UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): June 30, 1998
CONSECO, INC.
(Exact name of registrant as specified in its charter)
Indiana 1-9250 35-1468632
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(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
organization)
11825 North Pennsylvania Street
Carmel, Indiana 46032
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(Address of principal executive offices) (Zip Code)
(317) 817-6100
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address,
if changed since last report.)
CONSECO, INC. AND SUBSIDIARIES
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INDEX
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Page
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Item 2 - Acquisition or Disposition of Assets 3
Item 5 - Other Events 3
Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The historical audited consolidated financial statements of Green
Tree Financial Corporation as of December 31, 1997 and 1996 and
for each of the three years ended December 31, 1997 are
incorporated by reference to Exhibit 99.3 filed herewith. 17
The unaudited consolidated financial statements of Green Tree
Financial Corporation as of March 31, 1998, and for the three
month periods ended March 31, 1998 and 1997 are incorporated by
reference to Exhibit 99.4 filed herein. 17
(b) Pro Forma Financial Information.
Pro Forma Combined Financial Statements of Conseco, Inc. and
Subsidiaries were filed with the Commission as Exhibit 99.1 to
the Registrant's Form 8-K dated June 3, 1998, and are
incorporated herein by this reference and are being filed
pursuant to General Instruction F to Form 8-K. 18
(c) Exhibits. 32
Exhibit 2.1 Agreement and Plan of Merger dated as of April 6,
1998, as amended, among Conseco, Inc., Marble
Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Conseco, Inc. and Green
Tree Financial Corporation (composite conformed
copy included as Annex A to the Joint Proxy
Statement - Prospectus of Conseco, Inc. contained
within the Registration of Conseco, Inc. on Form
S-4 (File No. 333-51123) which Agreement and
Plan of Merger is incorporated herein by
reference).
Exhibit 12.1 Computation of Earnings to Fixed Charges
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 23.2 Consent of KPMG Peat Marwick LLP
Exhibit 23.3 Consent of PricewaterhouseCoopers LLP
Exhibit 27 Restated Financial Data Schedule
Exhibit 27.1 Restated Financial Data Schedule
Exhibit 27.2 Restated Financial Data Schedule
Exhibit 99.1 Supplemental Consolidated Financial Statements of
Conseco, Inc. as of December 31, 1997 and 1996, and
for each of the three years ended December 31,
1997.
Exhibit 99.2 Unaudited Supplemental Consolidated Financial
Statements of Conseco, Inc. as of March 31, 1998,
and for the three months ended March 31, 1998 and
1997.
Exhibit 99.3 Consolidated Financial Statements of Green Tree
Financial Corporation as of December 31, 1997 and
1996 and for each of the three years ended December
31, 1997.
Exhibit 99.4 Unaudited Consolidated Financial Statements of
Green Tree Financial Corporation as of March
31,1998, and for the three months ended March 31,
1998 and 1997.
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1998, Conseco, Inc. ("Conseco") completed the acquisition
(the "Merger") of Green Tree Financial Corporation ("Green Tree") pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated as of April 6, 1998,
as amended, among Conseco, Marble Acquisition Corp., a Delaware corporation and
a wholly owned subsidiary of Conseco, and Green Tree. In the Merger, each share
of Green Tree's common stock, par value $.01 per share was converted into 0.9165
of a share of Conseco's common stock, no par value. Conseco issued approximately
124 million shares of Conseco common stock in exchange for all of Green Tree's
common shares and equivalents. After the Merger, Conseco's total common shares
outstanding increased to approximately 312 million. As a result of the Merger,
Green Tree became a wholly owned subsidiary of Conseco. The Merger will be
accounted for as a pooling of interests.
Green Tree is a diversified financial services company that provides
financing for manufactured homes, home equity, home improvements, consumer
products and equipment and provides consumer and commercial revolving credit.
Green Tree's insurance agencies market physical damage and term mortgage life
insurance and other credit protection relating to the customers' contracts Green
Tree services. Green Tree is the largest servicer of manufactured housing
contracts in the United States. Through its principal offices in Saint Paul,
Minnesota and service centers throughout the United States, Green Tree serves
all 50 states.
Green Tree pools and securitizes substantially all of the contracts it
originates, retaining the servicing on the contracts. Such pools are structured
into asset-backed securities which are sold in the public securities markets. In
servicing the contracts, Green Tree collects payments from the borrower and
remits principal and interest payments to the holder of the contract or investor
certificate backed by the contracts.
Green Tree was originally incorporated under the laws of the State of
Minnesota in 1975. In 1995, Green Tree reincorporated under the laws of the
State of Delaware. Green Tree's principal executive offices are located at 1100
Landmark Towers, 345 Saint Peter Street, Saint Paul, Minnesota 55102-1639, and
its telephone number is (612) 293-3400.
ITEM 5. OTHER EVENTS.
A. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As reported above under Item 2, on June 30, 1998, Conseco completed
its merger with Green Tree. The Merger was accounted for as a "pooling of
interests" under generally accepted accounting principles.
The following supplemental consolidated financial statements of
Conseco restating Conseco's historical consolidated financial statements as of
and for the three years ended December 31, 1997, to reflect the Merger are
incorporated herein by reference to Exhibit 99.1 filed herewith:
1. Management's Discussion and Analysis.
2. Consolidated Balance Sheet at December 31, 1997 and 1996.
3. Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995.
4. Consolidated Statement of Shareholder's Equity for the years ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statement of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
6. Notes to Consolidated Financial Statements.
The report of PricewaterhouseCoopers LLP, independent accountants, on
the supplemental consolidated financial statements of Conseco as of December 31,
1997 and 1996, and for each of the three years ended December 31, 1997 is filed
herein as part of Exhibit 99.1 and the related consent is filed herein as
Exhibit 23.1. Both the opinion and consent are incorporated herein by reference.
The following unaudited supplemental interim consolidated financial
statements of Conseco restating Conseco's historical unaudited consolidated
financial statements as of March 31, 1998, and for the three months ended March
31, 1998 and 1997, to reflect the Merger are incorporated herein by reference to
Exhibit 99.2 filed herein.
1. Consolidated Balance Sheet at March 31, 1998 (unaudited) and
December 31, 1997.
2. Consolidated Statement of Operations for the three months ended
March 31, 1998 and 1997 (unaudited).
3. Consolidated Statement of Shareholder's Equity for the three
months ended March 31, 1998 and 1997 (unaudited).
4. Consolidated Statement of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited).
5. Notes to the Consolidated Financial Statements (unaudited).
3
B. BUSINESS OF GREEN TREE
Green Tree Financial Corporation ("Green Tree" or the "Company" as used in
Item 5.B herein) is a diversified financial services company with operations
serving customers in the consumer finance, commercial finance and insurance
markets. Through its principal offices in Saint Paul, Minnesota and service
centers throughout the United States, Green Tree serves all 50 states.
The Company originates a variety of fixed term financing transactions on either
a "direct" or "indirect" basis. Under an "indirect" financing transaction, a
dealer sells a product to a customer and enters into a sales contract with the
customer evidencing a monetary obligation and providing security for that
obligation. The Company purchases such sales contracts from dealers and
contractors in the ordinary course of its business. Under a "direct"
origination, the Company and borrower are direct parties to the loan
documentation which evidences the borrower's obligation to the Company.
References herein to the terms "contracts," "sales contracts" or "loans" may be
used to refer to either "direct" or "indirect" financing transactions as the
context requires. Reference herein to the term "finance volume" refers to the
dollar amount of loans originated by the Company in a given period. All direct
or indirect originations are written on forms provided or approved by the
Company and are originated or purchased on an individually approved basis in
accordance with Company underwriting guidelines.
The Company provides commercial revolving credit to dealers, manufacturers and
distributors of various consumer and commercial products and provides consumer
revolving credit through selected merchants and dealers. Pursuant to the terms
of such revolving credit agreements, the Company funds product inventory or
customer purchases. Typically inventory products secure the commercial
revolving credit transactions. Reference herein to the term "revolving credit"
may be used in reference to commercial finance, floorplan receivables, asset-
based receivables or retail credit.
Green Tree pools and securitizes substantially all of the contracts it
originates, retaining the servicing on the contracts. Such pools are structured
into asset-backed securities which are primarily sold in the public securities
markets. In the servicing contracts, the Company collects payments from the
borrower and remits principal and interest payments to the holder of the
contract or investor certificate backed by the contracts. References herein to
the term "managed finance receivables" refers to the total dollar amount of
loans serviced as of a certain point in time without regard to whether or not
the loans have been securitized.
The Company was originally incorporated under the laws of the State of Minnesota
in 1975. In 1995, the Company reincorporated under the laws of the State of
Delaware. Green Tree Financial Corporation's principal executive offices are
located at 1100 Landmark Towers, 345 Saint Peter Street, Saint Paul, Minnesota
55102-1639, and its telephone number is (612) 293-3400. Unless the context
otherwise requires, "Green Tree" or the "Company" means Green Tree Financial
Corporation and its subsidiaries.
4
Consumer Financing Activities
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Manufactured Housing
"Manufactured housing" (MH) or a "manufactured home" is a structure,
transportable in one or more sections, which is designed to be a dwelling with
or without a permanent foundation. Since most manufactured homes are never
moved once the home has reached the homesite, the wheels and axles are removable
and have not been designed for continuous use. Manufactured housing does not
include either modular housing (which typically involves more sections, greater
assembly and a separate means of transporting the sections) or recreational
vehicles ("RV's") (which are either self-propelled vehicles or units towed by
passenger vehicles).
