Will the Bears Finally Get It Right About Conseco?

The company doesn't think so.
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Blast from the past: The last time anybody mentioned possible problems at

Conseco

(CNC) - Get Report

was in the early '90s, when it was one of the most popular names among short-sellers. They thought its plan of acquiring overleveraged insurance companies, on the cheap, was doomed to failure.

The only failure was suffered by the shorts, as Conseco's stock soared.

So, what brings them back?

More factors than this column has the time, space or desire to get into. But to make a very long story short: They think the Indiana-based insurer is destined to sink under the weight of its own debt, which totals more than $5 billion in what amounts to a menagerie of debt instruments including bank debt, various issues of senior notes, convertible subordinated notes and other, more esoteric securities.

What went (or is about to go) wrong? To hear the skeptics, the company blew it with its latest buying binge, which was capped off with last year's takeover of

Green Tree Acceptance

. Green Tree is best known for financing mobile home purchases. This year analysts expect it to account for roughly 40% of Conseco's operating earnings.

Not only was it an expensive deal, it makes the company much more difficult to understand.

Salomon Smith Barney

, which has done investment banking work for Conseco in the past, went so far as to put both its insurance and finance-company analysts on the case. After a thorough review earlier this year, it veered from the pack of Wall Street cheerleaders to downgrade the stock from a buy to a neutral.

Colin Devine, Salomon's insurance analyst, says the company's interest obligations on its debt are roughly $600 million, but according to his calculations Conseco has access to only $300 million in cash, or thereabouts. You wouldn't know it by looking at Conseco's consolidated statement of cash flows, which includes cash from all subsidiaries and shows that the company is flush with $980 million in cash from operations.

But Devine and other skeptics say you would've known, or at least had a clearer picture of the company's true cash flow, from another, more succinct cash flow statement that was included in prior years' 10-Ks but was omitted last year. This is important at Conseco, where the parent company is responsible for all debt but doesn't necessarily get to use all of the cash supplied by its subsidiaries. The fast-growing Green Tree throws off a lot of cash but also uses a lot of it.

Why was the cash flow statement removed? In a written response to my questions, Conseco said it was responding to investors who complained that its 1997 report "was too long and complicated." The company also said that when compared with peer companies, it determined that its disclosures "were unnecessarily complex." Besides, it felt the table in question "was redundant" and had become "less relevant" because of the Green Tree acquisition.

Devine, however, says he believes the table was removed for the simple reason that "there's more going out than coming in." Adds a short-seller who has spent months studying the company's financials: "By not breaking it out, they're hiding the fact that they have a cash crunch coming. They'd rather you look at the consolidated statements."

Further proof, according to Devine, is that last quarter Conseco added $144.6 million in debt. If cash flow is no problem, he asks, "why have corporate borrowings increased 26% in the past year to $3.1 billion?"

Good question, but Conseco insists its cash flow "is strong (well in excess of the parent's cash needed) and getting stronger," and is more than adequate to not only service its debt, but to invest in the growth of its businesses. It also claims its balance sheet is improving.

One thing's for certain: Both Conseco and the skeptics can't be right.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.