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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
< X > Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
Common stock (no par) (voting) Not listed
8 1/2% Preferred Stock Series A
(Par Value $1.00 per share) (non-voting)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes XX No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Based on the closing price on March 1, 2000, the aggregate market value
of common stock held by non-affiliates of the registrant was $180,481.
The number of outstanding common shares of the registrant as of March 1,
2000 was 2,578,295.
PART I
TEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") is an insurance holding
company which, until October 1, 1997, was a leading provider, through its
subsidiaries, of credit life and credit disability insurance in the Middle
Atlantic region of the United States. The insurance subsidiaries previously
conducted the majority of their business in the states of Pennsylvania,
Delaware, Maryland, Nebraska, Ohio and Virginia, marketing credit insurance
products primarily through automobile dealers. In connection with its credit
insurance operations, the Company also marketed, as an agent, an automobile
extended service warranty product.
Effective October 1, 1997, the Company transferred all of its credit
insurance and fee income accounts to Life of the South Corporation ( LOTS ), a
Georgia-based financial services holding corporation. On January 1, 1998,
LOTS hired substantially all of the sales and marketing personnel of the
company and assumed the administration of the Company s credit insurance
business. In addition, effective January 1, 1998, the Company also reinsured
to American Republic Insurance Company ( American Republic ), a financial
partner of LOTS in this transaction, 100% of its credit insurance business
which was inforce on September 30, 1997 (the Sale of Assets ) and reinsured
100% of the credit insurance business written on the policy or certificate
forms of the Company s subsidiaries in the fourth quarter of 1997. In
connection with these transactions, the Company and LOTS also agreed that,
with respect to one of the subsidiaries, the new credit insurance business
produced by that subsidiary s former customer accounts, which were transferred
to LOTS, would continue to be written on the policy or certificate forms of
the subsidiary until September 30, 1999, which date was extended by the
parties to November 15, 1999 with respect to Pennsylvania business only. This
premium and the related insurance risk were also reinsured 100% to American
Republic.
Settlement on the Sale of Assets transaction, which received the
approval of state insurance regulators and the approval of the Company s
preferred and common shareholders at a special meeting held on March 24, 1998
(the Special Meeting ), took place in May 1998. At the Special Meeting, the
Company s shareholders also approved a Plan of Liquidation and Dissolution
(the Plan of Liquidation ) pursuant to which the Company is liquidating its
remaining assets in order to provide for all of its liabilities, distribute
cash to its preferred shareholders, up to their liquidation preference, and
distribute any remaining cash to its common shareholders.
The assets and liabilities of the Company may be transferred to a
liquidating trust if the Board of Directors determines that the use of a
liquidating trust provides the best alternative for liquidating the Company.
If the Company s assets and liabilities are transferred to such a trust, all
distributions to shareholders would then be made directly from the liquidating
trust after the satisfaction of all liabilities.
In 1992, the Company sold all of its traditional whole-life, term and
annuity business. In 1994, the Company reinsured substantially all of its
universal life insurance business to a third party insurer and, effective
January 1, 1997, it sold its remaining block of universal life business back
to the direct writer of the business. Additional information regarding the
sale of the Individual Life Insurance Division s in-force business appears
below under "Operations."
The Company, through its wholly-owned subsidiary, IAAC, Inc., formerly
Interstate Auto Auction, Inc. ("Interstate"), also conducted wholesale and
retail automobile auctions of used vehicles for automobile dealers, banks and
leasing companies. The Company sold the business and the related operating
assets of Interstate in November 1996. Additional information regarding the
termination of the auto auction operations appears below under Operations.
The term "Company" when used herein refers to Consumers Financial
Corporation and its subsidiaries unless the context requires otherwise. The
Company's executive offices are located at 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania 17011. Its telephone number is (717) 761-4230.
The Company was formed in 1966 as 20th Century Corporation (a
Pennsylvania business corporation) and adopted its present name on May 30,
1980. The Company operated through various wholly-owned subsidiaries since it
was formed; however, all of these subsidiaries have been either sold or
liquidated except for Consumers Life Insurance Company, a Delaware life
insurance company ( Consumers Life ).