The majority of the Company's sales contracts for manufactured home purchases
are financed on a conventional basis, with a small number of units insured by
the FHA or partially guaranteed by the VA. With respect to manufactured
housing, the relative volume of conventional, FHA or VA contracts originated by
the Company depends on customer and dealer preferences as well as prevailing
market conditions. The Company has developed more cost effective conventional
manufactured housing lending programs and as a result, FHA and VA contracts
represented less than 1% of the Company's manufactured housing originations
during 1997. FHA and VA contracts constituted 5% of the Company's servicing
portfolio at December 31, 1997. Manufactured housing contracts are generally
subject to minimum down payments of at least 5% of the amount financed. The
Company offers manufactured housing contract terms of up to 30 years.
Through its regional service centers, the Company arranges to purchase MH
contracts from MH dealers located throughout the United States. The Company's
regional service center personnel contact dealers located in their region and
explain the Company's available financing plans, terms, prevailing rates, and
credit and financing policies. If the dealer wishes to utilize the Company's
available customer financing, the dealer must make an application for dealer
approval. Upon satisfactory results of the Company's investigation of the
dealer's creditworthiness and general business reputation, the Company and the
dealer execute a dealer agreement. The Company also originates manufactured
housing installment loan agreements directly with customers. For the year ended
December 31, 1997, the Company's manufactured housing contract originations
consisted of 79% purchased from dealers, and 21% directly originated by the
Company.
The dealer or the customer submits the customer's credit application and, with
respect to new manufactured homes, the purchase order to a central or regional
service center where Company personnel make an analysis of the creditworthiness
of such customer. If the application meets the Company's guidelines and credit
is approved, the Company generally purchases the contract after the manufactured
home is delivered and set up and the customer has moved in.
For manufactured housing contracts, the Company uses a proprietary automated
credit scoring system. The scoring system is statistically based, quantifying
information using variables obtained from customer credit applications and
credit reports. As of December 31, 1997, this credit scoring system has been
used in making credit determinations on over three million applications.
5
Home Equity
The Company originates home equity loans through a system of retail satellite
offices and regional centers, and through a network of correspondent lenders.
As of December 31, 1997, the Company marketed home equity loan products directly
to consumers from 75 retail satellite offices and six regional centers located
throughout the United States. The satellite offices are responsible for
originating, processing, underwriting and funding the loan transaction.
Subsequently, loans are re-underwritten in the regional service center and on a
test basis by a third party to ensure compliance with policy. Upon completion
of the loan closing, the loan package is forwarded to the Company's loan
servicing center located in Tempe, Arizona. The servicing center is responsible
for handling customer service and loan functions, as well as performing document
handling, custodial and quality control functions.
During 1997, approximately 50% of the Company's home equity finance volume
resulted from the Company's marketing personnel working directly with consumers.
The remaining finance volume was the result of transactions between the Company
and correspondents, with a much smaller percentage of transactions occurring
between the Company and brokers. (The purchases from correspondents typically
occur on a monthly basis either on a flow or bulk basis from a network of
approximately 75 correspondents.) The Company re-underwrites each of the loan
documents forwarded from correspondents to ensure compliance with the Company's
underwriting, grading and pricing policies.
Typically, home equity loans are secured by first or second liens on site-built
homes. Homes used for collateral in securing home equity loans may be either
residential or investor owned one-to-four-family properties having a minimum
appraised value of $25,000. During 1997 and 1996, approximately 75% of the
loans originated were secured by first liens. The average loan to value for the
same period for the loans originated was approximately 85%. The majority of the
Company's home equity loans are fixed rate closed end loans. The Company
periodically purchases adjustable rate loans from its correspondent network.
Adjustable rate loans accounted for 15% of the Company's home equity finance
volume during 1997.
Home Improvement
The Company originates the majority of its home improvement loan contracts
indirectly through a network of home improvement contractors located throughout
the United States. The Company has a contractor approval process pursuant to
which the financial condition, business experience and qualifications of the
contractor are reviewed prior to his or her approval to sell contracts to the
Company.
The Company finances both conventional home improvement (HI) contracts and HI
contracts insured through the FHA Title I program. Such contracts are generally
secured by first, second or, to a lesser extent, third liens on the improved
real estate. The Company has also implemented an unsecured conventional HI
lending program for certain customers which generally allows for loan amounts
ranging from $2,500 to $15,000. Unsecured loans account for less than 10% of
the home improvement servicing portfolio.
Typically, the approved contractor submits the customer's credit application and
construction contract to the Company's centralized service center, where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by the
6
Company in 1993. If it is determined that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured
contracts) and the credit is approved, the Company purchases the contract from
the contractor generally when the customer verifies satisfactory completion of
the work.
During 1997, the Company launched a direct-to-consumer origination channel for
home improvement loans. Through a direct mail solicitation campaign, the
customer calls the Company's telemarketing center and the Company's sales
representative explains to the customer the available financing plans, terms and
rates depending on the customers needs. The majority of the loans are secured
by a second or third lien on the real estate of the customer. This direct
channel resulted in approximately 5% of the home improvement finance volume
during 1997.
