telecopier (212) 815-5915; and if to the Subordinated Trustee, to: Harris Trust and Savings Bank, 311 W. Monroe Street, 12th Floor, Chicago, Illinois 60603, (312) 461-2527, telecopier (312) 461-3525. For record keeping purposes, one copy of each such amendment or supplement shall also be mailed or telecopier to Sidley & Austin, Bank One Plaza, 10 South Dearborn Street, Chicago, Illinois 60603, Attention: Paul L. Choi, (312) 853-2145, telecopier: (312) 853-7036. In the event that at the time the solicitation of offers to purchase from the Company is suspended (other than to establish or change interest rates or formulas, maturities, prices or other similar variable terms with respect to the Notes) there shall be any offers to purchase Notes that have been accepted by the Company which have not been settled, the Company will promptly advise the Offering Agent and the Trustee whether such offers may be settled and whether copies of the Prospectus as theretofore amended and/or supplemented as in effect at the time of the suspension may be delivered in connection with the settlement of such offers. The Company will have the sole responsibility for such decision and for any arrangements which may be made in the event that the Company determines that such offers may not be settled or that copies of such Prospectus may not be so delivered. Delivery of Prospectus and applicable Pricing Supplement: A copy of the most recent Prospectus and the applicable Pricing Supplement, which pursuant to Rule 434 may be delivered separately from the Prospectus, must accompany or precede the earlier of (a) the written confirmation of a sale sent to an investor or other purchaser or its agent and (b) the delivery of Notes to an investor or other purchaser or its agent. Authenticity of Signatures: The Agents will have no obligation or liability to the Company, the Senior Trustee or the Subordinated Trustee in respect of the authenticity of the signature of any officer, employee or agent of the Company or either Trustee on any Note. 9 Documents Incorporated by Reference: The Company shall supply the Agents upon request with an adequate supply of all documents incorporated by reference in the Registration Statement and the Prospectus. PART II: PROCEDURES FOR NOTES ISSUED IN BOOK-ENTRY FORM In connection with the qualification of Notes issued in book-entry form for eligibility in the book-entry system maintained by DTC, the Trustee will perform the custodial, document control and administrative functions described below, in accordance with its respective obligations under a Letter of Representations from the Company and the Senior Trustee to DTC, dated September 10, 1998, and a Certificate Agreement, dated November 17, 1995, between the Senior Trustee and DTC, as amended (the "Senior Certificate Agreement"), or a Letter of Representations from the Company assumed by the Subordinated Trustee to DTC, dated September 10, 1998, and a Certificate Agreement, dated July 2, 1980, between the Subordinated Trustee and DTC, as amended (the "Subordinated Certificate Agreement" and, together with the Senior Certificate Agreement, the "Certificate Agreements"), as the case may be, and the Trustee's obligations as a participant in DTC, including DTC's Same-Day Funds Settlement System ("SDFS"). Issuance: All Fixed Rate Notes issued in book-entry form having the same Original Issue Date, Specified Currency, Interest Rate, Default Rate, Interest Payment Dates, redemption and/or repayment terms, if any, and Stated Maturity Date (collectively, the "Fixed Rate Terms") will be represented initially by a single Global Note; and all Floating Rate Notes issued in book-entry form having the same Original Issue Date, Specified Currency, Interest Category, formula for the calculation of interest (including the Interest Rate Basis or Bases, which may be the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or the Treasury Rate or any other interest rate basis or formula, and Spread and/or Spread Multiplier, if any), Day Count Convention, Initial Interest Rate, Default Rate, Index Maturity (if applicable), Minimum Interest Rate, if any, Maximum Interest Rate, if any, redemption and/or repayment terms, if any, Interest Payment Dates, Initial Interest Reset Date, Interest Reset Dates and Stated Maturity Date (collectively, the "Floating Rate Terms") will be represented initially by a single Global Note. For other variable terms with respect to the Fixed Rate Notes and Floating Rate Notes, see the Prospectus and the applicable Pricing Supplement. Owners of beneficial interests in Global Notes will be entitled to physical delivery of Certificated Notes equal in principal amount to their respective beneficial interests only upon certain limited circumstances described in the Prospectus. Identification: The Company has arranged with the CUSIP Service Bureau of Standard & Poor's Corporation (the "CUSIP Service Bureau") for the reservation of one series of CUSIP numbers with respect to the Senior Notes and one series of CUSIP numbers with respect to the 10 Subordinated Notes, each of which consists of approximately 900 CUSIP numbers which have been reserved for and relating to Global Notes and the Company has delivered to each of the Trustees and DTC such lists of such CUSIP numbers. The Company will assign CUSIP numbers to Global Notes as described below under Settlement Procedure B. DTC will notify the CUSIP Service Bureau periodically of the CUSIP numbers that the Company has assigned to Global Notes. The appropriate Trustee will notify the Company at any time when fewer than 100 of the reserved CUSIP numbers relating to Senior Notes or Subordinated Notes, as the case may be, remain unassigned to Global Notes, and, if it deems necessary, the Company will reserve and obtain additional CUSIP numbers for assignment to Global Notes. Upon obtaining such additional CUSIP numbers for either Senior Notes or Subordinated Notes, the Company will deliver a list of such additional numbers to the appropriate Trustee and DTC. Notes issued in book-entry form in excess of $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) aggregate principal amount and otherwise required to be represented by the same Global Note will instead be represented by two or more Global Notes which shall all be assigned the same CUSIP number. Registration: Unless otherwise specified by DTC, each Global Note will be registered in the name of Cede & Co., as nominee for DTC, on the register maintained by the Trustee under the applicable Indenture. The beneficial owner of a Note issued in book-entry form (i.e., an owner of a beneficial interest in a Global Note) (or one or more indirect participants in DTC designated by such owner) will designate one or more participants in DTC (with respect to such Note issued in book-entry form, the "Participants") to act as agent for such beneficial owner in connection with the book-entry system maintained by DTC, and DTC will record in book-entry form, in accordance with instructions provided by such Participants, a credit balance with respect to such Note issued in book-entry form in the account of such Participants. The ownership interest of such beneficial owner in such Note issued in book-entry form will be recorded through the records of such Participants or through the separate records of such Participants and one or more indirect participants in DTC. Transfers: Transfers of beneficial ownership interests in a Global Note will be accomplished by book entries made by DTC and, in turn, by Participants (and in certain cases, one or more indirect participants in DTC) acting on behalf of beneficial transferors and transferees of such Global Note. Exchanges: The Trustee may deliver to DTC and the CUSIP Service Bureau at any time a written notice specifying (a) the CUSIP numbers of two or more Global Notes outstanding on such date that represent Global Notes having the same Fixed Rate Terms or Floating Rate Terms, as the case may be (other than Original Issue Dates), and for which interest has been paid to the same date; (b) a date, occurring at least 30 days after such written notice is delivered and at least 30 days before the next Interest Payment Date for the related Notes issued in book-entry form, on which such Global Notes shall be exchanged for a single 11 replacement Global Note; and (c) a new CUSIP number, obtained from the Company, to be assigned to such replacement Global Note. Upon receipt of such a notice, DTC will send to its Participants (including the Trustee) a written reorganization notice to the effect that such exchange will occur on such date. Prior to the specified exchange date, the Trustee will deliver to the CUSIP Service Bureau written notice setting forth such exchange date and the new CUSIP number and stating that, as of such exchange date, the CUSIP numbers of the Global Notes to be exchanged will no longer be valid. On the specified exchange date, the Trustee will exchange such Global Notes for a single Global Note bearing the new CUSIP number and the CUSIP numbers of the exchanged Notes will, in accordance with CUSIP Service Bureau procedures, be canceled and not immediately reassigned. Notwithstanding the foregoing, if the Global Notes to be exchanged exceed $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) in aggregate principal amount, one replacement Note will be authenticated and issued to represent each $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) in aggregate principal amount of the exchanged Global Notes and an additional Global Note or Notes will be authenticated and issued to represent any remaining principal amount of such Global Notes (See "Denominations" below). Denominations: Unless otherwise provided in the applicable Pricing Supplement, Notes issued in book-entry form will be issued in denominations of $1,000 and integral multiples thereof. Global Notes will not be denominated in excess of $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) aggregate principal amount. If one or more Notes are issued in book-entry form in excess of $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) aggregate principal amount and would, but for the preceding sentence, be represented by a single Global Note, then one Global Note will be issued to represent each $200,000,000 (or the equivalent thereof in one or more foreign or composite currencies) in aggregate principal amount of such Notes issued in book-entry form and an additional Global Note or Notes will be issued to represent any remaining aggregate principal amount of such Note or Notes issued in book-entry form. In such a case, each of the Global Notes representing Notes issued in book-entry form shall be assigned the same CUSIP number. Payments of Principal and Interest: Payments of Interest Only. Promptly after each Regular Record Date, the Trustee will deliver to the Company and DTC a written notice specifying by CUSIP number the amount of interest to be paid on each Global Note on the following Interest Payment Date (other than an Interest Payment Date coinciding with the Maturity Date) and the total of such amounts. DTC will confirm the amount payable on each Global Note on such Interest Payment Date by reference to the daily bond reports published by Standard & Poor's Corporation. On such Interest Payment Date, the Company will pay to the Trustee in immediately available funds an amount sufficient to pay the interest then due and owing on the Global Notes, and upon receipt of such 12 funds from the Company, the Trustee in turn will pay to DTC such total amount of interest due on such Global Notes (other than on the Maturity Date) which is payable in U.S. dollars, at the times and in the manner set forth below under "Manner of Payment". The Trustee shall make payment of that amount of interest due and owing on any Global Notes that Participants have elected to receive in foreign or composite currencies directly to such Participants. Notice of Interest Rates. Promptly after each Interest Determination Date or Calculation Date, as the case may be, for Floating Rate Notes issued in book-entry form, the Trustee will notify each of Duff & Phelps Credit Rating Company and Standard & Poor's Corporation of the interest rates determined as of such Interest Determination Date. Payments at Maturity. On or about the first Business Day of each month, the Trustee will deliver to the Company and DTC a written list of principal, premium, if any, and interest to be paid on each Global Note maturing or otherwise becoming due in the following month. The Trustee, the Company and DTC will confirm the amounts of such principal, premium, if any, and interest payments with respect to each such Global Note on or about the fifth Business Day preceding the Maturity Date of such Global Note. On the Maturity Date, the Company will pay to the Trustee in immediately available funds an amount sufficient to make the required payments, and upon receipt of such funds the Trustee in turn will pay to DTC the principal amount of Global Notes, together with premium, if any, and interest due on the Maturity Date, which are payable in U.S. dollars, at the times and in the manner set forth below under "Manner of Payment". The Trustee shall make payment of the principal, premium, if any, and interest to be paid on the Maturity Date of each Global Note that Participants have elected to receive in foreign or composite currencies directly to such Participants. Promptly after (i) payment to DTC of the principal, premium, if any, and interest due on the Maturity Date of such Global Note which are payable in U.S. dollars and (ii) payment of the principal, premium, if any, and interest due on the Maturity Date of such Global Note to those Participants who have elected to receive such payments in foreign or composite currencies, the Trustee will cancel such Global Note and deliver it to the Company with an appropriate debit advice. On the first Business Day of each month, the Trustee will deliver to the Company a written statement indicating the total principal amount of outstanding Global Notes as of the close of business on the immediately preceding Business Day. Manner of Payment. The total amount of any principal, premium, if any, and interest due on Global Notes on any Interest Payment Date or the Maturity Date, as the case may be, which is payable in U.S. dollars shall be paid by the Company to the Trustee in funds available for use by the Trustee no later than 10:00 a.m., New York City time, on such date. The Company will make such payment on such Global Notes to an account specified by the Trustee. Upon receipt of such funds, the Trustee will pay by separate wire transfer (using Fedwire message entry instructions in a form previously specified by DTC) to an account at the Federal Reserve Bank of New York previously specified by 13 DTC, in funds available for immediate use by DTC, each payment in U.S. dollars of principal, premium, if any, and interest due on Global Notes on such date. Thereafter on such date, DTC will pay, in accordance with its SDFS operating procedures then in effect, such amounts in funds available for immediate use to the respective Participants in whose names the beneficial interests in such Global Notes are recorded in the book-entry system maintained by DTC. Neither the Company nor the Trustee shall have any responsibility or liability for the payment in U.S. dollars by DTC of the principal of, or premium, if any, or interest on, the Global Notes. The Trustee shall make all payments of principal, premium, if any, and interest on each Global Note that Participants have elected to receive in foreign or composite currencies directly to such Participants. Withholding Taxes. The amount of any taxes required under applicable law to be withheld from any interest payment on a Global Note will be determined and withheld by the Participant, indirect participant in DTC or other Person responsible for forwarding payments and materials directly to the beneficial owner of such Global Note. Settlement Procedures: Settlement Procedures with regard to each Note in book-entry form sold by an Agent, as agent of the Company, or purchased by an Agent, as principal, will be as follows: A. The Offering Agent will advise the Company by telephone, confirmed by facsimile, of the following settlement information: 1. Principal amount, Authorized Denomination, and Specified Currency. 2. Exchange Rate Agent, if any. 3. (a) Fixed Rate Notes: (i) Interest Rate. (ii) Interest Payment Dates. (iii) Whether such Note is being issued with Original Issue Discount and, if so, the terms thereof. (b) Floating Rate Notes: (i) Interest Category. (ii) Interest Rate Basis or Bases. (iii) Initial Interest Rate. (iv) Spread and/or Spread Multiplier, if any. 14 (v) Initial Interest Reset Date or Interest Reset Dates. (vi) Interest Payment Dates. (vii) Index Maturity, if any. (viii) Maximum and/or Minimum Interest Rates, if any. (ix) Day Count Convention. (viii) Calculation Agent. 4. Price to public, if any, of such Note (or whether such Note is being offered at varying prices relating to prevailing market prices at time of resale as determined by the Offering Agent). 5. Trade Date. 6. Settlement Date (Original Issue Date). 7. Stated Maturity Date. 8. Redemption provisions, if any. 9. Repayment provisions, if any. 10. Default Rate, if any. 11. Net proceeds to the Company. 12. The Offering Agent's discount or commission. 13. Whether such Note is being sold to the Offering Agent as principal or to an investor or other purchaser through the Offering Agent acting as agent for the Company. 14. Such other information specified with respect to such Note (whether by Addendum or otherwise). B. The Company will assign a CUSIP number to the Global Note representing such Note and then advise the Trustee by facsimile transmission or other electronic transmission of the above settlement information received from the Offering Agent, such CUSIP number and the name of the Offering Agent. The Company will also advise the Offering Agent of the CUSIP number assigned to the Global Note. C. The Trustee will communicate to DTC and the Offering Agent through DTC's Participant Terminal System a pending deposit 15 message specifying the following settlement information: 1. The information set forth in the Settlement Procedure A. 2. Identification numbers of the participant accounts maintained by DTC on behalf of the Trustee and the Offering Agent. 3. Identification of the Global Note as a Fixed Rate Global Note or Floating Rate Global Note. 4. Initial Interest Payment Date for such Note, number of days by which such date succeeds the related record date for DTC purposes (or, in the case of Floating Rate Notes which reset daily or weekly, the date five calendar days preceding the Interest Payment Date) and, if then calculable, the amount of interest payable on such Interest Payment Date (which amount shall have been confirmed by the Trustee). 5. CUSIP number of the Global Note representing such Note. 6. Whether such Global Note represents any other Notes issued or to be issued in book-entry form. DTC will arrange for each pending deposit message described above to be transmitted to Standard & Poor's Corporation, which will use the information in the message to include certain terms of the related Global Note in the appropriate daily bond report published by Standard & Poor's Corporation. D. The Trustee will complete and authenticate the Global Note representing such Note. E. DTC will credit such Note to the participant account of the Trustee maintained by DTC. F. The Trustee will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Note to the Trustee's participant account and credit such Note to the participant account of the Offering Agent maintained by DTC and (ii) to debit the settlement account of the Offering Agent and credit the settlement account of the Trustee maintained by DTC, in an amount equal to the price of such Note less such Offering Agent's discount or underwriting commission, as applicable. Any entry of such a deliver order shall be deemed to constitute a representation and warranty by the Trustee to DTC that (i) the Global Note representing such Note has been issued and authenticated and (ii) the Trustee is holding such Global Note pursuant to the applicable Certificate Agreement. 16 G. In the case of Notes in book-entry form sold through the Offering Agent, as agent, the Offering Agent will enter an SDFS deliver order through DTC's Participant Terminal System instructing DTC (i) to debit such Note to the Offering Agent's participant account and credit such Note to the participant account of the Participants maintained by DTC and (ii) to debit the settlement accounts of such Participants and credit the settlement account of the Offering Agent maintained by DTC in an amount equal to the initial public offering price of such Note. H. Transfers of funds in accordance with SDFS deliver orders described in Settlement Procedures F and G will be settled in accordance with SDFS operating procedures in effect on the Settlement Date. I. Upon receipt, the Trustee will pay the Company, by wire transfer of immediately available funds to an account specified by the Company to the Trustee from time to time, the amount transferred to the Trustee in accordance with Settlement Procedure H. J. The Trustee will send a copy of the Global Note by first class mail to the Company together with a statement setting forth the principal amount of Notes Outstanding as of the related Settlement Date after giving effect to such transaction and all other offers to purchase Notes of which the Company has advised the Trustee but which have not yet been settled. K. If such Note was sold through the Offering Agent, as agent, the Offering Agent will confirm the purchase of such Note to the investor or other purchaser either by transmitting to the Participant with respect to such Note a confirmation order through DTC's Participant Terminal System or by mailing a written confirmation to such investor or other purchaser. Settlement Procedures Timetable: For offers to purchase Notes accepted by the Company, Settlement Procedures A through K set forth above shall be completed as soon as possible following the trade but not later than the respective times (New York City time) set forth below: SETTLEMENT PROCEDURE TIME ---------- ---- A 11:00 a.m. on the trade date or within one hour following the trade B 12:00 noon on the trade date or within one hour following the trade C No later than the close of business on the trade date D 9:00 a.m. on Settlement Date E 10:00 a.m. on Settlement Date F-G No later than 2:00 p.m. on Settlement Date 17 H 4:00 p.m. on Settlement Date I-K 5:00 p.m. on Settlement Date Settlement Procedure H is subject to extension in accordance with any extension of Fedwire closing deadlines and in the other events specified in the SDFS operating procedures in effect on the Settlement Date. If settlement of a Note issued in book-entry form is rescheduled or canceled, the Trustee will deliver to DTC, through DTC's Participant Terminal System, a cancellation message to such effect by no later than 5:00 p.m., New York City time, on the Business Day immediately preceding the scheduled Settlement Date. Failure to Settle: If the Trustee fails to enter an SDFS deliver order with respect to a Note issued in book-entry form pursuant to Settlement Procedure F, the Trustee may deliver to DTC, through DTC's Participant Terminal System, as soon as practicable a withdrawal message instructing DTC to debit such Note to the participant account of the Trustee maintained at DTC. DTC will process the withdrawal message, provided that such participant account contains a principal amount of the Global Note representing such Note that is at least equal to the principal amount to be debited. If withdrawal messages are processed with respect to all the Notes represented by a Global Note, the Trustee will mark such Global Note "canceled", make appropriate entries in its records and send certification of destruction of such canceled Global Note to the Company. The CUSIP number assigned to such Global Note shall, in accordance with CUSIP Service Bureau procedures, be canceled and not immediately reassigned. If withdrawal messages are processed with respect to a portion of the Notes represented by a Global Note, the Trustee will exchange such Global Note for two Global Notes, one of which shall represent the Global Notes for which withdrawal messages are processed and shall be canceled immediately after issuance and the other of which shall represent the other Notes previously represented by the surrendered Global Note and shall bear the CUSIP number of the surrendered Global Note. In the case of any Note in book-entry form sold through the Offering Agent, as agent, if the purchase price for any such Note is not timely paid to the Participants with respect thereto by the beneficial investor or other purchaser thereof (or a person, including an indirect participant in DTC, acting on behalf of such investor or other purchaser), such Participants and, in turn, the related Offering Agent may enter SDFS deliver orders through DTC's Participant Terminal System reversing the orders entered pursuant to Settlement Procedures F and G, respectively. Thereafter, the Trustee will deliver the withdrawal message and take the related actions described in the preceding paragraph. If such failure shall have occurred for any reason other than default by the applicable Offering Agent to perform its obligations hereunder or under the Distribution Agreement, the Company will reimburse such Offering Agent on an equitable basis for its reasonable loss of the use of funds during the period when the funds 18 were credited to the account of the Company. Notwithstanding the foregoing, upon any failure to settle with respect to a Note in book-entry form, DTC may take any actions in accordance with its SDFS operating procedures then in effect. In the event of a failure to settle with respect to a Note that was to have been represented by a Global Note also representing other Notes, the Trustee will provide, in accordance with Settlement Procedure D, for the authentication and issuance of a Global Note representing such remaining Notes and will make appropriate entries in its records. PART III: PROCEDURES FOR CERTIFICATED NOTES Denominations: Unless otherwise provided in the applicable Pricing Supplement, the Certificated Notes will be issued in denominations of $1,000 and integral multiples thereof. Payments of Principal, Premium, if any, and Interest: Upon presentment and delivery of the Certificated Note, the Trustee upon receipt of immediately available funds from the Company will pay the principal of, premium, if any, and interest on, each Certificated Note on the Maturity Date in immediately available funds. All interest payments on a Certificated Note, other than interest due on the Maturity Date, will be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register; provided, however, that Holders of $10,000,000 or more in aggregate principal amount of Certificated Notes (whether having identical or different terms and provisions) shall be entitled to receive such interest payments by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 calendar days prior to the applicable Interest Payment Date. The Trustee will provide monthly to the Company a list of the principal, premium, if any, and interest to be paid on Certificated Notes maturing in the next succeeding month. The Trustee will be responsible for withholding taxes on interest paid as required by applicable law. Certificated Notes presented to the Trustee on the Maturity Date for payment will be canceled by the Trustee. All canceled Certificated Notes held by the Trustee shall be destroyed, and the Trustee shall furnish to the Company a certificate with respect to such destruction. Settlement Procedures: Settlement Procedures with regard to each Certificated Note purchased by an Agent, as principal, or through an Agent, as agent, shall be as follows: A. The Offering Agent will advise the Company by telephone of 19 the following Settlement information with regard to each Certificated Note: 1. Exact name in which the Certificated Note(s) is to be registered (the "Registered Owner"). 2. Exact address or addresses of the Registered Owner for delivery, notices and payments of principal, premium, if any, and interest. 3. Taxpayer identification number of the Registered Owner. 4. Principal amount, Authorized Denomination and Specified Currency. 5. Exchange Rate Agent, if any. 6. (a) Fixed Rate Notes: (i) Interest Rate. (ii) Interest Payment Dates. (iii) Whether such Note is being issued with Original Issue Discount and, if so, the terms thereof. (b) Floating Rate Notes: (i) Interest Category. (ii) Interest Rate Basis or Bases. (iii) Initial Interest Rate. (iv) Spread and/or Spread Multiplier, if any. (v) Initial Interest Reset Date and Interest Reset Dates. (vi) Interest Payment Dates. (vii) Index Maturity, if any. (viii) Maximum and/or Minimum Interest Rates, if any. (ix) Day Count Convention. (x) Calculation Agent. 7. Price to public of such Certificated Note (or whether 20 such Note is being offered at varying prices relating to prevailing market prices at time of resale as determined by the Offering Agent). 8. Trade Date. 9. Settlement Date (Original Issue Date). 10. Stated Maturity Date. 11. Redemption provisions, if any. 12. Repayment provisions, if any. 13. Default Rate, if any. 14. Net proceeds to the Company. 15. The Offering Agent's discount or commission. 16. Whether such Note is being sold to the Offering Agent as principal or to an investor or other purchaser through the Offering Agent acting as agent for the Company. 17. Such other information specified with respect to such Note (whether by Addendum or otherwise). B. After receiving such settlement information from the Offering Agent, the Company will advise the Trustee of the above settlement information by facsimile transmission confirmed by telephone. The Company will cause the Trustee to issue, authenticate and deliver the Certificated Note. C. The Trustee will complete the Certificated Note in the form approved by the Company and the Offering Agent, and will make three copies thereof (herein called "Stub 1", "Stub 2" and "Stub 3"): 1. Certificated Note with the Offering Agent's confirmation, if traded on a principal basis, or the Offering Agent's customer confirmation, if traded on an agency basis. 2. Stub 1 for Trustee. 3. Stub 2 for Offering Agent. 4. Stub 3 for the Company. D. With respect to each trade, the Trustee will deliver the Certificated Note and Stub 2 thereof to the Offering Agent at the following applicable address: Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Money Markets 21 Clearance, 55 Water Street, Concourse Level, N.S.C.C. Window, New York, New York 10041, Attention: Al Mitchell, (212) 558-2405, telecopier: (212) 558-2457; Banc of America Securities LLC, c/o Bank of New York, 1 Wall Street, 3rd Floor, Window B, Account Banc of America Securities LLC Attention: Joe Cangelosi, New York, New York 10286, A/C #016854; Chase Securities Inc., 55 Water Street, Room 226, New York, New York 10041, Attention: Window 17 or 18, (212) 638-6787, telecopier: (212) 638-5618; Deutsche Bank Securities Inc., one copy to: Deutsche Bank Securities Inc. c/o ADP Prospectus, 536 Broadhollow Road, Melville, New York 11747, (516) 254-7107, telecopier: (516) 254-7134, and one copy to: Pam Kendall, Deutsche Bank Securities Inc., 31 W. 52nd Street, New York, New York, 10019, (212) 469-7288, telecopier: (212) 469-8173; First Union Securities, Inc., 301 South College Street DC8, Charlotte, North Carolina 28288, Attention: Investment Grade Syndicate, (704) 383-7727, telecopier: (704) 383-9165; Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Credit Department - Credit Control - Medium-Term Notes, (212) 902-0346, telecopier: (212) 346- 2793; Lehman Brothers Inc. 3 World Financial Center, Debt Capital Markets - 9th Floor, New York, New York 10285, (212) 526-2301, telecopier (212) 526-1578; if to SG Cowen Securities Corporation to: 1221 Avenue of the Americas, 6th Floor, New York, New York 10020, Attention: Edward Lascala, Capital Markets, (212) 278-5718, telecopier: (212) 278-5099; Warburg Dillon Read LLC: 677 Washington Blvd., Stamford, Connecticut 06901, Attention: Debt Syndicate, (203) 719-1088, telecopier: (203) 719-0495; and the Trustee will keep Stub 1. The Offering Agent will acknowledge receipt of the Certificated Note through a broker's receipt and will keep Stub 2. Delivery of the Certificated Note will be made only against such acknowledgment of receipt. Upon determination that the Certificated Note has been authorized, delivered and completed as aforementioned, the Offering Agent will wire the net proceeds of the Certificated Note after deduction of its applicable commission to the Company pursuant to standard wire instructions given by the Company. E. In the case of a Certificated Note sold through the Offering Agent, as agent, the Offering Agent will deliver such Certificated Note (with the confirmation) to the purchaser against payment in immediately available funds. F. The Trustee will send Stub 3 to the Company. Settlement Procedures Timetable: For offers to purchase Certificated Notes accepted by the Company, Settlement Procedures A through F set forth above shall be completed as soon as possible following the trade but not later than the respective times (New York City time) set forth below: 22 SETTLEMENT PROCEDURE TIME ---------- ---- A 11:00 a.m. on the trade date or within one hour following the trade B 12:00 noon on the trade date or within one hour following the trade C-D 2:15 p.m. on Settlement Date E 3:00 p.m. on Settlement Date F 5:00 p.m. on Settlement Date Failure to Settle: In the case of Certificated Notes sold through the Offering Agent, as agent, if an investor or other purchaser of a Certificated Note from the Company shall either fail to accept delivery of or make payment for such Certificated Note on the date fixed for settlement, the Offering Agent will forthwith notify the Trustee and the Company by telephone, confirmed in writing, and return such Certificated Note to the Trustee. The Trustee, upon receipt of such Certificated Note from the Offering Agent, will immediately advise the Company and the Company will promptly arrange to credit the account of the Offering Agent in an amount of immediately available funds equal to the amount previously paid to the Company by such Offering Agent in settlement for such Certificated Note. Such credits will be made on the Settlement Date if possible, and in any event not later than the Business Day following the Settlement Date; provided that the Company has received notice on the same day. If such failure shall have occurred for any reason other than failure by such Offering Agent to perform its obligations hereunder or under the Distribution Agreement, the Company will reimburse such Offering Agent on an equitable basis for its reasonable loss of the use of funds during the period when the funds were credited to the account of the Company. Immediately upon receipt of the Certificated Note in respect of which the failure occurred, the Trustee will cancel and destroy such Certificated Note, make appropriate entries in its records to reflect the fact that such Certificated Note was never issued, and accordingly notify in writing the Company. 23 EXHIBIT C FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY TO BE DELIVERED PURSUANT TO SECTION 5(b)(1) (1) The Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Indiana. (2) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into the Distribution Agreement and consummate the transactions contemplated in the Prospectus. (3) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect. (4) All of the issued and outstanding shares of capital stock of the Company have been duly authorized and are validly issued, fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company were issued in violation of preemptive or other similar rights of any securityholder of the Company. (5) Each Significant Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect; except as stated in the Prospectus, all of the issued and outstanding shares of capital stock of each Significant Subsidiary have been duly authorized and are validly issued, fully paid and non-assessable and, to the best of my knowledge, are owned by the Company, directly or through subsidiaries, free and clear of any material security interest, mortgage, pledge, lien, encumbrance, claim or equity. (6) The Distribution Agreement has been duly authorized, executed and delivered by the Company. (7) Each Indenture has been duly authorized, executed and delivered by the Company and (assuming due authorization, execution and delivery thereof by the applicable Trustee) constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, (B) general equitable principles (regardless of whether enforcement is considered in a proceeding in equity or at law), (C) requirements that a claim with respect to any debt securities issued under the Indenture that are payable in a foreign or composite currency (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law or (D) governmental authority to limit, delay or prohibit the making of payments outside the United States. (8) The Notes have been duly authorized by the Company for offer, sale, issuance and delivery pursuant to the Distribution Agreement and, when issued, authenticated and delivered in the manner provided for in the applicable Indenture and delivered against payment of the consideration therefor, will constitute valid 1 and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, (B) general equitable principles (regardless of whether enforcement is considered in a proceeding in equity or at law), (C) requirements that a claim with respect to any Notes payable in a foreign or composite currency (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law or (D) governmental authority to limit, delay or prohibit the making of payments outside the United States; and the Notes, in the forms certified on the date hereof, are in the form contemplated by, and each registered holder thereof is entitled to the benefits of, the applicable Indenture. (9) The Indentures and the Notes, in the forms certified on the date hereof, conform in all material respects to the statements relating thereto contained in the Prospectus and are in substantially the form filed or incorporated by reference, as the case may be, as an exhibit to the Registration Statement and the Previous Registration Statement. (10) The information in the Prospectus under "Description of Debt Securities," "Description of Notes" and "Certain Federal Income Tax Considerations," or any caption purporting to cover such matters, the information in the Annual Report on Form 10-K under "Business of Conseco - Federal Income Taxation" and the information in the Registration Statement and the Previous Registration Statement under Item 15, to the extent that such information constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by me and is correct in all material respects. (11) To the best of my knowledge, neither the Company nor any of its Significant Subsidiaries is in violation of its charter or by-laws and no default by the Company or any of its Significant Subsidiaries exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any Agreement and Instrument that is described or referred to in the Registration Statement, the Previous Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement. (12) The execution, delivery and performance of the Distribution Agreement, each Indenture and the Notes and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated in the Prospectus, the consummation of the transactions contemplated in the Prospectus (including the issuance and sale of the Notes and the use of the proceeds therefrom as described in the Prospectus) and the compliance by the Company with its obligations thereunder have been duly authorized by all necessary corporate action and, in each case, do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event under, or result in the creation or imposition of any lien, charge or encumbrance upon any assets, properties or operations of the Company or any of its subsidiaries pursuant to, any Agreement and Instrument known to me, except for such conflicts, breaches or defaults that would not result in a Material Adverse Effect, nor will such action result in any violation of any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to me, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their assets, properties or operations, except for such violations that would not result in a Material Adverse Effect, or any violation of the provisions of the charter or by-laws of the Company or any of its Significant Subsidiaries. (13) Except as disclosed in the Company's public filings with the Securities and Exchange Commission made prior to the date hereof, to the best of my knowledge, there is no action, suit, proceeding, inquiry or investigation to which the Company or any of its Significant Subsidiaries thereof is a party or to which the assets, properties or operations of the Company or any of its Significant Subsidiaries thereof is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might 2 reasonably be expected to result in a Material Adverse Effect. (14) All descriptions in the Prospectus of contracts and other documents to which the Company or any of its subsidiaries are a party are accurate in all material respects; and, to the best of my knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or the Previous Registration Statement or to be filed as exhibits to the Registration Statement or the Previous Registration Statement other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (15) To the best of my knowledge, there are no statutes or regulations that are required to be described in the Prospectus that are not described as required. (16) Each of the Registration Statement and the Previous Registration Statement has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and to the best of my knowledge, no stop order suspending the effectiveness of the Registration Statement or the Previous Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been initiated or are pending or threatened by the Commission. (17) The Registration Statement, the Previous Registration Statement and the Prospectus, excluding the documents incorporated by reference therein, and each amendment or supplement to the Registration Statement, Previous Registration Statement and Prospectus, excluding the documents incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom and the Form T-1, as to which I express no opinion), complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (18) The documents incorporated by reference in the Prospectus (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which I express no opinion), when they were filed with the Commission, complied as to form in all material respects with the requirements of the 1934 Act and the 1934 Act Regulations. (19) The Company is not, and upon the issuance and sale of the Notes and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" within the meaning of the 1940 Act. (20) The Notes, in the forms certified on the date hereof, will be excluded or exempted under, or beyond the purview of, the Commodity Exchange Act and the Commodity Exchange Act Regulations. (21) No filing with, or approval, authorization, consent, license, registration, qualification, order or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Company of its obligations under the Distribution Agreement, either Indenture or the Notes or the consummation of the transactions contemplated in the Prospectus, except such as have been previously obtained or rendered, as the case may be, and such as may be obtained under the state securities laws of any jurisdiction in connection with the sale of the Notes as contemplated in the Distribution Agreement. (22) The Company and each of its subsidiaries hold all material licenses, certificates and permits from all governmental authorities (including, without limitation, the Insurance Licenses) which are necessary to the conduct of their businesses; the Company and each of its subsidiaries have fulfilled and performed all material obligations necessary to maintain their respective Insurance Licenses, and no event or events have occurred which may be reasonably expected to result in the material impairment, modification, termination or 3 revocation of such Insurance Licenses. Nothing has come to my attention that would cause me to believe that the Registration Statement or the Previous Registration Statement or any post-effective amendment thereto (other than financial statement, schedules and other financial data included or incorporated therein and for the Form T-1, as to which I express no belief), at the time the Registration Statement or the Previous Registration Statement, as the case may be, or any post-effective amendment thereto became effective or at the date of any agreement of the applicable Agent(s) to purchase Notes from the Company as principal (but after giving effect to Rule 430A under the 1933 Act), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (other than financial statements and schedules and other financial data included or incorporated, as to which I express no belief), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering my opinion, I may rely as to matters of fact (but not as to legal conclusions), to the extent I deem proper, on certificates of responsible officers of the Company and public officials. 