UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF CONSECO, INC.
On April 6, 1998, Conseco, Inc. ("Conseco") and Green Tree Financial
Corporation ("Green Tree") entered into an Agreement and Plan of Merger pursuant
to which Green Tree would become a wholly owned subsidiary of Conseco (the
"Merger"). The following unaudited pro forma combined balance sheet as of March
31, 1998, combines the historical combined balance sheets of Conseco and Green
Tree as if the Merger had been effective on March 31, 1998, after giving effect
to certain adjustments described in the accompanying notes to the unaudited pro
forma combined financial information.
The unaudited pro forma combined statements of operations for the three
months ended March 31, 1998 and 1997, and for each of the three years ended
December 31, 1997, present the combined results of operations of Conseco and
Green Tree as if the Merger had been effective at the earliest period presented.
The unaudited pro forma combined financial information and accompanying
notes reflect the application of the pooling of interests method of accounting
for the Merger. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expense of Conseco and Green Tree
are combined and reflected at their historical amounts.
The unaudited pro forma combined financial statements are based on the
historical financial statements of Conseco and Green Tree and are qualified in
their entirety by, and should be read in conjunction with, these financial
statements and the notes thereto. The unaudited pro forma combined financial
statements are not necessarily indicative of the results of operations or the
combined financial position that would have resulted had the Merger been
consummated at the beginning of the period indicated, nor are they necessarily
indicative of future results of operations or financial position.
1
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1998
(Dollars in millions)
ASSETS
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- ----------
Investments:
Actively managed fixed maturities at fair value.................. $22,968.9 $ - $ - $22,968.9
Equity securities at fair value.................................. 263.4 - - 263.4
Interest only securities......................................... - 1,412.3 - 1,412.3
Finance receivables.............................................. - 2,154.6 - 2,154.6
Mortgage loans................................................... 474.2 - - 474.2
Credit-tenant loans.............................................. 596.6 - - 596.6
Policy loans..................................................... 691.7 - - 691.7
Other invested assets ........................................... 534.8 19.1 - 553.9
Short-term investments........................................... 837.7 888.7 - 1,726.4
Assets held in separate accounts................................. 675.2 - - 675.2
--------- -------- ------ ---------
Total investments.......................................... 27,042.5 4,474.7 - 31,517.2
Accrued investment income............................................ 399.9 - - 399.9
Other receivables.................................................... - 228.5 - 228.5
Servicing rights..................................................... - 111.8 - 111.8
Cost of policies purchased........................................... 2,442.6 - - 2,442.6
Cost of policies produced............................................ 1,022.5 - - 1,022.5
Reinsurance receivables.............................................. 761.8 - - 761.8
Income tax assets.................................................... 42.4 - (42.4) (2) -
Goodwill............................................................. 3,604.9 55.4 - 3,660.3
Property and equipment............................................... 176.0 121.2 - 297.2
Cash deposits, restricted............................................ - 234.2 - 234.2
Other assets......................................................... 431.3 29.4 - 460.7
--------- -------- ------ ---------
Total assets............................................... $35,923.9 $5,255.2 $(42.4) $41,136.7
========= ======== ====== =========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
2
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
March 31, 1998
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- ---------
Liabilities:
Insurance liabilities:
Interest sensitive products................................... $17,320.6 $ - $ - $17,320.6
Traditional products.......................................... 5,758.0 - - 5,758.0
Claims payable and other policyholder funds................... 1,617.3 - - 1,617.3
Unearned premiums............................................. 409.1 - - 409.1
Liabilities related to separate accounts...................... 675.2 - - 675.2
Investment borrowings............................................ 1,196.1 - - 1,196.1
Investor payables................................................ - 653.3 - 653.3
Other liabilities................................................ 1,223.4 556.2 240.0 (3) 2,019.6
Income tax liabilities........................................... - 637.4 (42.4) (2) 595.0
Notes payable and commercial paper:
Corporate...................................................... 2,435.1 - - 2,435.1
Related to finance receivables................................. - 2,059.1 - 2,059.1
--------- -------- ------- ---------
Total liabilities.......................................... 30,634.8 3,906.0 197.6 34,738.4
--------- -------- ------- ---------
Minority interest:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust...................... 1,388.1 - - 1,388.1
Common stock of subsidiary....................................... .7 - - .7
Shareholders' equity:
Preferred stock.................................................. 115.8 - - 115.8