The types of home improvements financed by the Company include exterior
renovations, such as windows, siding and roofing; pools and spas; kitchen and
bath remodeling; and room additions and garages. The Company may also, under
certain limited conditions, extend additional credit beyond the purchase price
of the home improvement for the purpose of debt consolidation.
Consumer Products
Green Tree provides consumer financing for the purchase of marine products
(including boats, boat trailers and outboard motors); motorcycles; recreational
vehicles; sport vehicles (including snowmobiles, personal watercraft and all-
terrain vehicles); pianos and organs; and horse and utility trailers.
The Company arranges to purchase certain contracts originated by dealers
throughout the United States. The Company's personnel contact dealers and
explain Green Tree's available financing plans, terms, prevailing rates and
credit and financing policies. If the dealer wishes to utilize the Company's
available customer financing, the dealer must complete an application for
approval.
The approved dealer submits the customer's credit application and purchase order
to the Company's central service center where an analysis of the
creditworthiness of the proposed buyer is made. If the application meets the
Company's guidelines and credit is approved, the Company purchases the contract
when the customer completes the purchase transaction with the dealer.
Revolving Credit Card
The Company began offering a private label retail credit program in 1996 and has
entered into program agreements with selected retailers to provide competitive
credit card services to the customers of such retailers. Green Tree chartered a
limited purpose credit card bank to conduct its credit card business. The bank,
Green Tree Retail Services Bank, is a state chartered bank located in Rapid
City, South Dakota. The Company has a retailer approval process pursuant to
which the financial condition, business experience and customer service
reputation are reviewed. The Company also underwrites the credit of individual
customers for approval utilizing a credit scoring system.
7
On November 2, 1997, the Company chartered a Utah industrial loan company, Green
Tree Capital Bank, Inc. ("Capital Bank"). This entity has the authority to
engage generally in the banking business, including the acceptance of all types
of deposits, other than demand deposits. Consumer retail credit card business
was first conducted in the Capital Bank in January 1998.
Commercial Financing Activities
- - -------------------------------
Commercial
Through its three regional lending centers, the Company extends credit generally
under revolving credit agreements with dealers, manufacturers and distributors
("Dealer") of various consumer and commercial products. "Floorplan Receivables"
represent the financing of product inventory for retail dealers of a variety of
consumer products. The products securing the Floorplan Receivables currently
include manufactured housing, recreational vehicles and marine products.
"Asset-Based Receivables" generally represent the financing of production and
inventory by manufacturers, such revolving credit arrangements being secured by
finished goods inventory, accounts receivable rising from the sale of such
inventory, certain work-in-process, raw materials and component parts, as well
as other assets of the borrower, and may include real estate.
The Company will provide floorplan financing for products for a particular
dealer or distributor, in most instances, only if the Company has also entered
into a floorplanning agreement with the manufacturer, distributor or other
vendor of such product. A Dealer requesting the establishment of a credit line
with Green Tree is required to submit an application and financial information.
Advances made for the purchase of inventory are most commonly arranged in the
following manner: the Dealer will contact the manufacturer and place a purchase
order for a shipment of inventory. If the manufacturer has been advised that
Green Tree is the Dealer's inventory financing source, the manufacturer will
contact Green Tree to obtain an approval number with respect to such purchase
order. Upon such request, the Company will determine whether (i) the
manufacturer is in compliance with its floorplan agreement, (ii) the Dealer is
in compliance with its program with Green Tree and (iii) such purchase order is
within the Dealer's credit limit. If all of such requirements are met, the
Company will issue an approval number to the manufacturer. The manufacturer
will then ship the inventory and directly submit its invoice for such purchase
order to Green Tree for payment. Interest or finance charges normally begin to
accrue on the Dealer's accounts as of the invoice date. The proceeds of the
loan being made by the Company to the Dealer are paid directly to the
manufacturer in satisfaction of the invoice price and are often funded a number
of days subsequent to the invoice date depending upon the Company's arrangements
with the manufacturer. Inventory inspections are frequently performed to
physically verify the collateral used to secure a Dealer's loan, check the
condition of the inventory, account for any missing inventory and collect any
funds due. Approximately two-thirds of Green Tree's MH dealers are participants
in this program.
8
Asset-Based Receivables are credit facilities provided to certain manufacturers
and distributors which typically involve a revolving line of credit, for a
contractually committed period of time, pursuant to which the borrower may draw
the lesser of the maximum amount of such line of credit or a specifically
negotiated loan availability amount, subject to the availability of adequate
collateral. The loan availability amount is determined by multiplying an agreed
upon advance rate against the value of certain types of assets. In these
facilities, Green Tree will most typically lend against finished inventory and
eligible accounts receivable arising from the sale of such inventory which are
free and clear of other liens and otherwise in compliance with specified
standards. Certain Asset-Based Receivables may also be secured by real estate.