Prior to the discontinuation of its business operations, as discussed
above, the Company operated in three industry segments: the Automotive
Resource Division, which marketed credit insurance and other products and
services to its automobile dealer customers, the Individual Life Insurance
Division and the Auto Auction Division. These segments did not include the
corporate activities of Consumers Financial Corporation which previously were
insignificant in relation to the three segments. All three segments are now
presented as discontinued operations in the Company s consolidated financial
statements for all periods presented. See Note 4 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
OPERATIONS
The Company's principal subsidiary, Consumers Life, was engaged in the
marketing of credit insurance business until October 1, 1997. Consumers Life
is licensed in 25 states and the District of Columbia. In September 1999,
IFLAC Corp. (formerly Investors Fidelity Life Assurance Corp.), an Ohio life
insurance company which previously marketed credit insurance in that state,
surrendered its certificate of authority to conduct insurance operations and
was then liquidated. In August 1997, the Company sold another wholly-owned
subsidiary, Consumers Life Insurance Company of North Carolina, which had also
been engaged in the sale of credit insurance.
As noted previously in this Item 1, the Company sold its credit
insurance customer accounts to LOTS as of October 1, 1997 and, effective
January 1, 1998, the Company transferred to American Republic, through
reinsurance, its September 30, 1997 inforce block of credit insurance business
and 100% of the credit insurance business written in the fourth quarter of
1997. As a result of these transactions with LOTS and American Republic, the
Company has no remaining business segments, since it sold the remainder of its
individual life insurance business as of January 1, 1997 and sold its auto
auction business in November 1996. The information appearing below briefly
describes the three business segments in which the Company previously
operated. The activities of the Company are now restricted primarily to the
collection of investment income on the Company s remaining invested assets,
the collection of fee revenues from LOTS from the sale of the Company s credit
insurance accounts and the payment of certain corporate costs and other fixed
overhead expenses.
Since the reinsurance treaty between Consumers Life and American
Republic is an indemnity agreement, Consumers Life would become liable for the
insurance risks transferred in the event American Republic is unable to meet
its obligations under the reinsurance agreement.
AUTOMOTIVE RESOURCE DIVISION
Prior to the sale of its credit insurance and fee income accounts to
LOTS as of October 1, 1997, the Company marketed and retained the risk on
credit insurance in connection with consumer loan transactions, substantially
all of which were automobile purchases. Credit life insurance provides funds
in the event of the insured's death for payment of a specified loan or loans
owed by the insured. Similarly, credit disability insurance provides for the
periodic paydown of such loans during the term of the insured's disability. In
most cases, the entire premium is paid at the time the insurance is issued.
The primary beneficiary under credit insurance is the lender, with any
proceeds in excess of the unpaid portion of the loan payable to a named second
beneficiary or the insured's estate.
The credit insurance business was the major source of the Company's
revenues and, until 1991, provided the majority of its profits as well.
Automobile sales accounted for substantially all of the credit insurance sold
by the Company. The credit insurance industry and the Company s credit
business were both adversely affected in the early 1990's by the increase in
the number of automobiles which were being leased instead of purchased, not
only because there was a general lack of availability of approved credit
insurance products applicable to leases but also due to a reluctance on the
part of automobile dealers to emphasize the sale of credit insurance products
on lease transactions.
The Company also marketed, in an agency capacity, extended service
automobile warranty products through a subsidiary. These products were
underwritten by unaffiliated insurance companies, administered by unaffiliated
third party administrators and sold primarily through automobile dealers who
also sold the Company's credit insurance. Other related products and services
were also offered to the Company's automobile dealer customers.
INDIVIDUAL LIFE INSURANCE DIVISION
In March of 1992, the Company announced the termination of this
Division's marketing activities and announced its intent to sell its existing
blocks of whole-life, term, annuity and universal life business. Effective
October 1, 1992, the traditional whole-life, term and annuity business was
sold for $5.6 million to the Londen Insurance Group located in Phoenix,
Arizona. Effective December 31, 1994, the Company coinsured its direct
universal life business and irrevocably assigned all its right, title and
interest in a block of assumed universal life business (coinsured from AMEX
Life Assurance Company on a 90% quota share basis) to American Merchants Life
Insurance Company, located in Jacksonville, Florida, for $5.5 million.
Effective January 1, 1997, the Company sold its remaining block of individual
life insurance business back to the direct writer of the business. The direct
writer paid the Company a recapture consideration of $1.05 million in March
1997 when the transaction closed.
AUTO AUCTION DIVISION
As indicated previously, the business and the related operating assets
of Interstate were sold in November 1996 for cash of $4.85 million. Prior to
the sale, Interstate conducted wholesale automobile auctions of used vehicles
at its facility in Mercer, Pennsylvania (about 50 miles north of Pittsburgh).