Common stock and additional paid-in capital...................... 2,397.0 446.6 (222.6) (4) 2,621.0
Accumulated other comprehensive income:
Unrealized appreciation of fixed maturity investments......... 159.0 - - 159.0
Unrealized appreciation of other investments.................. 10.9 .9 - 11.8
Minimum pension liability adjustment.......................... - (3.1) - (3.1)
Less treasury shares at cost..................................... - (222.6) 222.6 (4) -
Retained earnings................................................ 1,217.6 1,127.4 (240.0) (3) 2,105.0
--------- -------- ------- ---------
Total shareholders' equity................................. 3,900.3 1,349.2 (240.0) 5,009.5
--------- -------- ------- ---------
Total liabilities and shareholders' equity................. $35,923.9 $5,255.2 $ (42.4) $41,136.7
========= ======== ======= =========
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
3
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 1998
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Revenues:
Insurance policy income:
Traditional products............................................. $ 859.4 $ - $ 859.4
Interest sensitive products...................................... 130.7 - 130.7
Net investment income............................................... 583.3 101.0 684.3
Gain on sale of receivables......................................... - 129.1 129.1
Net investment gains................................................ 104.8 - 104.8
Fee revenue and other income........................................ 20.8 55.7 76.5
-------- ------ --------
Total revenues.............................................. 1,699.0 285.8 1,984.8
-------- ------ --------
Benefits and expenses:
Insurance policy benefits........................................... 680.4 - 680.4
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 188.4 - 188.4
Other amounts added to variable and equity-indexed
annuity products........................................... 85.6 - 85.6
Interest expense on notes payable................................... 39.0 48.5 87.5
Interest expense on short-term investment borrowings................ 18.9 - 18.9
Amortization related to operations.................................. 117.1 - 117.1
Amortization related to investment gains............................ 86.4 - 86.4
Other operating costs and expenses.................................. 165.0 134.9 299.9
-------- ------ --------
Total benefits and expenses................................... 1,380.8 183.4 1,564.2
-------- ------ --------
Income before income taxes, minority interest
and extraordinary charge ................................. 318.2 102.4 420.6
Income tax expense...................................................... 131.3 38.9 170.2
-------- ------ --------
Income before minority interest and
extraordinary charge ..................................... 186.9 63.5 250.4
Minority interest - distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts, net of
income taxes........................................................ 19.4 - 19.4
-------- ------ --------
Income before extraordinary charge ......................... 167.5 63.5 231.0
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 16.4 - 16.4
-------- ------ --------
Net income.................................................. 151.1 63.5 214.6
Less preferred stock dividends.......................................... 2.0 - 2.0
-------- ------ --------
Net income applicable to common stock....................... $ 149.1 $ 63.5 $ 212.6
======== ====== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
4
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the three months ended March 31, 1998
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 185,941,000 134,237,000 (11,209,000) (4) 308,969,000
Net income before extraordinary charge ........................ $.89 $.47 $.74
Extraordinary charge .......................................... .09 - .05
---- ---- ----
Net income................................................ $.80 $.47 $.69
==== ==== ====
Diluted:
Weighted average shares outstanding........................... 207,930,000 135,820,000 (11,341,000) (4) 332,409,000
Net income before extraordinary charge ........................ $.81 $.47 $.70
Extraordinary charge........................................... .08 - .05
---- ---- ----
Net income................................................ $.73 $.47 $.65
==== ==== ====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
5
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the three months ended March 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Revenues:
Insurance policy income:
Traditional products............................................. $ 566.2 $ - $ 566.2
Interest sensitive products...................................... 103.9 - 103.9
Net investment income............................................... 409.2 75.4 484.6
Gain on sale of receivables......................................... - 153.4 153.4
Net investment gains................................................ 5.1 - 5.1
Fee revenue and other income........................................ 14.6 38.4 53.0
-------- ------ --------
Total revenues.............................................. 1,099.0 267.2 1,366.2
-------- ------ --------
Benefits and expenses:
Insurance policy benefits........................................... 455.3 - 455.3
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 173.7 - 173.7
Other amounts added to variable and equity-indexed
annuity products........................................... 16.2 - 16.2
Interest expense on notes payable................................... 25.8 29.8 55.6
Interest expense on short-term investment borrowings................ 2.8 - 2.8
Amortization related to operations.................................. 103.6 - 103.6