Equipment
The Company's equipment finance operations provide financing programs for
commercial borrowers, including truck and trailer financing for over the road
new and used class eight trucks/tractors and new and used trailers. In
addition, financing is provided on various types of new and used aircraft, from
small single engine pistons to multi-jet engine aircraft. Financing or lease
agreements for office automation equipment (e.g., telecommunication systems,
facsimile machines, copiers) and other equipment types, and fixed rate financing
for the land, building or equipment of franchise operations are also available.
Company sales personnel contact equipment dealers or vendors and provide an
explanation of the available financing plans offered, including terms,
prevailing interest rates, credit guidelines, residual purchase options, and
financing policies. The dealer or vendor submits an application for approval if
the dealer or vendor wishes to utilize Green Tree available financing for their
commercial customer.
Upon receipt of a customer's credit application and purchase order from the
dealer or vendor, the Company analyzes the creditworthiness of the applicant.
If the application meets the Company's guidelines and credit is approved, the
Company purchases the sales contract or lease equipment at the time the customer
accepts delivery of the product. Customer service, collection and other
administrative and support functions for the Company's equipment operations are
handled from the Company's offices in Saint Paul and Bloomington, Minnesota and
in Paramus, New Jersey.
Other Activities
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Insurance
Through certain subsidiaries, the Company markets physical damage insurance on
manufactured homes, certain consumer and equipment products and dealer inventory
which collateralize contracts and receivables serviced by the Company. The
Company also markets term mortgage and credit life insurance to its manufactured
housing, home improvement, home equity and equipment finance customers and
provides retail credit insurance to consumer cardholders. In addition, the
Company owns a reinsurance subsidiary which functions as a reinsurer for
policies written by selected other insurers covering individuals whose contracts
are serviced by the Company.
9
The following table provides certain information with respect to new written
premiums (gross premiums on new or renewal policies issued less cancellations of
previous policies) on policies written by the Company. The Company acts as an
agent with respect to the sale of such policies and, in some cases, the Company
also acts as reinsurer of such policies.
Year ended December 31
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1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------
(dollars in thousands)
Net written premiums:
Physical damage $109,623 $ 91,883 $82,438 $63,979 $48,172
Credit/Mortgage Insurance 13,534 12,125 10,154 7,240 5,683
-------------- -------------- -------------- -------------- --------------
Total $123,157 $104,008 $92,592 $71,219 $53,855
============== ============== ============== ============== ==============
Managed Finance Receivables
- - ---------------------------
The Company services all of the fixed term and revolving credit receivables that
it originates or purchases from other originators, collecting loan payments,
taxes and insurance payments, where applicable, and other payments from
borrowers and remitting principal and interest payments to the holders of its
asset-backed securities.
The following table reflects the composition of the Company's managed finance
receivables at December 31, for the years indicated.
December 31
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1997 1996 1995 1994 1993
---------------- -------------- -------------- -------------- --------------
(dollars in millions)
Fixed term $ 26,036 $ 18,965 $ 13,314 $ 9,653 $ 7,194
Revolving credit 1,921 1,108 574 168 --
---------------- -------------- -------------- -------------- --------------
Total $ 27,957 $ 20,073 $ 13,888 $ 9,821 $ 7,194
================ ============== ============== ============== ==============
Number of fixed term
contracts serviced 1,076,000 827,000 657,000 512,000 406,000
Number of revolving credit
accounts serviced 700,000 180,000 23,000 8,000 --
Credit Quality
- - --------------
The Company considers revolving credit receivables with any due and unpaid
balance and fixed term receivables with any due and unpaid balance of $25 or
more to be delinquent. Beginning in 1996, certain receivables for which the
obligor was in bankruptcy but was current under their court-approved bankruptcy
payment plan were generally not considered delinquent. Delinquent receivables
are subject to acceleration and repossession or foreclosure of the underlying
collateral.
10
The following table provides certain information with respect to the 60-days-
and-over contractual dollar delinquency, loss experience and repossessed
collateral for the Company's managed finance receivables as of December 31, for
the years indicated.
1997 1996 1995
------------- ------------- -------------
Delinquency (a)
Manufactured Housing 1.22% 1.19% .96%
Home Equity/Improvement .88% .85% .56%
Other Consumer 1.24% .94% .84%
------------- ------------- -------------
Total Consumer Lending 1.15% 1.13% .92%
Commercial Lending .55% .61% 1.81%
------------- ------------- -------------
Total 1.08% 1.08% .93%
============= ============= =============
Net Credit Losses (b)
Manufactured Housing 1.15% .76% .56%
Home Equity/Improvement .69% 1.12% .59%
Other Consumer 1.20% .52% .46%
------------- ------------- -------------
Total Consumer Lending 1.07% .77% .56%
Commercial Lending .75% .44% .04%
------------- ------------- -------------
Total 1.04% .74% .56%
============= ============= =============
Repossessed Collateral (c)
Manufactured Housing 1.04% .93% .65%
Home Equity/Improvement .71% .23% .09%
Other Consumer .69% .51% .35%
------------- ------------- -------------
Total Consumer Lending .95% .84% .60%
Commercial Lending 1.00% 1.26% .27%
------------- ------------- -------------
Total .95% .85% .58%
============= ============= =============
(a) As a percentage of managed finance receivables at period end, excluding
receivables already in repossession or foreclosure.
