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new managers say they have a crack turnaround plan for the ailing insurance and finance company. But Conseco's two main businesses -- insurance and lending -- won't make any real profits until 2002, according to simple calculations based on the company's own data.

Conseco shares well off their highs

The company's numbers suggest that, in the rest of this year and in 2001, Conseco won't produce any operating earnings, excluding a hoped-for $2 billion in proceeds from nonrecurring asset sales the firm plans to make this year and next.

Sell-side analysts are expecting Conseco to make operating profits of around $150 million, or 56 cents per share, in the second half of 2000, and some $300 million, or $1.03 per share, in 2001, according to estimates compiled by

First Call/Thomson Financial


The numbers also seem to indicate that the June 30 debt level -- the center of investors' cash-flow fears -- at Conseco's parent company is more than $2 billion higher than the $3.6 billion number given in second-quarter financials filed with the

Securities and Exchange Commission

. The planned asset sales are designed to raise cash to pay off parent company debt, but the sudden addition of some $2 billion in debt may leave the parent company as indebted as before.

Conseco spokesman Mark Lubbers says the data, which were included in an SEC filing Wednesday -- two days after they were

disclosed in a presentation to a select group of analysts -- can't be used to make accurate estimates of operating earnings. And Lubbers strenuously denies that Conseco effectively gives earnings projections in the presentation. Instead, he says the array of cash flow numbers was included to show analysts how the company proposes to make debt repayments following its $2.8 billion debt restructuring announced Friday. Conseco shares closed Wednesday at $8.12.

Another Day Older?

Conseco's stock has become the focus of an intense stock market war as investors reach sharply differing views of the company's recovery prospects. The stock was pummeled under the leadership of former CEO

Stephen Hilbert

, who

left in April amid concerns about

accounting practices and dwindling

cash flows.

In June, ex-

GE Capital

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Gary Wendt

joined Conseco as CEO to head up a restoration effort, attracting a lot of buyers to the stock. However, the skeptics believe Conseco is in a dire state even after the debt restructuring, and they don't believe Wendt can resuscitate the firm. Any indication that Conseco's basic operations won't make any profits till 2002 lends weight to the bears' case.

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So what do Conseco's own numbers say? A table in the presentation lays out operating cash flows from Conseco's two main business lines,

Conseco Finance

, which does the lending, and the insurance companies. Combined, Conseco expects these two businesses to produce operating cash flows of $233 million in the remainder of 2000 and $700 million in 2001 (see table, above).

Subtracting company-projected interest payments and taxes, and then dividends, these operations appear to forecast a loss of nearly $50 million in the rest of 2000, and then a break-even in 2001. In fact, the results could end up being worse than estimated here, because the firm's cash flow numbers presumably exclude noncash expenses like the amortization of goodwill and deferred expenses in the insurance business.

In an email, Conseco's Lubbers responds: "If you could accurately project the various noncash elements of the income statement, you could logically work your way to a conclusion about a minimal earnings projection. We have made no such projections."

He adds that some modeling could be done with the numbers in the presentation but cautions that it would necessarily have to contain arbitrary assumptions. Lubbers concludes: "In any event, the number you would project, if based on cash flows

in the presentation, would be a threshold number required to support cash flow to make debt repayment."

Deeper in Debt?

Elsewhere in the presentation, Conseco says that parent company debt totaled $5.9 billion at the end of June. However, in the firm's consolidated balance sheet contained in its SEC quarterly filing, corporate obligations totaled $3.63 billion. That means the figure used in the presentation is $2.27 billion higher.

A Conseco spokeswoman says that the difference relates primarily to a credit note issued by the Conseco parent to Conseco Finance. Without saying why this loan wasn't included in the corporate debt total in previous filings, she adds: "The amount of the note is included in

the Conseco Finance notes payable in the consolidated financial statements."

While shifting loans around like this won't affect overall indebtedness at Conseco, it does increase the debt burden at the Conseco parent, which, having few recurring income streams of its own, and significant recurring expenses, is dependent on cash flows from the sickly finance and insurance divisions.

"At the end of the day, the parent company is in no better shape," remarks one New York-based hedge fund manager who requested anonymity. (His fund has sold Conseco's shares short, a trade that stands to profit if they decline in price.)

With cash flows remaining an issue for Conseco, the banks drove a hard bargain in last week's restructuring. True, the banks, led by

Bank of America

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( CMB), agreed to extend $571 million of debt that fell due last week to the end of 2001. But they also demanded repayment of $650 million, which probably ate up the bulk of Conseco's spare cash. In addition, an SEC filing on the debt deal, also filed Wednesday, suggests that the banks have maneuvered themselves into a position where, in the event of a default, they would have first right to income from Conseco's insurance companies, leaving Conseco's bond holders lower in the creditors' pecking order.

How so? The debt agreement says that the banks have a guaranty on their loans from an entity called


, which, in Conseco's annual report, looks to be the immediate parent of Conseco's insurance subsidiaries. The bond holders, in contrast, have lent to the Conseco parent company. By securing a guaranty from CIHC, the banks could get first claim to any profits that are paid upstream by the insurance companies, since CIHC appears to be their most immediate owner, not the parent company.

Lubbers didn't comment on the relationship between CIHC, the parent company and the insurance subsidiaries. But he did note that, in the debt restructuring, the banks were mindful of bond holders' interests. To a certain extent, the banks were: In the restructuring, they didn't demand full repayment before big bond payments are scheduled to be made in December 2000 and June 2001.

"From the scheduling of the debt repayment, it should be clear that the banks put themselves in a secondary position to the public debt holders," Lubbers said.

As originally published, this story contained an error. Please see

Corrections and Clarifications. Also, for a detailed explanation, please see a related story,

Conseco, Taxes and Cash Flows: The Numbers and Beyond.