Amortization related to investment gains............................ 11.8 - 11.8
Other operating costs and expenses.................................. 114.4 89.3 203.7
-------- ------ --------
Total benefits and expenses................................... 903.6 119.1 1,022.7
-------- ------ --------
Income before income taxes, minority interest
and extraordinary charge ................................. 195.4 148.1 343.5
Income tax expense...................................................... 70.6 56.3 126.9
-------- ------ --------
Income before minority interest and
extraordinary charge ..................................... 124.8 91.8 216.6
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes.... 8.7 - 8.7
Dividends on preferred stock of subsidiaries........................ 1.3 - 1.3
-------- ------ --------
Income before extraordinary charge ........................... 114.8 91.8 206.6
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 3.3 - 3.3
-------- ------ --------
Net income.................................................... 111.5 91.8 203.3
Less amounts applicable to preferred stock:
Charge related to induced conversions............................... 12.3 - 12.3
Preferred stock dividends........................................... 2.3 - 2.3
-------- ------ --------
Net income applicable to common stock....................... $ 96.9 $ 91.8 $ 188.7
======== ====== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
6
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the three months ended March 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 177,670,000 138,511,000 (11,566,000) (4) 304,615,000
Net income before extraordinary charge ........................ $.57 $.66 $.63
Extraordinary charge .......................................... .02 - .01
---- ---- ----
Net income................................................ $.55 $.66 $.62
==== ==== ====
Diluted:
Weighted average shares outstanding........................... 203,620,000 142,220,000 (11,875,000) (4) 333,965,000
Net income before extraordinary charge ........................ $.51 $.65 $.58
Extraordinary charge........................................... .02 - .01
---- ---- ----
Net income................................................ $.49 $.65 $.57
==== ==== ====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
7
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Revenues:
Insurance policy income:
Traditional products............................................. $2,954.1 $ - $2,954.1
Interest sensitive products...................................... 456.7 - 456.7
Net investment income............................................... 1,825.3 370.6 2,195.9
Gain on sale of receivables......................................... - 546.8 546.8
Net investment gains................................................ 266.5 - 266.5
Fee revenue and other income........................................ 65.8 174.1 239.9
-------- -------- --------
Total revenues.............................................. 5,568.4 1,091.5 6,659.9
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 2,368.3 - 2,368.3
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 697.1 - 697.1
Other amounts added to variable and equity-indexed
annuity products........................................... 109.6 109.6
Interest expense on notes payable................................... 109.4 160.9 270.3
Interest expense on short-term investment borrowings................ 42.0 - 42.0
Amortization related to operations.................................. 408.8 - 408.8
Amortization related to investment gains............................ 181.2 - 181.2
Nonrecurring charges................................................ 71.7 - 71.7
Other operating costs and expenses.................................. 577.2 444.5 1,021.7
-------- -------- --------
Total benefits and expenses................................... 4,565.3 605.4 5,170.7
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 1,003.1 486.1 1,489.2
Income tax expense...................................................... 376.6 184.7 561.3
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 626.5 301.4 927.9
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes... 49.0 - 49.0
Dividends on preferred stock of subsidiaries........................ 3.3 - 3.3
-------- -------- --------
Income before extraordinary charge ......................... 574.2 301.4 875.6
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 6.9 - 6.9
-------- -------- --------
Net income.................................................. 567.3 301.4 868.7
Less amounts applicable to preferred stock:
Charge related to induced conversions............................... 13.2 - 13.2
Preferred stock dividends........................................... 8.7 - 8.7
-------- -------- --------
Net income applicable to common stock....................... $ 545.4 $ 301.4 $ 846.8
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
8
CONSECO, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1997
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 185,751,000 136,715,000 (11,416,000)(4) 311,050,000
Net income before extraordinary charge ........................ $2.98 $2.20 $2.74
Extraordinary charge .......................................... .04 - .02
----- ----- -----
Net income................................................ $2.94 $2.20 $2.72
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 210,179,000 140,254,000 (11,711,000)(4) 338,722,000
Net income before extraordinary charge ........................ $2.67 $2.15 $2.55
Extraordinary charge........................................... .03 - .02
----- ----- -----
Net income................................................ $2.64 $2.15 $2.53
===== ===== =====
The accompanying notes are an integral
part of the unaudited pro forma combined financial
statements.