(b) As a percentage of average managed finance receivables during the period,
net of recoveries.
(c) Includes receivables in the process of foreclosure and repossessed
collateral in process of liquidation as a percentage of managed receivables
at period end.
Prior to 1997, the Company reported delinquency information separately for fixed
term contracts and commercial and consumer revolving credit. Fixed term
contracts were based on the number of contracts delinquent and commercial and
consumer revolving credit was based on the dollar amount delinquent. In 1997,
the Company began reporting delinquencies based on dollars by product line. The
1996 and 1995 delinquency information has been restated for comparative
purposes. As of December 31, 1994 and 1993, the number of fixed term contracts
delinquent as a percentage of average fixed term contracts outstanding was .70%
and .77%, respectively. The commercial and consumer revolving credit
receivables were not significant in 1994 and 1993.
11
Prior to 1997, the Company reported loss experience and repossessed collateral
information for its fixed term contracts. In 1997, the Company began reporting
this information on the basis of product line. Information for 1996 and 1995
has been restated for comparative purposes. Credit losses for fixed term
contracts in 1994 and 1993 were .63% and .85%, respectively. Losses related to
revolving credit during 1994 and 1993 were not significant. The number of
repossessed collateral units as a percentage of the total number of fixed term
contracts serviced as of December 31, 1994 and 1993 was .43% and .51%,
respectively. Repossessed collateral relating to revolving credit assets as of
these dates were not significant.
Finance Volume
- - --------------
Consumer and commercial finance volume originated by the Company during each of
the past five years is indicated below:
Year ended December 31
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- --------------- ---------------- ----------------
(dollars in thousands)
Manufactured
Housing $ 5,479,290 $ 4,882,018 $4,159,836 $3,201,491 $2,449,121
Home Equity/Home
Improvement 3,476,229 1,493,720 626,986 465,523 169,443
Consumer/
Retail Credit 1,510,918 835,578 361,449 96,131 47,306
----------------- ----------------- --------------- ---------------- ----------------
Total Consumer $10,466,437 $ 7,211,316 $5,148,271 $3,763,145 $2,665,870
Commercial/
Equipment 5,181,362 3,343,000 1,742,704 302,419 136
----------------- ----------------- --------------- ---------------- ----------------
Total $15,647,799 $10,554,316 $6,890,975 $4,065,564 $2,666,006
================= ================= =============== ================ ================
The Company believes that, in addition to an individual analysis of each
contract, it is important to achieve a geographic dispersion of contracts in
order to reduce the impact of regional economic conditions on the overall
performance of the Company's portfolio. Accordingly, the Company seeks to
maintain a portfolio of contracts dispersed throughout the United States. At
December 31, 1997, no state accounted for more than 10% of all contracts
serviced by the Company. In addition, no single contractor, dealer, or vendor
accounted for more than 5% of the total dollar volume of contracts originated by
the Company.
Securitized Asset Sales
- - -----------------------
The Company regularly pools contracts for sale to investors. It is the
Company's policy to sell substantially all of the contracts it originates or
purchases through asset-backed securities.
Manufactured housing, home equity, home improvement, consumer and equipment
finance contracts and leases are pooled and sold by the Company through
securitized asset sales which have been either single class or
senior/subordinate pass-through structures. Under its securitized sale
structures, the Company has provided a variety of forms of credit enhancements.
While such credit enhancements generally take the form of corporate guarantees,
they have also
12
included bank letters of credit, surety bonds, cash deposits or other equivalent
collateral. The Company analyzes the cash flows unique to each transaction, as
well as the marketability, earnings potential and risk transference of such
transactions when choosing the appropriate structure for each securitized loan
sale. The structure of each securitized sale depends, to a great extent, on
conditions of the fixed income markets at the time of sale as well as cost
considerations and availability and effectiveness of the various enhancement
methods. Customer principal and interest payments are deposited in separate bank
accounts as received by the Company and are held for monthly distribution to the
certificateholders.
In previous years Green Tree sold a substantial portion of its interest only
securities, representing net cash flows retained from the securitization of its
manufactured housing contracts, in the form of securitized Net Interest Margin
Certificates ("NIM Certificates") through public offerings. A subordinated
interest in those certificates was retained by the Company. As a result of
these transactions, certain net cash flows that formerly were retained by Green
Tree are now passed through to investors. Payments on the subordinated interests
retained do not commence until the senior certificateholders have been paid all
principal and interest due them under the terms of the transaction.