4 EXHIBIT D FORM OF ACCOUNTANT'S COMFORT LETTER PURSUANT TO SECTION 5(d) We are independent public accountants with respect to the Company and its subsidiaries within the meaning of the 1933 Act and the 1933 Act Regulations and: (i) in our opinion, the audited consolidated financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the [three- month periods ended _________, 19__ and _________, 19__, the three- and six-month periods ended _________, 19__ and _________, 19__ and the three- and nine-month periods ended _________, 19__ and _________, 19__, included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus (collectively, the "10-Q Financials")] [, a reading of the latest available unaudited interim consolidated financial statements of the Company],1 a reading of the minutes of all meetings of the stockholders and directors of the Company and its subsidiaries and committees thereof since [day after end of last audited period], inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the [description of relevant periods]2 and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (A) the 10-Q Financials included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus for them to be in conformity with generally accepted accounting principles; - ------------- 1 Include if the latest available unaudited financial statements are more recent than the unaudited financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus. 2 The relevant periods include all interim unaudited consolidated financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus. 1 (B) at [_________, 19___ and at]3 a specified date not more than five days4 prior to the date hereof, there was any decrease in the consolidated total assets or shareholders' equity of the Company and its subsidiaries or any increase in the consolidated long-term debt of the Company and its subsidiaries, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus, except in each case for any changes, decreases or increases that the Registration Statement, the Previous Registration Statement and the Prospectus disclose have occurred or may occur; or (C) for the period from [_________, 19__ to _________, 19__ and for the period from]5 _________, 19__ to a specified date not more than five days prior to the date hereof, there was any decrease in the total amounts of consolidated premiums (including annuity deposits), collected net investment income, total revenues, net income, earnings applicable to common stock or net income per diluted common share, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement and the Prospectus discloses have occurred or may occur; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Financial Data included or incorporated by reference in the Registration Statement and the Prospectus [and a reading of the financial statements from which such data were derived],6 nothing came to our attention that caused us to believe that the Selected Financial Data included or incorporated by reference in the Registration Statement and the Prospectus do not comply as to form in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act [, that the amounts included in the Selected Financial Data are not in agreement with the corresponding amounts in the audited consolidated financial statements for the respective periods or that the financial statements not included or incorporated by reference in the Registration Statement and the Prospectus from which certain of such data were derived are not in conformity with generally accepted -------- 3 If the latest available unaudited financial statements are more recent than the unaudited financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus, include and insert the date of the latest available financial statements of the Company. 4 According to Example A of SAS No. 72, the specified date should be five calendar days prior to the date of the comfort letter. 5 If the latest available unaudited financial statements are more recent than the unaudited financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus, include and insert the period from the end of the period of the unaudited financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus to the date of the latest available financial statements of the Company. Even if this first period is applicable, the second period should run from the date of the most recent financial statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus, not from the latest available financial statements of the Company. 6 Include only if there are selected financial data that have been derived from financial statements not included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus. 2 accounting principles; (iv) we have compared the information included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and on the basis of limited procedures specified herein, nothing came to our attention that caused us to believe that such information does not comply as to form in all material respects with the disclosure requirements of Items 302, 402 and 503(d), respectively, of Regulation S-K; [(v) based upon the procedures set forth in clause (ii) above, a reading of the latest available unaudited financial statements of the Company that have not been included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus and a review of such financial statements in accordance with SAS 71, nothing came to our attention that caused us to believe that the unaudited amounts for ________ for the [most recent period] do not agree with the amounts set forth in the unaudited consolidated financial statements for those periods or that such unaudited amounts were not determined on a basis substantially consistent with that of the corresponding amounts in the audited consolidated financial statements;]7 [(vi) we are unable to and do not express any opinion on the [Pro Forma Combined Balance Sheet and Statement of Operations] (collectively, the "Pro Forma Statements") included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus or on the pro forma adjustments applied to the historical amounts included in the Pro Forma Statements; however, for purposes of this letter we have: (A) read the Pro Forma Statements; (B) performed [an audit] [a review in accordance with SAS 71] of the financial statements to which the pro forma adjustments were applied; (C) made inquiries of certain officials of the Company who have responsibility for financial and accounting matters about the basis for their determination of the pro forma adjustments and whether the Pro Forma Statements comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X; and (D) proved the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the Pro Forma Statements; and on the basis of such procedures and such other inquiries and procedures as specified herein, nothing came to our attention that caused us to believe that the Pro Forma Statements included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements;] (vii) in addition to the procedures referred to in clause (ii) above, we have performed - ---------- 7 This language should be included when the Registration Statement and the Prospectus include earnings or other data for a period after the date of the most recent financial statements included or incorporated by reference in the Registration Statement and the Prospectus. The blank should be filled in with a description of the financial statement item(s) included. 3 other procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus, which are specified herein, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company; and [(viii) [If applicable, add comfort on a financial forecast that is included or incorporated by reference in the Registration Statement, the Previous Registration Statement and the Prospectus]. 4 EX-1.2 3 EX-1.2 [Face of Note] CUSIP NO. _______ CONSECO, INC. PRINCIPAL AMOUNT: $________ REGISTERED NO. FX ___ SENIOR MEDIUM-TERM NOTE, SERIES C If this Note is a Book-Entry Note, the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, and the following legend is applicable: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co., or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. The following summary of terms is subject to the information set forth on the reverse hereof: ORIGINAL ISSUE DATE: OPTIONAL REDEMPTION: o YES o NO INTEREST RATE: INITIAL REDEMPTION DATE: STATED MATURITY DATE: INITIAL REDEMPTION PERCENTAGE: AUTHORIZED DENOMINATIONS ANNUAL PERCENTAGE (If other than $1,000 and integral REDEMPTION REDUCTION: multiples thereof): REDEMPTION PRICE: The Initial Redemption Percentage, FORM: o BOOK-ENTRY as adjusted downward by the Annual Percentage Redemption o CERTIFICATED Reduction on each anniversary of the Initial Redemption Date (until the adjusted percentage is 100%), multiplied by the PAYING AGENT (If other than the Senior Trustee): unpaid Principal Amount of the Note or the portion thereof to be redeemed. REGULAR RECORD DATES: OPTION TO ELECT REPAYMENT: o YES o NO INTEREST PAYMENT DATES: OPTIONAL REPAYMENT DATE[S]: SINKING FUND: o YES o NO OPTIONAL REPAYMENT PRICE[S]: ORIGINAL ISSUE DISCOUNT: o YES o NO SPECIFIED CURRENCY: AMORTIZING NOTE: o YES o NO OTHER PROVISIONS: EXCHANGE RATE AGENT: DEPOSITARY: ANNEX ATTACHED (and incorporated by reference herein): o YES o NO
If this Note was issued with "original issue discount" for purposes of Section 1273 of the Internal Revenue Code of 1986, as amended, the following shall be completed: ORIGINAL ISSUE DISCOUNT NOTE: o Yes o No ISSUE PRICE (expressed as a percentage of aggregate principal amount): YIELD TO MATURITY: INITIAL PERIOD:
CONSECO, INC., a corporation duly organized and existing under the laws of Indiana (herein called the "Company," which term includes any successor corporation under the Senior Indenture referred to on the reverse hereof), for value received, hereby promises to pay to ________________ __________________________________ or registered assigns, the principal sum specified above on the Stated Maturity Date shown above, and to pay interest thereon from and including the Original Issue Date shown above or from and including the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for, as the case may be. Interest will be paid on the Interest Payment Date or Dates specified above, at the rate per annum specified above, commencing with the first such Interest Payment Date next succeeding the Original Issue Date shown above (except as provided below) until the principal hereof is paid or duly made available for payment. Interest payments will be made in an amount equal to the amount accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity Date or such prior date on which the principal hereof becomes due and payable (the "Maturity Date"), as the case may be. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Senior Indenture, be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the Regular Record Date specified above next preceding such Interest Payment Date. The first payment of interest on any Note originally issued between a Regular Record Date and the next Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the Holder on such next succeeding Regular Record Date. Except as otherwise provided in the Senior Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of their having been such Holder and may either be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Senior Trustee, notice whereof is to be given to Holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Senior Indenture. Unless otherwise specified above, the Company will make payments of principal of, and premium, if any, and interest, if any, on this Note in the Specified Currency specified above. Any such amounts payable by the Company in the Specified Currency will be converted by the Exchange Rate Agent specified above into United States dollars for payments to Holders unless otherwise specified above or the Holder of this Note elects, in the manner hereinafter described, to receive such amounts in the Specified Currency. If the Specified Currency is other than United States dollars, any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of such Specified Currency payable to all Holders of Notes, the Specified Currency for which is other than United States Dollars, scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments will be made in the Specified Currency. If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and /or interest, if any, in the Specified Currency instead of in United States dollars, by submitting a written request for such payment to the Senior Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice to the Senior Trustee, but written notice by any such revocation must be received by such Trustee on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. If this Note is to be held in the name of a broker or nominee the Holder should contact such broker or nominee to determine whether and how an election to receive payments in the Specified Currency may be made. If this Note is a Book-Entry Note as specified above, while this Note is represented by one or more Book-Entry Notes registered in the name of the Depositary or its nominee, the Company will cause payments of principal of, premium, if any, and interest on such Book-Entry Notes to be made to the Depositary or its nominee, as the case may be, by wire transfer to the extent, in the funds and in the manner required by agreements with, or regulations or procedures prescribed from time to time by, the Depositary or its nominee, and otherwise in accordance with such agreements, regulations and procedures. If this Note is a Book-Entry Note as specified above, the following legend is applicable except as specified on the reverse hereof: THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR OF THE DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR. If this Note is a certificated Note as specified above, payments of interest, if any, on this Note on any Interest Payment Date other than at Stated Maturity Date will be made by check mailed to the address of the Holder entitled thereto as such address appears in the Security Register of the Company. Notwithstanding the foregoing, a Holder of $10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in such Specified Currency) or more in aggregate principal amount of certificated Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments, if any, on any Interest Payment Date other than at Stated Maturity by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 days prior to such Interest Payment Date. If the Specified Currency specified above is other than United States dollars, payments of the principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in United States dollars will be made in the manner specified above with respect to Notes denominated in United States dollars. If the Specified Currency specified above is other than United States dollars, payments of interest, if any, on this Note which are to be made in the Specified Currency on an Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the Holder of this Note as it appears in the Security Register, subject to the right to receive such interest payments by wire transfer of immediately available funds under the circumstances described above. If the Specified Currency specified above is other than United States dollars, payments of principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in the Specified Currency on the Maturity Date will be made by wire transfer of immediately available funds to an account with a bank designated at least fifteen calendar days prior to the Maturity Date by the Holder of this Note, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered at the office or agency maintained by the Company for such purpose in the Borough of Manhattan, The City of New York in time for the Senior Trustee to make such payments in such funds in accordance with its normal procedures. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but not any tax, assessment or governmental charge imposed upon the Holder of this Note. If this Note is a certificated Note as specified above, payment of the principal, premium, if any, due on the Maturity Date in respect of this Note will be made in immediately available funds upon presentation and surrender of this Note at the principal corporate trust office of the Trustee in the Borough of Manhattan, The City of New York. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF OR THE ATTACHED ANNEX, IF ANY, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof, or its successor as Trustee, or its Authenticating Agent, by manual signature of an authorized signatory, this Note will not be entitled to any benefit under the Senior Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: CONSECO, INC. TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities issued under the within-mentioned Senior Indenture. By:__________________________________ Its:________________________________ BANK OF NEW YORK, as Trustee Attest: _____________________________ By:__________________________ Its:________________________________ Authorized Officer [Reverse of Note] CONSECO, INC. SENIOR MEDIUM-TERM NOTE, SERIES C SECTION 1. General. This Note is one of a series of Securities of the Company issued under an Indenture, dated as of November 13, 1997, as amended from time to time (the "Senior Indenture"), between the Company and Bank of New York, as successor to LTCB Trust Company, as trustee (the "Senior Trustee"), to which Senior Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Senior Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Note is one of the Securities designated on the face hereof (the "Notes"). The Notes may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption provisions, if any, may be subject to different sinking funds, if any, and may otherwise vary, all as provided in the Senior Indenture. SECTION 2. Payments. Interest on this Note will be payable on January 15 and July 15 of each year or on such other date(s) specified on the face hereof (each, an "Interest Payment Date") and on the Maturity Date. Unless otherwise specified in on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. If any Interest Payment Date(s) or the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest will be made on the next succeeding Business Day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after such Interest Payment Date or the Maturity Date, as the case may be, to the date of such payment on the next succeeding Business Day. As used herein, Business Day means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to non-United States dollar-denominated notes, the day is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the principal financial center, as described below, of the country issuing the specified currency or, if the specified currency is Euro, the day is also a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to notes as to which LIBOR is an applicable Interest Rate Basis, the day is also a London business day. A London Business Day is a day on which commercial banks are open for business, including dealings in the Index Currency in London. The principal financial centers for the respective currencies are: United States dollars, New York; Australian dollars, Sydney and Melbourne; Canadian dollars, Toronto; Deutsche marks, Frankfurt; Dutch guilders, Amsterdam; South African rand, Johannesburg; Swiss francs, Zurich; and all other currencies, capital city of the country. SECTION 3. Redemption. This Note will be redeemable at the option of the Company prior to the Stated Maturity Date only if an Initial Redemption Date is specified on the face hereof. If so specified, this Note will be subject to redemption at the option of the Company on any date on and after the Initial Redemption Date in whole or from time to time in part in increments of $1,000 or the minimum denomination, if any, specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such minimum denomination), at the Redemption Price specified on the face hereof, together with unpaid interest accrued hereon to the date of redemption, on written notice given to the Holder hereof not more than 60 nor less than 30 calendar days prior to the date of redemption and in accordance with the provisions of the Senior Indenture. In the event of redemption of this Note in part only, this Note will be cancelled and a new Note or Notes representing the unredeemed portion hereof will be issued in the name of the Holder hereof. SECTION 4. Repayment. This Note will be repayable by the Company at the option of the Holder hereof prior to the Stated Maturity Date only if one or more Optional Repayment Dates are specified on the face hereof. If so specified, this Note will be subject to repayment at the option of the Holder hereof on any Optional Repayment Date in whole or from time to time in part in increments of $1,000 or such other minimum denomination specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such other minimum denomination), at a repayment price equal to 100% of the unpaid principal amount, or such other repayment price specified on the face hereof, to be repaid, together with unpaid interest accrued heron to but excluding the date of repayment. For this Note to be repaid, it must be received, together with the form thereon entitled "Option to Elect Repayment" duly completed, by the Senior Trustee at its office maintained for such purpose in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the date of repayment. Exercise of such repayment option by the Holder will be irrevocable. Only the Depositary may exercise the repayment option if this Note is a Book-Entry Note as specified on the face hereof. Accordingly, if the beneficial owner hereof, if this is a Book-Entry Note, desires to have all or any portion of the Book-Entry Note repaid they must instruct the participant through which they own their interest to direct the Depositary to exercise the repayment option on their behalf by delivering this Note and duly completed election form to the Senior Trustee as aforesaid. In order to ensure that this Note and election form are received by such Senior Trustee on a particular day, the beneficial owner hereof must so instruct the participant through which they own their interest before such participant's deadline for accepting instructions for that day. Different firms may have different deadlines for accepting instructions from their customers. Accordingly, the beneficial owner hereof should consult the participants through which they own their interest for the respective deadlines for such participants. All instructions given to participants from beneficial owners of Book-Entry Notes relating to the option to elect repayment will be irrevocable. In addition, at the time such instructions are given, the beneficial owner of this Note shall cause the participant through which it owns its interest to transfer such beneficial owner's interest in the Book-Entry Note, on the Depositary's records, to the Senior Trustee. SECTION 5. Sinking Fund. This Note is not subject to a sinking fund unless otherwise specified on the face hereof. SECTION 6. Discount Notes. If the Issue Price of this Note (as specified on the face hereof) is less than 100% of the principal amount hereof (i.e. par) by more than a percentage equal to the product of 0.25% and the number of full years to the Stated Maturity Date (a "Discount Note"), the difference between the Issue Price of this Note and par is referred to herein as the "Discount." In the event of redemption, repayment or acceleration of maturity of this Note, the amount payable to the Holder hereof will be equal to the sum of (i) the Issue Price (increased by any accruals of Discount) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid interest accrued hereon to the date of such redemption, repayment or acceleration of maturity, as the case may be (the "Amortized Face Amount"). Unless otherwise specified on the face hereof, for purposes of determining the amount of Discount that has accrued as of any date on which a redemption, repayment or acceleration of maturity occurs for this Note, such Discount will be accrued using a constant yield method. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as hereinafter defined), corresponds to the shortest period between Interest Payment Dates for this Note (with ratable accruals within a compounding period), a coupon rate equal to the initial coupon rate applicable to this Note and an assumption that the maturity of this Note will not be accelerated. If the period from the date of issue to the initial Interest Payment Date for this Note (the "Initial Period") is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period with the short period being treated as provided in the preceding sentence. SECTION 7. Amortizing Notes. If this Note is an Amortizing Note as specified on the face hereof, unless otherwise specified on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. Payments with respect to this Note if it is an Amortizing Note will be applied first to interest due and payable hereon and then to the reduction of the unpaid principal amount hereof. Further information concerning additional terms and provisions of Amortizing Notes will be set forth on the Annex attached hereto, which Annex will for all purposes have the same effect as if set forth at this place. SECTION 8. Covenants. Unless otherwise specified on the face hereof, this Note contains the following covenants: (1) Limitation on Issuance or Disposition of Stock of Significant Subsidiaries. The Company will not, nor will it permit any Significant Subsidiary to, issue, sell or otherwise dispose of any shares of Capital Stock (other than non-voting Preferred Stock) of any Significant Subsidiary, except for (i) directors' qualifying shares; (ii) sales or other dispositions to the Company or to one or more wholly-owned Significant Subsidiaries; (iii) the sale or other disposition of all or any part of the Capital Stock of any Significant Subsidiary for consideration which is at least equal to the fair value of such Capital Stock as determined by the Company's board of directors (acting in good faith); or (iv) any issuance, sale, assignment, transfer or other disposition made in compliance with an order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or any Significant Subsidiary. (2) Limitation on Liens. Except as provided below, neither the Company nor any Significant Subsidiary may incur, issue, assume or guarantee any Indebtedness secured by a Lien on any property or assets of the Company or any Significant Subsidiary, or any shares of Capital Stock of any Significant Subsidiary, without effectively providing that the Notes (together with, if the Company shall so determine, any other Indebtedness which is not subordinated to the Notes) shall be secured equally and ratably with (or prior to) such Indebtedness, so long as such Indebtedness shall be so secured; provided, however, that this covenant shall not apply to Indebtedness secured by (i) Liens existing on the date of the applicable Pricing Supplement; (ii) Liens on property of, or on any shares of stock of, any corporation existing at the time such corporation becomes a Significant Subsidiary or merges into or consolidates with the Company or a Significant Subsidiary; (iii) Liens on property or on shares of stock existing at the time of acquisition thereof by the Company or any Significant Subsidiary; (iv) Liens to secure the financing of the acquisition, construction or improvement of property, or the acquisition of shares of stock by the Company or any Significant Subsidiary, provided that such Liens are created not later than one year after such acquisition or, in the case of property, no later than one year after completion of construction or commencement of commercial operation, whichever is later, are limited to the property acquired, constructed or improved or the shares of stock acquired and do not secure indebtedness in excess of the cost of such acquisition, construction or improvement; (v) Liens in favor of the Company or any Subsidiary; (vi) Liens in favor of, or required by, governmental authorities; and (vii) any extension, renewal or replacement as a whole or in part, of any Lien referred to in the foregoing clauses (i) to (vi) inclusive; provided, however, that (a) such extension, renewal or replacement Lien shall be limited to all or a part of the same property or shares of stock that secured the Lien extended, renewed or replaced and (b) the Indebtedness secured by such Lien at such time is not so increased. The restrictions in the immediately preceding paragraph do not apply if, immediately after the incurrence, issuance, assumption or guarantee of any Indebtedness secured by a Lien, the aggregate principal amount of such secured Indebtedness (other than the Indebtedness secured by Liens described in clauses (i) to (vii), inclusive, of the immediately preceding paragraph) would not exceed 10% of Consolidated Capitalization. Definitions "Capital Lease Obligations" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock. "Consolidated Capitalization" means the sum of the Company's consolidated shareholders' equity, redeemable preferred stock and preferred securities in any trust, partnership, corporation or other entity of which more than 50% of the voting equity is owned directly or indirectly by the Company, including, without limitation, the trust securities issued by Conseco Financing Trust I, Conseco Financing Trust II, Conseco Financing Trust III, Conseco Financing Trust IV, Conseco Financing Trust V, Conseco Financing Trust VI, Conseco Financing Trust VII and Conseco Financing Trust XI. "Indebtedness" means (i) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit (other than letters of credit obtained in the ordinary course of business), or (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any businesses, properties or assets of any kind or with services incurred in connection with capital expenditures (other than accounts payable or other indebtedness to trade creditors arising in the ordinary course of business), or (3) for the payment of money relating to a Capital Lease Obligation; (ii) any liability of others described in the preceding clause (1) that the Person has guaranteed or that is otherwise its legal liability; and (iii) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "Person" means any individual, corporation, partnership, joint venture, association, joint-stock or limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Significant Subsidiary" means any Subsidiary with net earnings which constituted at least 20% of the Company's consolidated total net earnings, as determined as of the date of the Company's most recently prepared quarterly financial statements for the 12-month period then ended. "Stated Maturity," when used with respect to any security or any installment of interest on any security, means the date specified in such security as the fixed date on which the principal of such security or such installment of interest, respectively, is finally due and payable, except as otherwise provided in the case of Capital Lease Obligations. "Subsidiary" means a corporation of which a majority of the Capital Stock having voting power under ordinary circumstances to elect a majority of the board of directors is owned directly or indirectly by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. SECTION 9. Events of Default. If any Event of Default with respect to Notes of this series will occur and be continuing, the principal of the Notes of this series may be declared due and payable in the manner and with the effect provided in the Senior Indenture; provided, however, that notwithstanding anything herein to the contrary, if this Note is a Discount Note, the amount so declared to be due and payable will be the Amortized Face Amount of this Note as of the date of such declaration as specified under Section 6. SECTION 10. Modification or Waiver; Obligation of the Company Absolute. The Senior Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Senior Indenture at any time by the Company and the Senior Trustee with the consent of the Holders of not less than a majority in principal amount of the outstanding Securities of each series to be affected. The Senior Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the outstanding Securities of each series, on behalf of the Holders of all Securities of such series, to waive, with respect to the Securities of such series, compliance by the Company with certain provisions of the Senior Indenture and certain past defaults under the Senior Indenture and their consequences. Any such consent or waiver by the Holder of this Note will be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Senior Indenture and no provision of this Note or of the Senior Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and premium, if any, and interest on this Note at the times, places and rates, herein prescribed. SECTION 11. Discharge, Legal Defeasance and Covenant Defeasance. The Senior Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and the related Events of Default upon compliance by the Company with certain conditions specified therein, which provisions apply to this Note. SECTION 12. Authorized Denominations. Unless otherwise specified on the face hereof, the Notes of this series are issuable only in global or certificated registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As provided in the Senior Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, Notes of this series are exchangeable for Notes of this series of like aggregate principal amount and like Stated Maturity and with like terms and conditions of a different authorized denomination, as requested by the Holder surrendering the same. SECTION 13. Registration of Transfer. As provided in the Senior Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, the transfer of this Note is registerable in the Security Register upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for that purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar (which will initially be the Senior Trustee at its principal corporate trust office located in the Borough of Manhattan, The City of New York) duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of this series with like terms and conditions, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. If this Note is a Book-Entry Note as specified on the face hereof, this Note is exchangeable for certificated Notes only upon the terms and conditions provided in the Senior Indenture. Except as provided in the Senior Indenture, owners of beneficial interests in this Book-Entry Note will not be entitled to receive physical delivery of Notes in certificated registered form and will not be considered the Holders thereof for any purpose under the Senior Indenture. No service charge will be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. SECTION 14. Owners. Prior to due presentment of this Note for registration of transfer, the Company, the Senior Trustee and any agent of the Company or the Senior Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon, and none of the Company, the Senior Trustee or any such agent will be affected by notice to the contrary. SECTION 15. Governing Law. The Senior Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York. SECTION 16. Defined Terms. All terms used in this Note which are defined in the Senior Indenture will have the meanings assigned to them in the Senior Indenture unless otherwise defined herein; and all references in the Senior Indenture to "Security" or "Securities" will be deemed to include the Notes. OPTION TO ELECT REPAYMENT [To be completed only if this Note is repayable at the option of the Holder and the Holder elects to exercise such rights] The undersigned owner of this Note hereby irrevocably elects to have the Company repay the principal amount of this Note or portion hereof below designated at the applicable Optional Repayment Price indicated on the face hereof, plus accrued and unpaid interest to but excluding the date of repayment, if this Note is to be repaid pursuant to Section 4 of this Note. If a portion of this Note is not being repaid, specify the principal amount to be repaid and the denomination or denominations (which will be $1,000 or an integral multiple thereof) of the Note or Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): Dated:_____________________________ Signature __________________________________ Sign exactly as name appears on the front of this Note. Indicate address where check is to be sent, if repaid: Principal amount to be repaid if amount to be repaid ____________________________________________ is less than the entire principal amount of this Note (principal amount remaining must be an authorized ____________________________________________ denomination) $______________________________________________________ (which will be an integral multiple of $1,000) Denomination or denominations of the Note SOCIAL SECURITY OR OTHER TAXPAYER ID NUMBER or Notes to be issued for the portion of this Note not being repaid ____________________________________________ _______________________________________________________ _______________________________________________________
ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, will be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT Custodian _____________________________________________ (Cust) (Minor) Under Uniform Gifts to Minors Act _____________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated: _______________________ ___________________________________________ Signature Sign exactly as name appears on the front of this Note [SIGNATURE MUST BE GUARANTEED by a member of a recognized Medallion Guarantee Program] NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN INSTRUMENT IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. [Face of Note] CUSIP NO. _______ CONSECO, INC. PRINCIPAL AMOUNT: $_________ REGISTERED NO. FL ________ SENIOR MEDIUM-TERM NOTE, SERIES C If this Note is a Book-Entry Note, the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, and the following legend is applicable: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co., or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. The following summary of terms is subject to the information set forth on the reverse hereof: INTEREST OPTIONAL REDEMPTION: o YES o NO CALCULATION: o REGULAR FLOATING RATE NOTE o FLOATING RATE/FIXED RATE NOTE FIXED RATE COMMENCEMENT DATE: FIXED INTEREST RATE: o INVERSE FLOATING RATE FIXED INTEREST RATE: o OTHER FLOATING RATE NOTE (see attached) ORIGINAL ISSUE DATE: INITIAL REDEMPTION DATE: STATED MATURITY: INITIAL REDEMPTION PERCENTAGE: ANNUAL PERCENTAGE REDEMPTION REDUCTION: AUTHORIZED DENOMINATIONS (If other than $1,000 and integral REDEMPTION PRICE: The Initial Redemption Percentage, multiples thereof): as adjusted downward by the Annual Percentage Redemption Reduction on each anniversary of the Initial Redemption Date (until the adjusted percentage is 100%), multiplied by the unpaid Principal Amount of the Note or the portion thereof to be redeemed. FORM: o BOOK-ENTRY OPTION TO ELECT REPAYMENT: o YES o NO o CERTIFICATED PAYING AGENT (If other than the Senior Trustee): OPTIONAL REPAYMENT DATE[S]: INTEREST CALCULATION: INTEREST RATE BASIS: OPTIONAL REPAYMENT PRICE[S]: INDEX MATURITY: REGULAR RECORD DATES: DAY COUNT CONVENTION: INTEREST PAYMENT DATES: INITIAL INTEREST RATE: SPECIFIED CURRENCY: MAXIMUM INTEREST RATE: MINIMUM INTEREST RATE: SPREAD: SPREAD MULTIPLIER: OTHER PROVISIONS: INTEREST RESET PERIOD: INTEREST RESET DATES: ANNEX ATTACHED (and incorporated by reference herein): o YES o NO
INTEREST DETERMINATION DATES: SINKING FUND: o YES o NO CALCULATION AGENT: EXCHANGE RATE AGENT: ORIGINAL ISSUE DISCOUNT: o YES o NO AMORTIZING NOTE: o YES o NO DEPOSITARY:
If this Note was issued with "original issue discount" for purposes of Section 1273 of the Internal Revenue Code of 1986, as amended, the following shall be completed: ORIGINAL ISSUE DISCOUNT NOTE: o Yes o No ISSUE PRICE (expressed as a percentage of aggregate principal amount): YIELD TO MATURITY: INITIAL PERIOD:
CONSECO, INC., a corporation duly organized and existing under the laws of Indiana (herein called the "Company," which term includes any successor corporation under the Senior Indenture referred to on the reverse hereof), for value received, hereby promises to pay to __________________________________________________ or registered assigns, the principal sum specified above on the Stated Maturity Date shown above, and to pay interest thereon from and including the Original Issue Date shown above or from and including the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for, as the case may be. Interest will be paid on the Interest Payment Date or Dates specified above, at the rate per annum determined in accordance with the provisions on the reverse hereof, depending on the Interest Rate Basis, the Spread, if any, and/or the Spread Multiplier, if any, specified above, commencing with the first such Interest Payment Date next succeeding the Original Issue Date shown above (except as provided below) until the principal hereof is paid or duly made available for payment. Interest payments will be made in an amount equal to the amount accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity Date or such prior date on which the principal hereof becomes due and payable (the "Maturity Date"), as the case may be. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Senior Indenture, be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the Regular Record Date specified above next preceding such Interest Payment Date. The first payment of interest on any Note originally issued between a Regular Record Date and the next Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the Holder on such next succeeding Regular Record Date. Except as otherwise provided in the Senior Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of their having been such Holder and may either be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Senior Trustee, notice whereof is to be given to Holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Senior Indenture. Unless otherwise specified above, the Company will make payments of principal of, and premium, if any, and interest, if any, on this Note in the Specified Currency specified above. Any such amounts payable by the Company in the Specified Currency will be converted by the Exchange Rate Agent specified above into United States dollars for payments to Holders unless otherwise specified above or the Holder of this Note elects, in the manner hereinafter described, to receive such amounts in the Specified Currency. If the Specified Currency is other than United States dollars, any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of such Specified Currency payable to all Holders of Notes, the Specified Currency for which is other than United States Dollars, scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments will be made in the Specified Currency. If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and /or interest, if any, in the Specified Currency, instead of in United States dollars, by submitting a written request for such payment to the Senior Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice to the Senior Trustee, but written notice by any such revocation must be received by such Trustee on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. If this Note is to be held in the name of a broker or nominee the Holder should contact such broker or nominee to determine whether and how an election to receive payments in the Specified Currency may be made. If this Note is a Book-Entry Note as specified above, while this Note is represented by one or more Book-Entry Notes registered in the name of the Depositary or its nominee, the Company will cause payments of principal of, premium, if any, and interest on such Book-Entry Notes to be made to the Depositary or its nominee, as the case may be, by wire transfer to the extent, in the funds and in the manner required by agreements with, or regulations or procedures prescribed from time to time by, the Depositary or its nominee, and otherwise in accordance with such agreements, regulations and procedures. If this Note is a Book-Entry Note as specified above, the following legend is applicable except as specified on the reverse hereof: THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR OF THE DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR. If this Note is a certificated Note as specified above, payments of interest, if any, on this Note on any Interest Payment Date other than at Stated Maturity Date will be made by check mailed to the address of the Holder entitled thereto as such address appears in the Security Register of the Company. Notwithstanding the foregoing, a Holder of $10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in such Specified Currency) or more in aggregate principal amount of certificated Notes (whether having identical or different terms and p7rovisions) will be entitled to receive interest payments, if any, on any Interest Payment Date other than at Stated Maturity by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 days prior to such Interest Payment Date. If the Specified Currency specified above is other than United States dollars, payments of the principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in United States dollars will be made in the manner specified above with respect to Notes denominated in United States dollars. If the Specified Currency specified above is other than United States dollars, payments of interest, if any, on this Note which are to be made in the Specified Currency on an Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the Holder of this Note as it appears in the Security Register, subject to the right to receive such interest payments by wire transfer of immediately available funds under the circumstances described above. If the Specified Currency specified above is other than United States dollars, payments of principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in the Specified Currency on the Maturity Date will be made by wire transfer of immediately available funds to an account with a bank designated at least fifteen calendar days prior to the Maturity Date by the Holder of this Note, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered at the office or agency maintained by the Company for such purpose in the Borough of Manhattan, The City of New York in time for the Senior Trustee to make such payments in such funds in accordance with its normal procedures. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but not any tax, assessment or governmental charge imposed upon the Holder of this Note. If this Note is a certificated Note as specified above, payment of the principal, premium, if any, due on the Maturity Date in respect of this Note will be made in immediately available funds upon presentation and surrender of this Note at the principal corporate trust office of the Trustee in the Borough of Manhattan, The City of New York. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF OR THE ATTACHED ANNEX, IF ANY, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof, or its successor as Trustee, or its Authenticating Agent, by manual signature of an authorized signatory, this Note will not be entitled to any benefit under the Senior Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: CONSECO, INC. TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities issued under the within-mentioned Senior Indenture. By:___________________________________ Its:__________________________________ BANK OF NEW YORK, as Trustee Attest:_______________________________ By:_______________________ Its:__________________________________ Authorized Officer [Reverse of Note] CONSECO, INC. SENIOR MEDIUM-TERM NOTE, SERIES C SECTION 1. General. This Note is one of a series of Securities of the Company issued under an Indenture, dated as of November 13, 1997, as amended from time to time (the "Senior Indenture"), between the Company and Bank of New York, as successor to LTCB Trust Company, as trustee (the "Senior Trustee"), to which Senior Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Senior Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Note is one of the Securities designated on the face hereof (the "Notes"). The Notes may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption provisions, if any, may be subject to different sinking funds, if any, and may otherwise vary, all as provided in the Senior Indenture. SECTION 2. Interest Rate Calculations; Payments. The interest rate borne by this Note will be determined as follows: (i) Unless it is specified on the face hereof that this Note is a "Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note" or has an Annex attached, or that "Other Provisions" apply, in each case relating to a different interest rate formula, this Note will be designated as a "Regular Floating Rate Note" and, except as described below or as specified on the face hereof, will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable will be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate. (ii) If it is specified on the face hereof that this Note is a "Floating Rate/Fixed Rate Note," then, except as described below or as specified on the face hereof, this Note will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note will be payable will be reset as of each Interest Reset Date; provided, however, that (y) the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate and (z) the interest rate in effect for the period commencing on the Fixed Rate Commencement Date to the Maturity Date shall be the Fixed Interest Rate, if such rate is specified on the face hereof or, if no such Fixed Interest Rate is specified, the interest rate in effect thereon on the day immediately preceding the Fixed Rate Commencement Date. (iii) If it is specified on the face hereof that this Note is an "Inverse Floating Rate Note," then, except as described below or on the face hereof, this Note will bear interest at the Fixed Interest Rate minus the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any; provided, however, that, unless otherwise specified on the face hereof, the interest rate thereon will not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on such Inverse Floating Rate Note will be payable will be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate. The "Spread" is the number of basis points to be added to or subtracted from the related Interest Rate Basis or Bases applicable to this Note. The "Spread Multiplier" is the percentage of the related Interest Rate Basis or Bases applicable to this Note by which such Interest Rate Basis or Bases will be multiplied to determine the applicable interest rate on this Note. The "Index Maturity" is the period to maturity of the instrument or obligation with respect to which the related Interest Rate Basis or Bases will be calculated. Unless otherwise specified on the face hereof, the interest rate with respect to each Interest Rate Basis will be determined in accordance with the applicable provisions below. Except as specified on the face hereof, the interest rate in effect on each day will be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as hereinafter defined) immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. The rate of interest on this Note will be reset daily, weekly, monthly, quarterly, semiannually or annually or on such other specified basis (each, an "Interest Reset Period," the first day of each Interest Reset Period being an "Interest Reset Date"), as specified on the face hereof. Unless otherwise specified on the face hereof, the Interest Reset Dates will be, if this Note resets: (i) daily, each Business Day; (ii) weekly, the Wednesday of each week (unless the Interest Rate Basis specified on the face hereof is Treasury Rate, which will reset the Tuesday of each week, except as described below); (iii) monthly, the third Wednesday of each month (unless the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, which will reset on the first calendar day of the month); (iv) quarterly, the third Wednesday of March, June, September and December of each year; (v) semiannually, the third Wednesday of the two months specified on the face hereof; and (vi) annually, the third Wednesday of the month specified on the face hereof; provided however, that, if this Note is a Floating Rate/Fixed Rate Notes, the rate of interest hereon will not reset after the applicable Fixed Rate Commencement Date, as specified on the face hereof. If any Interest Reset Date for this Note would otherwise be a day that is not a Business Day, such Interest Reset Date will be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis specified on the face hereof and such Business Day falls in the next succeeding calendar month, such Interest Reset Date will be the immediately preceding Business Day. The interest rate applicable to each Interest Reset Period commencing on the related Interest Reset Date will be the rate determined by the Calculation Agent (as hereinafter defined) as of the applicable Interest Determination Date and calculated on or prior to the Calculation Date (as hereinafter defined), except with respect to LIBOR and the Eleventh District Cost of Funds Rate, which will be calculated on such Interest Determination Date. Unless otherwise specified on the face hereof, the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is CD Rate, CMT Rate or Commercial Paper Rate, will be the second Business Day immediately preceding the applicable Interest Reset Date; the "Interest Determination Date" if the Interest Rate Basis specified on the face hereof is Federal Funds Rate or Prime Rate, will be the Business Day immediately preceding the applicable Interest Reset Date; the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, will be the last working day of the month immediately preceding the applicable Interest Reset Date on which the Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes the Index (as hereinafter defined); and the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is LIBOR, will be the second London Business Day immediately preceding the applicable Interest Reset Date. If the Interest Rate Basis specified on the face hereof is Treasury Rate, the "Interest Determination Date" will be the day in the week in which the applicable Interest Reset Date falls on which day Treasury Bills (as hereinafter defined) are normally auctioned (Treasury Bills are normally sold at an auction held on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday); provided, however, that if an auction is held on the Friday of the week preceding the applicable Interest Reset Date, the "Interest Determination Date" will be such preceding Friday; provided, further, that if the Interest Determination Date would otherwise fall on an Interest Reset Date, then such Interest Reset Date will be postponed to the next succeeding Business Day. If the interest rate specified on the face hereof is determined by reference to two or more Interest Rate Bases, the "Interest Determination Date" will be the most recent Business Day which is at least two Business Days prior to the applicable Interest Reset Date for this Note on which each Interest Rate Basis is determinable. Each Interest Rate Basis will be determined as of such date, and the applicable interest rate will take effect on the applicable Interest Reset Date. Notwithstanding the foregoing, this Note may also have either or both of the following, as specified on the face hereof: (i) a Maximum Interest Rate, or ceiling, that may accrue during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may accrue during any Interest Period. In addition to any Maximum Interest Rate specified on the face hereof, the interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Except as set forth below, if the Specified Currency, if other than United States dollars, specified on the face hereof is not available for the required payment of principal, premium, if any, and/or interest, if any, in respect thereof due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the Market Exchange Rate (as defined below), computed by the Exchange Rate Agent, on the second Business Day prior to such payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate, or as otherwise specified on the face hereof. If the Specified Currency specified on the face hereof is a composite currency that is not available for the required payment of principal, premium, if any, and/or interest, if any, in respect thereof due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the equivalent of the composite currency in United States dollars. The component currencies of the composite currency for this purpose (the "Component Currencies") will be the currency amounts that were components of the composite currency as of the last day on which the composite currency was used. The equivalent of the composite currency in United States dollars shall be calculated by aggregating the United States dollar equivalents of the Component Currencies. The United States dollar equivalent of each of the Component Currencies will be determined by the Exchange Rate Agent on the basis of the Market Exchange Rate on the second Business Day prior to the required payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate for each such Component Currency, or as otherwise specified on the face hereof. If the official unit of any Component Currency is altered by way of combination or subdivision, the number of units of the currency as a Component Currency will be divided or multiplied in the same proportion. If two or more Component Currencies are consolidated into a single currency, the amounts of those currencies as Component Currencies will be replaced by an amount in such single currency equal to the sum of the amounts of the consolidated Component Currencies expressed in such single currency. If any Component Currency is divided into two or more currencies, the amount of the original Component Currency shall be replaced by the amounts of such two or more currencies, the sum of which shall be equal to the amount of the original Component Currency. The "Market Exchange Rate" for a Specified Currency other than United States dollars means the noon dollar buying rate in The City of New York for cable transfers for such Specified Currency as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. Any payment made in United States dollars under the circumstances set forth above where the required payment is in a Specified Currency other than United States dollars will not constitute an Event of Default under the Senior Indenture with respect to this Note. All determinations referred to above made by the Exchange Rate Agent shall be at its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and binding on the Holder of this Note. Except as provided below or as specified on the face hereof, interest will be payable, if this Note resets: (i) daily, weekly or monthly, on the third Wednesday of each month or on the third Wednesday of March, June, September and December of each year, as specified on the face hereof; (ii) quarterly, on the third Wednesday of March, June, September and December of each year; (iii) semiannually, on the third Wednesday of the two months of each year specified on the face hereof; and (iv) annually, on the third Wednesday of the month of each year specified on the face hereof (each, an "Interest Payment Date" with respect to this Note) and, in each case, on the Maturity Date. If any Interest Payment Date other than the Maturity Date for this Note would otherwise be a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding Business Day, except that if LIBOR is specified on the face hereof as an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. If the Maturity Date of this Note falls on a day that is not a Business Day, the required payment of principal, premium, if any, and interest will be made on the next succeeding Business Day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after the Maturity Date to the date of such payment on the next succeeding Business Day. All percentages resulting from any calculation on this Note will be rounded to the nearest one hundred-thousandth of a percentage point, with five- one millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in or resulting from such calculation on this Note will be rounded, in the case of United States dollars, to the nearest cent or, in the case of a foreign or composite currency, to the nearest unit (with one-half cent or unit being rounded upwards). Accrued interest on this Note is calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the applicable Interest Period. Unless otherwise specified on the face hereof, the interest factor for each such day will be computed by dividing the interest rate applicable to such day by 360, if the Interest Rate Basis specified on the face hereof is CD Rate, Commercial Paper Rate, Eleventh District Cost of Funds Rate, Federal Funds Rate, LIBOR or Prime Rate, or by the actual number of days in the year if the Interest Rate Basis specified on the face hereof is CMT Rate or Treasury Rate. Unless otherwise specified on the face hereof, the interest factor for this Note if the interest rate is calculated with reference to two or more Interest Rate Bases will be calculated in each period in the same manner as if only the applicable Interest Rate Basis specified on the face hereof applied. Unless otherwise specified on the face hereof, the Senior Trustee will be the "Calculation Agent" with respect to this Note. Upon request of the Holder of this Note, the Calculation Agent will disclose the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next succeeding Interest Reset Date with respect to such Floating Rate Note. Unless otherwise specified on the face hereof, the "Calculation Date," if applicable, pertaining to any Interest Determination Date will be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Maturity Date, as the case may be. As used herein, Business Day means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to non-United States dollar-denominated notes, the day is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the principal financial center, as described below, of the country issuing the specified currency or, if the specified currency is Euro, the day is also a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to notes as to which LIBOR is an applicable Interest Rate Basis, the day is also a London business day. A London Business Day is a day on which commercial banks are open for business, including dealings in the Index Currency in London. The principal financial centers for the respective currencies are: United States dollars, New York; Australian dollars, Sydney and Melbourne; Canadian dollars, Toronto; Deutsche marks, Frankfurt; Dutch guilders, Amsterdam; South African rand, Johannesburg; Swiss francs, Zurich; and all other currencies, capital city of the country. Unless otherwise specified on the face hereof, the Calculation Agent will determine each Interest Rate Basis in accordance with the following provisions. Determination of CD Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is the CD Rate, with respect to any Interest Determination Date (a "CD Rate Interest Determination Date"), such rate will equal the rate on such date for negotiable United States dollar certificates of deposit having the Index Maturity specified on the face hereof as published by the Board of Governors of the Federal Reserve System in "Statistical Release H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)") under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such CD Rate Interest Determination Date for negotiable United States dollar certificates of deposit of the Index Maturity specified on the face hereof as published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "CDS (secondary market)." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the CD Rate on such CD Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the secondary market offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest Determination Date, of three leading nonbank dealers in negotiable United States dollar certificates of deposit in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent for negotiable United States dollar certificates of deposit of major United States money center banks for negotiable certificates of deposit with a remaining maturity closest to the Index Maturity specified on the face hereof in an amount that is representative for a single transaction in that market at that time; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the CD Rate determined as of such CD Rate Interest Determination Date will be the CD Rate in effect on such CD Rate Interest Determination Date. Determination of CMT Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is the CMT Rate, with respect to any Interest Determination Date (a "CMT Rate Interest Determination Date"), such rate will equal the rate displayed on the Designated CMT Telerate Page under the caption "...Treasury Constant Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45 P.M.," under the column for the Designated CMT Maturity Index for (i) if the Designated CMT Telerate Page is 7051, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the weekly or monthly average, as specified on the face hereof, for the week or the month, as applicable, ended immediately preceding the week or the month, as applicable, in which the related CMT Rate Interest Determination Date falls. If such rate is no longer displayed on the relevant page or is not displayed by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index as published in H.15(519). If such rate is no longer published or is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index (or other United States Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with respect to such Interest Reset Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines to be comparable to the rate formerly displayed on the Designated CMT Telerate Page and published in H.15(519). If such information is not provided by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on the CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity, based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date reported, according to their written records, by three leading primary United States government securities dealers in The City of New York (which may include the Agents or their affiliates) (each, a "Reference Dealer") selected by the Calculation Agent (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct noncallable fixed rate obligations of the United States ("Treasury Notes") with an original maturity of approximately the Designated CMT Maturity Index and a remaining term to maturity of not less than such Designated CMT Maturity Index minus one year. If the Calculation Agent is unable to obtain three such Treasury Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers in The City of New York (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with an original maturity of the number of years that is the next highest to the Designated CMT Maturity Index and a remaining term to maturity closest to the Designated CMT Maturity Index and in an amount of at least $100 million. If three or four (and not five) of such Reference Dealers are quoting as described above, then the CMT Rate will be based on the arithmetic mean of the offered rates obtained and neither the highest nor the lowest of such quotes will be eliminated; provided, however, that if fewer than three Reference Dealers so selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate determined as of such CMT Rate Interest Determination Date will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two Treasury Notes with an original maturity as described in the second preceding sentence have remaining terms to maturity equally close to the Designated CMT Maturity Index, the Calculation Agent will obtain quotations for the Treasury Note with the shorter remaining term to maturity. "Designated CMT Telerate Page" means the display on Bridge Telerate, Inc. (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying Treasury Constant Maturities as reported in H.15(519). If no such page is specified on the face hereof, the Designated CMT Telerate Page will be 7052 for the most recent week. "Designated CMT Maturity Index" means the original period to maturity of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified on the face hereof with respect to which the CMT Rate will be calculated or, if no such maturity is specified on the face hereof, 2 years. Determination of Commercial Paper Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Commercial Paper Rate, with respect to any Interest Determination Date (a "Commercial Paper Rate Interest Determination Date"), such rate will equal the Money Market Yield (as hereinafter defined) on such date of the rate for commercial paper having the Index Maturity specified on the face hereof as published in H.15(519) under the heading "Commercial Paper-Nonfinancial". In the event that such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be the Money Market Yield of the rate for commercial paper having the Index Maturity specified on the face hereof as published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "Commercial Paper-Nonfinancial." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and will be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity specified on the face hereof placed for an industrial issuer whose bond rating is "Aa", or the equivalent, from a nationally recognized statistical rating organization; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate Interest Determination Date. "Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula: D x 360 X 100 ----------- Money Market Yield = 360 - (D x M) where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period. Determination of Eleventh District Cost of Funds Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, with respect to any Interest Determination Date (an "Eleventh District Cost of Funds Rate Interest Determination Date"), such rate will equal the rate equal to the monthly weighted average cost of funds for the calendar month immediately preceding the month in which such Eleventh District Cost of Funds Rate Interest Determination Date falls, as set forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on Telerate Page 7058 on such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds Rate Interest Determination Date will be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date. If the FHLB of San Francisco fails to announce the Index on or prior to such Eleventh District Cost of Funds Rate Interest Determination Date for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate determined as of such Eleventh District Cost of Funds Rate Interest Determination Date will be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. Determination of Federal Funds Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Federal Funds Rate, with respect to any Interest Determination Date (a "Federal Funds Rate Interest Determination Date"), such rate will equal the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)", as displayed on Bridge Telerate, Inc., or any successor service on page 120 or on any other page as may replace the applicable page on that service ("Telerate Page 120") or, if the rate does not appear on Telerate Page 120 or is not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Federal Funds Rate Interest Determination Date for United States dollar federal funds published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate under the caption "Federal Funds/Effective Rate." If such rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of federal funds transactions in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date. Determination of LIBOR. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is LIBOR: (i) With respect to any Interest Determination Date (a "LIBOR Interest Determination Date"), LIBOR will be either: (a) if "LIBOR Reuters" is specified on the face hereof, the arithmetic mean of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate will be used) for deposits in the Designated LIBOR Currency having the Index Maturity specified on the face hereof, commencing on the second London Business Day immediately following the applicable Interest Reset Date, that appear (or, if only a single rate is required as aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date, or (b) if "LIBOR Telerate" is specified on the face hereof or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the rate for deposits in the Designated LIBOR Currency having the Index Maturity specified on the face hereof, commencing on such Interest Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If fewer than two such offered rates so appear, or if no such rate so appears, as applicable, LIBOR on such LIBOR Interest Determination Date will be determined in accordance with the provisions described in clause (ii) below. (ii) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates appear, or no rate appears, as the case may be, on the Designated LIBOR Page as specified in clause (i) above, the Calculation Agent will request the principal London offices of each of four major reference banks (which may include affiliates of the Agents) in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in the Designated LIBOR Currency for the period of the Index Maturity specified on the face hereof, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time. If at least two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., in the applicable Principal Financial Center, on such LIBOR Interest Determination Date by three major banks (which may include affiliates of the Agents) in such Principal Financial Center selected by the Calculation Agent for loans in the Designated LIBOR Currency to leading European banks, having the Index Maturity specified on the face hereof and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date will be LIBOR in effect on such LIBOR Interest Determination Date. "Designated LIBOR Currency" means the currency or composite currency specified on the face hereof as to which LIBOR will be calculated or, if no such currency or composite currency is specified on the face hereof, United States dollars. "Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified on the face hereof, the display on the Reuter Monitor Money Rates Service (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified on the face hereof or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the display on Bridge Telerate, Inc. (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency. "Principal Financial Center" means (i) the capital city of the country issuing the Specified Currency (unless the Specified Currency is European Units ("ECU"), in which case it is also the display designated "ISDE" on the Reuter Monitor Money Rate Service or the ECU Banking Association) or (ii) the capital city of the country to which the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU, Luxembourg), except, in each case, that with respect to United States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian lire and Swiss francs, the "Principal Financial Center" shall be The City of New York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause (i) above) and Zurich, respectively. Determination of Prime Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Prime Rate, with respect to any Interest Determination Date (a "Prime Rate Interest Determination Date"), such rate will equal the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan." If such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on the applicable Interest Determination Date published in H. 15 Daily Update, or such other recognized electronic source used for the purpose of displaying the applicable rate under the caption "Bank Prime Loan." If the foregoing rate is not published prior to 3:00 P.M., New York City time, on the related Calculation Date, then the Prime Rate will be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime Rate will be the arithmetic mean of the prime rates or base lending rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date by three major banks (which may include affiliates of the Agents) in The City of New York selected by the Calculation Agent. If fewer than four such quotations are so provided, then the Prime Rate will be the arithmetic mean of four prime rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date as furnished in The City of New York by the major money center banks, if any, that have provided such quotations and by a reasonable number of substitute banks or trust companies (which may include affiliates of the Agents) to obtain four such prime rate quotations, provided such substitute banks or trust companies are organized and doing business under the laws of the United States, or any State thereof, each having total equity capital of at least $500 million and being subject to supervision or examination by Federal or State authority, selected by the Calculation Agent to provide such rate or rates; provided, however, that if the banks or trust companies so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date will be the Prime Rate in effect on such Prime Rate Interest Determination Date. "Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor Money Rates Service (or any successor service) on the "USPRIME1" page (or such other page as may replace the USPRIME1 page on such service) for the purpose of displaying prime rates or base lending rates of major United States banks. Determination of Treasury Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Treasury Rate, with respect to any Interest Determination Date (a "Treasury Rate Interest Determination Date"), such rate will equal (1) the rate from the auction held on the applicable Interest Determination Date (the "Auction") of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified in the applicable pricing supplement under the caption 'INVESTMENT RATE" on the display on Bridge Telerate, Inc. or any successor service on page 56 or any other page as may replace page 56 on that service ("Telerate Page 56") or page 57 or any other page as may replace page 57 on that service ("Telerate Page 57"); or, (2) if the rate described in clause (1) is not so published by 3:00 P.M., New York City time, on the related calculation date, the Bond Equivalent Yield of the rate for the applicable Treasury Bills as published in H.15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "U.S. Government Securities/Treasury Bills/Auction High"; or (3) if such rate the rate described in clause (2) is not so published by 3:00 P.M., New York City time, on the related calculation date, the Bond Equivalent Yield of the auction rate of the applicable Treasury Bills announced by the United States Department of the Treasury; or (4) in the event that the rate referred to in clause (3) is not announced by the United States Department of the Treasury, or if the Auction is not held, the Bond Equivalent Yield of the rate on the applicable Interest Determination Date of Treasury Bills having the Index Maturity specified in the applicable Pricing Supplement published in H.15(519) under the caption "U.S. Government Securities/Treasury Bills/Secondary Market"; or (5) if the rate referred to in clause (4) is not so published by 3:00 P.M., New York City time, on the related calculation date, the rate on the applicable Interest Determination Date of the applicable Treasury Bills as published in H.15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "U.S. Government Securities/Treasury Bills/Secondary Market"; or (6) if the rate referred to in clause (5) is not so published by 3:00 P.M., New York City time, on the related calculation date, the rate on the applicable Interest Determination Date calculated by the calculation agent as the Bond Equivalent Yield of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on the applicable Interest Determination Date, of three primary United States Government securities dealers, which may include an agent or its affiliates, selected by the calculation agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity specified in the applicable pricing supplement; or (7) if the dealers selected by the calculation agent are not quoting as mentioned in clause (6), the rate in effect on the applicable Interest Determination Date. SECTION 3. Redemption. This Note will be redeemable at the option of the Company prior to the Stated Maturity Date only if an Initial Redemption Date is specified on the face hereof. If so specified, this Note will be subject to redemption at the option of the Company on any date on and after the Initial Redemption Date in whole or from time to time in part in increments of $1,000 or the minimum denomination, if any, specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such minimum denomination), at the Redemption Price specified on the face hereof, together with unpaid interest accrued hereon to the date of redemption, on written notice given to the Holder hereof not more than 60 nor less than 30 calendar days prior to the date of redemption and in accordance with the provisions of the Senior Indenture. In the event of redemption of this Note in part only, this Note will be cancelled and a new Note or Notes representing the unredeemed portion hereof will be issued in the name of the Holder hereof. SECTION 4. Repayment. This Note will be repayable by the Company at the option of the Holder hereof prior to the Stated Maturity Date only if one or more Optional Repayment Dates are specified on the face hereof. If so specified, this Note will be subject to repayment at the option of the Holder hereof on any Optional Repayment Date in whole or from time to time in part in increments of $1,000 or such other minimum denomination specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such other minimum denomination), at a repayment price equal to 100% of the unpaid principal amount, or such repayment price specified on the face hereof, to be repaid, together with unpaid interest accrued heron to but excluding the date of repayment. For this Note to be repaid, it must be received, together with the form thereon entitled "Option to Elect Repayment" duly completed, by the Senior Trustee at its office maintained for such purpose in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the date of repayment. Exercise of such repayment option by the Holder will be irrevocable. Only the Depositary may exercise the repayment option if this Note is a Book-Entry Note as specified on the face hereof. Accordingly, if the beneficial owner hereof, if this is a Book-Entry Note, desires to have all or any portion of the Book-Entry Note repaid they must instruct the participant through which they own their interest to direct the Depositary to exercise the repayment option on their behalf by delivering this Note and duly completed election form to the Senior Trustee as aforesaid. In order to ensure that this Note and election form are received by such Senior Trustee on a particular day, the beneficial owner hereof must so instruct the participant through which they own their interest before such participant's deadline for accepting instructions for that day. Different firms may have different deadlines for accepting instructions from their customers. Accordingly, the beneficial owner hereof should consult the participants through which they own their interest for the respective deadlines for such participants. All instructions given to participants from beneficial owners of Book-Entry Notes relating to the option to elect repayment will be irrevocable. In addition, at the time such instructions are given, the beneficial owner of this Note shall cause the participant through which it owns its interest to transfer such beneficial owner's interest in the Book-Entry Note, on the Depositary's records, to the Senior Trustee. SECTION 5. Sinking Fund. This Note is not subject to a sinking fund unless otherwise specified on the face hereof. SECTION 6. Discount Notes. If the Issue Price of this Note (as specified on the face hereof) is less than 100% of the principal amount hereof (i.e. par) by more than a percentage equal to the product of 0.25% and the number of full years to the Stated Maturity Date (a "Discount Note"), the difference between the Issue Price of this Note and par is referred to herein as the "Discount." In the event of redemption, repayment or acceleration of maturity of this Note, the amount payable to the Holder hereof will be equal to the sum of (i) the Issue Price (increased by any accruals of Discount) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid interest accrued hereon to the date of such redemption, repayment or acceleration of maturity, as the case may be (the "Amortized Face Amount"). Unless otherwise specified on the face hereof, for purposes of determining the amount of Discount that has accrued as of any date on which a redemption, repayment or acceleration of maturity occurs for this Note, such Discount will be accrued using a constant yield method. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as hereinafter defined), corresponds to the shortest period between Interest Payment Dates for this Note (with ratable accruals within a compounding period), a coupon rate equal to the initial coupon rate applicable to this Note and an assumption that the maturity of this Note will not be accelerated. If the period from the date of issue to the initial Interest Payment Date for this Note (the "Initial Period") is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period with the short period being treated as provided in the preceding sentence. SECTION 7. Linked Notes. If this Note is a Linked Note as specified on the face hereof, the amount of principal, premium and/or interest payable in respect hereof will be determined with reference to the price or prices of specified commodities or stocks, to the exchange rate of one or more designated currencies (including a composite currency such as the ECU) relative to an indexed currency or to other items, in each case as specified on the face hereof. Holders of Linked Notes may receive a principal payment on the Maturity Date that is greater than or less than the principal amount of such Linked Notes depending upon the relative value on the Maturity Date of the specified indexed item. Information as to the method for determining the amount of principal, premium, if any, and/or interest, if any, payable in respect of Linked Notes will be set forth on the Annex attached hereto, which will for all purposes have the same effect as if set forth at this place. SECTION 8. Amortizing Notes. If this Note is an Amortizing Note as specified on the face hereof, unless otherwise specified on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. Payments with respect to this Note if it is an Amortizing Note will be applied first to interest due and payable hereon and then to the reduction of the unpaid principal amount hereof. Further information concerning additional terms and provisions of Amortizing Notes will be set forth on the Annex attached hereto, which Annex will for all purposes have the same effect as if set forth at this place. SECTION 9. Covenants. Unless otherwise specified on the face hereof, this Note contains the following covenants: (1) Limitation on Issuance or Disposition of Stock of Significant Subsidiaries. The Company will not, nor will it permit any Significant Subsidiary to, issue, sell or otherwise dispose of any shares of Capital Stock (other than non-voting Preferred Stock) of any Significant Subsidiary, except for (i) directors' qualifying shares; (ii) sales or other dispositions to the Company or to one or more wholly-owned Significant Subsidiaries; (iii) the sale or other disposition of all or any part of the Capital Stock of any Significant Subsidiary for consideration which is at least equal to the fair value of such Capital Stock as determined by the Company's board of directors (acting in good faith); or (iv) any issuance, sale, assignment, transfer or other disposition made in compliance with an order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or any Significant Subsidiary. (2) Limitation on Liens. Except as provided below, neither the Company nor any Significant Subsidiary may incur, issue, assume or guarantee any Indebtedness secured by a Lien on any property or assets of the Company or any Significant Subsidiary, or any shares of Capital Stock of any Significant Subsidiary, without effectively providing that the Notes (together with, if the Company shall so determine, any other Indebtedness which is not subordinated to the Notes) shall be secured equally and ratably with (or prior to) such Indebtedness, so long as such Indebtedness shall be so secured; provided, however, that this covenant shall not apply to Indebtedness secured by (i) Liens existing on the date of the applicable Pricing Supplement; (ii) Liens on property of, or on any shares of stock of, any corporation existing at the time such corporation becomes a Significant Subsidiary or merges into or consolidates with the Company or a Significant Subsidiary; (iii) Liens on property or on shares of stock existing at the time of acquisition thereof by the Company or any Significant Subsidiary; (iv) Liens to secure the financing of the acquisition, construction or improvement of property, or the acquisition of shares of stock by the Company or any Significant Subsidiary, provided that such Liens are created not later than one year after such acquisition or, in the case of property, no later than one year after completion of construction or commencement of commercial operation, whichever is later, are limited to the property acquired, constructed or improved or the shares of stock acquired and do not secure indebtedness in excess of the cost of such acquisition, construction or improvement; (v) Liens in favor of the Company or any Subsidiary; (vi) Liens in favor of, or required by, governmental authorities; and (vii) any extension, renewal or replacement as a whole or in part, of any Lien referred to in the foregoing clauses (i) to (vi) inclusive; provided, however, that (a) such extension, renewal or replacement Lien shall be limited to all or a part of the same property or shares of stock that secured the Lien extended, renewed or replaced and (b) the Indebtedness secured by such Lien at such time is not so increased. The restrictions in the immediately preceding paragraph do not apply if, immediately after the incurrence, issuance, assumption or guarantee of any Indebtedness secured by a Lien, the aggregate principal amount of such secured Indebtedness (other than the Indebtedness secured by Liens described in clauses (i) to (vii), inclusive, of the immediately preceding paragraph) would not exceed 10% of Consolidated Capitalization. Definitions "Capital Lease Obligations" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock. "Consolidated Capitalization" means the sum of the Company's consolidated shareholders' equity, redeemable preferred stock and preferred securities in any trust, partnership, corporation or other entity of which more than 50% of the voting equity is owned directly or indirectly by the Company, including, without limitation, the trust securities issued by Conseco Financing Trust I, Conseco Financing Trust II, Conseco Financing Trust III, Conseco Financing Trust IV, Conseco Financing Trust V, Conseco Financing Trust VI, Conseco Financing Trust VII and Conseco Financing Trust XI. "Indebtedness" means (i) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit (other than letters of credit obtained in the ordinary course of business), or (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any businesses, properties or assets of any kind or with services incurred in connection with capital expenditures (other than accounts payable or other indebtedness to trade creditors arising in the ordinary course of business), or (3) for the payment of money relating to a Capital Lease Obligation; (ii) any liability of others described in the preceding clause (1) that the Person has guaranteed or that is otherwise its legal liability; and (iii) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "Person" means any individual, corporation, partnership, joint venture, association, joint-stock or limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Significant Subsidiary" means any Subsidiary with net earnings which constituted at least 20% of the Company's consolidated total net earnings, as determined as of the date of the Company's most recently prepared quarterly financial statements for the 12-month period then ended. "Stated Maturity," when used with respect to any security or any installment of interest on any security, means the date specified in such security as the fixed date on which the principal of such security or such installment of interest, respectively, is finally due and payable, except as otherwise provided in the case of Capital Lease Obligations. "Subsidiary" means a corporation of which a majority of the Capital Stock having voting power under ordinary circumstances to elect a majority of the board of directors is owned directly or indirectly by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. SECTION 10. Events of Default. If any Event of Default with respect to Notes of this series will occur and be continuing, the principal of the Notes of this series may be declared due and payable in the manner and with the effect provided in the Senior Indenture; provided, however, that notwithstanding anything herein to the contrary, if this Note is a Discount Note, the amount so declared to be due and payable will be the Amortized Face Amount of this Note as of the date of such declaration as specified under Section 6. SECTION 11. Modification or Waiver; Obligation of the Company Absolute. The Senior Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Senior Indenture at any time by the Company and the Senior Trustee with the consent of the Holders of not less than a majority in principal amount of the outstanding Securities of each series to be affected. The Senior Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the outstanding Securities of each series, on behalf of the Holders of all Securities of such series, to waive, with respect to the Securities of such series, compliance by the Company with certain provisions of the Senior Indenture and certain past defaults under the Senior Indenture and their consequences. Any such consent or waiver by the Holder of this Note will be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Senior Indenture and no provision of this Note or of the Senior Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and premium, if any, and interest on this Note at the times, places and rates, herein prescribed. SECTION 12. Discharge, Legal Defeasance and Covenant Defeasance. The Senior Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and the related Events of Default upon compliance by the Company with certain conditions specified therein, which provisions apply to this Note. SECTION 13. Authorized Denominations. Unless otherwise specified on the face hereof, the Notes of this series are issuable only in global or certificated registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As provided in the Senior Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, Notes of this series are exchangeable for Notes of this series of like aggregate principal amount and like Stated Maturity and with like terms and conditions of a different authorized denomination, as requested by the Holder surrendering the same. SECTION 14. Registration of Transfer. As provided in the Senior Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, the transfer of this Note is registerable in the Security Register upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for that purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar (which will initially be the Senior Trustee at its principal corporate trust office located in the Borough of Manhattan, The City of New York) duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of this series with like terms and conditions, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. If this Note is a Book-Entry Note as specified on the face hereof, this Note is exchangeable for certificated Notes only upon the terms and conditions provided in the Senior Indenture. Except as provided in the Senior Indenture, owners of beneficial interests in this Book-Entry Note will not be entitled to receive physical delivery of Notes in certificated registered form and will not be considered the Holders thereof for any purpose under the Senior Indenture. No service charge will be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. SECTION 15. Owners. Prior to due presentment of this Note for registration of transfer, the Company, the Senior Trustee and any agent of the Company or the Senior Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon, and none of the Company, the Senior Trustee or any such agent will be affected by notice to the contrary. SECTION 16. Governing Law. The Senior Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York. SECTION 17. Defined Terms. All terms used in this Note which are defined in the Senior Indenture will have the meanings assigned to them in the Senior Indenture unless otherwise defined herein; and all references in the Senior Indenture to "Security" or "Securities" will be deemed to include the Notes. OPTION TO ELECT REPAYMENT [To be completed only if this Note is repayable at the option of the Holder and the Holder elects to exercise such rights] The undersigned owner of this Note hereby irrevocably elects to have the Company repay the principal amount of this Note or portion hereof below designated at the applicable Optional Repayment Price indicated on the face hereof, plus accrued and unpaid interest to but excluding the date of repayment, if this Note is to be repaid pursuant to Section 4 of this Note. If a portion of this Note is not being repaid, specify the principal amount to be repaid and the denomination or denominations (which will be $1,000 or an integral multiple thereof) of the Note or Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): Dated:_____________________________ _______________________________________________________ Signature Sign exactly as name appears on the front of this Note. Indicate address where check is to be sent, if repaid: Principal amount to be repaid if amount to be repaid is less _______________________________________________________ than the entire principal amount of this Note (principal amount remaining must be an authorized denomination) _______________________________________________________ $______________________________________________ (which will be an integral multiple of $1,000) Denomination or denominations of the Note or Notes to be SOCIAL SECURITY OR OTHER TAXPAYER ID NUMBER issued for the portion of this Note not being repaid _______________________________________________________ _______________________________________________ _______________________________________________
ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, will be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT Custodian __________________________________________ (Cust) (Minor) Under Uniform Gifts to Minors Act __________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated: _________________ __________________________________________________ Signature Sign exactly as name appears on the front of this Note [SIGNATURE MUST BE GUARANTEED by a member of a recognized Medallion Guarantee Program] NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN INSTRUMENT IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-1.3 4 EX-1.3 [Face of Note] CUSIP NO. _______ CONSECO, INC. PRINCIPAL AMOUNT: $_________ REGISTERED NO. FX _______ SUBORDINATED MEDIUM-TERM NOTE, SERIES C If this Note is a Book-Entry Note, the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, and the following legend is applicable: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co., or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. The following summary of terms is subject to the information set forth on the reverse hereof: ORIGINAL ISSUE DATE: OPTIONAL REDEMPTION: o YES o NO INTEREST RATE: INITIAL REDEMPTION DATE: STATED MATURITY DATE: INITIAL REDEMPTION PERCENTAGE: AUTHORIZED DENOMINATIONS ANNUAL PERCENTAGE (If other than $1,000 and integral REDEMPTION REDUCTION: multiples thereof): REDEMPTION PRICE: The Initial Redemption Percentage, FORM: o BOOK-ENTRY as adjusted downward by the Annual Percentage Redemption o CERTIFICATED Reduction on each anniversary of the Initial Redemption Date (until the adjusted percentage is 100%), multiplied by the PAYING AGENT (If other than the Subordinated Trustee): unpaid Principal Amount of the Note or the portion thereof to be redeemed. REGULAR RECORD DATES: OPTION TO ELECT REPAYMENT: o YES o NO INTEREST PAYMENT DATES: OPTIONAL REPAYMENT DATE[S]: SINKING FUND: o YES o NO OPTIONAL REPAYMENT PRICE[S]: ORIGINAL ISSUE DISCOUNT: o YES o NO SPECIFIED CURRENCY: AMORTIZING NOTE: o YES o NO OTHER PROVISIONS: EXCHANGE RATE AGENT: DEPOSITARY: ANNEX ATTACHED (and incorporated by reference herein): o YES o NO
If this Note was issued with "original issue discount" for purposes of Section 1273 of the Internal Revenue Code of 1986, as amended, the following shall be completed: ORIGINAL ISSUE DISCOUNT NOTE: o Yes o No ISSUE PRICE (expressed as a percentage of aggregate principal amount): YIELD TO MATURITY: INITIAL PERIOD:
CONSECO, INC., a corporation duly organized and existing under the laws of Indiana (herein called the "Company," which term includes any successor corporation under the Subordinated Indenture referred to on the reverse hereof), for value received, hereby promises to pay to __________________________________________________ or registered assigns, the principal sum specified above on the Stated Maturity Date shown above, and to pay interest thereon from and including the Original Issue Date shown above or from and including the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for, as the case may be. Interest will be paid on the Interest Payment Date or Dates specified above, at the rate per annum specified above, commencing with the first such Interest Payment Date next succeeding the Original Issue Date shown above (except as provided below) until the principal hereof is paid or duly made available for payment. Interest payments will be made in an amount equal to the amount accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity Date or such prior date on which the principal hereof becomes due and payable (the "Maturity Date"), as the case may be. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Subordinated Indenture, be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the Regular Record Date specified above next preceding such Interest Payment Date. The first payment of interest on any Note originally issued between a Regular Record Date and the next Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the Holder on such next succeeding Regular Record Date. Except as otherwise provided in the Subordinated Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of their having been such Holder and may either be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Subordinated Trustee, notice whereof is to be given to Holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Subordinated Indenture. Unless otherwise specified above, the Company will make payments of principal of, and premium, if any, and interest, if any, on this Note in the Specified Currency specified above. Any such amounts payable by the Company in the Specified Currency will be converted by the Exchange Rate Agent specified above into United States dollars for payments to Holders unless otherwise specified above or the Holder of this Note elects, in the manner hereinafter described, to receive such amounts in the Specified Currency. If the Specified Currency is other than United States dollars, any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of such Specified Currency payable to all Holders of Notes, the Specified Currency for which is other than United States Dollars, scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments will be made in the Specified Currency. If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and /or interest, if any, in the Specified Currency instead of in United States dollars by submitting a written request for such payment to the Subordinated Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice to the Subordinated Trustee, but written notice by any such revocation must be received by such Trustee on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. If this Note is to be held in the name of a broker or nominee the Holder should contact such broker or nominee to determine whether and how an election to receive payments in the Specified Currency may be made. If this Note is a Book-Entry Note as specified above, while this Note is represented by one or more Book-Entry Notes registered in the name of the Depositary or its nominee, the Company will cause payments of principal of, premium, if any, and interest on such Book-Entry Notes to be made to the Depositary or its nominee, as the case may be, by wire transfer to the extent, in the funds and in the manner required by agreements with, or regulations or procedures prescribed from time to time by, the Depositary or its nominee, and otherwise in accordance with such agreements, regulations and procedures. If this Note is a Book-Entry Note as specified above, the following legend is applicable except as specified on the reverse hereof: THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR OF THE DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR. If this Note is a certificated Note as specified above, payments of interest, if any, on this Note on any Interest Payment Date other than at Stated Maturity Date will be made by check mailed to the address of the Holder entitled thereto as such address appears in the Security Register of the Company. Notwithstanding the foregoing, a Holder of $10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in such Specified Currency) or more in aggregate principal amount of certificated Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments, if any, on any Interest Payment Date other than at Stated Maturity by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 days prior to such Interest Payment Date. If the Specified Currency specified above is other than United States dollars, payments of the principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in United States dollars will be made in the manner specified above with respect to Notes denominated in United States dollars. If the Specified Currency specified above is other than United States dollars, payments of interest, if any, on this Note which are to be made in the Specified Currency on an Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the Holder of this Note as it appears in the Security Register, subject to the right to receive such interest payments by wire transfer of immediately available funds under the circumstances described above. If the Specified Currency specified above is other than United States dollars, payments of principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in the Specified Currency on the Maturity Date will be made by wire transfer of immediately available funds to an account with a bank designated at least fifteen calendar days prior to the Maturity Date by the Holder of this Note, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered at the office or agency maintained by the Company for such purpose in the Borough of Manhattan, The City of New York in time for the Subordinated Trustee to make such payments in such funds in accordance with its normal procedures. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but not any tax, assessment or governmental charge imposed upon the Holder of this Note. If this Note is a certificated Note as specified above, payment of the principal, premium, if any, due on the Maturity Date in respect of this Note will be made in immediately available funds upon presentation and surrender of this Note at the principal corporate trust office of the Trustee in the Borough of Manhattan, The City of New York. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF OR THE ATTACHED ANNEX, IF ANY, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof, or its successor as Trustee, or its Authenticating Agent, by manual signature of an authorized signatory, this Note will not be entitled to any benefit under the Subordinated Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: CONSECO, INC. TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities issued under the within-mentioned Subordinated Indenture. By:_________________________________________ Its:________________________________________ HARRIS TRUST AND SAVINGS BANK, as Trustee Attest:_____________________________________ By:___________________________ Its:________________________________________ Authorized Officer [Reverse of Note] CONSECO, INC. SUBORDINATED MEDIUM-TERM NOTE, SERIES C SECTION 1. General. This Note is one of a series of Securities of the Company issued under an Indenture, dated as of July 21, 1999, as amended from time to time (the "Subordinated Indenture"), between the Company and Harris Trust and Savings Bank, as trustee (the "Subordinated Trustee"), to which Subordinated Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Subordinated Trustee and the Holders of the Notes and of the terms upon which the Securities are, and are to be, authenticated and delivered. All Securities, including this Note, issued and to be issued under the Subordinated Indenture will be unsecured and will be subordinate and junior in right of payment, to the extent and in the manner set forth in the Subordinated Indenture, to all Senior Indebtedness (as defined in the Subordinated Indenture). This Note is one of the Securities designated on the face hereof (the "Notes"). The Notes may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption provisions, if any, may be subject to different sinking funds, if any, and may otherwise vary, all as provided in the Subordinated Indenture. SECTION 2. Payments. Interest on this Note will be payable on January 15 and July 15 of each year or on such other date(s) specified on the face hereof (each, an "Interest Payment Date") and on the Maturity Date. Unless otherwise specified on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. If any Interest Payment Date(s) or the Maturity Date of a Fixed Rate Note falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest will be made on the next succeeding Business Day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after such Interest Payment Date or the Maturity Date, as the case may be, to the date of such payment on the next succeeding Business Day. As used herein, Business Day means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to non-United States dollar-denominated notes, the day is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the principal financial center, as described below, of the country issuing the specified currency or, if the specified currency is Euro, the day is also a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to notes as to which LIBOR is an applicable Interest Rate Basis, the day is also a London business day. A London Business Day is a day on which commercial banks are open for business, including dealings in the Index Currency in London. The principal financial centers for the respective currencies are: United States dollars, New York; Australian dollars, Sydney and Melbourne; Canadian dollars, Toronto; Deutsche marks, Frankfurt; Dutch guilders, Amsterdam; South African rand, Johannesburg; Swiss francs, Zurich; and all other currencies, capital city of the country. SECTION 3. Redemption. This Note will be redeemable at the option of the Company prior to the Stated Maturity Date only if an Initial Redemption Date is specified on the face hereof. If so specified, this Note will be subject to redemption at the option of the Company on any date on and after the Initial Redemption Date in whole or from time to time in part in increments of $1,000 or the minimum denomination, if any, specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such minimum denomination), at the Redemption Price specified on the face hereof, together with unpaid interest accrued hereon to the date of redemption, on written notice given to the Holder hereof not more than 60 nor less than 30 calendar days prior to the date of redemption and in accordance with the provisions of the Subordinated Indenture. In the event of redemption of this Note in part only, this Note will be cancelled and a new Note or Notes representing the unredeemed portion hereof will be issued in the name of the Holder hereof. SECTION 4. Repayment. This Note will be repayable by the Company at the option of the Holder hereof prior to the Stated Maturity Date only if one or more Optional Repayment Dates are specified on the face hereof. If so specified, this Note will be subject to repayment at the option of the Holder hereof on any Optional Repayment Date in whole or from time to time in part in increments of $1,000 or such other minimum denomination specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such other minimum denomination), at a repayment price equal to 100% of the unpaid principal amount, or such other repayment price specified on the face hereof, to be repaid, together with unpaid interest accrued heron to but excluding the date of repayment. For this Note to be repaid, it must be received, together with the form thereon entitled "Option to Elect Repayment" duly completed, by the Subordinated Trustee at its office maintained for such purpose in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the date of repayment. Exercise of such repayment option by the Holder will be irrevocable. Only the Depositary may exercise the repayment option if this Note is a Book-Entry Note as specified on the face hereof. Accordingly, if the beneficial owner hereof, if this is a Book-Entry Note, desires to have all or any portion of the Book-Entry Note repaid they must instruct the participant through which they own their interest to direct the Depositary to exercise the repayment option on their behalf by delivering this Note and duly completed election form to the Subordinated Trustee as aforesaid. In order to ensure that this Note and election form are received by such Subordinated Trustee on a particular day, the beneficial owner hereof must so instruct the participant through which they own their interest before such participant's deadline for accepting instructions for that day. Different firms may have different deadlines for accepting instructions from their customers. Accordingly, the beneficial owner hereof should consult the participants through which they own their interest for the respective deadlines for such participants. All instructions given to participants from beneficial owners of Book-Entry Notes relating to the option to elect repayment will be irrevocable. In addition, at the time such instructions are given, the beneficial owner of this Note shall cause the participant through which it owns its interest to transfer such beneficial owner's interest in the Book-Entry Note, on the Depositary's records, to the Subordinated Trustee. SECTION 5. Sinking Fund. This Note is not subject to a sinking fund unless otherwise specified on the face hereof. SECTION 6. Discount Notes. If the Issue Price of this Note (as specified on the face hereof) is less than 100% of the principal amount hereof (i.e. par) by more than a percentage equal to the product of 0.25% and the number of full years to the Stated Maturity Date (a "Discount Note"), the difference between the Issue Price of this Note and par is referred to herein as the "Discount." In the event of redemption, repayment or acceleration of maturity of this Note, the amount payable to the Holder hereof will be equal to the sum of (i) the Issue Price (increased by any accruals of Discount) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid interest accrued hereon to the date of such redemption, repayment or acceleration of maturity, as the case may be (the "Amortized Face Amount"). Unless otherwise specified on the face hereof, for purposes of determining the amount of Discount that has accrued as of any date on which a redemption, repayment or acceleration of maturity occurs for this Note, such Discount will be accrued using a constant yield method. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as hereinafter defined), corresponds to the shortest period between Interest Payment Dates for this Note (with ratable accruals within a compounding period), a coupon rate equal to the initial coupon rate applicable to this Note and an assumption that the maturity of this Note will not be accelerated. If the period from the date of issue to the initial Interest Payment Date for this Note (the "Initial Period") is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period with the short period being treated as provided in the preceding sentence. SECTION 7. Amortizing Notes. If this Note is an Amortizing Note as specified on the face hereof, unless otherwise specified on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. Payments with respect to this Note if it is an Amortizing Note will be applied first to interest due and payable hereon and then to the reduction of the unpaid principal amount hereof. Further information concerning additional terms and provisions of Amortizing Notes will be set forth on the Annex attached hereto, which Annex will for all purposes have the same effect as if set forth at this place. SECTION 8. Covenants. Unless otherwise specified on the face hereof, this Note contains the following covenants: (1) Limitation on Issuance or Disposition of Stock of Significant Subsidiaries. The Company will not, nor will it permit any Significant Subsidiary to, issue, sell or otherwise dispose of any shares of Capital Stock (other than non-voting Preferred Stock) of any Significant Subsidiary, except for (i) directors' qualifying shares; (ii) sales or other dispositions to the Company or to one or more wholly-owned Significant Subsidiaries; (iii) the sale or other disposition of all or any part of the Capital Stock of any Significant Subsidiary for consideration which is at least equal to the fair value of such Capital Stock as determined by the Company's board of directors (acting in good faith); or (iv) any issuance, sale, assignment, transfer or other disposition made in compliance with an order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or any Significant Subsidiary. (2) Limitation on Liens. Except as provided below, neither the Company nor any Significant Subsidiary may incur, issue, assume or guarantee any Indebtedness secured by a Lien on any property or assets of the Company or any Significant Subsidiary, or any shares of Capital Stock of any Significant Subsidiary, without effectively providing that the Notes (together with, if the Company shall so determine, any other Indebtedness which is not subordinated to the Notes) shall be secured equally and ratably with (or prior to) such Indebtedness, so long as such Indebtedness shall be so secured; provided, however, that this covenant shall not apply to Indebtedness secured by (i) Liens existing on the date of the applicable Pricing Supplement; (ii) Liens on property of, or on any shares of stock of, any corporation existing at the time such corporation becomes a Significant Subsidiary or merges into or consolidates with the Company or a Significant Subsidiary; (iii) Liens on property or on shares of stock existing at the time of acquisition thereof by the Company or any Significant Subsidiary; (iv) Liens to secure the financing of the acquisition, construction or improvement of property, or the acquisition of shares of stock by the Company or any Significant Subsidiary, provided that such Liens are created not later than one year after such acquisition or, in the case of property, no later than one year after completion of construction or commencement of commercial operation, whichever is later, are limited to the property acquired, constructed or improved or the shares of stock acquired and do not secure indebtedness in excess of the cost of such acquisition, construction or improvement; (v) Liens in favor of the Company or any Subsidiary; (vi) Liens in favor of, or required by, governmental authorities; and (vii) any extension, renewal or replacement as a whole or in part, of any Lien referred to in the foregoing clauses (i) to (vi) inclusive; provided, however, that (a) such extension, renewal or replacement Lien shall be limited to all or a part of the same property or shares of stock that secured the Lien extended, renewed or replaced and (b) the Indebtedness secured by such Lien at such time is not so increased. The restrictions in the immediately preceding paragraph do not apply if, immediately after the incurrence, issuance, assumption or guarantee of any Indebtedness secured by a Lien, the aggregate principal amount of such secured Indebtedness (other than the Indebtedness secured by Liens described in clauses (i) to (vii), inclusive, of the immediately preceding paragraph) would not exceed 10% of Consolidated Capitalization. Definitions "Capital Lease Obligations" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock. "Consolidated Capitalization" means the sum of the Company's consolidated shareholders' equity, redeemable preferred stock and preferred securities in any trust, partnership, corporation or other entity of which more than 50% of the voting equity is owned directly or indirectly by the Company, including, without limitation, the trust securities issued by Conseco Financing Trust I, Conseco Financing Trust II, Conseco Financing Trust III, Conseco Financing Trust IV, Conseco Financing Trust V, Conseco Financing Trust VI, Conseco Financing Trust VII and Conseco Financing Trust XI. "Indebtedness" means (i) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit (other than letters of credit obtained in the ordinary course of business), or (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any businesses, properties or assets of any kind or with services incurred in connection with capital expenditures (other than accounts payable or other indebtedness to trade creditors arising in the ordinary course of business), or (3) for the payment of money relating to a Capital Lease Obligation; (ii) any liability of others described in the preceding clause (1) that the Person has guaranteed or that is otherwise its legal liability; and (iii) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "Person" means any individual, corporation, partnership, joint venture, association, joint-stock or limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Significant Subsidiary" means any Subsidiary with net earnings which constituted at least 20% of the Company's consolidated total net earnings, as determined as of the date of the Company's most recently prepared quarterly financial statements for the 12-month period then ended. "Stated Maturity," when used with respect to any security or any installment of interest on any security, means the date specified in such security as the fixed date on which the principal of such security or such installment of interest, respectively, is finally due and payable, except as otherwise provided in the case of Capital Lease Obligations. "Subsidiary" means a corporation of which a majority of the Capital Stock having voting power under ordinary circumstances to elect a majority of the board of directors is owned directly or indirectly by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. SECTION 9. Events of Default. If any Event of Default with respect to Notes of this series will occur and be continuing, the principal of the Notes of this series may be declared due and payable in the manner and with the effect provided in the Subordinated Indenture; provided, however, that notwithstanding anything herein to the contrary, if this Note is a Discount Note, the amount so declared to be due and payable will be the Amortized Face Amount of this Note as of the date of such declaration as specified under Section 6. SECTION 10. Modification or Waiver; Obligation of the Company Absolute. The Subordinated Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Subordinated Indenture at any time by the Company and the Subordinated Trustee with the consent of the Holders of not less than a majority in principal amount of the outstanding Securities of each series to be affected. The Subordinated Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the outstanding Securities of each series, on behalf of the Holders of all Securities of such series, to waive, with respect to the Securities of such series, compliance by the Company with certain provisions of the Subordinated Indenture and certain past defaults under the Subordinated Indenture and their consequences. Any such consent or waiver by the Holder of this Note will be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Subordinated Indenture and no provision of this Note or of the Subordinated Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and premium, if any, and interest on this Note at the times, places and rates, herein prescribed. SECTION 11. Discharge, Legal Defeasance and Covenant Defeasance. The Subordinated Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and the related Events of Default upon compliance by the Company with certain conditions specified therein, which provisions apply to this Note. SECTION 12. Authorized Denominations. Unless otherwise specified on the face hereof, the Notes of this series are issuable only in global or certificated registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As provided in the Subordinated Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, Notes of this series are exchangeable for Notes of this series of like aggregate principal amount and like Stated Maturity and with like terms and conditions of a different authorized denomination, as requested by the Holder surrendering the same. SECTION 13. Registration of Transfer. As provided in the Subordinated Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, the transfer of this Note is registerable in the Security Register upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for that purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar (which will initially be the Subordinated Trustee at its principal corporate trust office located in the Borough of Manhattan, The City of New York) duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of this series with like terms and conditions, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. If this Note is a Book-Entry Note as specified on the face hereof, this Note is exchangeable for certificated Notes only upon the terms and conditions provided in the Subordinated Indenture. Except as provided in the Subordinated Indenture, owners of beneficial interests in this Book-Entry Note will not be entitled to receive physical delivery of Notes in certificated registered form and will not be considered the Holders thereof for any purpose under the Subordinated Indenture. No service charge will be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. SECTION 14. Owners. Prior to due presentment of this Note for registration of transfer, the Company, the Subordinated Trustee and any agent of the Company or the Subordinated Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon, and none of the Company, the Subordinated Trustee or any such agent will be affected by notice to the contrary. SECTION 15. Governing Law. The Subordinated Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York. SECTION 16. Defined Terms. All terms used in this Note which are defined in the Subordinated Indenture will have the meanings assigned to them in the Subordinated Indenture unless otherwise defined herein; and all references in the Subordinated Indenture to "Security" or "Securities" will be deemed to include the Notes. OPTION TO ELECT REPAYMENT [To be completed only if this Note is repayable at the option of the Holder and the Holder elects to exercise such rights] The undersigned owner of this Note hereby irrevocably elects to have the Company repay the principal amount of this Note or portion hereof below designated at the applicable Optional Repayment Price indicated on the face hereof, plus accrued and unpaid interest to but excluding the date of repayment, if this Note is to be repaid pursuant to Section 4 of this Note. If a portion of this Note is not being repaid, specify the principal amount to be repaid and the denomination or denominations (which will be $1,000 or an integral multiple thereof) of the Note or Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): Dated:_____________________________ _______________________________________________________ Signature Sign exactly as name appears on the front of this Note. Indicate address where check is to be sent, if repaid: Principal amount to be repaid if amount to be repaid is less _______________________________________________________ than the entire principal amount of this Note (principal amount remaining must be an authorized denomination) _______________________________________________________ $______________________________________________ (which will be an integral multiple of $1,000) Denomination or denominations of the Note or Notes to be SOCIAL SECURITY OR OTHER TAXPAYER ID NUMBER issued for the portion of this Note not being repaid _______________________________________________________ _______________________________________________ _______________________________________________
ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, will be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT Custodian _____________________________________ (Cust) (Minor) Under Uniform Gifts to Minors Act _____________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated: _____________ ___________________________________________________ Signature Sign exactly as name appears on the front of this Note [SIGNATURE MUST BE GUARANTEED by a member of a recognized Medallion Guarantee Program] NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN INSTRUMENT IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. [Face of Note] CUSIP NO. CONSECO, INC. PRINCIPAL AMOUNT: $__________ REGISTERED NO. FL _______ SUBORDINATED MEDIUM-TERM NOTE, SERIES C If this Note is a Book-Entry Note, the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, and the following legend is applicable: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co., or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. The following summary of terms is subject to the information set forth on the reverse hereof: INTEREST OPTIONAL REDEMPTION: o YES o NO CALCULATION: o REGULAR FLOATING RATE NOTE o FLOATING RATE/FIXED RATE NOTE FIXED RATE COMMENCEMENT DATE: FIXED INTEREST RATE: o INVERSE FLOATING RATE FIXED INTEREST RATE: o OTHER FLOATING RATE NOTE (see attached) ORIGINAL ISSUE DATE: INITIAL REDEMPTION DATE: STATED MATURITY: INITIAL REDEMPTION PERCENTAGE: ANNUAL PERCENTAGE REDEMPTION REDUCTION: REDEMPTION PRICE: The Initial Redemption Percentage, AUTHORIZED DENOMINATIONS as adjusted downward by the Annual Percentage Redemption (if other than $1,000 and integral Reduction on each anniversary of the Initial Redemption Date multiples thereof) (until the adjusted percentage is 100%), multiplied by the unpaid Principal Amount of the Note or the portion thereof to be redeemed. FORM: o BOOK-ENTRY OPTION TO ELECT REPAYMENT: o YES o NO o CERTIFICATED PAYING AGENT (If other than the Subordinated Trustee): OPTIONAL REPAYMENT DATE[S]: INTEREST CALCULATION: INTEREST RATE BASIS: OPTIONAL REPAYMENT PRICE[S]: INDEX MATURITY: REGULAR RECORD DATES: DAY COUNT CONVENTION: INTEREST PAYMENT DATES: INITIAL INTEREST RATE: SPECIFIED CURRENCY: MAXIMUM INTEREST RATE: MINIMUM INTEREST RATE: SPREAD: SPREAD MULTIPLIER: OTHER PROVISIONS: INTEREST RESET PERIOD: INTEREST RESET DATES: ANNEX ATTACHED (and incorporated by reference herein): o YES o NO INTEREST DETERMINATION DATES: SINKING FUND: o YES o NO CALCULATION AGENT: EXCHANGE RATE AGENT: ORIGINAL ISSUE DISCOUNT: o YES o NO AMORTIZING NOTE: o YES o NO DEPOSITARY:
If this Note was issued with "original issue discount" for purposes of Section 1273 of the Internal Revenue Code of 1986, as amended, the following shall be completed: ORIGINAL ISSUE DISCOUNT NOTE: o Yes o No ISSUE PRICE (expressed as a percentage of aggregate principal amount):