9
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Revenues:
Insurance policy income:
Traditional products............................................. $1,384.3 $ - $1,384.3
Interest sensitive products...................................... 269.9 - 269.9
Net investment income............................................... 1,302.5 215.3 1,517.8
Gain on sale of receivables......................................... - 389.7 389.7
Net investment gains................................................ 60.8 - 60.8
Fee revenue and other income........................................ 49.8 119.1 168.9
-------- -------- --------
Total revenues.............................................. 3,067.3 724.1 3,791.4
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 1,195.0 - 1,195.0
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 620.2 - 620.2
Other amounts added to variable and equity-indexed
annuity products........................................... 48.4 - 48.4
Interest expense on notes payable................................... 108.1 70.1 178.2
Interest expense on short-term investment borrowings................ 22.0 - 22.0
Amortization related to operations.................................. 240.0 - 240.0
Amortization related to investment gains............................ 36.0 - 36.0
Other operating costs and expenses.................................. 304.0 330.2 634.2
-------- -------- --------
Total benefits and expenses................................... 2,573.7 400.3 2,974.0
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 493.6 323.8 817.4
Income tax expense...................................................... 179.8 123.0 302.8
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 313.8 200.8 514.6
Minority interest:
Distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of income taxes... 3.6 - 3.6
Dividends on preferred stock of subsidiaries........................ 8.9 - 8.9
Equity in earnings of subsidiaries.................................. 22.4 - 22.4
-------- -------- --------
Income before extraordinary charge ......................... 278.9 200.8 479.7
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 26.5 - 26.5
-------- -------- --------
Net income.................................................. 252.4 200.8 453.2
Less preferred stock dividends.......................................... 27.4 - 27.4
-------- -------- --------
Net income applicable to common stock....................... $ 225.0 $ 200.8 $ 425.8
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the pro forma combined financial
statements.
10
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1996
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 104,584,000 136,996,000 (11,439,000)(4) 230,141,000
Net income before extraordinary charge ........................ $2.40 $1.47 $1.96
Extraordinary charge .......................................... .25 - .11
----- ----- -----
Net income................................................ $2.15 $1.47 $1.85
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 138,860,000 140,562,000 (11,737,000)(4) 267,685,000
Net income before extraordinary charge ........................ $2.01 $1.43 $1.79
Extraordinary charge........................................... .19 - .10
----- ----- -----
Net income................................................ $1.82 $1.43 $1.69
===== ===== =====
The accompanying notes are an integral
part of the pro forma combined financial
statements.
11
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
for the year ended December 31, 1995
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Revenues:
Insurance policy income:
Traditional products............................................. $1,355.6 $ - $1,355.6
Interest sensitive products...................................... 109.4 - 109.4
Net investment income............................................... 1,142.6 176.0 1,318.6
Gain on sale of receivables......................................... - 448.7 448.7
Net investment gains................................................ 204.1 - 204.1
Fee revenue and other income........................................ 43.6 86.6 130.2
-------- -------- --------
Total revenues.............................................. 2,855.3 711.3 3,566.6
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 1,107.5 - 1,107.5
Amounts added to annuity and financial product
policyholder account balances:
Interest...................................................... 556.6 - 556.6
Other amounts added to variable and equity-indexed
annuity products........................................... 28.8 - 28.8
Interest expense on notes payable................................... 119.4 57.3 176.7
Interest expense on short-term investment borrowings................ 22.2 - 22.2
Amortization related to operations.................................. 203.6 - 203.6
Amortization related to investment gains............................ 126.6 - 126.6
Other operating costs and expenses.................................. 272.1 244.4 516.5
-------- -------- --------
Total benefits and expenses................................... 2,436.8 301.7 2,738.5
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ................................. 418.5 409.6 828.1
Income tax expense...................................................... 87.0 155.6 242.6
-------- -------- --------
Income before minority interest and
extraordinary charge ..................................... 331.5 254.0 585.5
Minority interest:
Dividends on preferred stock of subsidiaries........................ 11.9 - 11.9
Equity in earnings of subsidiaries.................................. 97.1 - 97.1
-------- -------- --------
Income before extraordinary charge ......................... 222.5 254.0 476.5
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 2.1 - 2.1
-------- -------- --------
Net income.................................................. 220.4 254.0 474.4
Less preferred stock dividends.......................................... 18.4 - 18.4
-------- -------- --------
Net income applicable to common stock....................... $ 202.0 $ 254.0 $ 456.0
======== ======== ========
(continued on next page)
The accompanying notes are an integral
part of the pro forma combined financial
statements.
12
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
for the year ended December 31, 1995
(Dollars in millions, except per share data)
PRO FORMA
CONSECO GREEN TREE ADJUSTMENTS COMBINED
------- ---------- ----------- --------
Earnings per common share:
Basic:
Weighted average shares outstanding............................ 81,405,000 136,644,000 (11,410,000)(4) 206,639,000
Net income before extraordinary charge ........................ $2.51 $1.86 $2.22
Extraordinary charge .......................................... .03 - .01
----- ----- -----
Net income................................................ $2.48 $1.86 $2.21
===== ===== =====
Diluted:
Weighted average shares outstanding............................ 103,881,000 140,090,000 (11,698,000)(4) 232,273,000
Net income before extraordinary charge ........................ $2.14 $1.81 $2.05
Extraordinary charge........................................... .02 - .01
----- ----- -----
Net income................................................ $2.12 $1.81 $2.04
===== ===== =====
The accompanying notes are an integral
part of the pro forma combined financial
statements.