The Company securitizes a majority of its commercial finance and credit card
receivables through revolving trust structures which generally include the
issuance of senior/subordinate bonds with contractual terms to maturity. As
such, the principal balance of the bonds does not receive any paydowns until
such time as either the contractual revolving period has ended and the bonds
have entered an amortization period or an early amortization event has occurred.
Early amortization events as detailed in the various trusts include, among
others, asset quality tests, asset turn rate tests, requirements as to the
minimum required amount of receivables and/or cash maintained within the trust,
and the occurrence of an event of default with respect to the Company.
Information on the Company's securitized asset sales is as follows:
Year ended December 31
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
(dollars in millions)
Contracts sold:
Manufactured Housing $ 5,370 $5,033 $4,020 $3,226 $2,303
Home Equity/Home
Improvement 3,020 1,324 579 544 43
Consumer/Equipment 1,627 1,556 -- -- --
------------- ------------ ------------ ------------ ------------
10,017 7,913 4,599 3,770 2,346
NIM Certificates -- -- 308 600 --
Floorplan/Asset-Based 74 500 428 -- --
Lease 508 -- -- -- --
Revolving Credit Card 150 -- -- -- --
------------- ------------ ------------ ------------ ------------
Total $10,749 $8,413 $5,335 $4,370 $2,346
============= ============ ============ ============ ============
13
Regulation
- - ----------
The Company's operations are subject to supervision by various state authorities
(typically state mortgage lending, financial institutions, consumer credit and
insurance authorities) that generally require that the Company be licensed to
conduct its business. In many states, issuance of licenses is dependent upon a
finding of public convenience, and of financial responsibility, character and
fitness of the applicant. The Company is generally subject to state
regulations, examinations and reporting requirements, and licenses are revocable
for cause.
Contracts insured under the FHA Title I manufactured home and home improvement
lending programs are subject to compliance with detailed federal regulations
governing originations, servicing, and loss claim payments by the FHA to cover a
portion of losses due to default and repossessions or foreclosures. Other
governmental programs such as VA also contain similar detailed regulations
governing loan origination and servicing responsibilities.
The Federal Consumer Credit Protection Act ("FCCPA") requires, among other
things, a written disclosure showing the cost of credit to debtors when consumer
credit contracts are executed. The Federal Equal Credit Opportunity Act
requires certain disclosures to applicants for credit concerning information
that is used as a basis for denial of credit and prohibits discrimination
against applicants with respect to any aspect of a credit transaction on the
basis of sex, race, color, religion, national origin, age, marital status,
derivation of income from a public assistance program, or the good faith
exercise of a right under the FCCPA, of which it is a part. By virtue of a
Federal Trade Commission rule, consumer credit contracts must contain a
provision that the holder of the contract is subject to all claims and defenses
which the debtor could assert against the seller, but the debtor's recovery
under such provisions cannot exceed the amount paid under the contract.
The Company is also required to comply with other federal disclosure laws for
certain of its lending programs. The home equity lending program, the
combination land-and-home program, the land-in-lieu program and the home
improvement lending program are subject to the Federal Real Estate Settlement
and Procedures Act. In addition, the Company is subject to the reporting
requirements of the Home Mortgage Disclosure Act for its manufactured home,
purchase money mortgage and home improvement lending products.
The construction of manufactured housing is subject to compliance with
governmental regulation. Changes in such regulations may occur from time to
time and such changes may affect the cost of manufactured housing. The Company
cannot predict whether any regulatory changes will occur or what impact such
future changes would have on the manufactured housing industry.
The Company is subject to state usury laws. Generally, state law has been
preempted by federal law with respect to certain manufactured home, mortgage
lending and home improvement products, although certain states have enacted
legislation superseding federal law. To be eligible for the federal preemption,
the Company's contract form must comply with certain consumer protection
provisions. The Company offers its products within the limitations set by the
state usury laws and federal preemption of these laws.
14
The Company has chartered both a limited purpose credit card bank, Green Tree
Retail Services Bank ("Retail Bank"), and a Utah industrial loan company, Green
Tree Capital Bank, Inc. ("Capital Bank"). Both Retail Bank and Capital Bank are
regulated by the Federal Deposit Insurance Corporation. Retail Bank is regulated
by the South Dakota Department of Banking and Capital Bank is regulated by the
Utah Department of Financial Institutions. The ownership of these entities does
not subject the Company to regulation by the Federal Reserve Board as a bank
holding company. Retail Bank is authorized only to engage in the credit card
business and may issue certificates of deposit in denominations of $100,000 or
greater. Capital Bank has the authority to engage generally in the banking
business and may accept all types of deposits, other than demand deposits if the
assets of the industrial loan company exceed $100 million. Generally state laws
relating to permissible interest rates and fees have been preempted by federal
law applicable to both Retail Bank and Capital Bank, although certain states
have enacted or may in the future enact legislation superseding federal law.