Interstate s customers included automobile dealers and leasing companies. In
connection with its weekly auctions, Interstate provided a body shop repair
and conditioning service and an arbitration service through which disputes
between buyers and sellers were resolved.
INVESTMENTS
The Company's insurance subsidiaries have historically invested
primarily in fixed maturity securities (bonds) and, to a lesser extent, in
mortgages with intermediate terms (generally not more than seven years).
Investments in mortgages allowed the Company to obtain higher yields while
maintaining maturities in the five to seven year range. Prior to the sale of
the Company s direct universal life business, the Company's investment policy
also included investing in certain mortgage-backed securities which provided
competitive yields on assets supporting these interest sensitive products. The
Company s only remaining fixed maturity securities are bonds and a certificate
of deposit which Consumers Life is required to maintain on deposit with
various state insurance departments.
The Company s mortgage loan portfolio, which relates primarily to
commercial real estate, has declined significantly during the past five years,
from $9.9 million at the end of 1994 to $1.6 million at December 31, 1999. The
reduction is primarily attributable to the sale of certain mortgages,
refinancings and early payoffs. Approximately $1.1 million of the mortgage
balance at the end of 1999 relates to a loan issued to the co-owner of the
Company s home office building. Upon the sale of the office building, which is
scheduled to occur in June 2000, this loan will be repaid in full. The
mortgage portfolio has generally been concentrated in the Central Pennsylvania
area. The Company considered this strategy to be conservative because this
region has historically not been particularly susceptible to wide economic
swings in recessionary times, due to the diversity of industries throughout
the area and the presence of government operations and military installations.
Since the approval of the Plan of Liquidation, the Company has
maintained all of its remaining investable funds in short-term securities in
order to provide the liquidity necessary to pay current expenses and dividends
to preferred shareholders and to eliminate the market risk associated with
bond investments. The Company also intends to invest the funds which arise
from the eventual liquidation of its mortgage loan investments and the office
building in short-term securities.
The following table sets forth the Company's investment results for the
periods indicated:
Years ended December 31,
1999 1998 1997
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
Interest:
Fixed maturities $60 6.4 $175 5.0 $1,934 6.7
Mortgage loans 109 7.0 139 7.8 189 8.7
Short term 80 5.5 733 4.3 486 4.4
investments
Other 82 9.7
249 6.3 1,047 5.5 2,691 6.3
Investment expenses (39) (0.7) (85) (0.4) (675) (1.6)
Total net investment
income 210 5.6 962 5.1 2,016 4.7
Less investment income
for period subsequent
to adoption of
liquidation basis of
accounting 210 487
Net investment income
for period prior to
adoption of
liquidation
basis of
accounting 0 475 2,016
Less net investment
income attributable to
discontinued operations 0 415 1,953
Net investment income
attributable to
continuing operations $0 $60 $63
COMPETITION
Inasmuch as the Company no longer conducts any insurance or other
operations, it no longer competes with other organizations.
REGULATION
Consumers Life is subject to regulation and supervision in the states in
which it is licensed. The extent of such regulation varies from state to
state, but, in general, each state has statutory restrictions and a
supervisory agency which has broad discretionary administrative powers. Such
regulation is designed primarily to protect policyholders and relates to the
licensing of insurers and their agents, the approval of policy forms, the
methods of computing financial statement reserves, the form and content of
financial reports and the type and concentration of permitted investments.
Consumers Life is also subject to periodic examination by the Delaware
Department of Insurance. Although this subsidiary now has only three direct
policyholders, the Delaware Department continues to monitor the company s
statutory capital and surplus and other aspects of its financial compliance
with state insurance laws and regulations.
The dividends which a life insurance company may distribute are subject
to regulatory requirements based upon minimum statutory capital and surplus
and/or statutory earnings. In addition to regulatory considerations, the
overall financial strength of each operating entity is considered before
dividends are paid. Additionally, the amount of dividends a life insurance
company can pay is subject to certain tax considerations. See Notes 3 and 15
of the Notes to Consolidated Financial Statements appearing elsewhere in this
Form 10-K.
The Company is also subject to regulation under the insurance holding
company laws of certain states. These laws vary from state to state, but
generally require insurance holding companies and insurers that are
subsidiaries of holding companies to register and file certain reports,
including information concerning their capital structures, ownership,
financial condition and general business operations, and require prior
regulatory agency approval of changes in control of an insurer, most dividends
and intercorporate transfers of assets within the holding company structure.