13
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma combined financial statements have been prepared
assuming that the Merger will be accounted for under the pooling of
interests method and are based on the historical consolidated financial
statements of Conseco and Green Tree. Certain amounts in the historical
financial statements of Green Tree have been reclassified to conform with
Conseco's historical financial statement presentation.
Conseco and Green Tree are still in the process of reviewing their
respective accounting policies relative to those followed by the other
entity. As a result of this review, it might be necessary to restate
certain amounts in Conseco's or Green Tree's financial statements to
conform to those accounting policies that are most appropriate. In
management's opinion, any such restatements will not be material.
Green Tree pools and securitizes substantially all of the loan contracts
it originates, retaining: (i) investments in interest-only securities
that are subordinated to the rights of other investors; and (ii) the
servicing on the contracts. The valuation of interest-only securities and
servicing rights is determined by discounting the projected cash flows
over the expected life of the finance receivables sold using prepayment,
default, loss, servicing cost and discount rate assumptions. Impairment
in the value of interest-only securities considered other than temporary
is recognized as a reduction to earnings, while impairment that is
temporary is recognized as a reduction to shareholders' equity.
Impairment in the value of servicing rights is recognized as a reduction
in earnings. The assumptions used in calculating the value of
interest-only securities and servicing rights are subject to volatility.
Prepayments resulting from competition, obligor mobility, general and
regional economic conditions, and prevailing interest rates, as well as
actual losses incurred, may vary from the performance projected in future
periods. Assumptions with respect to future prepayments, defaults,
losses, servicing costs and discount rates are reviewed periodically. As
disclosed in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, Green Tree realized a material writedown of its interest-
only securities due to higher than expected prepayments. Prepayments have
continued to exceed expectations in April 1998. If prepayments continue
above expectations, or upon review certain other assumptions are revised,
it is likely that there will be a further material writedown in the value
of the interest-only securities and servicing rights and this reduction
in value could materially affect operating results. Any adjustments to be
made in future periods will depend on circumstances existing at that
time.
The unaudited pro forma consolidated financial information should be read
in conjunction with the historical consolidated financial statements of
Conseco and Green Tree and the notes thereto.
2. INCOME TAX LIABILITIES
The income tax assets of Conseco are netted against the income tax
liabilities of Green Tree.
3. MERGER AND INTEGRATION COSTS
In connection with the Merger, Conseco expects to incur Merger-related
costs of approximately $240 million, net of income taxes. Such costs
include investment banking, accounting, legal and regulatory fees,
severance and retention costs and other costs associated with the Merger.
These expenses (including the related tax effect) have been reflected in
the unaudited pro forma combined balance sheet financial information, but
are not reflected in the unaudited pro forma statement of operations
financial information since such expenses are not expected to have a
continuing impact on the combined company.
4. SHAREHOLDERS' EQUITY AND WEIGHTED AVERAGE SHARES OUTSTANDING
Weighted average shares outstanding have been adjusted to reflect the
issuance of .9165 shares of Conseco common stock for each share of Green
Tree common stock or equivalent. The following shares of Green Tree
common stock or equivalents were outstanding at April 6, 1998: (i)
134,012,054 shares of Green Tree common stock; (ii) 10,297,132 options
outstanding to purchase Green Tree common stock at an average price of
$23.12 per share (such options are equivalent to 6,174,713 shares of
Conseco common stock, based on the last reported sale price of a share of
Conseco common stock on April 6, 1998); and (iii) warrants to purchase
2,735,688 shares of Green Tree common stock at $22.75 per share (such
warrants are equivalent to 710,568 shares of Conseco common stock, based
on the last reported sale price of a share of Conseco common stock on
April 6, 1998 based on Green Tree's right to call the warrant by issuing
stock equivalents at $15 per warrant). The treasury stock held by Green
Tree prior to the Merger has been reclassified to common stock and
additional paid-in capital to conform to Conseco's presentation.
5. OPERATING COST SAVINGS
No adjustment has been included in the unaudited pro forma consolidated
financial information for the anticipated operating cost savings. The
combined company expects to achieve operating cost savings through the
reduction of certain borrowing costs as well as potentially through the
elimination of redundant staff functions, data processing, marketing
synergies and certain back office operations and the reduction of
corporate overhead. There can be no assurance that anticipated operating
cost savings will be achieved.
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