The regulatory procedures discussed above are subject to changes by the
regulatory authorities. There are no assurances that future regulatory changes
will not occur. These regulatory changes could place additional burdens on the
Company's programs.
Competition and Other Factors
- - -----------------------------
The Company is affected by consumer demand for manufactured housing, home equity
financing, home improvements, consumer and equipment products, and consumer and
commercial revolving credit as well as its insurance products. Consumer and
commercial demand, in turn, are partially influenced by regional trends,
economic conditions and personal preferences. The Company competes primarily
with banks, finance companies, savings and loan associations, and credit unions.
The Company competes by offering superior service, prompt credit review and
integrated financing programs.
Prevailing interest rates are typically affected by economic conditions.
Changes in rates, however, generally do not inhibit the Company's ability to
compete for loan originations, although from time to time in particular
geographic areas, local competition may choose to offer more favorable rates.
In addition, in a falling interest rate environment the Company's servicing
portfolio is more susceptible to the refinancing initiatives of competitors,
although the Company has initiated programs to mitigate such activity.
The Company's business is generally subject to seasonal trends, reflecting the
general pattern of sales of manufactured housing and site-built homes. Sales
typically peak during the spring and summer seasons and decline to lower levels
from mid-November through January.
15
C. LEGAL PROCEEDINGS OF GREEN TREE
-------------------------------
Green Tree Financial Corporation (the"Company", as used in Item 5.c.)
has been served with various related lawsuits which were filed against
the Company in United States District Court for the District of Minnesota.
These lawsuits were filed by certain stockholders of the Company as
purported class actions on behalf of persons or entities who purchased
common stock of the Company during the alleged class periods that
generally run from February 1995 to January 1988. One such action did
not include class action claims. In addition to the Company, certain
current and former officers and directors of the Company are named as
defendants in one or more of the lawsuits. The Company and other defendants
intend to seek consolidation in the United States District Court for the
District of Minnesota of each of the lawsuits seeking class action status.
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 the
Company 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 the Company (particularly with respect to prepayment
assumptions and performance of certain of the Company's loan portfolios) which
allegedly rendered the Company's financial statements false and misleading The
Company believes that the lawsuits are without merit and intends to defend such
lawsuits vigorously.
In addition, the nature of the Company's business is such that it is routinely a
party or subject to items of pending or threatened litigation. Although the
ultimate outcome of certain of these matters cannot be predicted, management
believes, based upon information currently available, that the resolution
of these routine legal matters will not result in any material adverse
effect on its consolidated financial condition.
16
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired.
The historical audited consolidated financial statements of Green
Tree Financial Corporation as of December 31, 1997 and 1996 and
for each of the three years ended December 31, 1997 are
incorporated by reference to Exhibit 99.3 filed herewith.
The unaudited consolidated financial statements of Green Tree
Financial Corporation as of March 31, 1998, and for the three
month periods ended March 31, 1998 and 1997 are incorporated by
reference to Exhibit 99.4 filed herein.
17
(b) Pro Forma Financial Information.
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.
18
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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
26
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.
27
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.
28
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.
29
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.
30
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma combined financial statements have been prepared
to give effect to the Merger 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.
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.
31
(c) Exhibits.
Exhibit 2.1 Agreement and Plan of Merger dated as of April 6,
1998, as amended, among Conseco, Inc., Marble
Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Conseco, Inc. and Green
Tree Financial Corporation (composite conformed
copy included as Annex A to the Joint Proxy
Statement - Prospectus of Conseco, Inc. contained
within the Registration of Conseco, Inc. on Form
S-4 (File No. 333-51123) which Agreement and Plan
of Merger is incorporated herein by reference).
Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 23.2 Consent of KPMG Peat Marwick LLP
Exhibit 23.3 Consent of PricewaterhouseCoopers LLP
Exhibit 27 Restated Financial Data Schedule
Exhibit 27.1 Restated Financial Data Schedule
Exhibit 27.2 Restated Financial Data Schedule
Exhibit 99.1 Supplemental Consolidated Financial Statements of
Conseco, Inc. as of December 31, 1997 and 1996, and
for each of the three years ended December 31,
1997.
Exhibit 99.2 Unaudited Supplemental Consolidated Financial
Statements of Conseco, Inc. as of March 31, 1998,
and for the three months ended March 31, 1998 and
1997.
Exhibit 99.3 Consolidated Financial Statements of Green Tree
Financial Corporation as of December 31, 1997 and
1996 and for each of the three years ended December
31, 1997.
Exhibit 99.4 Unaudited Consolidated Financial Statements of
Green Tree Financial Corporation as of March 31,
1998, and for the three months ended March 31, 1998
and 1997.
32
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 hereunto duly authorized.
CONSECO, INC.
DATE: August 6, 1998 By: /s/ ROLLIN M. DICK
----------------------------------
Name: Rollin M. Dick
Title: Executive Vice President
and Chief Financial Officer
33