EMPLOYEES AND AGENTS
As of March 1, 2000, the Company had only 3 full-time employees and 1
part-time employee. On January 1, 1998, all of the Company s sales personnel
resigned and became employees of LOTS in connection with the transactions
discussed earlier in this Item 1, and certain other administrative employees
were terminated.
The Company has adequate insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. There can be no
assurance that the Company will be able to continue to obtain such coverage in
the future or that it will not experience uninsured losses.
ITEM 2. PROPERTIES
Since September 1989, the Company has maintained its executive and
business offices in a leased building located at 1200 Camp Hill By-Pass, Camp
Hill, Pennsylvania. The office building contains approximately 44,000 square
feet of office space (approximately 39,000 square feet of leasable space).
Prior to 1994, the Company leased the entire facility at an annual rental of
$421,000, plus insurance, taxes and utilities. In March of 1994, the Company
exercised its option to acquire a 50% interest in its home office building for
$1.75 million, which reduced the Company s annual rent on the portion of the
building it does not own to $204,000.
As a result of the sale of all of its insurance operations and the
adoption of the Plan of Liquidation, the Company has occupied only about 14%
of the leasable office space during the past several years. Since 1998, the
Company has leased about 45% of the leasable space to third party tenants
pursuant to various short-term leases, and received $175,000, $87,000 and
$57,000 in 1999, 1998 and 1997, respectively, from these subleases. The
Company s lease terminated in July 1999, and since that time, the Company and
its co-owner have shared in the sublease income and the operating costs of the
office building.
In September 1999, the Company and its co-owner signed an agreement to
sell the office building to a local investor. Closing on the sale transaction
is expected to take place in June 2000, at which time the Company anticipates
leasing a minimal amount of office space elsewhere in order to complete the
liquidation process.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits which are ordinary and
routine litigation incidental to its business. None of these lawsuits is
expected to have a materially adverse effect on the Company's financial
condition or operations. See Note 12 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K for additional information
concerning litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to the
shareholders of the Company for their consideration through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Consumers Financial Corporation common stock was traded on the NASDAQ
National Market System with a ticker symbol of CFIN until June 1, 1998 when it
was delisted by NASDAQ for non-compliance with NASDAQ s new market value of
public float requirements. The Company s Convertible Preferred Stock, Series A
was also traded on the NASDAQ National Market System until March 16, 1998,
when it was also delisted by NASDAQ for non-compliance with the new public
float requirement of a minimum of 750,000 shares. Since the shareholders of
the Company approved the Plan of Liquidation and Dissolution on March 24,
1998, the Company did not appeal the delisting decision for either the common
or preferred stock, nor did it take any steps to come into compliance with the
new rules or attempt to seek inclusion on the NASDAQ Small Cap Market.
Quarterly high and low bid prices for the Company s common and preferred
stock, based on information provided by The National Association of
Securities Dealers through the NASD OTC Bulletin Board, are presented below.
Such prices do not reflect prices in actual transactions and exclude retail
mark-ups and mark-downs and broker commissions.
1999 QUARTERLY BID PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Common Stock
High 0.16 0.10 0.07 0.15
Low 0.10 0.07 0.07 0.07
Convertible Preferred Stock
Series A
High 8.88 8.50 4.75 2.75
Low 8.50 4.25 2.00 2.00
As of December 31, 1999, there were 6,724 shareholders of record who
collectively held 2,578,295 common shares and 107 shareholders of record of
the Convertible Preferred Stock, Series A, who held 463,461 shares. The number
of recordholders presented above excludes individual participants in
securities positions listings.
Dividends on both the Company s common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. No common stock
dividends have been paid since 1994. See Note 13 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K for a description
of the restrictions on the Company's ability to pay dividends to common
shareholders. The Convertible Preferred Stock, Series A dividends are paid
quarterly on the first day of January, April, July and October at an annual
rate of $.85 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or
derived from the Consolidated Financial Statements and the Notes thereto.