YIELD TO MATURITY: INITIAL PERIOD: CONSECO, INC., a corporation duly organized and existing under the laws of Indiana (herein called the "Company," which term includes any successor corporation under the Subordinated Indenture referred to on the reverse hereof), for value received, hereby promises to pay to __________________________________________________ or registered assigns, the principal sum specified above on the Stated Maturity Date shown above, and to pay interest thereon from and including the Original Issue Date shown above or from and including the most recent Interest Payment Date (as hereinafter defined) to which interest has been paid or duly provided for, as the case may be. Interest will be paid on the Interest Payment Date or Dates specified above, at the rate per annum determined in accordance with the provisions on the reverse hereof, depending on the Interest Rate Basis, the Spread, if any, and/or the Spread Multiplier, if any, specified above, commencing with the first such Interest Payment Date next succeeding the Original Issue Date shown above (except as provided below) until the principal hereof is paid or duly made available for payment. Interest payments will be made in an amount equal to the amount accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity Date or such prior date on which the principal hereof becomes due and payable (the "Maturity Date"), as the case may be. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will, as provided in such Subordinated Indenture, be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on the Regular Record Date specified above next preceding such Interest Payment Date. The first payment of interest on any Note originally issued between a Regular Record Date and the next Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the Holder on such next succeeding Regular Record Date. Except as otherwise provided in the Subordinated Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date by virtue of their having been such Holder and may either be paid to the Person in whose name this Note (or one or more predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Subordinated Trustee, notice whereof is to be given to Holders of Notes not less than 10 calendar days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Subordinated Indenture. Unless otherwise specified above, the Company will make payments of principal of, and premium, if any, and interest, if any, on this Note in the Specified Currency specified above. Any such amounts payable by the Company in the Specified Currency will be converted by the Exchange Rate Agent specified above into United States dollars for payments to Holders unless otherwise specified above or the Holder of this Note elects, in the manner hereinafter described, to receive such amounts in the Specified Currency. If the Specified Currency is other than United States dollars, any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of such Specified Currency payable to all Holders of Notes, the Specified Currency for which is other than United States Dollars, scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments will be made in the Specified Currency. If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and /or interest, if any, in the Specified Currency, instead of in United States dollars, by submitting a written request for such payment to the Subordinated Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice to the Subordinated Trustee, but written notice by any such revocation must be received by such Trustee on or prior to the applicable Record Date or at least fifteen calendar days prior to the Maturity Date, as the case may be. If this Note is to be held in the name of a broker or nominee the Holder should contact such broker or nominee to determine whether and how an election to receive payments in the Specified Currency may be made. If this Note is a Book-Entry Note as specified above, while this Note is represented by one or more Book-Entry Notes registered in the name of the Depositary or its nominee, the Company will cause payments of principal of, premium, if any, and interest on such Book-Entry Notes to be made to the Depositary or its nominee, as the case may be, by wire transfer to the extent, in the funds and in the manner required by agreements with, or regulations or procedures prescribed from time to time by, the Depositary or its nominee, and otherwise in accordance with such agreements, regulations and procedures. If this Note is a Book-Entry Note as specified above, the following legend is applicable except as specified on the reverse hereof: THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR OF THE DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR. If this Note is a certificated Note as specified above, payments of interest, if any, on this Note on any Interest Payment Date other than at Stated Maturity will be made by check mailed to the address of the Holder entitled thereto as such address appears in the Security Register of the Company. Notwithstanding the foregoing, a Holder of $10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in such Specified Currency) or more in aggregate principal amount of certificated Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments, if any, on any Interest Payment Date other than at Stated Maturity by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Trustee not less than 15 days prior to such Interest Payment Date. If the Specified Currency specified above is other than United States dollars, payments of the principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in United States dollars will be made in the manner specified above with respect to Notes denominated in United States dollars. If the Specified Currency specified above is other than United States dollars, payments of interest, if any, on this Note which are to be made in the Specified Currency on an Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the Holder of this Note as it appears in the Security Register, subject to the right to receive such interest payments by wire transfer of immediately available funds under the circumstances described above. If the Specified Currency specified above is other than United States dollars, payments of principal of, and premium, if any, and/or interest, if any, on this Note which are to be made in the Specified Currency on the Maturity Date will be made by wire transfer of immediately available funds to an account with a bank designated at least fifteen calendar days prior to the Maturity Date by the Holder of this Note, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered at the office or agency maintained by the Company for such purpose in the Borough of Manhattan, The City of New York in time for the Subordinated Trustee to make such payments in such funds in accordance with its normal procedures. The Company will pay any administrative costs imposed by banks in connection with making payments by wire transfer, but not any tax, assessment or governmental charge imposed upon the Holder of this Note. If this Note is a certificated Note as specified above, payment of the principal, premium, if any, due on the Maturity Date in respect of this Note will be made in immediately available funds upon presentation and surrender of this Note at the principal corporate trust office of the Trustee in the Borough of Manhattan, The City of New York. REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE HEREOF OR THE ATTACHED ANNEX, IF ANY, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof, or its successor as Trustee, or its Authenticating Agent, by manual signature of an authorized signatory, this Note will not be entitled to any benefit under the Subordinated Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: CONSECO, INC. TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities issued under the within-mentioned Subordinated Indenture. By:___________________________________ Its:__________________________________ HARRIS TRUST AND SAVINGS BANK, as Trustee Attest:_______________________________ By:____________________________ Its:__________________________________ Authorized Officer [Reverse of Note] CONSECO, INC. SUBORDINATED MEDIUM-TERM NOTE, SERIES C SECTION 1. General. This Note is one of a series of Securities of the Company issued under an Indenture, dated as of July 21, 1999, as amended from time to time (the "Subordinated Indenture"), between the Company and Harris Trust and Savings Bank, as trustee (the "Subordinated Trustee"), to which Subordinated Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Subordinated Trustee and the Holders of the Notes and of the terms upon which the Securities are, and are to be, authenticated and delivered. All Securities, including this Note, issued and to be issued under the Subordinated Indenture will be unsecured and will be subordinate and junior in right of payment, to the extent and in the manner set forth in the Subordinated Indenture, to all Senior Indebtedness (as defined in the Subordinated Indenture). This Note is one of the Securities designated on the face hereof (the "Notes"). The Notes may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption provisions, if any, may be subject to different sinking funds, if any, and may otherwise vary, all as provided in the Subordinated Indenture. SECTION 2. Interest Rate Calculations; Payments. The interest rate borne by this Note will be determined as follows: (i) Unless it is specified on the face hereof that this Note is a "Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note" or has an Annex attached, or that "Other Provisions" apply, in each case relating to a different interest rate formula, this Note will be designated as a "Regular Floating Rate Note" and, except as described below or as specified on the face hereof, will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable will be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate. (ii) If it is specified on the face hereof that this Note is a "Floating Rate/Fixed Rate Note," then, except as described below or as specified on the face hereof, this Note will bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note will be payable will be reset as of each Interest Reset Date; provided, however, that (y) the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate and (z) the interest rate in effect for the period commencing on the Fixed Rate Commencement Date to the Maturity Date shall be the Fixed Interest Rate, if such rate is specified on the face hereof or, if no such Fixed Interest Rate is specified, the interest rate in effect thereon on the day immediately preceding the Fixed Rate Commencement Date. (iii) If it is specified on the face hereof that this Note is an "Inverse Floating Rate Note," then, except as described below or on the face hereof, this Note will bear interest at the Fixed Interest Rate minus the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if any, and/or (b) multiplied by the applicable Spread Multiplier, if any; provided, however, that, unless otherwise specified on the face hereof, the interest rate thereon will not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on such Inverse Floating Rate Note will be payable will be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date will be the Initial Interest Rate. The "Spread" is the number of basis points to be added to or subtracted from the related Interest Rate Basis or Bases applicable to this Note. The "Spread Multiplier" is the percentage of the related Interest Rate Basis or Bases applicable to this Note by which such Interest Rate Basis or Bases will be multiplied to determine the applicable interest rate on this Note. The "Index Maturity" is the period to maturity of the instrument or obligation with respect to which the related Interest Rate Basis or Bases will be calculated. Unless otherwise specified on the face hereof, the interest rate with respect to each Interest Rate Basis will be determined in accordance with the applicable provisions below. Except as specified on the face hereof, the interest rate in effect on each day will be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as hereinafter defined) immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. The rate of interest on this Note will be reset daily, weekly, monthly, quarterly, semiannually or annually or on such other specified basis (each, an "Interest Reset Period," the first day of each Interest Reset Period being an "Interest Reset Date"), as specified on the face hereof. Unless otherwise specified on the face hereof, the Interest Reset Dates will be, if this Note resets: (i) daily, each Business Day; (ii) weekly, the Wednesday of each week (unless the Interest Rate Basis specified on the face hereof is Treasury Rate, which will reset the Tuesday of each week, except as described below); (iii) monthly, the third Wednesday of each month (unless the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, which will reset on the first calendar day of the month); (iv) quarterly, the third Wednesday of March, June, September and December of each year; (v) semiannually, the third Wednesday of the two months specified on the face hereof; and (vi) annually, the third Wednesday of the month specified on the face hereof; provided however, that, if this Note is a Floating Rate/Fixed Rate Notes, the rate of interest hereon will not reset after the applicable Fixed Rate Commencement Date, as specified on the face hereof. If any Interest Reset Date for this Note would otherwise be a day that is not a Business Day, such Interest Reset Date will be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis specified on the face hereof and such Business Day falls in the next succeeding calendar month, such Interest Reset Date will be the immediately preceding Business Day. The interest rate applicable to each Interest Reset Period commencing on the related Interest Reset Date will be the rate determined by the Calculation Agent (as hereinafter defined) as of the applicable Interest Determination Date and calculated on or prior to the Calculation Date (as hereinafter defined), except with respect to LIBOR and the Eleventh District Cost of Funds Rate, which will be calculated on such Interest Determination Date. Unless otherwise specified on the face hereof, the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is CD Rate, CMT Rate or Commercial Paper Rate, will be the second Business Day immediately preceding the applicable Interest Reset Date; the "Interest Determination Date" if the Interest Rate Basis specified on the face hereof is Federal Funds Rate or Prime Rate, will be the Business Day immediately preceding the applicable Interest Reset Date; the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, will be the last working day of the month immediately preceding the applicable Interest Reset Date on which the Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes the Index (as hereinafter defined); and the "Interest Determination Date," if the Interest Rate Basis specified on the face hereof is LIBOR, will be the second London Business Day immediately preceding the applicable Interest Reset Date. If the Interest Rate Basis specified on the face hereof is Treasury Rate, the "Interest Determination Date" will be the day in the week in which the applicable Interest Reset Date falls on which day Treasury Bills (as hereinafter defined) are normally auctioned (Treasury Bills are normally sold at an auction held on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday); provided, however, that if an auction is held on the Friday of the week preceding the applicable Interest Reset Date, the "Interest Determination Date" will be such preceding Friday; provided, further, that if the Interest Determination Date would otherwise fall on an Interest Reset Date, then such Interest Reset Date will be postponed to the next succeeding Business Day. If the interest rate specified on the face hereof is determined by reference to two or more Interest Rate Bases, the "Interest Determination Date" will be the most recent Business Day which is at least two Business Days prior to the applicable Interest Reset Date for this Note on which each Interest Rate Basis is determinable. Each Interest Rate Basis will be determined as of such date, and the applicable interest rate will take effect on the applicable Interest Reset Date. Notwithstanding the foregoing, this Note may also have either or both of the following, as specified on the face hereof: (i) a Maximum Interest Rate, or ceiling, that may accrue during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may accrue during any Interest Period. In addition to any Maximum Interest Rate specified on the face hereof, the interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Except as set forth below, if the Specified Currency, if other than United States dollars, specified on the face hereof is not available for the required payment of principal, premium, if any, and/or interest, if any, in respect thereof due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the Market Exchange Rate (as defined below), computed by the Exchange Rate Agent, on the second Business Day prior to such payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate, or as otherwise specified on the face hereof. If the Specified Currency specified on the face hereof is a composite currency that is not available for the required payment of principal, premium, if any, and/or interest, if any, in respect thereof due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the equivalent of the composite currency in United States dollars. The component currencies of the composite currency for this purpose (the "Component Currencies") will be the currency amounts that were components of the composite currency as of the last day on which the composite currency was used. The equivalent of the composite currency in United States dollars shall be calculated by aggregating the United States dollar equivalents of the Component Currencies. The United States dollar equivalent of each of the Component Currencies will be determined by the Exchange Rate Agent on the basis of the Market Exchange Rate on the second Business Day prior to the required payment or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate for each such Component Currency, or as otherwise specified on the face hereof. If the official unit of any Component Currency is altered by way of combination or subdivision, the number of units of the currency as a Component Currency will be divided or multiplied in the same proportion. If two or more Component Currencies are consolidated into a single currency, the amounts of those currencies as Component Currencies will be replaced by an amount in such single currency equal to the sum of the amounts of the consolidated Component Currencies expressed in such single currency. If any Component Currency is divided into two or more currencies, the amount of the original Component Currency shall be replaced by the amounts of such two or more currencies, the sum of which shall be equal to the amount of the original Component Currency. The "Market Exchange Rate" for a Specified Currency other than United States dollars means the noon dollar buying rate in The City of New York for cable transfers for such Specified Currency as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. Any payment made in United States dollars under the circumstances set forth above where the required payment is in a Specified Currency other than United States dollars will not constitute an Event of Default under the Subordinated Indenture with respect to this Note. All determinations referred to above made by the Exchange Rate Agent shall be at its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and binding on the Holder of this Note. Except as provided below or as specified on the face hereof, interest will be payable, if this Note resets: (i) daily, weekly or monthly, on the third Wednesday of each month or on the third Wednesday of March, June, September and December of each year, as specified on the face hereof; (ii) quarterly, on the third Wednesday of March, June, September and December of each year; (iii) semiannually, on the third Wednesday of the two months of each year specified on the face hereof; and (iv) annually, on the third Wednesday of the month of each year specified on the face hereof (each, an "Interest Payment Date" with respect to this Note) and, in each case, on the Maturity Date. If any Interest Payment Date other than the Maturity Date for this Note would otherwise be a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding Business Day, except that if LIBOR is specified on the face hereof as an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding Business Day. If the Maturity Date of this Note falls on a day that is not a Business Day, the required payment of principal, premium, if any, and interest will be made on the next succeeding Business Day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after the Maturity Date to the date of such payment on the next succeeding Business Day. All percentages resulting from any calculation on this Note will be rounded to the nearest one hundred-thousandth of a percentage point, with five- one millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in or resulting from such calculation on this Note will be rounded, in the case of United States dollars, to the nearest cent or, in the case of a foreign or composite currency, to the nearest unit (with one-half cent or unit being rounded upwards). Accrued interest on this Note is calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the applicable Interest Period. Unless otherwise specified on the face hereof, the interest factor for each such day will be computed by dividing the interest rate applicable to such day by 360, if the Interest Rate Basis specified on the face hereof is CD Rate, Commercial Paper Rate, Eleventh District Cost of Funds Rate, Federal Funds Rate, LIBOR or Prime Rate, or by the actual number of days in the year if the Interest Rate Basis specified on the face hereof is CMT Rate or Treasury Rate. Unless otherwise specified on the face hereof, the interest factor for this Note if the interest rate is calculated with reference to two or more Interest Rate Bases will be calculated in each period in the same manner as if only the applicable Interest Rate Basis specified on the face hereof applied. Unless otherwise specified on the face hereof, the Subordinated Trustee will be the "Calculation Agent" with respect to this Note. Upon request of the Holder of this Note, the Calculation Agent will disclose the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next succeeding Interest Reset Date with respect to such Floating Rate Note. Unless otherwise specified on the face hereof, the "Calculation Date," if applicable, pertaining to any Interest Determination Date will be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Maturity Date, as the case may be. As used herein, Business Day means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that, with respect to non-United States dollar-denominated notes, the day is also not a day on which commercial banks are authorized or required by law, regulation or executive order to close in the principal financial center, as described below, of the country issuing the specified currency or, if the specified currency is Euro, the day is also a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) System is open; provided, further, that, with respect to notes as to which LIBOR is an applicable Interest Rate Basis, the day is also a London business day. A London Business Day is a day on which commercial banks are open for business, including dealings in the Index Currency in London. The principal financial centers for the respective currencies are: United States dollars, New York; Australian dollars, Sydney and Melbourne; Canadian dollars, Toronto; Deutsche marks, Frankfurt; Dutch guilders, Amsterdam; South African rand, Johannesburg; Swiss francs, Zurich; and all other currencies, capital city of the country. Unless otherwise specified on the face hereof, the Calculation Agent will determine each Interest Rate Basis in accordance with the following provisions. Determination of CD Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is the CD Rate, with respect to any Interest Determination Date (a "CD Rate Interest Determination Date"), such rate will equal the rate on such date for negotiable United States dollar certificates of deposit having the Index Maturity specified on the face hereof as published by the Board of Governors of the Federal Reserve System in "Statistical Release H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)") under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such CD Rate Interest Determination Date for negotiable United States dollar certificates of deposit of the Index Maturity specified on the face hereof as published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "CDS (secondary market)." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the CD Rate on such CD Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the secondary market offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest Determination Date, of three leading nonbank dealers in negotiable United States dollar certificates of deposit in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent for negotiable United States dollar certificates of deposit of major United States money center banks for negotiable certificates of deposit with a remaining maturity closest to the Index Maturity specified on the face hereof in an amount that is representative for a single transaction in that market at that time; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the CD Rate determined as of such CD Rate Interest Determination Date will be the CD Rate in effect on such CD Rate Interest Determination Date. Determination of CMT Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is the CMT Rate, with respect to any Interest Determination Date (a "CMT Rate Interest Determination Date"), such rate will equal the rate displayed on the Designated CMT Telerate Page under the caption "...Treasury Constant Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45 P.M.," under the column for the Designated CMT Maturity Index for (i) if the Designated CMT Telerate Page is 7051, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7051, the weekly or monthly average, as specified on the face hereof, for the week or the month, as applicable, ended immediately preceding the week or the month, as applicable, in which the related CMT Rate Interest Determination Date falls. If such rate is no longer displayed on the relevant page or is not displayed by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index as published in H.15(519). If such rate is no longer published or is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index (or other United States Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with respect to such Interest Reset Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines to be comparable to the rate formerly displayed on the Designated CMT Telerate Page and published in H.15(519). If such information is not provided by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on the CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity, based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date reported, according to their written records, by three leading primary United States government securities dealers in The City of New York (which may include the Agents or their affiliates) (each, a "Reference Dealer") selected by the Calculation Agent (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct noncallable fixed rate obligations of the United States ("Treasury Notes") with an original maturity of approximately the Designated CMT Maturity Index and a remaining term to maturity of not less than such Designated CMT Maturity Index minus one year. If the Calculation Agent is unable to obtain three such Treasury Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers in The City of New York (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with an original maturity of the number of years that is the next highest to the Designated CMT Maturity Index and a remaining term to maturity closest to the Designated CMT Maturity Index and in an amount of at least $100 million. If three or four (and not five) of such Reference Dealers are quoting as described above, then the CMT Rate will be based on the arithmetic mean of the offered rates obtained and neither the highest nor the lowest of such quotes will be eliminated; provided, however, that if fewer than three Reference Dealers so selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate determined as of such CMT Rate Interest Determination Date will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two Treasury Notes with an original maturity as described in the second preceding sentence have remaining terms to maturity equally close to the Designated CMT Maturity Index, the Calculation Agent will obtain quotations for the Treasury Note with the shorter remaining term to maturity. "Designated CMT Telerate Page" means the display on the Bridge Telerate, Inc. (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying Treasury Constant Maturities as reported in H.15(519). If no such page is specified on the face hereof, the Designated CMT Telerate Page will be 7052 for the most recent week. "Designated CMT Maturity Index" means the original period to maturity of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified on the face hereof with respect to which the CMT Rate will be calculated or, if no such maturity is specified on the face hereof, 2 years. Determination of Commercial Paper Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Commercial Paper Rate, with respect to any Interest Determination Date (a "Commercial Paper Rate Interest Determination Date"), such rate will equal the Money Market Yield (as hereinafter defined) on such date of the rate for commercial paper having the Index Maturity specified on the face hereof as published in H.15(519) under the heading "Commercial Paper-Nonfinancial". In the event that such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be the Money Market Yield of the rate for commercial paper having the Index Maturity specified on the face hereof as published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "Commercial Paper-Nonfinancial." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and will be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity specified on the face hereof placed for an industrial issuer whose bond rating is "Aa", or the equivalent, from a nationally recognized statistical rating organization; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate Interest Determination Date. "Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula: D x 360 X 100 Money Market Yield = ------------- 360 - (D x M) where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period. Determination of Eleventh District Cost of Funds Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Eleventh District Cost of Funds Rate, with respect to any Interest Determination Date (an "Eleventh District Cost of Funds Rate Interest Determination Date"), such rate will equal the rate equal to the monthly weighted average cost of funds for the calendar month immediately preceding the month in which such Eleventh District Cost of Funds Rate Interest Determination Date falls, as set forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on Telerate Page 7058 on such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds Rate Interest Determination Date will be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date. If the FHLB of San Francisco fails to announce the Index on or prior to such Eleventh District Cost of Funds Rate Interest Determination Date for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate determined as of such Eleventh District Cost of Funds Rate Interest Determination Date will be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. Determination of Federal Funds Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Federal Funds Rate, with respect to any Interest Determination Date (a "Federal Funds Rate Interest Determination Date"), such rate will equal the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)", as displayed on Bridge Telerate, Inc., or any successor service on page 120 or on any other page as may replace the applicable page on that service ("Telerate Page 120") or, if the rate does not appear on Telerate Page 120 or is not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Federal Funds Rate Interest Determination Date for United States dollar federal funds published in H. 15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate under the caption "Federal Funds/Effective Rate." If such rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of federal funds transactions in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date. Determination of LIBOR. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is LIBOR: (i) With respect to any Interest Determination Date (a "LIBOR Interest Determination Date"), LIBOR will be either: (a) if "LIBOR Reuters" is specified on the face hereof, the arithmetic mean of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate will be used) for deposits in the Designated LIBOR Currency having the Index Maturity specified on the face hereof, commencing on the second London Business Day immediately following the applicable Interest Reset Date, that appear (or, if only a single rate is required as aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date, or (b) if "LIBOR Telerate" is specified on the face hereof or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the rate for deposits in the Designated LIBOR Currency having the Index Maturity on the face hereof, commencing on such Interest Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If fewer than two such offered rates so appear, or if no such rate so appears, as applicable, LIBOR on such LIBOR Interest Determination Date will be determined in accordance with the provisions described in clause (ii) below. (ii) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates appear, or no rate appears, as the case may be, on the Designated LIBOR Page as specified in clause (i) above, the Calculation Agent will request the principal London offices of each of four major reference banks (which may include affiliates of the Agents) in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in the Designated LIBOR Currency for the period of the Index Maturity specified on the face hereof, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time. If at least two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., in the applicable Principal Financial Center, on such LIBOR Interest Determination Date by three major banks (which may include affiliates of the Agents) in such Principal Financial Center selected by the Calculation Agent for loans in the Designated LIBOR Currency to leading European banks, having the Index Maturity specified on the face hereof and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date will be LIBOR in effect on such LIBOR Interest Determination Date. "Designated LIBOR Currency" means the currency or composite currency specified on the face hereof as to which LIBOR will be calculated or, if no such currency or composite currency is specified on the face hereof, United States dollars. "Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified on the face hereof, the display on the Reuter Monitor Money Rates Service (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified on the face hereof or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the display on the Bridge Telerate, Inc. (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency. "Principal Financial Center" means (i) the capital city of the country issuing the Specified Currency (unless the Specified Currency is European Currency Units ("ECU"), in which case it is also the display designated "ISDE" on the Reuter Monitor Money Rate Service or the ECU Banking Association) or (ii) the capital city of the country to which the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU, Luxembourg), except, in each case, that with respect to United States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian lire and Swiss francs, the "Principal Financial Center" shall be The City of New York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause (i) above) and Zurich, respectively. Determination of Prime Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Prime Rate, with respect to any Interest Determination Date (a "Prime Rate Interest Determination Date"), such rate will equal the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan." If such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on the applicable Interest Determination Date published in H. 15 Daily Update, or such other recognized electronic source used for the purpose of displaying the applicable rate under the caption "Bank Prime Loan." If the foregoing rate is not published prior to 3:00 P.M., New York City time, on the related Calculation Date, then the Prime Rate will be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime Rate will be the arithmetic mean of the prime rates or base lending rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date by three major banks (which may include affiliates of the Agents) in The City of New York selected by the Calculation Agent. If fewer than four such quotations are so provided, then the Prime Rate will be the arithmetic mean of four prime rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date as furnished in The City of New York by the major money center banks, if any, that have provided such quotations and by a reasonable number of substitute banks or trust companies (which may include affiliates of the Agents) to obtain four such prime rate quotations, provided such substitute banks or trust companies are organized and doing business under the laws of the United States, or any State thereof, each having total equity capital of at least $500 million and being subject to supervision or examination by Federal or State authority, selected by the Calculation Agent to provide such rate or rates; provided, however, that if the banks or trust companies so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date will be the Prime Rate in effect on such Prime Rate Interest Determination Date. "Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor Money Rates Service (or any successor service) on the "USPRIME1" page (or such other page as may replace the USPRIME1 page on such service) for the purpose of displaying prime rates or base lending rates of major United States banks. 1 Determination of Treasury Rate. Unless otherwise specified, if the Interest Rate Basis specified on the face hereof is Treasury Rate, with respect to any Interest Determination Date (a "Treasury Rate Interest Determination Date"), such rate will equal (1) the rate from the auction held on the applicable Interest Determination Date (the "Auction") of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified in the applicable pricing supplement under the caption 'INVESTMENT RATE" on the display on Bridge Telerate, Inc. or any successor service on page 56 or any other page as may replace page 56 on that service ("Telerate Page 56") or page 57 or any other page as may replace page 57 on that service ("Telerate Page 57"); or, (2) if the rate described in clause (1) is not so published by 3:00 P.M., New York City time, on the related calculation date, the Bond Equivalent Yield of the rate for the applicable Treasury Bills as published in H.15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "U.S. Government Securities/Treasury Bills/Auction High"; or (3) if such rate the rate described in clause (2) is not so published by 3:00 P.M., New York City time, on the related calculation date, the Bond Equivalent Yield of the auction rate of the applicable Treasury Bills announced by the United States Department of the Treasury; or (4) in the event that the rate referred to in clause (3) is not announced by the United States Department of the Treasury, or if the Auction is not held, the Bond Equivalent Yield of the rate on the applicable Interest Determination Date of Treasury Bills having the Index Maturity specified in the applicable Pricing Supplement published in H.15(519) under the caption "U.S. Government Securities/Treasury Bills/Secondary Market"; or (5) if the rate referred to in clause (4) is not so published by 3:00 P.M., New York City time, on the related calculation date, the rate on the applicable Interest Determination Date of the applicable Treasury Bills as published in H.15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, under the caption "U.S. Government Securities/Treasury Bills/Secondary Market"; or (6) if the rate referred to in clause (5) is not so published by 3:00 P.M., New York City time, on the related calculation date, the rate on the applicable Interest Determination Date calculated by the calculation agent as the Bond Equivalent Yield of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on the applicable Interest Determination Date, of three primary United States Government securities dealers, which may include an agent or its affiliates, selected by the calculation agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity specified in the applicable pricing supplement; or (7) if the dealers selected by the calculation agent are not quoting as mentioned in clause (6), the rate in effect on the applicable Interest Determination Date. SECTION 3. Redemption. This Note will be redeemable at the option of the Company prior to the Stated Maturity Date only if an Initial Redemption Date is specified on the face hereof. If so specified, this Note will be subject to redemption at the option of the Company on any date on and after the Initial Redemption Date in whole or from time to time in part in increments of $1,000 or the minimum denomination, if any, specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such minimum denomination), at the Redemption Price specified on the face hereof, together with unpaid interest accrued hereon to the date of redemption, on written notice given to the Holder hereof not more than 60 nor less than 30 calendar days prior to the date of redemption and in accordance with the provisions of the Subordinated Indenture. In the event of redemption of this Note in part only, this Note will be cancelled and a new Note or Notes representing the unredeemed portion hereof will be issued in the name of the Holder hereof. SECTION 4. Repayment. This Note will be repayable by the Company at the option of the Holder hereof prior to the Stated Maturity Date only if one or more Optional Repayment Dates are specified on the face hereof. If so specified, this Note will be subject to repayment at the option of the Holder hereof on any Optional Repayment Date in whole or from time to time in part in increments of $1,000 or such other minimum denomination specified on the face hereof (provided that any remaining principal amount hereof will be at least $1,000 or such other minimum denomination), at a repayment price equal to 100% of the unpaid principal amount, or such other repayment price specified on the face hereof, to be repaid, together with unpaid interest accrued heron to but excluding the date of repayment. For this Note to be repaid, it must be received, together with the form thereon entitled "Option to Elect Repayment" duly completed, by the Subordinated Trustee at its office maintained for such purpose in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the date of repayment. Exercise of such repayment option by the Holder will be irrevocable. Only the Depositary may exercise the repayment option if this Note is a Book-Entry Note as specified on the face hereof. Accordingly, if the beneficial owner hereof, if this is a Book-Entry Note, desires to have all or any portion of the Book-Entry Note repaid they must instruct the participant through which they own their interest to direct the Depositary to exercise the repayment option on their behalf by delivering this Note and duly completed election form to the Subordinated Trustee as aforesaid. In order to ensure that this Note and election form are received by such Subordinated Trustee on a particular day, the beneficial owner hereof must so instruct the participant through which they own their interest before such participant's deadline for accepting instructions for that day. Different firms may have different deadlines for accepting instructions from their customers. Accordingly, the beneficial owner hereof should consult the participants through which they own their interest for the respective deadlines for such participants. All instructions given to participants from beneficial owners of Book-Entry Notes relating to the option to elect repayment will be irrevocable. In addition, at the time such instructions are given, the beneficial owner of this Note shall cause the participant through which it owns its interest to transfer such beneficial owner's interest in the Book-Entry Note, on the Depositary's records, to the Subordinated Trustee. SECTION 5. Sinking Fund. This Note is not subject to a sinking fund unless otherwise specified on the face hereof. SECTION 6. Discount Notes. If the Issue Price of this Note (as specified on the face hereof) is less than 100% of the principal amount hereof (i.e. par) by more than a percentage equal to the product of 0.25% and the number of full years to the Stated Maturity Date (a "Discount Note"), the difference between the Issue Price of this Note and par is referred to herein as the "Discount." In the event of redemption, repayment or acceleration of maturity of this Note, the amount payable to the Holder hereof will be equal to the sum of (i) the Issue Price (increased by any accruals of Discount) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (ii) any unpaid interest accrued hereon to the date of such redemption, repayment or acceleration of maturity, as the case may be (the "Amortized Face Amount"). Unless otherwise specified on the face hereof, for purposes of determining the amount of Discount that has accrued as of any date on which a redemption, repayment or acceleration of maturity occurs for this Note, such Discount will be accrued using a constant yield method. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as hereinafter defined), corresponds to the shortest period between Interest Payment Dates for this Note (with ratable accruals within a compounding period), a coupon rate equal to the initial coupon rate applicable to this Note and an assumption that the maturity of this Note will not be accelerated. If the period from the date of issue to the initial Interest Payment Date for this Note (the "Initial Period") is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period with the short period being treated as provided in the preceding sentence. SECTION 7. Linked Notes. If this Note is a Linked Note as specified on the face hereof, the amount of principal, premium and/or interest payable in respect hereof will be determined with reference to the price or prices of specified commodities or stocks, to the exchange rate of one or more designated currencies (including a composite currency such as the ECU) relative to an indexed currency or to other items, in each case as specified on the face hereof. Holders of Linked Notes may receive a principal payment on the Maturity Date that is greater than or less than the principal amount of such Linked Notes depending upon the relative value on the Maturity Date of the specified indexed item. Information as to the method for determining the amount of principal, premium, if any, and/or interest, if any, payable in respect of Linked Notes will be set forth on the Annex attached hereto, which will for all purposes have the same effect as if set forth at this place. SECTION 8. Covenants. Unless otherwise specified on the face hereof, this Note contains the following covenants: (1) Limitation on Issuance or Disposition of Stock of Significant Subsidiaries. The Company will not, nor will it permit any Significant Subsidiary to, issue, sell or otherwise dispose of any shares of Capital Stock (other than non-voting Preferred Stock) of any Significant Subsidiary, except for (i) directors' qualifying shares; (ii) sales or other dispositions to the Company or to one or more wholly-owned Significant Subsidiaries; (iii) the sale or other disposition of all or any part of the Capital Stock of any Significant Subsidiary for consideration which is at least equal to the fair value of such Capital Stock as determined by the Company's board of directors (acting in good faith); or (iv) any issuance, sale, assignment, transfer or other disposition made in compliance with an order of a court or regulatory authority of competent jurisdiction, other than an order issued at the request of the Company or any Significant Subsidiary. (2) Limitation on Liens. Except as provided below, neither the Company nor any Significant Subsidiary may incur, issue, assume or guarantee any Indebtedness secured by a Lien on any property or assets of the Company or any Significant Subsidiary, or any shares of Capital Stock of any Significant Subsidiary, without effectively providing that the Notes (together with, if the Company shall so determine, any other Indebtedness which is not subordinated to the Notes) shall be secured equally and ratably with (or prior to) such Indebtedness, so long as such Indebtedness shall be so secured; provided, however, that this covenant shall not apply to Indebtedness secured by (i) Liens existing on the date of the applicable Pricing Supplement; (ii) Liens on property of, or on any shares of stock of, any corporation existing at the time such corporation becomes a Significant Subsidiary or merges into or consolidates with the Company or a Significant Subsidiary; (iii) Liens on property or on shares of stock existing at the time of acquisition thereof by the Company or any Significant Subsidiary; (iv) Liens to secure the financing of the acquisition, construction or improvement of property, or the acquisition of shares of stock by the Company or any Significant Subsidiary, provided that such Liens are created not later than one year after such acquisition or, in the case of property, no later than one year after completion of construction or commencement of commercial operation, whichever is later, are limited to the property acquired, constructed or improved or the shares of stock acquired and do not secure indebtedness in excess of the cost of such acquisition, construction or improvement; (v) Liens in favor of the Company or any Subsidiary; (vi) Liens in favor of, or required by, governmental authorities; and (vii) any extension, renewal or replacement as a whole or in part, of any Lien referred to in the foregoing clauses (i) to (vi) inclusive; provided, however, that (a) such extension, renewal or replacement Lien shall be limited to all or a part of the same property or shares of stock that secured the Lien extended, renewed or replaced and (b) the Indebtedness secured by such Lien at such time is not so increased. The restrictions in the immediately preceding paragraph do not apply if, immediately after the incurrence, issuance, assumption or guarantee of any Indebtedness secured by a Lien, the aggregate principal amount of such secured Indebtedness (other than the Indebtedness secured by Liens described in clauses (i) to (vii), inclusive, of the immediately preceding paragraph) would not exceed 10% of Consolidated Capitalization. Definitions "Capital Lease Obligations" of a Person means any obligation that is required to be classified and accounted for as a capital lease on the face of a balance sheet of such Person prepared in accordance with generally accepted accounting principles; the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital Stock" means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any Preferred Stock. "Consolidated Capitalization" means the sum of the Company's consolidated shareholders' equity, redeemable preferred stock and preferred securities in any trust, partnership, corporation or other entity of which more than 50% of the voting equity is owned directly or indirectly by the Company, including, without limitation, the trust securities issued by Conseco Financing Trust I, Conseco Financing Trust II, Conseco Financing Trust III, Conseco Financing Trust IV, Conseco Financing Trust V, Conseco Financing Trust VI, Conseco Financing Trust VII and Conseco Financing Trust XI. "Indebtedness" means (i) any liability of any Person (1) for borrowed money, or under any reimbursement obligation relating to a letter of credit (other than letters of credit obtained in the ordinary course of business), or (2) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any businesses, properties or assets of any kind or with services incurred in connection with capital expenditures (other than accounts payable or other indebtedness to trade creditors arising in the ordinary course of business), or (3) for the payment of money relating to a Capital Lease Obligation; (ii) any liability of others described in the preceding clause (1) that the Person has guaranteed or that is otherwise its legal liability; and (iii) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement and any lease in the nature thereof). "Person" means any individual, corporation, partnership, joint venture, association, joint-stock or limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Significant Subsidiary" means any Subsidiary with net earnings which constituted at least 20% of the Company's consolidated total net earnings, as determined as of the date of the Company's most recently prepared quarterly financial statements for the 12-month period then ended. "Stated Maturity," when used with respect to any security or any installment of interest on any security, means the date specified in such security as the fixed date on which the principal of such security or such installment of interest, respectively, is finally due and payable, except as otherwise provided in the case of Capital Lease Obligations. "Subsidiary" means a corporation of which a majority of the Capital Stock having voting power under ordinary circumstances to elect a majority of the board of directors is owned directly or indirectly by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. SECTION 9. Amortizing Notes. If this Note is an Amortizing Note as specified on the face hereof, unless otherwise specified on the face hereof, interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months. Payments with respect to this Note if it is an Amortizing Note will be applied first to interest due and payable hereon and then to the reduction of the unpaid principal amount hereof. Further information concerning additional terms and provisions of Amortizing Notes will be set forth on the Annex attached hereto, which Annex will for all purposes have the same effect as if set forth at this place. SECTION 10. Events of Default. If any Event of Default with respect to Notes of this series will occur and be continuing, the principal of the Notes of this series may be declared due and payable in the manner and with the effect provided in the Subordinated Indenture; provided, however, that notwithstanding anything herein to the contrary, if this Note is a Discount Note, the amount so declared to be due and payable will be the Amortized Face Amount of this Note as of the date of such declaration as specified under Section 6. SECTION 11. Modification or Waiver; Obligation of the Company Absolute. The Subordinated Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Subordinated Indenture at any time by the Company and the Subordinated Trustee with the consent of the Holders of not less than a majority in principal amount of the outstanding Securities of each series to be affected. The Subordinated Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the outstanding Securities of each series, on behalf of the Holders of all Securities of such series, to waive, with respect to the Securities of such series, compliance by the Company with certain provisions of the Subordinated Indenture and certain past defaults under the Subordinated Indenture and their consequences. Any such consent or waiver by the Holder of this Note will be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Subordinated Indenture and no provision of this Note or of the Subordinated Indenture will alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and premium, if any, and interest on this Note at the times, places and rates, herein prescribed. SECTION 12. Discharge, Legal Defeasance and Covenant Defeasance. The Subordinated Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Note and (b) certain restrictive covenants and the related Events of Default upon compliance by the Company with certain conditions specified therein, which provisions apply to this Note. SECTION 13. Authorized Denominations. Unless otherwise specified on the face hereof, the Notes of this series are issuable only in global or certificated registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As provided in the Subordinated Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, Notes of this series are exchangeable for Notes of this series of like aggregate principal amount and like Stated Maturity and with like terms and conditions of a different authorized denomination, as requested by the Holder surrendering the same. SECTION 14. Registration of Transfer. As provided in the Subordinated Indenture and subject to certain limitations therein specified and to the limitations described below, if applicable, the transfer of this Note is registerable in the Security Register upon surrender of this Note for registration of transfer at the office or agency of the Company maintained for that purpose duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar (which will initially be the Subordinated Trustee at its principal corporate trust office located in the Borough of Manhattan, The City of New York) duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of this series with like terms and conditions, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. If this Note is a Book-Entry Note as specified on the face hereof, this Note is exchangeable for certificated Notes only upon the terms and conditions provided in the Subordinated Indenture. Except as provided in the Subordinated Indenture, owners of beneficial interests in this Book-Entry Note will not be entitled to receive physical delivery of Notes in certificated registered form and will not be considered the Holders thereof for any purpose under the Subordinated Indenture. No service charge will be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. SECTION 15. Owners. Prior to due presentment of this Note for registration of transfer, the Company, the Subordinated Trustee and any agent of the Company or the Subordinated Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue and notwithstanding any notation of ownership or other writing hereon, and none of the Company, the Subordinated Trustee or any such agent will be affected by notice to the contrary. SECTION 16. Governing Law. The Subordinated Indenture and the Notes will be governed by and construed in accordance with the laws of the State of New York. SECTION 17. Defined Terms. All terms used in this Note which are defined in the Subordinated Indenture will have the meanings assigned to them in the Subordinated Indenture unless otherwise defined herein; and all references in the Subordinated Indenture to "Security" or "Securities" will be deemed to include the Notes. OPTION TO ELECT REPAYMENT [To be completed only if this Note is repayable at the option of the Holder and the Holder elects to exercise such rights] The undersigned owner of this Note hereby irrevocably elects to have the Company repay the principal amount of this Note or portion hereof below designated at the applicable Optional Repayment Price indicated on the face hereof, plus accrued and unpaid interest to but excluding the date of repayment, if this Note is to be repaid pursuant to Section 4 of this Note. If a portion of this Note is not being repaid, specify the principal amount to be repaid and the denomination or denominations (which will be $1,000 or an integral multiple thereof) of the Note or Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any specification, one such Note will be issued for the portion not being repaid): Dated:_____________________________ _______________________________________________________ Signature Sign exactly as name appears on the front of this Note. Indicate address where check is to be sent, if repaid: Principal amount to be repaid if amount to be repaid is less _______________________________________________________ than the entire principal amount of this Note (principal amount remaining must be an authorized denomination) _______________________________________________________ $______________________________________________ (which will be an integral multiple of $1,000) Denomination or denominations of the Note or Notes to be SOCIAL SECURITY OR OTHER TAXPAYER ID NUMBER issued for the portion of this Note not being repaid _______________________________________________________ _______________________________________________ _______________________________________________
ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this instrument, will be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT Custodian ____________________________________________ (Cust) (Minor) Under Uniform Gifts to Minors Act ____________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE ________________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing _______________________ attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Dated: _________________ _______________________________________________ Signature Sign exactly as name appears on the front of this Note [SIGNATURE MUST BE GUARANTEED by a member of a recognized Medallion Guarantee Program] NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN INSTRUMENT IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-10.1.15 5 EX-10.1.15 Description of Incentive Compensation and Severance Arrangement with Edward M. Berube In connection with recruiting Mr. Berube to join the Company, the Company agreed to compensate him for the loss of certain incentive compensation which would have been otherwise available from his prior employer. Pursuant to this arrangement Conseco has agreed that Mr. Berube will have accumulated incentive compensation in 2004 with a value of at least $1,234,000. In addition, Conseco agreed that it would provide Mr. Berube a severance benefit of the greater of one year's salary and bonus or $1 million in the event of a change of control or major change in strategy resulting in the elimination of his role or material reduction in his responsibilities (but not a termination of employment due to cause or lack of performance). EX-10.8.11 6 EX-10.8.11 AMENDED AND RESTATED DIRECTOR, OFFICER AND KEY EMPLOYEE STOCK PURCHASE PLAN OF CONSECO, INC. 1. PURPOSE. The Amended and Restated Director, Officer and Key Employee Stock Purchase Plan (the "Plan"), of Conseco, Inc. ("Conseco"), is adopted to facilitate the purchase, by the Directors, executives and senior managers of Conseco and its subsidiaries (collectively, the "Company"), of Conseco's common stock ("Common Stock") and Conseco's Preferred Redeemable Increased Dividend Equity Securities, 7% PRIDES, Convertible Preferred Stock ("PRIDES"). The purchases facilitated by the Plan are intended to achieve the following specific purposes: a) more closely align key employees' financial rewards with the financial rewards realized by all other shareholders of the Company; b) increase key employees' motivation to manage the Company as owners; and c) increase the ownership of Common Stock and PRIDES among senior management of the Company. 2. ELIGIBILITY. To be eligible to participate in the Plan, the individual must be: (a) a non-employee Director of the Company or an executive officer of the Company; or (b) an officer of or a key employee of the Company selected by the Directors or by the Chief Executive Officer of Conseco ("Eligible Participant"). Notwithstanding section 13 hereof, an individual shall be deemed to continue to be an employee of the Company if such individual's employment by the Company terminates as a direct and immediate result of the disposition by the Company of a Disposed Unit (as hereinafter defined) and immediately prior to such disposition, the individual was primarily engaged in activities for the Disposed Unit (a "Disposed Unit Employee"); provided, however, the Board of Directors of Conseco or the Executive Committee of the Board of Directors of Conseco may determine in its sole and absolute discretion to exclude any such individual from the "Disposed Unit Employee" definition. An individual shall no longer be deemed to be a Disposed Unit Employee pursuant to the preceding sentence upon Conseco giving written notice to such individual that he or she is no longer deemed to be an employee of the Company as of a date which is five days after the date of such notice and the provisions of section 13 are thereafter applicable (the "Termination Notice"). Conseco is permitted, but not required, to give the Termination Notice only if (a) the closing price of Common Stock on the New York Stock Exchange for each of the 10 business days preceding the date of the Termination Notice is equal to or greater than the Make Whole Value (as hereinafter defined) or (b) such individual violates any applicable retention agreement or similar agreement entered into in connection with the disposition of the Disposed Unit. Prior to Conseco giving a Termination Notice to a Participant, the other provisions of this Plan (including, but not limited to, section 8, but excluding section 13) shall be applicable. "Disposed Unit" means any legal entity, division or unit of the Company sold or otherwise disposed of as determined in the sole and absolute discretion of the Board of Directors of Conseco or the Executive Committee of the Board of Directors of Conseco. "Make Whole Value" means the price of a share of Common Stock equal to the sum of the Participant's Loan amount and the Interest Payment Loan amount divided by the total number of shares of Common Stock purchased by the Participant under the Plan. 3. PARTICIPATION. To become a Plan participant ("Participant"), an Eligible Participant must satisfy the following requirements: a) submit a completed, signed and irrevocable election to purchase (i) in the case of Directors and executive officers of the Company, a portion of the Common Stock or PRIDES which the Eligible Participant is eligible to purchase under the Plan or (ii) in the case of any other Eligible Participants a specified amount (or one of multiple specified amounts) which such Eligible Participant is entitled to purchase under the Plan and as set forth in the election form or accompanying materials furnished to such Eligible Participant by the Company in each case along with a power of attorney authorizing such purchases on the Participant's behalf; b) complete and sign all necessary agreements and other documents relating to the loan described in Section 4 hereof including, but not limited to, personal financial statements, letters of instruction to brokers, transfer agents and banks as are necessary or appropriate under the loan described in Section 2 4 hereof, and a power of attorney authorizing borrowings under such loan; and c) satisfy all other conditions of participation specified in the Plan. The agreements and other documents specified in subsections 3 (a), (b) and (c) must be submitted at such times and to such Company offices as specified by the Company. No Eligible Participant is required to participate in the Plan. Directors and executive officers may purchase up to 2,600,000 shares of Common Stock under the Plan. Officers and key employees electing to become Participants must purchase at least 5,000 shares of Common Stock. Up to 12,500,000 shares of Common Stock may be purchased by all Participants. Directors and executive officers shall have the right to purchase shares not purchased by other Participants in such amount as is determined by the pro rata amount of their participation in the Plan compared to the participation of the other Participants electing to purchase additional shares. All such purchases may be made by the individual Participant or by a trust, corporation, partnership or limited liability company controlled by the Participant ("Participant Designee"; the term Participant shall include Participant Designee unless the context otherwise requires). 4. PURCHASE OF SHARES. Conseco, in its sole discretion subject to the terms and provisions of the Plan, will determine the timing, amount, price and mechanics of all of the purchases of shares of Common Stock (the "Purchased Shares") through open market and negotiated transactions. Purchases of Purchased Shares shall be effected through a broker in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The shares of Common Stock purchased pursuant to the Plan will be allocated proportionately among Participants at the end of each trading day based upon the percentage of all of the shares of Common Stock Participants have elected to purchase and the average price for all purchases of shares of Common Stock on that day. Notwithstanding the foregoing, directors and executive officers may, with the consent of the Chief Executive Officer of Conseco, have certain specified purchases made by them allocated exclusively to such Participant's account, rather than the standard pro-rata allocation to all Participants and such purchases may be made through this Plan without waiting for the overall purchases in such Plan to be made. Conseco has arranged the opportunity for each Participant to obtain a loan through Bank of America National Trust and Savings Association and other participating financial institutions (collectively, the "Bank") to fund the purchase of the Purchased Shares (the "Loan"). Each Participant must sign a power of attorney authorizing loans under the Credit Agreement with the Bank and the purchase of the Purchased Shares. Each Participant is responsible for satisfying all of 3 the lending requirements specified by the Bank to qualify for the Loan including all collateral requirements. Each Participant is fully obligated to repay to the Bank all principal, interest, and any prepayment fees on the Loan when due and payable. In the event a Participant does not wish to obtain the Loan, the Participant shall provide sufficient funds to fund the purchase of the Purchased Shares. Such Participant must execute a power of attorney authorizing the purchase of the Purchased Shares. If the Participant fails to fund the purchase of the Purchased Shares, the Participant may no longer participate in the Plan, and all of the Purchased Shares not paid for will be allocated to the other Participants. 5. REGISTRATION OF SHARES. The Purchased Shares will be registered in the name of the Participant or his or her designee and certificated. Each certificate will bear a legend referring to the Plan. The certificates for the Purchased Shares of each Participant who participates in the Loan will be held by the Bank as collateral for the Loan. Each such Participant must deliver to the Bank a stock power endorsed in blank with respect to the Purchased Shares. A Participant may be able to obtain a release of the Purchased Shares from the Bank provided that other collateral of equal value is substituted as collateral for the Loan. 6. SHAREHOLDER RIGHTS. Each Participant will have all of the rights of a shareholder with respect to the Purchased Shares, including the right to vote the shares and the right to receive dividends. Any dividends in excess of required interest payments will be deposited to the Participant's account at the Bank. 7. SALE OF PURCHASED SHARES. Each Participant is permitted to sell all or any portion of the Purchased Shares; provided, that any such sale does not violate any provision of a Loan. 8. DEATH OR DISABILITY. Upon the death of a Participant, her or his estate or the Participant Designee, as the case may be, may elect to cause Conseco to pay the estate or the Participant Designee, as the case may be, an amount equal to the balance of the Participant's Loan minus the value of such shares based upon the closing price of Common Stock on the New York Stock Exchange on the first trading date after the date of death. The estate or the Participant Designee, as the case may be, of a deceased Participant must make such election, in writing, within 30 days after written notice from Conseco. Upon the total and permanent disability of a Participant who is an employee of the Company, such disabled Participant may elect to cause Conseco to pay the Participant an amount equal to the balance of the Participant's Loan minus the value of such shares based upon the closing price of Common Stock on the New York Stock Exchange on the first trading date after 4 the final date of employment. The Participant must make such election, in writing, within 30 days after written notice from Conseco. "Total and permanent disability" means the inability of a Participant to provide meaningful service for the Company due to a medically determinable physical or mental impairment. Such determination of total and permanent disability shall be made by the Company. Notwithstanding the above, if a Participant qualifies for Federal Social Security disability benefits or for payments under the Company's long-term disability income plan, based upon his physical or mental condition, he shall be deemed to suffer from a total and permanent disability hereunder. This Section 8 has no effect on a deceased or disabled Participant's sale of Purchased Shares before the Participant's death or disability. Payment by Conseco of amounts described in this Section 8 is conditioned on the payment in full of the Participant's Loan (if any), the release of the Company's guarantee with respect thereto, and the payment in full of the Interest Payment Loan. This Section 8 will terminate January 1, 2001. 9. LOAN GUARANTEE. Conseco will guarantee repayment to the Bank of 100% of all principal, interest, prepayment fees and other obligations of each Participant under such Participant's Loan described in Section 4. The Conseco loan guaranty is a condition to the loan arrangement Conseco has made with the Bank. The terms and conditions of the guarantee are as agreed by Conseco and the Bank. If a Participant specifies a Participant Designee, the Participant shall enter into an indemnification agreement to indemnify Conseco for any losses under the guaranty of the Loan with respect to the Participant Designee. Each Participant is fully obligated to repay to the Bank all principal, interest, and other amounts on the Loan when due and payable. Conseco may take any action relating to the Participant and her or his assets, which the Board of Directors deems reasonable and necessary, (including, but not limited to, offsetting amounts owed to Conseco against wages, fees or other amounts owed to the Participant from Conseco) to obtain full reimbursement for amounts Conseco pays to the Bank under its guaranty related to the Participant's or a Participant Designee's Loan ("Loan Default"). Notwithstanding the foregoing, Conseco will not be subrogated to any right of the Bank as a holder of a security interest in the Purchased Shares. 10. LOAN OF INTEREST PAYMENTS. At the discretion of the Directors, Conseco or one of its subsidiaries (the "Lender") may loan funds to the Participants equal to the amount of current interest payments owed by the Participants pursuant to the Credit Agreement (the "Interest Payment Loans"). All Interest Payment Loans shall be evidenced by promissory notes, the terms and conditions of which shall be determined at the sole discretion of the Lender. If a Participant specifies a 5 Participant Designee, the Participant shall enter into an indemnification agreement to indemnity the Lender for any losses under the Interest Payment Loan. 11. MARGIN REGULATIONS. (a) None of the obligations of the Participants to Conseco or one of its subsidiaries (collectively, Conseco and its subsidiaries shall be referred to as "Conseco" for the purposes of this Section 11) hereunder is or will be secured, directly or indirectly, by Margin Stock (as such term is defined in Regulation U and Regulation G promulgated by the Board of Governors of the Federal Reserve System); (b) Neither Conseco nor any third party acting on behalf of Conseco has taken or will take possession of a Participant's Margin Stock to secure, directly or indirectly, any of the obligations of such Participant to Conseco; (c) Conseco does not and will not have any right to prohibit such Participant from selling, pledging, encumbering or otherwise disposing of any Margin Stock owned by such Participant so long as the obligations of such Participant under this Plan remain outstanding; (d) Such Participant has not granted and will not grant Conseco or any third party acting on behalf of Conseco the right to accelerate repayment of any of the obligations under this Plan of such Participant if any of the Margin Stock owned by such Participant is sold by such Participant or otherwise; and (e) There is no agreement or other arrangement between such Participant and Conseco or any third party acting on behalf of Conseco (and no such agreement or arrangement shall be entered into so long as this Plan is in effect or any of the obligations of such Participant under this Plan remain outstanding) under which the Margin Stock of Participant would be made more readily available as security to Conseco than to other creditors of such Participant. 12. CHANGES OF CONTROL. A "Change of Control" of Conseco shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "1934 Act") as revised effective January 20, 1987, or if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the 1934 Act which serve similar purposes; provided, that, without limitations, (x) such a change of control shall be deemed to have occurred if and when either (A) except as provided in (y) below, any "person" (as such terms is used in 6 Sections 13(d) and 14(d) of the 1934 Act) is or becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Conseco representing 25% or more of the combined voting power of Conseco's then outstanding securities entitled to vote with respect to the election of its Board of Directors or (B) as the result of a tender offer, merger, consolidation, sale of assets, or contest for election of directors, or any combination of the foregoing transactions or events, individuals who were members of the Board of Directors of Conseco immediately prior to any such transaction or event shall not constitute a majority of the Board of Directors following such transaction or event, and (y) no such change of control shall be deemed to have occurred if and when either (A) any such change is the result of a transaction which constitutes a "Rule 13e-3 transaction" as such term is defined in Rule 13e-3 promulgated under the 1934 Act or (B) any such person becomes, with the approval of the Board of Directors of Conseco, the beneficial owner of securities of Conseco representing 25% or more but less than 50% of the combined voting power of Conseco's then outstanding securities entitled to vote with respect to the election of its Board of Directors and in connection therewith represents, and at all times continues to represent, in a filing, as amended, with the Securities and Exchange Commission on Schedule 13D or Schedule 13G (or any successor Schedule thereto) that "such person has acquired such securities for investment and not with the purpose nor with the effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect" or words of comparable meaning and import. The designation by any such person, with the approval of the Board of Directors of Conseco, of a single individual to serve as a member of, or observer at meetings of, Conseco's Board of Directors, shall not be considered "changing or influencing the control of the Company" within the meaning of the immediately preceding clause (B), so long as such individual does not constitute at any time more than one-third of the total number of directors serving on such Board. In the event of a Change of Control, each Participant will receive in exchange for the Purchased Shares the higher of (i) the purchase price paid for all of each Participant's Purchased Shares, respectively, plus all interest paid by each respective Participant under the Loan or (ii) the amount of the consideration to be paid for the Purchased Shares in connection with the Change of Control. Such amount shall be paid to the Participants upon consummation of the event resulting in a Change of Control; provided, however, the foregoing clause shall not apply to any Participant (i) who was a Director and/or executive officer of Conseco as of November 1, 1999 or (ii) who consents in writing at any time to have such provision not apply to such person. 7 13. OTHER TERMINATION. If a Participant ceases to be a Director, officer or employee of Conseco in circumstances other than as described in section 12, Conseco shall notify the Participant or Participant Designee that such Participant or Participant Designee shall have the option to either (i) within 30 days of the notice, retire the Loan and release Conseco's guaranty or (ii) continue the Loan and the Interest Payment Loan until their maturity date with Conseco's guaranty, but commence paying all future interest payments on such Loans as due. If the Participant desires Conseco's guaranty to continue, he or she agrees that, as compensation for continuing such guaranty beyond the termination of such Participant's employment or directorship, as the case may be, the former Participant shall pay to Conseco the following fees: (a) A continuing guaranty fee on the outstanding note balance at each calendar quarter end to be paid at the rate of .5% each quarter. (b) A settlement fee equal to half of the "Exit Profit". The Exit Profit shall be the excess, if any, of (i) the proceeds received from the sale of the Related Shares (as defined herein) or the market value of the Related Shares on the date the guaranty is released, whichever occurs first minus (ii) the sum of (x) the higher of (1) the market value of the Related Shares at the Participant's termination date and (2) the original purchase price of the Related Shares and (y) the interest accrued on the Loan since the termination date for the Related Shares. The "Related Shares" means the number of Purchased Shares acquired with the proceeds of the remaining principal amount of the loan at the date of termination of employment. 14. ADMINISTRATION. The Board of Directors of Conseco shall be charged with the administration and interpretation of the Plan but may delegate the ministerial duties hereunder to such persons as it determines. The Board of Directors of Conseco may adopt such rules as may be necessary or appropriate for the proper administration of the Plan. The decision of the Board of Directors of Conseco in all matters involving the interpretation and application of the Plan shall be final and shall be given the maximum possible deference allowed by law. 15. PAYMENT OF EXPENSES. The expenses of administering the Plan shall be paid by the Company except those expenses which are expenses of the Participants. 16. EMPLOYER-EMPLOYEE RELATIONSHIP. The establishment of this Plan shall not be construed as conferring any legal or other rights upon any employee or any person for a continuation of 8 employment, nor shall it interfere with the rights of the Company to discharge any employee or otherwise act with relation to the employee. The Company may take any action (including discharge) with respect to any employee or other person and may treat such person without regard to the effect which such action or treatment might have upon such person as a Participant of this Plan. 17. AMENDMENT AND TERMINATION. The Company reserves the right to change or discontinue this Plan by action of the Board of Directors in its discretion; provided, however, that in the case of any person to whom benefits under this Plan had accrued upon termination of employment prior to such Board of Directors action, or in the case of any Participant who would have been entitled to benefits under this Plan had the Participant's employment ceased prior to such change or discontinuance, the benefits such person had accrued under this Plan prior to such change or discontinuance shall not be adversely affected thereby. Notwithstanding anything herein to the contrary, nothing contained herein shall restrict the Company's right to terminate the Plan. This Plan completely supersedes and restates the Amended and Restated Director, Executive and Senior Officer Stock Purchase Plan of Conseco, Inc. dated August 21, 1997. 18. WITHHOLDING. The Company shall have the right to deduct in cash (whether under this Plan or otherwise) in connection with all payments by the Company to a Participant under this Plan any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. 19. GOVERNING LAW. This Plan shall be construed in accordance with the laws of the State of Indiana. 20. APPROVAL. If a Participant purchases Purchased Shares, such purchase shall constitute formal approval of this Plan by the Participant and such Participant's agreement to be bound by the terms and conditions of the Plan. Effective Date: July 30, 1998 Amended and Restated: November 2, 1999 9 EX-10.8.21 7 EX-10.8.21 AMENDED AND RESTATED 1999 DIRECTOR AND EXECUTIVE OFFICER STOCK PURCHASE PLAN OF CONSECO, INC. 1. PURPOSE. The Amended and Restated 1999 Director and Executive Officer Stock Purchase Plan (the "Plan") of Conseco, Inc. ("Conseco" or the "Company") is adopted to facilitate the purchase by the Directors and Executive Officers of Conseco of Conseco's common stock ("Common Stock"). The purchases facilitated by the Plan are intended to achieve the following specific purposes: a) more closely align key employees' financial rewards with the financial rewards realized by all other shareholders of the Company; b) increase key employees' motivation to manage the Company as owners; and c) increase the ownership of Common Stock among senior management of the Company. 2. ELIGIBILITY. To be eligible to participate in the Plan, the individual must be a non-employee Director of the Company or an executive officer of the Company("Eligible Participant"). 3. PARTICIPATION. To become a Plan participant ("Participant"), an Eligible Participant must satisfy the following requirements: a) submit a completed, signed and irrevocable election to purchase a portion of the Common Stock which the Eligible Participant is eligible to purchase under the Plan along with a power of attorney authorizing such purchases on the Participant's behalf; b) complete and sign all necessary agreements and other documents relating to the loan described in Section 4 hereof including, but not limited to, personal financial statements, letters of instruction to brokers, transfer agents and banks as are necessary or appropriate under the loan described in Section 4 hereof, and a power of attorney authorizing borrowings under such loan; and c) satisfy all other conditions of participation specified in the Plan. The agreements and other documents specified in subsections 3 (a), (b) and (c) must be submitted at such times and to such Company offices as specified by the Company. No Eligible Participant is required to participate in the Plan. Up to an aggregate of [number of shares that can be purchased for not more than $150 million] shares of Common Stock may be purchased by all Participants, with the individual allocations to be approved by the Chief Executive Officer of Conseco. All such purchases may be made by the individual Participant or by a trust, corporation, partnership or limited liability company controlled by the Participant ("Participant Designee"; the term Participant shall include Participant Designee unless the context otherwise requires). 4. PURCHASE OF SHARES. Conseco, in its sole discretion subject to the terms and provisions of the Plan, will determine the timing, amount, price and mechanics of all of the purchases of shares of Common Stock (the "Purchased Shares") through open market and negotiated transactions. Purchases of Purchased Shares shall be effected through a broker in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The shares of Common Stock purchased pursuant to the Plan will be allocated proportionately among Participants at the end of each trading day based upon the percentage of all of the shares of Common Stock Participants have elected to purchase and the average price for all purchases of shares of Common Stock on that day. Conseco has arranged the opportunity for each Participant to obtain a loan through Chase Manhattan Bank and other participating financial institutions (collectively, the "Bank") to fund the purchase of the Purchased Shares (the "Loan"). Each Participant must sign a power of attorney authorizing loans under the Credit Agreement with the Bank and the purchase of the Purchased Shares. Each Participant is responsible for satisfying all of the lending requirements specified by the Bank to qualify for the Loan including all collateral requirements. Each Participant is fully obligated to repay to the Bank all principal, interest, and any prepayment fees on the Loan when due and payable. In the event a Participant does not wish to obtain the Loan, the Participant shall provide sufficient funds to fund the purchase of the Purchased Shares. Such Participant must execute a power of attorney authorizing the purchase of the Purchased Shares. If the Participant fails to fund the purchase of the Purchased Shares, the Participant may no longer participate in the Plan, and all of the Purchased Shares not paid for will be allocated to the other Participants. 2 5. REGISTRATION OF SHARES. The Purchased Shares will be registered in the name of the Participant or his or her designee and certificated. Each certificate may bear a legend referring to the Plan. The certificates for the Purchased Shares of each Participant who participates in the Loan will be held by the Bank as collateral for the Loan. Each such Participant must deliver to the Bank a stock power endorsed in blank with respect to the Purchased Shares. A Participant may be able to obtain a release of the Purchased Shares from the Bank provided that other collateral of equal value is substituted as collateral for the Loan. 6. SHAREHOLDER RIGHTS. Each Participant will have all of the rights of a shareholder with respect to the Purchased Shares, including the right to vote the shares and the right to receive dividends. Any dividends in excess of required interest payments will be deposited to the Participant's account at the Bank. 7. SALE OF PURCHASED SHARES. Each Participant is permitted to sell all or any portion of the Purchased Shares; provided, that any such sale does not violate any provision of a Loan. 8. DEATH OR DISABILITY. Upon the death of a Participant, her or his estate or the Participant Designee, as the case may be, may elect to cause Conseco to pay the estate or the Participant Designee, as the case may be, an amount equal to the balance of the Participant's Loan minus the value of such shares based upon the closing price of Common Stock on the New York Stock Exchange on the first trading date after the date of death. The estate or the Participant Designee, as the case may be, of a deceased Participant must make such election, in writing, within 30 days after written notice from Conseco. Upon the total and permanent disability of a Participant who is an employee of the Company, such disabled Participant may elect to cause Conseco to pay the Participant an amount equal to the balance of the Participant's Loan minus the value of such shares based upon the closing price of Common Stock on the New York Stock Exchange on the first trading date after the final date of employment. The Participant must make such election, in writing, within 30 days after written notice from Conseco. "Total and permanent disability" means the inability of a Participant to provide meaningful service for the Company due to a medically determinable physical or mental impairment. Such determination of total and permanent disability shall be made by the Company. Notwithstanding the above, if a Participant qualifies for Federal Social Security disability benefits or for payments under the Company's long-term disability income plan, based upon his physical or mental condition, he shall be deemed to suffer from a total and permanent disability hereunder. This Section 8 has no effect on a deceased or disabled Participant's sale of Purchased Shares before the Participant's death or disability. Payment 3 by Conseco of amounts described in this Section 8 is conditioned on the payment in full of the Participant's Loan (if any), the release of the Company's guarantee with respect thereto, and the payment in full of the Interest Payment Loan. This Section 8 will terminate January 1, 2001. 9. LOAN GUARANTEE. Conseco will guarantee repayment to the Bank of 100% of all principal, interest, prepayment fees and other obligations of each Participant under such Participant's Loan described in Section 4. The Conseco loan guaranty is a condition to the loan arrangement Conseco has made with the Bank. The terms and conditions of the guarantee are as agreed by Conseco and the Bank. If a Participant specifies a Participant Designee, the Participant shall enter into an indemnification agreement to indemnify Conseco for any losses under the guaranty of the Loan with respect to the Participant Designee. Each Participant is fully obligated to repay to the Bank all principal, interest, and other amounts on the Loan when due and payable. Conseco may take any action relating to the Participant and her or his assets, which the Board of Directors deems reasonable and necessary, (including, but not limited to, offsetting amounts owed to Conseco against wages, fees or other amounts owed to the Participant from Conseco) to obtain full reimbursement for amounts Conseco pays to the Bank under its guaranty related to the Participant's or a Participant Designee's Loan ("Loan Default"). Notwithstanding the foregoing, Conseco will not be subrogated to any right of the Bank as a holder of a security interest in the Purchased Shares. 10. LOAN OF INTEREST PAYMENTS AND FEES. At the discretion of the Directors, Conseco or one of its subsidiaries (the "Lender") may loan funds to the Participants equal to the amount of current interest payments and up-front fees owed by the Participants pursuant to the Credit Agreement (collectively, the "Interest Payment Loans"). All Interest Payment Loans shall be evidenced by promissory notes, the terms and conditions of which shall be determined at the sole discretion of the Lender. If a Participant specifies a Participant Designee, the Participant shall enter into an indemnification agreement to indemnity the Lender for any losses under the Interest Payment Loan. 11. MARGIN REGULATIONS. (a) None of the obligations of the Participants to Conseco or one of its subsidiaries (collectively, Conseco and its subsidiaries shall be referred to as "Conseco" for the purposes of this Section 11) hereunder is or will be secured, directly or indirectly, by Margin Stock (as such term is defined in Regulation U promulgated by the Board of Governors of the Federal Reserve System); 4 (b) Neither Conseco nor any third party acting on behalf of Conseco has taken or will take possession of a Participant's Margin Stock to secure, directly or indirectly, any of the obligations of such Participant to Conseco; (c) Conseco does not and will not have any right to prohibit such Participant from selling, pledging, encumbering or otherwise disposing of any Margin Stock owned by such Participant so long as the obligations of such Participant under this Plan remain outstanding; (d) Such Participant has not granted and will not grant Conseco or any third party acting on behalf of Conseco the right to accelerate repayment of any of the obligations under this Plan of such Participant if any of the Margin Stock owned by such Participant is sold by such Participant or otherwise; and (e) There is no agreement or other arrangement between such Participant and Conseco or any third party acting on behalf of Conseco (and no such agreement or arrangement shall be entered into so long as this Plan is in effect or any of the obligations of such Participant under this Plan remain outstanding) under which the Margin Stock of Participant would be made more readily available as security to Conseco than to other creditors of such Participant. 12. OTHER TERMINATION. If a Participant ceases to be a Director, officer or employee of Conseco, Conseco shall notify the Participant or Participant Designee that such Participant or Participant Designee shall have the option to either (i) within 30 days of the notice, retire the Loan and release Conseco's guaranty or (ii) continue the Loan and the Interest Payment Loan until their maturity date with Conseco's guaranty, but commence paying all future interest payments on such Loans as due. If the Participant desires Conseco's guaranty to continue, he or she agrees that, as compensation for continuing such guaranty beyond the termination of such Participant's employment or directorship, as the case may be, the former Participant shall pay to Conseco the following fees: 5 (a) A continuing guaranty fee on the outstanding note balance at each calendar quarter end to be paid at the rate of .5% each quarter. (b) A settlement fee equal to half of the "Exit Profit". The Exit Profit shall be the excess, if any, of (i) the proceeds received from the sale of the Related Shares (as defined herein) or the market value of the Related Shares on the date the guaranty is released, whichever occurs first minus (ii) the sum of (x) the higher of (1) the market value of the Related Shares at the Participant's termination date and (2) the original purchase price of the Related Shares and (y) the interest accrued on the Loan since the termination date for the Related Shares. The "Related Shares" means the number of Purchased Shares acquired with the proceeds of the remaining principal amount of the loan at the date of termination of employment. 13. ADMINISTRATION. The Board of Directors of Conseco shall be charged with the administration and interpretation of the Plan but may delegate the ministerial duties hereunder to such persons as it determines. The Board of Directors of Conseco may adopt such rules as may be necessary or appropriate for the proper administration of the Plan. The decision of the Board of Directors of Conseco in all matters involving the interpretation and application of the Plan shall be final and shall be given the maximum possible deference allowed by law. 14. PAYMENT OF EXPENSES. The expenses of administering the Plan shall be paid by the Company except those expenses which are expenses of the Participants. 