(NOT COVERED BY INDEPENDENT AUDITOR S REPORT)
For the For the
period from period from
Year ended March 25, 1998 January 1, 1998
(dollar amounts in thousands, December 31, to to
except per share) 1999 December 31,1998 March 24, 1998 Years ended December 31,
1997 1996 1995
Total revenues (excluding
change in unearned premiums) $261 $40 $378 $664
Premiums written (4) (37) 353 685
Net investment income 60 63 59 40
Net return on average 4.8% 4.9% 5.4% 6.0%
investments
Loss from continuing (88) (1,441) (1,737) (1,429)
operations
Discontinued operations 112 (4,919) 503 (172)
Net income (loss) 24 (6,360) (1,234) (1,601)
Basic and diluted income
(loss) per common share:
Loss from continuing (0.08) (0.73) (0.83) (0.71)
operations
Discontinued operations 0.04 (1.89) 0.19 (0.07)
Net loss (0.04) (2.62) (0.64) (0.78)
Increase (decrease) in net assets
in liquidation:
Net loss ($252) ($132)
Increase in liability
for underfunded (388) (734)
pension plan
Adjustment of liabilities
to estimated
settlement amounts 210
Preferred stock dividends (406) (307)
Adjustment of preferred
stock to estimated
liquidation value 303 (175)
Other 150 16
Net decrease (383) (1,332)
December 31,
1999 1998 1997 1996 1995
Total assets $44,748 $62,688 $85,035 $114,619 $123,322
Net assets in liquidation 0 333
Total debt 0 0 0 0 2,537
Shareholders equity 1,806 8,650 11,014
Shareholders equity per
common share 0.78 3.31 4.20
Cash dividends declared per
common share NONE NONE NONE NONE NONE
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's net
assets in liquidation at December 31, 1999 and the changes in its net assets
in liquidation for the year then ended is presented below. Information
relating to 1998 and 1997 is also presented for comparative purposes. This
analysis should be read in conjunction with the Consolidated Financial
Statements and the related Notes appearing elsewhere in this Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K may include forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
identified by their use of such terms and phrases as "intends", "intend",
"intended", "goal", "estimate", "estimates", "expects", "expect", "expected",
"project", "projected", "projections", "plans", "anticipates", "anticipated",
"should", "designed to", "foreseeable future", "believe", "believes" and
"scheduled" and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's preferred and common shareholders approved the sale of the Company's
credit insurance and related products business, which was the Company's only
remaining business operation following the previous sales of its traditional
and universal life insurance businesses and its auto auction business. In
connection with the sale of its inforce credit insurance business, the Company
also sold its credit insurance customer accounts and one of its life insurance
subsidiaries. At the Special Meeting, the shareholders also approved a Plan of
Liquidation and Dissolution, pursuant to which the Company is now liquidating
its remaining assets so that it can pay or provide for all of its liabilities,
distribute cash to its preferred shareholders, up to the liquidation
preference of those shares, and distribute the remaining cash, if any, to its
common shareholders.
The agreement with the purchaser of the credit insurance operations
provides that the proceeds from the sale of the customer accounts are to be
received as fee income on a quarterly basis until September 2002, based on the
amount of credit insurance premiums produced by those accounts. However, as
discussed in Note 12 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K, a dispute arose during 1999 between the
Company and the purchaser regarding the payment of investment income on the
assets which were transferred to the purchaser in connection with the sale of
the inforce credit insurance business. Until the dispute is resolved, the
purchaser is withholding the above-referenced fee income from the Company to
offset the investment income it believes it is due. At December 31, 1999,
$137,000 of the $373,000 in net fee income reported for the year was being
held by the purchaser. As required by the agreements between the parties, this
matter will be settled through arbitration.
The Company may also receive a payment from a contingency fund
established by the Company and the purchaser based on the claims experience of
the inforce credit insurance business from October 1, 1997 to September 30,
2002. However, based on the claims experience to date, as provided by the
purchaser, the Company would not be entitled to any portion of the contingency
fund. Because of the fee income payments and the potential payment from the
contingency fund, the distribution, if any, to the Company's common
shareholders will not be made until late in 2002, when all amounts due from
the purchaser have been received.
As a result of the approval of the Plan of Liquidation, the Company
adopted a liquidation basis of accounting in its financial statements for
periods subsequent to March 24, 1998. Under liquidation accounting rules,
assets are stated at their estimated net realizable values and liabilities are
stated at their anticipated settlement amounts. Prior to March 25, 1998, the
Company reported the results of its operations and its asset and liability
amounts using accounting principles applicable to going concern entities.