15. EMPLOYER-EMPLOYEE RELATIONSHIP. The establishment of this Plan shall not be construed as conferring any legal or other rights upon any employee or any person for a continuation of employment, nor shall it interfere with the rights of the Company to discharge any employee or otherwise act with relation to the employee. The Company may take any action (including discharge) with respect to any employee or other person and may treat such person without regard to the effect which such action or treatment might have upon such person as a Participant of this Plan. 16. AMENDMENT AND TERMINATION. The Company reserves the right to change or discontinue this Plan by action of the Board of Directors in its discretion; provided, however, that in the case of any person to whom benefits under this Plan had accrued upon termination of employment prior to such Board of 6 Directors action, or in the case of any Participant who would have been entitled to benefits under this Plan had the Participant's employment ceased prior to such change or discontinuance, the benefits such person had accrued under this Plan prior to such change or discontinuance shall not be adversely affected thereby. Notwithstanding anything herein to the contrary, nothing contained herein shall restrict the Company's right to terminate the Plan. 17. WITHHOLDING. The Company shall have the right to deduct in cash (whether under this Plan or otherwise) in connection with all payments by the Company to a Participant under this Plan any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. 18. GOVERNING LAW. This Plan shall be construed in accordance with the laws of the State of Indiana. 19. APPROVAL. If a Participant purchases Purchased Shares, such purchase shall constitute formal approval of this Plan by the Participant and such Participant's agreement to be bound by the terms and conditions of the Plan. Effective Date: September 7, 1999 Amended and Restated: November 2, 1999 7 EX-10.8.22 8 EX-10.8.22 ================================================================================ GUARANTY Dated as of September 15, 1999 between CONSECO, INC., as Guarantor, and THE CHASE MANHATTAN BANK, as Administrative Agent ================================================================================ EXHIBITS EXHIBIT A-1 Form of Opinion of John J. Sabl, counsel to Guarantor EXHIBIT A-2 Form of Opinion of Baker & Daniels, outside counsel to Guarantor EXHIBIT B Form of Officer's Certificate EXHIBIT C Form of Conseco Corporate Structure GUARANTY THIS GUARANTY (this "Guaranty") is entered into as of September 15, 1999 by CONSECO, INC., an Indiana corporation ("Guarantor"), in favor of THE CHASE MANHATTAN BANK, as administrative agent (the "Administrative Agent") for the financial institutions (the "Banks" and together with Administrative Agent, collectively, the "Guarantied Parties") who are or from time to time may become party to the Credit Agreement (as hereinafter defined). Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to such terms pursuant to Article I hereof. WITNESSETH: WHEREAS, Guarantor has established a stock purchase program for certain of its officers and directors to increase Guarantor's ability to attract and retain able executive and senior officers and directors and, accordingly, promote the interest of Guarantor and its stockholders, while at the same time providing these individuals with additional incentive to work toward Guarantor's future success; WHEREAS, Guarantor has determined it to be in the best interest of Guarantor and its stockholders to expand the stock purchase program to permit the purchase of shares of common stock of Guarantor; WHEREAS, concurrently with Guarantor's execution and delivery of this Guaranty, certain other individuals (herein, collectively called, the "Borrowers" and each individually, a "Borrower") will enter into that certain Credit Agreement, dated as of September 15, 1999 (as from time to time, in whole or in part, the same may be amended, modified, supplemented, restated, refinanced, refunded or renewed, the "Credit Agreement"), among the Borrowers, the Banks and the Administrative Agent, whereby the Banks, among other things, have agreed to make term loans to the Borrowers in an aggregate principal amount of $150,000,000 on the terms and subject to the conditions contained in the Credit Agreement; WHEREAS, as a condition precedent to the Banks executing and delivering the Credit Agreement and making the initial Loans thereunder, Guarantor is required to execute and deliver this Guaranty; WHEREAS, Guarantor has been duly authorized to execute, deliver and perform this Guaranty; and WHEREAS, it is in the best interest of Guarantor to execute this Guaranty inasmuch as Guarantor has and will derive substantial direct and indirect benefits from the Loans made from time to time to the Borrowers by the Banks pursuant to the Credit Agreement; NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, and in order to induce the Banks to make Loans (including the initial Loans) to the Borrowers pursuant to the Credit Agreement, Guarantor agrees, for the benefit of each Guarantied Party, as follows: ARTICLE I. DEFINITIONS SECTION 1.1. Certain Terms. Capitalized terms used herein, unless otherwise defined herein, shall have the respective meanings assigned thereto in the Credit Agreement; provided that such definitions shall survive any termination of the Credit Agreement. In addition, when used herein the following terms shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Administrative Agent" - see Preamble. "Banks" or "Bank" - see Preamble. "Borrowers" or "Borrower" - see third recital. "Borrower Default" - see Section 6.1. "Cash Collateral Account" shall mean the custody account, account number 910-2-572212, maintained in the name of, and subject to the sole dominion and control of, the Administrative Agent for the sole benefit of the Banks, for the purpose of holding prepayments of the Obligations of the Borrowers by Guarantor pursuant to Section 6.1. "Credit Agreement" - see third recital. "Guarantied Party" - see Preamble. "Guaranty" - see Preamble. "Indemnified Liabilities" - see Section 6.2. "Indemnified Parties" - see Section 7.2. "Obligations" - see Section 2.1. "Permitted Liens" - see Section 4.4. 2 "Subrogation Rights" - see Section 2.6. "UCC" shall mean the Uniform Commercial Code or comparable statute or any successor statutes thereto, as in effect from time to time in the relevant jurisdiction. ARTICLE II. GUARANTY PROVISIONS SECTION 2.1. Guaranty. Guarantor hereby absolutely, unconditionally and irrevocably: (a) guaranties to the Guarantied Parties the full and punctual payment when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, and at all times thereafter, of all obligations of each Borrower to the Guarantied Parties, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due under the Credit Agreement, whether for principal, interest, fees, expenses or otherwise (including all such amounts which would become due but for the operation of the automatic stay provisions under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. ss.502(b) and ss.506(b)) (all such obligations hereinafter collectively called the "Obligations"); and (b) indemnifies and holds harmless each Guarantied Party or any holder of any Loan for any and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by such Guarantied Party or such holder, as the case may be, in enforcing any rights under this Guaranty; This Guaranty constitutes a guaranty of payment when due and not of collection, and Guarantor specifically agrees that, except as set forth in Article VI, it shall not be necessary or required that any Guarantied Party or any holder of any Loan exercise any right, assert any claim or demand or enforce any remedy whatsoever against any Borrower or any other obligor (or any other Person) before the performance of, or as a condition to, the obligations of Guarantor hereunder. SECTION 2.2. Acceleration of Guaranty. Guarantor agrees that, in the event of the insolvency of any Borrower, any other obligor with respect to the Obligations of such Borrower, or Guarantor, as the case may be, or the inability or failure of such Borrower, such other obligor or Guarantor to pay debts as they become due, or an assignment by such Borrower, such other obligor or Guarantor for the benefit of creditors, or the commencement of any case or proceeding in respect of such Borrower, such other obligor or Guarantor under any bankruptcy, insolvency or similar federal or state laws, and if such event shall occur at a time when any of the Obligations of such Borrower or such 3 other obligor may not then be due and payable, Guarantor will pay to the Banks forthwith (a) if such event relates to such Borrower or any other obligor with respect to the Obligations of such Borrower, the full amount which would be payable hereunder by Guarantor if all Obligations of such Borrower were then due and payable and (b) if such event relates to Guarantor or any other obligor with respect to the obligations of Guarantor, the full amount which would be payable hereunder by Guarantor if all the Obligations of all Borrowers were then due and payable. SECTION 2.3. Guaranty Absolute, etc. This Guaranty shall in all respects be a continuing, absolute, unconditional and irrevocable guaranty of payment, and shall remain in full force and effect until all Obligations of the Borrowers and each other obligor have been paid in full, all obligations of Guarantor hereunder shall have been paid in full and all Commitments shall have terminated. Guarantor guarantees that the Obligations of the Borrowers and each other obligor and their respective Subsidiaries, if any, will be paid strictly in accordance with the terms of the Credit Agreement and each other Loan Document under which they arise, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Guarantied Party or any holder of the Note(s) of any Borrower with respect thereto. The liability of Guarantor under this Guaranty shall be absolute, unconditional and irrevocable irrespective of: (a) any lack of validity, legality or enforceability of the Credit Agreement, any Note or any other Loan Document; (b) the failure of any Guarantied Party or any holder of any Note: (i) to assert any claim or demand or to enforce any right or remedy against any Borrower, any other obligor or any other Person under the provisions of the Credit Agreement, any Note, any other Loan Document or otherwise; or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Obligations of any Borrower or any other obligor; (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of any Borrower or any other obligor, or any other extension, compromise or renewal of any Obligations of any Borrower or any other obligor; (d) any reduction, limitation, impairment or termination of the Obligations of any Borrower or any other obligor for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and Guarantor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, the Obligations of any Borrower, any other obligor or otherwise; 4 (e) any amendment to, rescission, waiver, or other modification of, or any consent to any departure from, any of the terms of the Credit Agreement, any Note or any other Loan Document; (f) any addition, exchange, release, surrender or non-perfection of any collateral, or any amendment to or waiver or release or addition of, or consent to any departure from, any other guaranty, held by any Guarantied Party or any holder of any Note securing any of the Obligations of any Borrower or any other obligor; or (g) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, any Borrower, any other obligor, any surety or any guarantor. SECTION 2.4. Reinstatement, etc. Guarantor agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Obligations is rescinded or must otherwise be restored by any Guarantied Party or any holder of any Note, upon the insolvency, bankruptcy or reorganization of any Borrower, any other obligor or otherwise, all as though such payment had not been made. SECTION 2.5. Waiver, etc. Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations of the Borrower or any other obligor, and this Guaranty and any requirement that the Administrative Agent, any other Guarantied Party or any holder of any Note protect, secure, perfect or insure any security interest or Lien, or any property subject thereto, or exhaust any right or take any action against any Borrower, any other obligor or any other Person (including any other guarantor) or entity or any collateral securing the Obligations of any Borrower or any other obligor, as the case may be. SECTION 2.6. Waiver of Subrogation; Subordination. Guarantor hereby irrevocably waives with respect to any Borrower, until termination of the Commitments of the Banks with respect to such Borrower and thereafter until the prior indefeasible payment in full in cash of all Obligations of such Borrower under the Loan Documents, any claim or other rights which it may now or hereafter acquire against such Borrower or any other obligor that arises from the existence, payment, performance or enforcement of Guarantor's obligations under this Guaranty or any other Loan Document or otherwise, including any right of subrogation, reimbursement, exoneration, or indemnification, any right to participate in any claim or remedy of the Guarantied Parties against such Borrower or any other obligor or any collateral which the Administrative Agent now has or hereafter acquires, whether or not such claim, remedy or right (all such claims, remedies and rights being collectively called "Subrogation Rights") arises in equity, or under contract, statute or common law, including the right to take or receive from such Borrower or any other obligor, directly or indirectly, in cash or other property or by set-off or in any manner, payment or security on account of such claim or other rights. If any amount shall be paid to Guarantor in violation of the preceding sentence and the Obligations shall not have been paid in cash, in full, and the Commitments of the Banks with respect to such Borrower have not been terminated, such amount shall be deemed to have been paid to Guarantor 5 for the benefit of, and held in trust for, the Guarantied Parties, and shall forthwith be paid to the Guarantied Parties to be credited and applied upon the Obligations of such Borrower, whether matured or unmatured. Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Credit Agreement and that the waiver set forth in this Section is knowingly made in contemplation of such benefits. Notwithstanding the foregoing, the Subrogation Rights of Guarantor shall not include (and Guarantor acknowledges that it has no interest in) any of the collateral pledged by any of the Borrowers under the Pledge Agreement. SECTION 2.7. Successors, Transferees and Assigns; Transfers of Notes, etc. This Guaranty shall: (a) be binding upon Guarantor, and its successors, transferees and assigns; and (b) inure to the benefit of and be enforceable by the Administrative Agent and each other Guarantied Party. Without limiting the generality of clause (b), any Bank may assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person, and such other Person shall thereupon become vested with all rights and benefits in respect thereof granted to such Bank under any Loan Document (including this Guaranty) or otherwise. Notwithstanding anything contained in this Section 2.7 to the contrary, this Section 2.7 shall not be deemed to enlarge or create additional rights with respect to any Bank's ability to assign any portion of its Loans or rights under any Note or any other Loan Document pursuant to Section 12 of the Credit Agreement, and this Section 2.7 is expressly made subject thereto. SECTION 2.8. Payments Free and Clear of Taxes, etc. Guarantor hereby agrees that: (a) any and all payments made by Guarantor hereunder shall be made in accordance with Section 4.7 of the Credit Agreement free and clear of, and without deduction for, any and all Charges, to the same extent as if Guarantor were a Borrower. (b) Guarantor hereby indemnifies and holds harmless each Guarantied Party and each holder of a Loan for the full amount of any Charges paid by such Guarantied Party or such holder, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Charges were correctly or legally asserted. (c) Without prejudice to the survival of any other agreement of Guarantor hereunder, the agreements and obligations of Guarantor contained in this Section 2.8 shall survive the payment in full of the principal of and interest on the Loans. SECTION 2.9. Right of Offset. In addition to and not in limitation of all rights of offset that any Guarantied Party or other holder of a Note may have under applicable law or any 6 other Loan Document, subject to the terms of the Credit Agreement, each Guarantied Party or other holder of a Note shall upon the occurrence of any Event of Default and whether or not such Guarantied Party or such holder has made any demand or Guarantor's obligations are matured, have the right to appropriate and apply to the payment of Guarantor's obligations hereunder all deposits (general or special, time or demand, provisional or final) then or thereafter held by, and other indebtedness or property then or thereafter owing to, such Guarantied Party or other holder, whether or not related to this Guaranty or any transaction hereunder. ARTICLE III. REPRESENTATIONS AND WARRANTIES; INCORPORATION BY REFERENCE To induce the Guarantied Parties to enter into the Credit Agreement and to make the Loans thereunder, Guarantor represents and warrants to each Guarantied Party that: SECTION 3.1. Organization, etc. Guarantor and each of its Subsidiaries is a corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation or formation and each of Guarantor and its Subsidiaries is duly qualified to transact business and in good standing as a foreign corporation, partnership or limited liability company authorized to do business in each jurisdiction where the nature of its business makes such qualification necessary and failure to so qualify could reasonably be expected to have a Material Adverse Effect. SECTION 3.2. Authorization. Guarantor (a) has the power to execute, deliver and perform this Guaranty and the other Loan Documents to which it is a party, and (b) has taken all necessary action to authorize the execution, delivery and performance by it of this Guaranty and the other Loan Documents to which it is a party. SECTION 3.3. No Conflict. The execution, delivery and performance by Guarantor of this Guaranty and the other Loan Documents to which it is a party does not and will not (a) contravene or conflict with any provision of any law, statute, rule or regulation, (b) contravene or conflict with, result in any breach of, or constitute a default under, any material agreement or instrument binding on Guarantor or any of its Subsidiaries (including, without limitation, any writ, judgment, injunction or other similar court order), (c) result in the creation or imposition of or the obligation to create or impose any Lien (except for Permitted Liens) upon any of the property or assets of Guarantor or any of its Subsidiaries or (d) contravene or conflict with any provision of the articles of incorporation or bylaws of Guarantor. SECTION 3.4. Margin Regulations. 7 (a) None of the transactions contemplated hereunder or in connection herewith will in any way violate, contravene or conflict with any of the provisions of Regulation U; (b) None of the obligations of any Borrower to Guarantor is or will be directly or indirectly secured by "margin stock" (as defined in Regulation U); (c) Neither Guarantor nor any third party acting on behalf of Guarantor has taken or will take possession of any Borrower's "margin stock" to secure, directly or indirectly, any of the Obligations of such Borrower or the obligations of Guarantor under this Guaranty or any of the Loan Documents; (d) Guarantor does not and will not have any right to prohibit any Borrower from selling, pledging, encumbering or otherwise disposing of any margin stock owned by such Borrower so long as this Guaranty is in effect or any of the Obligations of such Borrower or the obligations of Guarantor under this Guaranty or any of the Loan Documents remain outstanding; (e) None of the Borrowers have granted or will grant Guarantor or any third party acting on behalf of Guarantor the right to accelerate repayment of any of the Obligations of such Borrower if any of the margin stock owned by such Borrower is sold by such Borrower or otherwise; and (f) There is no agreement or other arrangement between any Borrower and Guarantor or any third party acting on behalf of Guarantor (and no such agreement or arrangement shall be entered into so long as this Guaranty is in effect or any of the Obligations of such Borrower or the obligations of Guarantor under this Guaranty or any of the Loan Documents remain outstanding) under which the margin stock of such Borrower would be made more readily available as security to Guarantor than to other creditors of such Borrower. SECTION 3.5. Conseco Corporate Structure. The corporate structure of Guarantor and its Subsidiaries as of the date hereof is as set forth on Exhibit C. SECTION 3.6. No Default or Event of Default. No Default or Event of Default has occurred and is continuing with respect to Guarantor and no default or event of default has occurred and is continuing under the Revolving Credit Agreement. SECTION 3.7. Incorporation by Reference.. Guarantor agrees that the representations and warranties of Guarantor set forth in Section 5 of the Revolving Credit Agreement shall be incorporated by reference in this Guaranty in their entirety as if fully set forth herein with the same effect as if applied to this Guaranty. All capitalized terms set forth in such Sections shall have the meanings provided in the Revolving Credit Agreement; provided that for purposes of this Guaranty, to the extent set forth in the Revolving Credit Agreement (a) the term "Borrower" shall be deemed to refer to Guarantor and (b) the terms "Administrative Agent", "Agreement", "Banks", "Liabilities", "Required Banks", "Loan Documents", "Collateral", "Material Adverse Effect", and "Material Adverse Change" 8 shall have the respective meanings provided in the Credit Agreement. Such representations and warranties shall not be affected in any manner by the termination of the Revolving Credit Agreement. Notwithstanding the foregoing, if Section 5 of the Revolving Credit Agreement (or any successor section thereto) or any definitions set forth or used therein are amended or modified in accordance with the terms of the Revolving Credit Agreement either as the result of an amendment or modification to such section in the Revolving Credit Agreement or Guarantor's execution and delivery of a new credit facility in replacement, restatement or substitution for the Revolving Credit Agreement, this Section 3.7 shall be deemed to be amended and modified to the extent set forth in the Revolving Credit Agreement (as amended or modified) or any new credit facility entered into in replacement, restatement or substitution for the Revolving Credit Agreement; provided, that each of the Banks has received at least 10 days prior written notice of any such amendment, modification, replacement, restatement or substitution and the Required Banks (either directly or through the Administrative Agent) have not prior to the end of such 10 day period given notice to Guarantor that such amendment, modification, replacement, restatement or substitution is not acceptable. ARTICLE IV. COVENANTS SECTION 4.1. Guarantor agrees that, on and after the date hereof until the termination or expiration of the Commitments and for so long thereafter as any of the Obligations or the obligations of Guarantor hereunder remain unpaid or outstanding (except Obligations which by the terms hereof survive the payment in full of the Loans and termination of this Guaranty), Guarantor will comply with the covenants set forth Sections 6 and 7 of the Revolving Credit Agreement and the terms and provisions set forth therein shall be incorporated by reference in this Guaranty in their entirety as if fully set forth herein with the same effect as if applied to this Guaranty. All capitalized terms set forth in Sections 6 and 7 of the Revolving Credit Agreement shall have the meanings provided in the Revolving Credit Agreement; provided that for purposes of this Guaranty, to the extent set forth in the Revolving Credit Agreement (a) the term "Borrower" shall be deemed to refer to Guarantor and (b) the terms "Administrative Agent", "Agreement", "Banks", "Liabilities", "Required Banks", "Loan Documents", "Collateral", "Material Adverse Effect", and "Material Adverse Change" shall have the respective meanings provided in the Credit Agreement. Such covenants shall not be affected in any manner by the termination of the Revolving Credit Agreement. Notwithstanding the foregoing, if Sections 6 or 7 of the Revolving Credit Agreement (or any successor section thereto) or any definitions set forth or used therein are amended or modified in accordance with the terms of the Revolving Credit Agreement either as the result of an amendment or modification to such section in the Revolving Credit Agreement or Guarantor's execution and delivery of a new credit facility in replacement, restatement or substitution for the Revolving Credit Agreement, this Section 4.1 shall be deemed to be amended and modified to the extent set forth in the Revolving Credit Agreement (as amended or modified) or any new credit facility entered into in replacement, restatement or substitution for the Revolving 9 Credit Agreement; provided, that each of the Banks has received at least 10 days prior written notice of any such amendment, modification, replacement, restatement or substitution and the Required Banks (either directly or through the Administrative Agent) have not prior to the end of such 10 day period given notice to Guarantor that such amendment, modification, replacement, restatement or substitution is not acceptable. SECTION 4.2. Certain Indebtedness. Guarantor shall not, and shall not permit any of its Subsidiaries to amend or modify any provision of the Revolving Credit Agreement or the other Revolving Credit Loan Documents if such amendment or modification could reasonably be expected to have a material adverse effect on the Banks, Guarantor or any material provision of the Loan Documents. SECTION 4.3. Margin Regulations. Guarantor shall take such actions and execute and deliver such instruments or documents from time to time as the Administrative Agent shall reasonably request to maintain continuous compliance with Regulation U. SECTION 4.4. [Reserved] SECTION 4.5. Limitation on Additional Purpose Credit/Sale of Assets. Notwithstanding any other provision of this Guaranty, the Credit Agreement or the Revolving Credit Agreement to the contrary, Guarantor will not, and will not permit any of its Wholly-Owned Subsidiaries and/or Significant Subsidiaries to (a) incur or assume any Indebtedness which constitutes "purpose credit" secured "directly or indirectly" as defined in Regulation U by Margin Stock or (b) sell, transfer or otherwise dispose of any of its assets (other than as permitted in Section 7.03 of the Revolving Credit Agreement) unless in the case of both clauses (a) and (b) the Administrative Agent shall have been given at least 10 days' prior written notice thereof and either: (x) in the case of a disposition of assets, either (i) if permitted by the Revolving Credit Agreement, an amount equal to the Net Proceeds (as defined in the Revolving Credit Agreement) received by Guarantor, such Wholly-Owned Subsidiary and/or such Significant Subsidiary, as the case may be, in connection with any such disposition of assets shall be promptly applied to repay, pro rata, the principal amount of the Loans made to the Borrowers (together with any interest accrued thereon); provided that to the extent the Net Proceeds of any such disposition exceed the amount of the Loans, or the Loans shall have been paid in full, such Net Proceeds shall be applied to repay any remaining Liabilities or (ii) the Borrowers shall prepay their respective Liabilities hereunder in an amount equal to the product of (A) the Net Proceeds received by Guarantor, such Wholly-Owned Subsidiary and/or such Significant Subsidiary, as the case may be, in connection with such disposition of assets, multiplied by a fraction, the numerator of which is the Liabilities of such Borrower and the denominator of which is the aggregate of all Liabilities of all the Borrowers; or 10 (y) (i) no Default or Event of Default exists under the Credit Agreement or this Guaranty or shall result therefrom; (ii) the Required Banks have determined, in their sole and absolute discretion, that such proposed incurrence of Indebtedness or proposed disposition of assets, as the case may be, will not in any way violate, contravene or conflict with Regulation U (and the Administrative Agent shall have received such information from the Guarantor as may be requested by the Administrative Agent to make such determination, including a calculation of the "good faith loan value" of the assets comprising the Indirect Collateral remaining after giving effect to such incurrence of Indebtedness and/or disposition of assets); (iii) if requested by the Administrative Agent, the Banks shall have received (A) a certificate of the chief financial officer or a vice president with responsibility for or knowledge of financial matters of the Guarantor setting forth a calculation of the Collateral Ratio (which calculation shall reflect any adjustment in the "good faith loan value" of the Indirect Collateral as determined by the Required Lenders pursuant to clause (ii) above) and/or (B) an opinion of counsel satisfactory to the Administrative Agent and its counsel to the effect that such proposed incurrence of Indebtedness or disposition of assets, as the case may be, will not in way violate, contravene or conflict with Regulation U addressing such other legal matters as reasonably requested by the Administrative Agent; and (iv) after giving effect to the incurrence of such Indebtedness and/or the disposition of such assets, the Collateral Ratio shall be at least 2 to 1. SECTION 4.6. Compliance with Credit Agreement; Provision of Collateral Ratio Information. Guarantor acknowledges that it is the attorney-in-fact of each of the Borrowers and further acknowledges that it has certain obligations and responsibilities to the Banks under the Credit Agreement (including, without limitation, under Section 8.1.4 of the Credit Agreement). Guarantor hereby agrees to comply with and satisfy such obligations and responsibilities under the Credit Agreement. Furthermore, Guarantor shall provide to the Administrative Agent and the Banks such information as may be reasonably requested from time to time by the Administrative Agent or the Required Banks to permit the Administrative Agent or the Required Banks, as the case may be, to determine the "maximum good faith loan value" (as defined in Regulation U) of the Indirect Collateral and do such other acts and execute such other documentation to continue to comply with Regulation U. ARTICLE V. CONDITIONS AND EFFECTIVENESS OF THIS AGREEMENT 11 The obligation of the Banks to make the Loans is (in addition to the conditions precedent set forth in Section 9 of the Credit Agreement) subject to the performance by Guarantor of all of the obligations under this Guaranty and to the satisfaction of the following conditions precedent: SECTION 5.1. Initial Loans. Prior to or concurrent with the making of the initial Loans under the Credit Agreement, the Administrative Agent shall have received all of the following, each, except to the extent otherwise specified below, duly executed by a Responsible Officer of Guarantor, dated the date of the initial Loans (or such earlier date as shall be satisfactory to the Administrative Agent), in form and substance satisfactory to the Administrative Agent, each in sufficient number of signed counterparts or copies to provide one for each Bank and the Administrative Agent: 5.1.1. A favorable opinion of John J. Sabl, counsel of Guarantor and its Subsidiaries, substantially in the form of Exhibit A-1, and addressing such other legal matters as the Administrative Agent may require; 5.1.2. A favorable opinion of Baker & Daniels, outside counsel to Guarantor and its Subsidiaries, substantially in the form of Exhibit A-2, and addressing such other legal matters as the Administrative Agent may require; 5.1.3. An officer's certificate of Guarantor, substantially in the form of Exhibit C, and dated as of the Closing Date, signed by a Responsible Officer of Guarantor, and attested to by the secretary thereof, together with certified copies of Guarantor's articles of incorporation, bylaws and directors resolutions; 5.1.4. Evidence of the good standing or certificates of compliance of Guarantor in the jurisdiction in which Guarantor was incorporated as of the Closing Date; 5.1.5. Evidence that Guarantor paid to the Administrative Agent the fees and expenses provided for herein; 5.1.6. Evidence satisfactory to the Administrative Agent of compliance by Guarantor with Regulation U; and 5.1.7. Such other information and documents as may reasonably be required by the Administrative Agent and the Administrative Agent's counsel. ARTICLE VI. SALE AND RELEASE OF PLEDGED SHARES; CASH COLLATERAL 12 SECTION 6.1. Sale of Pledged Shares. Notwithstanding any provision set forth in any of the Loan Documents to the contrary (other than Section 6.6), the Administrative Agent agrees that after the occurrence and during the continuance of a Default under Section 10.1.2 of the Credit Agreement or any Event of Default with respect to any Borrower, the effect of which is to cause the Obligations of such Borrower to be due and payable under the Credit Agreement (a "Borrower Default"), subject to the provisions of Section 6.2, 6.4 and 6.6 below, it will not demand that Guarantor pay the Obligations of such Borrower (constituting outstanding principal and interest of such Borrower), until after the Administrative Agent has used its reasonable best efforts, in good faith, to sell the Pledged Shares of such Borrower, such sale to be consummated in one or a series of open market transactions through one or more reputable broker-dealers at the then fair market value of such Pledged Shares. SECTION 6.2. Conditions to Sale of Pledged Shares. The obligation of the Administrative Agent not to demand payment hereunder pursuant to Section 6.1 is subject to the following conditions: (a) Guarantor, within three (3) Business Days after receipt of written notice of a Borrower Default from the Administrative Agent, shall deposit with the Administrative Agent in the Cash Collateral Account an amount equal to the then outstanding Obligations of the Borrower related to such Borrower Default and, thereafter, upon written notice from the Administrative Agent, Guarantor shall continue to deposit funds in the Cash Collateral Account in sufficient amounts to pay in full any additional interest accrued on the Loans of such Borrower after the date of the initial deposit to the Cash Collateral Account; and (b) none of the following has occurred at the time of such Borrower Default or shall occur thereafter: (i) a suspension or material limitation in trading in securities generally or trading in the common stock of Guarantor on the New York Stock Exchange or any other exchange upon which the common stock of Guarantor may then be traded; (ii) a general moratorium on commercial banking activities in New York is declared by any Federal or New York State authorities; (iii) the Administrative Agent is prohibited or materially limited from selling the Pledged Shares as a result of any federal or state securities laws (including, without limitation, the rules promulgated thereunder relating to the disclosure of material information); or (iv) any other event (including, without limitation, commencement of any suit, action or litigation, filing of any claim or any other similar proceeding or any change in any applicable law) has occurred 13 which, in the reasonable opinion of the Administrative Agent, would prohibit, have a material adverse effect on, or materially limit the Administrative Agent's ability to sell the Pledged Shares as contemplated by the terms of Section 6.1. (c) Guarantor agrees that in any sale of any of the Pledged Shares, the Administrative Agent is authorized to comply with any limitation or restriction in connection with such sale as counsel may advise the Administrative Agent is necessary, in the reasonable opinion of such counsel, in order to avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and Guarantor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Administrative Agent be liable or accountable to Guarantor for any discount allowed by reason of the fact that such Pledged Shares are sold in compliance with any such limitation or restriction. (d) Guarantor further agrees to indemnify and hold harmless the Administrative Agent and the Banks and each of their respective officers, directors, employees, agents, successors and assigns, and any Person in control of any thereof, from and against any loss, liability, claim, damage and expense, including, without limitation, reasonable attorneys' fees actually incurred (in this paragraph collectively called the "Indemnified Liabilities"), under federal and state securities laws or otherwise resulting from the action or failure to act by Guarantor or any Borrower; provided, that no such Person shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 6.3. Release of Pledged Shares. The Administrative Agent agrees that, so long as Guarantor is in compliance with Section 6.2(a) and none of the events set forth in Section 6.2(b) has occurred, it shall not release any of the Pledged Shares of any Borrower from the Lien granted under the Pledge Agreement until after the termination of this Guaranty and the obligations of Guarantor hereunder with respect to such Borrower. Notwithstanding the foregoing, the Administrative Agent shall be entitled to (i) release the Pledged Shares of such Borrower if such Pledged Shares are replaced by additional common stock of Guarantor and (ii) sell the Pledged Shares pursuant to Section 6.1. SECTION 6.4. Borrower Event of Default. Guarantor hereby acknowledges and agrees that Sections 6.1 and 6.3 shall not apply to any Default or Event of Default relating to Guarantor or any of its Subsidiaries and, upon the occurrence of an Event of Default relating to Guarantor or any of its Subsidiaries, the Administrative Agent expressly reserves its rights and remedies under this Guaranty to demand payment hereunder to satisfy the Obligations of all Borrowers and the obligations of Guarantor hereunder whether or not the Administrative Agent has sold or attempted to sell the Pledged Shares of any Borrower or otherwise exercised its rights and remedies under the 14 Pledge Agreement or any other Loan Document. Furthermore nothing contained herein shall be deemed to prohibit or limit in any way whatsoever the Administrative Agent's or any Bank's right or ability to receive its portion of the assets of Guarantor upon the exercise by the Revolving Credit Agent or the Revolving Credit Banks of their rights and remedies under the Revolving Credit Loan Documents or any other creditor of Guarantor. SECTION 6.5. Application of Cash Collateral. If after compliance by the Administrative Agent with the provisions set forth in Section 6.1 any Obligations remain unpaid with respect to any applicable Borrower, any funds held in the Cash Collateral Account may be applied by the Administrative Agent against the payment of the Obligations of such Borrower. The Administrative Agent, prior to applying such funds against the Obligations of such Borrower, will certify to Guarantor (a) if the Pledged Shares of such Borrower are sold pursuant to Section 6.1, the net proceeds (including a calculation thereof in reasonable detail) received by the Administrative Agent from the sale of such Pledged Shares and (b) if the Pledged Shares of such Borrower are not sold pursuant to Section 6.1, the reason or reasons why such sale could not be accomplished. Any funds remaining in the Cash Collateral Account after application thereof to the Obligations as set forth above shall be returned to Guarantor. The Administrative Agent agrees that it shall deliver to Guarantor, after the application of such funds to the Obligations of such Borrower, a calculation in reasonable detail of the Obligations of such Borrower (including principal and interest of the Loans of such Borrower) and the application of such funds thereto. SECTION 6.6. No Requirement to Comply with Section 6.1 in Certain Circumstances. Notwithstanding the provisions of Section 6.1, the Administrative Agent shall not be required to attempt to sell the Pledged Shares of any Borrower in the manner contemplated by Section 6.1 prior to demanding payment from the Guarantor in respect of such Borrower's Obligations if (a) the Administrative Agent would not be legally permitted to do so by reason of restrictions imposed by the United States Bankruptcy Code, (b) the Administrative Agent would be required to comply with any restrictions on the immediate sale of such Pledged Shares imposed by federal securities laws or regulations or (c) in respect of the Loans of any Borrower, if the Administrative Agent shall not have received (i) counterparts, duly executed by such Borrower, of all documents contemplated by the Credit Agreement to be executed by such Borrower or (ii) a duly perfected first priority security interest in all shares of common stock of the Guarantor purchased by such Borrower with proceeds of such Loans. ARTICLE VII. MISCELLANEOUS SECTION 7.1. Guarantor agrees to pay on demand all reasonable expenses of the Administrative Agent (including the non-duplicative fees and reasonable expenses of counsel (including expenses of in-house counsel) and of local counsel, if any, who may be retained by such counsel) in connection with: 15 (i) the negotiation, preparation, execution, syndication and delivery of the Credit Agreement, this Guaranty and the other Loan Documents, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to the Credit Agreement, this Guaranty or the other Loan Documents as may from time to time hereafter be required, whether or not the transactions contemplated hereby or thereby are consummated; and (ii) the preparation and/or review of the form of any document or instrument relevant to the Credit Agreement, this Guaranty or any other Loan Document. Guarantor further agrees to pay, and to save the Administrative Agent and the Banks, and their respective Affiliates, harmless from all liability for, any stamp or other Taxes (other than income taxes of the Administrative Agent or the Banks) which may be payable in connection with the execution or delivery of the Credit Agreement, any Borrowing thereunder, the issuance of the Notes, if any, this Guaranty or any other Loan Document. Guarantor also agrees to reimburse the Administrative Agent and each Bank upon demand for all reasonable expenses (including attorneys' fees and legal expenses) incurred by the Administrative Agent or such Bank in connection with the enforcement of any Obligations or obligations hereunder and the consideration of legal issues relevant hereto and thereto whether or not such expenses are incurred by the Administrative Agent on its own behalf or on behalf of the Banks. All obligations of Guarantor provided for in this Section 7.1 shall survive termination of this Agreement. Notwithstanding the foregoing, the Administrative Agent or a Bank shall not have the right to reimbursement under this Section 7.1 for amounts determined by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of the Administrative Agent or a Bank. SECTION 7.2. Guarantor agrees to indemnify the Administrative Agent, each Bank, their Affiliates and their respective directors, officers, employees, persons controlling or controlled by any of them or their respective agents, consultants, attorneys and advisors (the "Indemnified Parties") and hold each Indemnified Party harmless from and against any and all liabilities, losses, claims, damages, costs and expenses of any kind to which any of the Indemnified Parties may become subject, whether directly or indirectly (including, without limitation, the reasonable fees and disbursements of counsel for any Indemnified Party), relating to or arising out of the Credit Agreement, this Guaranty, the other Loan Documents, or any actual or proposed use of the proceeds of the Loans hereunder; provided, that no Indemnified Party shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. All obligations of the Borrowers and Guarantor provided for in this Section 7.2 shall survive termination of the Credit Agreement and this Guaranty. SECTION 7.3. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile or similar writing) and shall be given to such party at its address, facsimile or telex number set forth on the signature or acknowledgement 16 pages hereof or such other address, facsimile or telex number as such party may hereafter specify for the purpose by written notice to the Administrative Agent and Guarantor. Each such notice, request or other communication shall be effective (a) if given by facsimile or telex, when such facsimile or telex is transmitted to the facsimile or telex number specified in this Section and, in the case of telex, the appropriate answerback is received, (b) if given by mail, seventy-two (72) hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (c) if given by any other means, when delivered at the address specified in this Section. SECTION 7.4. This Guaranty, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, except Guarantor shall not be permitted to assign this Guaranty nor any interest herein nor in the Collateral, nor any part thereof, except in accordance with the terms of the Credit Agreement. SECTION 7.5. EACH OF GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE OTHER LOAN DOCUMENTS, AND EACH OF GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR TO THE EXTENT PERMITTED BY LAW, FEDERAL COURT. EACH OF GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY ACTION OR PROCEEDING (WHETHER BROUGHT BY GUARANTOR, ANY OF ITS SUBSIDIARIES, THE ADMINISTRATIVE AGENT, ANY BANK OR OTHERWISE) IN ANY COURT HEREIN ABOVE SPECIFIED IN THIS SECTION 7.5 AS WELL AS ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. EACH OF GUARANTOR AND THE ADMINISTRATIVE AGENT AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. SECTION 7.6. Subject to Section 13.1 of the Credit Agreement, the provisions of this Guaranty may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by Guarantor and by the Administrative Agent (at the request of the Required Banks), and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 17 SECTION 7.7. The section headings in this Guaranty are inserted for convenience of reference and shall not be considered a part of this Guaranty or used in its interpretation. SECTION 7.8. No action of the Administrative Agent permitted hereunder shall in any way affect or impair the rights of the Administrative Agent and the obligations of Guarantor under this Guaranty. Guarantor hereby acknowledges that there are no conditions to the effectiveness of this Guaranty. SECTION 7.9. All obligations of Guarantor and rights of the Administrative Agent or obligation expressed in this Guaranty shall be in addition to and not in limitation of those provided in applicable law or in any other written instrument or agreement relating to any of the Obligations. SECTION 7.10. THIS GUARANTY SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. ALL OBLIGATIONS OF THE BORROWERS AND GUARANTOR AND RIGHTS OF THE ADMINISTRATIVE AGENT AND THE BANKS IN RESPECT OF THE OBLIGATIONS AND THE OBLIGATIONS OF GUARANTOR EXPRESSED HEREIN OR IN THE OTHER LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF THOSE PROVIDED BY APPLICABLE LAW. SECTION 7.11. This Guaranty may be executed in any number of counterparts, each of which shall for all purposes be deemed an original, but all such counterparts shall constitute but one and the same agreement. Guarantor hereby acknowledges receipt of a true, correct and complete counterpart of this Guaranty. SECTION 7.12. The Administrative Agent acts herein as agent for itself, the Banks and any and all future holders of the Obligations. SECTION 7.13. EACH OF GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS GUARANTY, ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS GUARANTY AND AGREES THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS GUARANTY. * * * IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. CONSECO, INC. By: /s/Rollin M. Dick -------------------------------- Name: Rollin M. Dick Title: Executive Vice President and Chief Financial Officer EX-10.8.23 9 EX-10.8.23 ================================================================================ BORROWER PLEDGE AGREEMENT dated as of September 15, 1999 among THE INDIVIDUALS LISTED ON THE SIGNATURE PAGES HERETO and THE CHASE MANHATTAN BANK as Administrative Agent ================================================================================ BORROWER PLEDGE AGREEMENT THIS BORROWER PLEDGE AGREEMENT (this "Agreement"), dated as of September 15, 1999, is made among the individuals listed as pledgors on the signature pages hereto (herein, collectively called the "Pledgors" and each individually, a "Pledgor"), and THE CHASE MANHATTAN BANK, as Administrative Agent for the Banks (each as hereinafter defined). This is the Borrower Pledge Agreement referred to in that certain Credit Agreement (as from time to time, in whole or in part, amended, modified, supplemented, restated, refinanced, refunded or renewed, the "Credit Agreement"), dated as of September 15, 1999, among the Pledgors, the financial institutions who are or from time to time become party thereto (the "Banks") and The Chase Manhattan Bank, as Administrative Agent for the Banks (the "Administrative Agent"). BACKGROUND: 1. Pursuant to the terms of the Credit Agreement, the Banks have agreed to make certain Loans to each Pledgor which shall be used by such Pledgor as provided in the Credit Agreement. 2. As security for the Loans and as a condition precedent to the making thereof, the Banks have required that each Pledgor execute and deliver this Agreement. NOW, THEREFORE, in consideration of any Loan or other financial accommodation heretofore or hereafter at any time made or granted by the Banks to the Pledgors and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Pledgor agrees with the Administrative Agent, for the benefit of the Banks, as follows: SECTION 1. Definitions. Capitalized terms used herein, unless otherwise specified, shall have the meanings assigned thereto in the Credit Agreement; provided that such definitions shall survive any termination of the Credit Agreement. In addition, when used herein the following terms shall have the following meanings: "Collateral" - see Section 2. "Indemnified Liabilities" - see Section 7(b)(vi). "Issuer" shall mean Conseco, Inc., an Indiana corporation. "Permitted Actions" - see Section 5(b). "Pledged Shares" - see Section 2. "Uniform Commercial Code" shall mean the Uniform Commercial Code or comparable statute, as in effect from time to time in the relevant jurisdiction. 1 SECTION 2. Pledge. To secure the prompt and complete payment and performance of the respective Liabilities of each such Pledgor, such Pledgor hereby grants, pledges, hypothecates, assigns, transfers, sets over and delivers unto the Administrative Agent, for the benefit of the Banks, a Lien on the following (herein collectively called the "Collateral"): (a) the shares of capital stock of the Issuer described in Schedule 1 hereto, whether in certificated form or otherwise, including the certificates representing or evidencing such shares of capital stock (herein called the "Pledged Shares"), together with all cash, securities, interests, dividends, rights, notes, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Pledged Shares; (b) all additional shares of capital stock of the Issuer from time to time acquired by the Pledgor and purchased with proceeds of the Loans including, without limitation, any uncertificated Securities (which additional shares of capital stock shall constitute a part of, and be, Pledged Shares ), and, in the case of certificated capital stock of the Issuer, the certificates representing or evidencing such additional shares, together with all cash, securities, interest, dividends, rights, notes, instruments and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares; (c) all other property hereafter delivered to the Administrative Agent in substitution for or in addition to any of the foregoing, and all certificates and instruments representing or evidencing such other property, together with all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (d) all proceeds, rents, issues, profits and returns of and from all of the foregoing; TO HAVE AND TO HOLD the Collateral, together with all rights, titles, interests, privileges and preferences appertaining or incidental thereto, unto the Administrative Agent, its successors and assigns, for the benefit of the Banks, forever; subject, however, to the terms, covenants and conditions hereafter set forth. Each Pledgor agrees to deliver to the Administrative Agent, promptly upon receipt and in the case of the Pledged Shares in due form for transfer (i.e., endorsed in blank accompanied by undated stock or bond powers executed in blank or registered on the books of the Issuer) and, subject to the provisions of Section 6 hereof, any Collateral which may at any time or from time to time be in or come into possession or control of any Pledgor; and prior to the delivery thereof to the Administrative Agent, such Collateral shall be held by such Pledgor separate and apart from its other property and in express trust for the Administrative Agent, for the benefit of the Banks. SECTION 3. Representations, Warranties and Covenants. 2 (a) Each Pledgor represents and warrants to the Administrative Agent, for the benefit of the Banks, that: (i) except for Liens, claims and rights of third parties arising solely through acts of the Administrative Agent, the Administrative Agent has and will continue to have at all times as security for the Liabilities of such Pledgor, for the benefit of the Banks, a valid, first priority perfected Lien on the Collateral pledged by such Pledgor and the proceeds thereof free of all Liens (except for the Lien granted hereunder), claims and rights of third parties whatsoever; (ii) all of the Pledged Shares of such Pledgor representing shares of stock pledged under this Agreement are evidenced by certificates, and such Pledgor has delivered to the Administrative Agent, for the benefit of the Banks, for pledge under this Agreement on the date hereof all of the certificates representing all such Pledged Shares; (iii) the Pledged Shares of such Pledgor represent and will continue to represent all of the issued and outstanding capital stock of the Issuer purchased with proceeds of the Loans made to such Pledgor; and (iv) such Pledgor will, at all times, keep pledged to the Administrative Agent, for the benefit of the Banks, pursuant hereto all of the capital stock of the Issuer of such Pledgor purchased with proceeds of the Loans made to such Pledgor. Each Pledgor agrees to endorse and deliver to the Administrative Agent for pledge hereunder, promptly upon its obtaining any thereof, any additional Collateral and to hold such Collateral, pending such delivery, in trust for the Administrative Agent, for the benefit of the Banks, separate and distinct from any other property of such Pledgor. As of the date of any such delivery of additional Collateral, certificates or instruments to the Administrative Agent, such Pledgor represents and warrants that (1) it will own such Collateral, certificates and instruments free and clear of any rights of any other Person (other than the rights created in the Administrative Agent hereunder), (2) it will have good and marketable title to said Collateral, certificates and instruments and have the right to pledge such Collateral, certificates and instruments to the Administrative Agent, for the benefit of the Banks, pursuant to this Agreement, and (3) it will have pledged to the Administrative Agent, for the benefit of the Banks, as at such date, all of the capital stock of the Issuer purchased with proceeds of the Loans made to such Pledgor. By the delivery of any additional Collateral, certificates or instruments, such Pledgor shall automatically be deemed to have represented and warranted to the Administrative Agent, for the benefit of the Banks, that at the time of such delivery the Administrative Agent, for the benefit of the Banks, has a valid, first priority perfected Lien on such Collateral, certificates or instruments and the proceeds thereof free of all Liens, claims and rights of third parties whatsoever. All documentary, stamp and other taxes and fees owing in connection with the issuance, transfer and/or pledge of the Pledged Shares of such Pledgor, certificates or instruments have been paid and will hereafter be paid by such Pledgor as such become due and payable. (b) Each Pledgor further represents and warrants to the Administrative Agent, for the benefit of the Banks, that it is the lawful owner of the Collateral pledged by such Pledgor, free of all Liens, other than the Lien granted hereunder, with full right to deliver, pledge, assign and transfer such Collateral to the Administrative Agent, for the benefit of the Banks, as Collateral hereunder. The pledge of the Collateral of such Pledgor effected by effective to vest in the Administrative Agent, for the benefit of the Banks, the rights of the Administrative Agent in such Collateral set forth herein. 3 (c) Each Pledgor additionally represents and warrants to the Administrative Agent, for the benefit of the Banks, that (i) such Pledgor has received all material consents and approvals (if any shall be required) necessary for the execution, delivery and performance of this Agreement, and such execution, delivery and performance does not and will not contravene or conflict with, result in any breach of, or constitute a default under, any material agreement or instrument binding on such Pledgor or result in the creation or imposition of or the obligation to create or impose any Lien (except for the Lien granted hereunder) on any of the Collateral pledged by such Pledgor and (ii) this Agreement is the legal, valid and binding obligation of such Pledgor, enforceable against such Pledgor in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws affecting the enforcement of creditors' rights generally and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity (including, without limitation, good faith, materiality and reasonableness) or at law). (d) Each Pledgor additionally covenants and agrees with the Administrative Agent, for the benefit of the Banks, that, until the expiration or termination of the Commitments as to such Pledgor and thereafter so long as any of the Liabilities of such Pledgor remain outstanding, such Pledgor will, unless the Administrative Agent and the Required Banks, for the benefit of the Banks, shall otherwise consent in writing: (i) at such Pledgor's sole expense, promptly deliver to the Administrative Agent, from time to time, upon request of the Administrative Agent or the Required Banks, such stock powers and other documents (including UCC financing statements), satisfactory in form and substance to the Administrative Agent, with respect to the Collateral pledged by such Pledgor as the Administrative Agent or the Required Banks may reasonably request, to perfect, preserve and protect the Lien created hereby, and to enable the Administrative Agent to enforce its rights and remedies hereunder; (ii) not permit any of the Collateral pledged by such Pledgor to be evidenced by uncertificated securities, provided, however, that should for whatsoever reason any of such Collateral become evidenced by uncertificated Securities, such Pledgor shall automatically, without request by the Administrative Agent, forthwith (A) notify the Administrative Agent thereof, (B) cause the books and records of the Issuer to contain a notation of the Lien of the Administrative Agent, for the benefit of the Banks, thereon, and (C) take such other action as the Administrative Agent shall reasonably request so that the Administrative Agent shall have at all times as security for the Liabilities of such Pledgor, for the benefit of the Banks, a valid, first priority perfected Lien on the Collateral pledged by such Pledgor and the proceeds thereof free of all Liens (except for the Lien granted hereunder), claims and rights of third parties whatsoever; and (iii) except as otherwise may be permitted by the Credit Agreement, (A) not sell, assign, exchange, pledge or otherwise dispose of or transfer any of its rights to any of the 4 Collateral pledged by such Pledgor, (B) not create or suffer to exist any Lien on or with respect to any of such Collateral except for the Lien created hereby, (C) not make or consent to any amendment or other modification or waiver with respect to any of such Collateral, or enter into any agreement or permit to exist any restriction with respect to any of such Collateral other than pursuant hereto, and (D) not take or fail to take any action which would in any manner impair the enforceability of the Administrative Agent's Lien, for the benefit of the Banks, on any of such Collateral. SECTION 4. Care of Collateral. The Administrative Agent shall exercise reasonable care in the custody and preservation of the Collateral. In addition, the Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral pledged by any Pledgor if it takes such action for that purpose as such Pledgor requests in writing, but failure of the Administrative Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Administrative Agent to preserve or protect any rights with respect to such Collateral against prior or other parties, or to do any act with respect to preservation of such Collateral not so requested by the Pledgor, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. SECTION 5. Certain Rights Regarding Collateral and Liabilities. (a) Subject to Sections 5(c) and 6 hereof the Administrative Agent may, and upon the request of the Required Banks shall, from time to time, after the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as a Pledgor or an Event of Default as to such Pledgor, without notice to such Pledgor, (i) transfer all or any part of the Collateral pledged by such Pledgor into the name of the Administrative Agent or its nominee or subagent, with or without disclosing that such Collateral is subject to the Lien hereunder, (ii) notify any Person obligated on any of the Collateral of such Pledgor to make payment to the Administrative Agent of any amounts due or to become due thereunder, and (iii) enforce collection of any of the Collateral pledged by such Pledgor by suit or otherwise. (b) If at any time the Administrative Agent takes any or all of the Permitted Actions (as hereinafter defined) whether such actions are taken before or after any of the Liabilities of such Pledgor shall be due and payable and without notice to such Pledgor, such actions shall not affect the enforceability of this Agreement. The Administrative Agent shall have taken a "Permitted Action" if it shall (to the extent permitted by the Credit Agreement and the other Loan Documents): (i) retain or obtain a Lien upon any property to secure payment and performance of any of the Liabilities or any obligation hereunder, (ii) retain, obtain or release the primary or secondary obligation of any Person, in addition to such Pledgor, with respect to one or more of the Liabilities, (iii) create, extend or renew for any periods (whether or not longer than the original period) or alter or exchange any of the Liabilities, or release or compromise any obligation of any nature of any Person with respect to any of the Liabilities, (iv) release or fail to perfect its Lien upon, or impair, surrender, release or permit any 5 substitution or exchange for, all or any part of any property securing any of the Liabilities or any obligation hereunder, or create, extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any Person with respect to any such property or (v) resort to the Collateral pledged by such Pledgor for payment of any of the Liabilities of such Pledgor whether or not the Administrative Agent (A) shall have resorted to any other property securing any of the Liabilities of such Pledgor or any obligation hereunder or (B) shall have proceeded against any Person primarily or secondarily obligated with respect to any of the Liabilities of such Pledgor (all of the actions referred to in preceding clauses (A) and (B) being hereby expressly waived by each Pledgor). (c) The Administrative Agent shall have no right to vote the Pledged Shares or other Collateral of any Pledgor or give consents, waivers or ratifications in respect thereof prior to the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor. After the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor, such Pledgor shall have the right to vote any and all of the Pledged Shares and other Collateral of such Pledgor and give consents, waivers and ratifications in respect thereof unless and until it receives notice from the Administrative Agent that such right has been terminated. Each Pledgor agrees to deliver (properly endorsed when required) to the Administrative Agent, after a Default pursuant to Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor shall have occurred and shall be continuing, promptly upon request of the Administrative Agent, such proxies and other documents as may be necessary for the Administrative Agent to exercise the voting power with respect to the Pledged Shares and other Collateral of such Pledgor then or previously owned by such Pledgor. SECTION 6. Dividends, etc. (a) So long as no Default pursuant to Section 10.1.2 of the Credit Agreement as to a particular Pledgor or an Event of Default as to such Pledgor shall have occurred and shall be continuing: (i) Subject to the provisions of the Credit Agreement and notwithstanding the provisions of Section 2(a) of this Agreement, such Pledgor shall be entitled to receive any and all cash dividends and payments on the Collateral pledged by such Pledgor which it is otherwise entitled to receive, but any and all capital stock and/or liquidating dividends, payments, distributions in property, returns of capital made on or in respect of the Collateral pledged by such Pledgor, whether resulting from a subdivision, combination, reclassification or conversion of the outstanding capital stock of the Issuer, or received in exchange for such Collateral or any part thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which the Issuer may be a party or otherwise, and any and all cash and other property received in exchange for such Collateral shall be and become part of the Collateral pledged hereunder and, if received by such Pledgor, shall forthwith be delivered to the Administrative Agent or its designated nominee (accompanied, if appropriate, by proper instruments of 6 assignment and/or stock powers executed by such Pledgor in accordance with the Administrative Agent's instructions) to be held subject to the terms of this Agreement. (ii) If the Collateral pledged by any Pledgor or any part thereof shall have been registered in the name of the Administrative Agent or its subagent, the Administrative Agent shall execute and deliver (or cause to be executed and delivered) to such Pledgor all such dividend orders and other instruments as such Pledgor may request for the purpose of enabling such Pledgor to receive the dividends or other payments which it is authorized to receive and retain pursuant to Section 6(a)(i) above. (b) Upon the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as to Pledgor or an Event of Default as to such Pledgor, all rights of such Pledgor pursuant to Section 6(a)(i) hereof shall cease and the Administrative Agent shall have the sole and exclusive right and authority to receive and retain the dividends and other payments in respect of the Collateral which such Pledgor would otherwise be authorized to retain. All such dividends and payments, and all other distributions made on or in respect of the Collateral which may at any time and from time to time be held by such Pledgor, shall, until delivery to the Administrative Agent, be held by such Pledgor separate and apart from its other property in trust for the Administrative Agent, for the benefit of the Banks. Any and all money and other property paid over to or received by the Administrative Agent pursuant to the provisions of this paragraph (b) shall be retained by the Administrative Agent as additional Collateral hereunder and be applied in accordance with the provisions hereof and until delivery to the Administrative Agent, shall be held by such Pledgor separate and apart from its other property in trust for the Administrative Agent, for the benefit of the Banks. SECTION 7. Default. (a) Upon the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as to Pledgor or an Event of Default as to such Pledgor, the Administrative Agent may exercise from time to time any rights and remedies available to it under the Credit Agreement, the Uniform Commercial Code or the other Loan Documents or otherwise available to it, including, without limitation, sale, assignment, or other disposal of the Collateral pledged by such Pledgor in exchange for cash or credit. If any notification of intended disposition of any of such Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed to such Pledgor at least ten (10) days before such disposition as provided in Section 13.3 of the Credit Agreement. Any proceeds of any disposition of Collateral pledged by such Pledgor shall be applied as provided in Section 8 hereof. No rights and remedies of the Administrative Agent expressed hereunder are intended to be exclusive of any other right or remedy, but every such right or remedy shall be cumulative and shall be in addition to all other rights and remedies herein conferred, or conferred upon the Administrative Agent under any other agreement or instrument relating to any of the Liabilities of such Pledgor or security therefor or now or hereafter existing at law or in equity or by statute. No delay on the part of the Administrative Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Administrative Agent of any right or 7 remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. (b)(i) Each Pledgor agrees that in any sale of any of the Collateral pledged by such Pledgor, the Administrative Agent is authorized to comply with any limitation or restriction in connection with such sale as counsel may advise the Administrative Agent is necessary in order to avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and such Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Administrative Agent nor any Bank be liable or accountable to such Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. (ii) Each Pledgor, upon the occurrence and during the continuance of a Default under Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor, further agrees that the Administrative Agent shall have the right, for and in the name, place and stead of such Pledgor to execute endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral pledged by such Pledgor, and may, without demand, presentment or notice of any kind appropriate and apply toward the payment of the Liabilities of such Pledgor in order of application set forth in Section 8 any balances, credits, deposits, accounts or monies of such Pledgor held by the Administrative Agent. (iii) Without limiting the foregoing paragraph, upon the occurrence and during the continuance of a Default pursuant to Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor, the Administrative Agent may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, (A) sell any or all of the Collateral, free of all rights and claims of such Pledgor therein and thereto at any public or private sale or brokers' board, and (B) bid for and purchase any or all of such Collateral at any such public sale free from rights of redemption, stay or appraisal of such Pledgor. SECTION 8. Application of Proceeds. All of the proceeds from the sale or disposition of any item of the Collateral pledged by the Pledgors pursuant to the terms of Section 7 hereof and/or, after a Default pursuant to Section 10.1.2 of the Credit Agreement as to such Pledgor or an Event of Default as to such Pledgor, the cash held as Collateral hereunder, shall be applied by the Administrative Agent pursuant to Section 6.2(a) of the Credit Agreement. SECTION 9. Authority of the Administrative Agent. The Administrative Agent shall have, and be entitled to exercise, all such powers hereunder (to the extent permitted by the Credit 8 Agreement) as are specifically delegated to the Administrative Agent by the terms hereof, together with such powers as are incidental thereto, for the benefit of the Banks. As to matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of this Agreement) the Administrative Agent shall not be required to exercise any discretion, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Banks and such instructions shall be binding upon all Banks. The Administrative Agent may execute any of its duties hereunder by or through agents or employees and shall be entitled to retain counsel and to act in reliance upon the reasonable advice of such counsel concerning all matters pertaining to its duties hereunder. Neither the Administrative Agent, the Banks nor any director, officer or employee thereof shall be liable for any action taken or omitted to be taken by it hereunder or in connection herewith, except for its own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Administrative Agent shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document or other support or security (including the validity, priority or perfection of any Lien), or any other document furnished in connection with any of the foregoing; provided that notwithstanding the foregoing, the Administrative Agent shall comply with Section 4. Each Pledgor agrees to reimburse the Administrative Agent, on demand, for all reasonable costs and expenses actually incurred by the Administrative Agent in connection with the administration and enforcement of this Agreement and for all costs and expenses of the enforcement of this Agreement (including, without limitation, reasonable costs and expenses actually incurred by any agent employed by the Administrative Agent) and agrees to indemnify (which indemnification shall survive any termination of this Agreement) and hold harmless the Administrative Agent and the Banks (and any such agent) from and against any and all liability incurred by the Administrative Agent or any Bank or any such agent thereof hereunder or in connection herewith, unless such liability shall be due to gross negligence or willful misconduct on the part of the Administrative Agent or any Bank or such agent, as the case may be. SECTION 10. Termination. Each Pledgor agrees that its pledge hereunder shall (notwithstanding, without limitation, that at any time or from time to time all Liabilities of such Pledgor may have been paid in full) terminate only when all such Liabilities (except such Liabilities which by the terms of the Credit Agreement survive the payment in full of the Loans and the termination of this Agreement) (including, without limitation, any extensions or renewals of any thereof) and all expenses (including, without limitation, reasonable attorneys' fees and legal expenses) paid or actually incurred by the Administrative Agent in endeavoring to enforce this Agreement, the Credit Agreement and the other Loan Documents to which the Administrative Agent is a party or of which it is a beneficiary shall have been finally paid in full and all other obligations of such Pledgor hereunder and thereunder have been fully performed, and all Commitments under the Credit Agreement have been terminated, at which time the Administrative Agent shall reassign and redeliver (or cause to be reassigned and redelivered) to such Pledgor, or to such Person or Persons as such Pledgor shall designate, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Administrative Agent pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and 9 release. Any such reassignment shall be without recourse upon, or representation or warranty by, the Administrative Agent or any Bank and at the sole cost and expense of such Pledgor. SECTION 11. Miscellaneous. (a) All notices or other communications hereunder shall be given in the manner specified under Section 13.3 of the Credit Agreement, whether or not then in effect. (b) This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, except the Pledgors shall not be permitted to assign this Agreement nor any interest herein nor in the Collateral pledged by such Pledgor, nor any part thereof, nor otherwise pledge, encumber or grant any option with respect to such Collateral, nor any part thereof, except in accordance with the terms of the Credit Agreement. (c) SUBMISSION TO JURISDICTION; WAIVER OF VENUE. EACH PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS, AND EACH PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR, TO THE EXTENT PERMITTED BY LAW, FEDERAL COURT. EACH PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE IN ANY ACTION OR PROCEEDING (WHETHER BROUGHT BY ANY PLEDGOR, THE ADMINISTRATIVE AGENT, ANY BANK OR OTHERWISE) IN ANY COURT HEREINABOVE SPECIFIED IN THIS SECTION 11(c) AS WELL AS ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. EACH PLEDGOR AND THE ADMINISTRATIVE AGENT AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. (d) At the option of the Administrative Agent, this Agreement, or a carbon, photographic or other reproduction of this Agreement or of any Uniform Commercial Code financing 10 statement covering the Collateral or any portion thereof, shall be sufficient as a Uniform Commercial Code financing statement and may be filed as such. (e) Subject to Section 13.1 of the Credit Agreement, the provisions of this Agreement may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Pledgors and by the Administrative Agent (at the request of the Required Banks), and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. (f) The section headings in this Agreement are inserted for convenience of reference and shall not be considered a part of this Agreement or used in its interpretation. (g) Each Pledgor hereby expressly waives: (i) notice of the acceptance by the Administrative Agent of this Agreement, (ii) notice of the existence or creation or nonpayment of all or any of the Liabilities of such Pledgor, (iii) presentment, demand, notice of dishonor, protest, and all other notices whatsoever (except as otherwise required herein), and (iv) all diligence in collection or protection of or realization upon the Liabilities of such Pledgor, or any security for or guaranty of any of the foregoing. (h) The Administrative Agent may, from time to time, without notice to any Pledgor, assign or transfer any or all of the Liabilities of such Pledgor or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities of such Pledgor for the purposes of this Agreement, and each and every immediate and successive assignee or transferee of any of such Liabilities or of any interest therein shall, to the extent of the interest of such assignee or transferee in such Liabilities, be entitled to the benefits of this Agreement to the same extent as if such assignee or transferee were the Administrative Agent; provided, however, that, unless the Administrative Agent shall otherwise consent in writing, the Administrative Agent shall have an unimpaired right, prior and superior to that of any such assignee or transferee, to enforce this Agreement, for the benefit of the Administrative Agent, as to those of the Liabilities which the Administrative Agent has not assigned or transferred. (i) Each Pledgor agrees that, if at any time all or any part of any payment theretofore applied by the Administrative Agent or any Bank to any of the Liabilities of such Pledgor is or must be rescinded or returned by the Administrative Agent or any Bank for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of the Issuer), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Administrative Agent, and the pledge by such Pledgor hereunder shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Administrative Agent or such Bank had not been made. 11 (j) No action of the Administrative Agent permitted hereunder shall in any way affect or impair the rights of the Administrative Agent and the obligations of any Pledgor under this Agreement. Each Pledgor hereby acknowledges that there are no conditions to the effectiveness of this Agreement. (k) All obligations of the Pledgors and rights of the Administrative Agent or obligation expressed in this Agreement shall be in addition to and not in limitation of those provided in applicable law or in any other written instrument or agreement relating to any of the Liabilities. (l) GOVERNING LAW. THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (m) This Agreement may be executed in any number of counterparts, each of which shall for all purposes be deemed an original, but all such counterparts shall constitute but one and the same agreement. Each Pledgor hereby acknowledges receipt of a true, correct and complete counterpart of this Agreement. (n) The Administrative Agent acts herein as agent for itself, the Banks and any and all future holders of the Liabilities. (o) WAIVER OF JURY TRIAL. EACH PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS AGREEMENT. (p) Each Pledgor agrees that the Administrative Agent may amend and replace Schedule 1 to this Agreement from time to time to reflect the purchase and pledge of Additional Pledged Shares hereunder without any further action on the part of any Pledgor and amend and file financing statements to reflect the amendments to Schedule 1 from time to time. * * * 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. PLEDGORS: THOMAS C. HILBERT IRREVOCABLE TRUST (By: Stephen C. Hilbert, as Trustee) /s/ Stephen C. Hilbert ------------------------------------- Name: Stephen C. Hilbert MARYJOSC, LP (By: Rollin M. Dick, General Partner) /s/ Rollin M. Dick ------------------------------------- Name: Rollin M. Dick NGAIRE E. CUNEO /s/ Ngaire E. Cuneo ------------------------------------- Name: Ngaire E. Cuneo John J. Sabl /s/ John J. Sabl ------------------------------------- Name: John J. Sabl THOMAS J. KILIAN /s/ Thomas J. Kilian ------------------------------------- Name: Thomas J. Kilian JAMES S. ADAMS /s/ James S. Adams ------------------------------------- Name: James S. Adams MAXWELL B. BUBLITZ /s/ Maxwell B. Bublitz ------------------------------------- Name: Maxwell B. Bublitz BRUCE A. CRITTENDEN /s/ Bruce A. Crittenden ------------------------------------- Name: Bruce A. Crittenden DENNIS E. MURRAY, SR. /s/ Dennis E. Murray, Sr. ------------------------------------- Name: Dennis E. Murray, Sr. DPM, LTD (By: Dennis E. Murray Sr. and Margaret A. Murray, General Partner /s/ Dennis E. Murray, Sr. ------------------------------------- Name: Dennis E. Murray, Sr. /s/ Margaret A. Murray ------------------------------------- Name: Margaret A. Murray DAVID R. DECATUR /s/ David R. Decatur ------------------------------------- Name: David R. Decatur JAMES D. MASSEY /s/ James D. Massey ------------------------------------- Name: James D. Massey LAWRENCE M. COSS /s/ Lawrence M. Coss ------------------------------------- Name: Lawrence M. Coss JOHN M. MUTZ /s/ John M. Mutz ------------------------------------- Name: John M. Mutz M. PHIL HATHAWAY /s/ M. Phil Hathaway ------------------------------------- Name: M. Phil Hathaway SCHEDULE I LISTING OF STOCK PLEDGED Number of Borrower Certificate No. Shares -------- --------------- --------- EX-10.8.24 10 EX-10.8.24 PROMISSORY NOTE $_________________________ Dated: September 15, 1999 Carmel, Indiana For value received, the undersigned, _____________________________, promises to pay to the order of Conseco Services, LLC, an Indiana limited liability company (the "Holder") or its assigns, at such place as the Holder may from time to time designate in writing, in lawful money of the United States which shall be legal tender in payment of all debts and dues public and private at the time of payment, the principal sum of $________ or, if less, the aggregate unpaid principal amount of all advances made by Conseco Services, LLC to or on behalf of the undersigned to pay interest under the Credit Agreement (as hereinafter defined). The undersigned also promises to pay interest on the unpaid balance of this Promissory Note (the "Note") at the rate and times hereinafter provided. Interest on the principal balance hereof from time to time remaining unpaid prior to maturity shall accrue at the variable rate per annum equal to the lowest interest rate per annum being paid by Conseco, Inc. under its most senior borrowing, calculated on the basis of a 360-day year counting the actual number of days elapsed; provided, however the interest rate shall in no event be lower than the Applicable Federal Rate as defined by Section 7872 of the Internal Revenue Code of 1986, as amended. However, after the Maturity Date (as hereinafter defined) or while there exists an Event of Default (as hereinafter defined), interest shall accrue at such rate plus three percent (3.0%) per annum. All unpaid principal and interest shall be due and payable on the same date (the "Maturity Date") as the principal amounts are due and payable by the undersigned for any loan under that certain Credit Agreement, dated as of September 15, 1999, among the undersigned, The Chase Manhattan Bank and the other financial institutions party thereto (the "Credit Agreement"). Interest on the principal balance hereof shall be due and payable in arrears on March 31, June 30, September 30 and December 31 of each year, beginning December 31, 1999. Interest shall also be paid on the date of any prepayment of this Note for the portion of this Note so prepaid. Maker may prepay this Note in full at any time or in part from time to time without premium penalty. The occurrence of one or more of the following events shall constitute an event of default ("Event of Default") under this Note: (a) default is made in the payment of any installment hereof, either principal or interest, or in the payment of any other sum due hereunder, on the day when the same shall be due and payable hereunder and such default in payment continues for ten (10) days; (b) any proceeding shall be commenced or any petition shall be filed seeking relief with respect to Maker under any bankruptcy, insolvency or similar law; (c) a receiver, trustee, custodian, sequestrator or similar official shall be appointed with respect to Maker or for a substantial part of its property; or (d) the death, the dissolution or termination of existence, or business failure of Maker. Upon the occurrence of an Event of Default hereunder, the Holder hereof may, at its option, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable, without notice, demand or presentment, all of which are hereby waived, and the Holder may offset against this Note any sum or sums owed by the Holder hereof to Maker. Upon the occurrence of an Event of Default under Section (b), (c) or (d) above, the entire unpaid principal of and accrued interest on this Note shall become immediately due and payable, without notice, demand or presentment, all of which are hereby waived. The Holder may offset against this Note any sum or sums owed by the Holder hereof to Maker. 2 Maker agrees to pay immediately upon demand all reasonable costs and expenses of the Holder, including reasonable attorneys' fees, (i) if, after an Event of Default, this Note is placed in the hands of an attorney or attorneys for collection, or (ii) if the Holder attempts to have any stay or injunction prohibiting the enforcement or collection of the Note lifted by any bankruptcy or other court, and any subsequent proceedings or appeals from any order or judgment entered in any such proceeding. The maker and any endorsers of this Note jointly and severally waive presentment for payment, notice of protest, dishonor and demand, protest, and diligence in bringing suit. This Note shall be construed according to and governed by the laws of the State of Indiana. Executed in Carmel, Indiana. _______________________________ 3 EX-12.1 11 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 nine months ended September 30, 1999 and the year ended December 31, 1998 (Dollars in millions) Nine months ended Year ended September 30, December 31, 1999 1998 ---- ---- Pretax income from operations: Net income........................................................... $ 788.0 $ 467.1 Add income tax expense............................................... 503.9 445.6 Add extraordinary charge on extinguishment of debt................... - 42.6 Add minority interest................................................ 93.9 90.4 -------- -------- Pretax income from operations.............................. 1,385.8 1,045.7 -------- -------- Add fixed charges: Interest expense on corporate debt, including amortization........... 124.0 165.4 Interest expense on finance debt..................................... 204.5 209.8 Interest expense on investment borrowings............................ 42.8 65.3 Other................................................................ .3 .5 Portion of rental(1)................................................. 11.1 14.6 -------- -------- Fixed charges................................................... 382.7 455.6 -------- -------- Adjusted earnings............................................... $1,768.5 $1,501.3 ======== ======== Ratio of earnings to fixed charges.............................. 4.62X 3.30X ===== ====== Ratio of earnings to fixed charges, excluding interest expense on debt related to finance receivables and other investments........................................... 11.23X 6.79X ====== ===== Fixed charges................................................... $ 382.7 $ 455.6 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)........................................... .9 13.6 Add distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts........ 144.5 139.1 ------- -------- Fixed charges................................................... $ 528.1 $ 608.3 ======= ======== Adjusted earnings............................................... $1,768.5 $1,501.3 ======== ======== Ratio of earnings to fixed charges, preferred dividends and distributions on Company-obligated mandatorily redeemable preferred securities of subsidiary trusts................... 3.35X 2.47X ======= ======== 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................................................... 5.42X 3.68X ====== ====== (1) Interest portion of rental is assumed to be 33 percent.
EX-27 12 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 9-MOS DEC-31-1999 SEP-30-1999 22,099,500 0 0 382,400 1,269,700 0 29,191,500 0 990,300 4,383,600 46,987,300 24,068,900 445,000 1,136,600 254,700 6,829,300 2,636,400 0 2,982,700 2,373,900 46,987,300 3,044,900 2,074,400 (95,900) 894,200 2,624,900 390,000 466,100 1,385,800 503,900 881,900 0 0 0 788,000 2.43 2.38 0 0 0 0 0 0 0 Includes $2,431,900 of cost of policies purchased. Includes $4,435,600 related to finance debt. Includes retained earnings of $3,106,300 and accumulated other comprehensive losses of $732,400. Includes gain on sale of finance receivables of $540,000 and fee revenue and other income of $354,200. Includes amortization of cost of policies purchased of $232,300 and amortization of cost of policies produced of $157,700.
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