At December 31, 1998, the Company's net assets in liquidation totaled
$383,000. During 1999, the net assets in liquidation were reduced to zero,
primarily as a result of a $252,000 net loss for the year, a $388,000 increase
in the liability for the Company's under funded pension plan and $406,000 in
preferred dividends. These reductions were partially offset by a $210,000
adjustment of certain liabilities to their estimated settlement amounts and a
$303,000 reduction in the estimated liquidation value of the Company's
preferred stock. In 1998, for the period following the adoption of the
liquidation basis of accounting, the Company's net assets in liquidation
declined by $1.3 million, from $1.7 million to $383,000. This decrease was
also the result of a net loss for the period ($132,000), an increase in the
pension plan liability ($374,000) and preferred shareholder dividends
($307,000). For the period from January 1, 1998 to March 24, 1998, the Company
reported net income of $24,000 (a loss of $.04 per share after giving
consideration to preferred dividends), which included a $112,000 gain from the
1997 disposal of its discontinued credit insurance business. In 1997, the
Company reported a loss from continuing operations of $1.4 million ($.73 per
share) and a loss from discontinued operations of $4.9 million ($1.89 per
share).
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
As a result of the sale of its remaining business and the adoption of
the Plan of Liquidation, the Company's income and expenses now consist
principally of (i) fee income from the sale of the Company's customer
accounts, (ii) investment income on existing assets, and (iii) corporate
expenses, primarily salaries, professional fees and home office rent and
related costs. A discussion of the material factors which affected the
Company's results of operations (for the year ended December 31, 1997 and for
the period from January 1, 1998 to March 24, 1998) and the changes in its net
assets in liquidation (for the period from March 25, 1998 to December 31, 1998
and for the year ended December 31, 1999) is presented below.
For the year ended December 31, 1999, the Company s expenses exceeded
its revenues by $252,000. In 1998, the Company reported (i) net income of
$24,000 from January 1, 1998 to March 24, 1998 and (ii) an excess of expenses
(including income taxes) over income of $132,000 for the period from March 25,
1998 to December 31, 1998, resulting in a total net loss of $108,000. In 1997,
the Company s net loss totaled $6.4 million. The losses in 1999 and 1998
improved compared to the 1997 loss because of significant expense reductions
and the elimination of the substantial losses which were being incurred in the
Company s credit insurance business prior to its sale. A $3.9 million loss on
the disposal of that segment and an additional $825,000 operating loss from
that line of business were reflected in the 1997 results of operations.
The Company s net assets in liquidation at December 31, 1999 were zero.
The $383,000 decline in 1999 was the result of the $252,000 net loss mentioned
earlier, a $388,000 increase in the liability for the Company s under funded
pension plan and $406,000 in preferred stock dividends. These reductions were
partially offset by a $210,000 adjustment of certain liabilities to their
estimated settlement amounts and a $303,000 reduction in the estimated
liquidation value of the Company s preferred stock. The 1999 net loss is
principally attributable to (i) higher than expected audit, actuarial and
legal fees and salary expenses (in part due to the Company s inability to
sell its life insurance subsidiary), (ii) delays in selling the Company s home
office building, which resulted in higher than anticipated rent and
maintenance costs for the year and (iii) a loss from a terminated joint
venture which was expected to generate income.
The Company's unfunded pension liability increased by $388,000 in 1999
principally because of the Company's decision in early 2000 to terminate the
plan. This decision resulted in the use of a discount rate in computing the
December 31, 1999 plan liabilities which is intended to approximate the rate
which will be in effect when the actual termination takes place. For
continuing plans, different assumptions regarding interest rates are generally
utilized. The plan is expected to be terminated in late 2000, following
Internal Revenue Service confirmation of its qualified status. At December 31,
1999, the plan's estimated unfunded liability was $534,000.
Due to the continuing reductions in its net assets during 1999, the
Company reduced the December 31, 1999 liquidation value of its preferred stock
from $4.6 million ($10 per share - the liquidation preference) to $4.3 million
($9.35 per share).
With respect to the home office building, in which it owns a one-half
interest, the Company's lease on the half interest it does not own expired in
July 1999. In accordance with the terms of the lease, the Company also paid
all taxes, insurance, utilities and repairs in addition to its base rent. The
Company now has no lease commitment and is responsible for only 50% of the
operating costs. In September 1999, the Company and the co-owner signed an
agreement to sell the property. Settlement is scheduled to occur in June 2000.
For the period from March 25, 1998 to December 31, 1998, net assets in
liquidation decreased by $1.3 million. The reduction was primarily due to (I)
a $132,000 net loss, (ii) a $734,000 increase in the liability for the under
funded pension plan and (iii) preferred shareholder dividends of $307,000. The
net loss for the period was attributable to the write-off of $472,000 of
deferred tax assets. On a pre-tax basis, revenues exceeded expenses by
$395,000 due to a significant increase in income from a now terminated joint
venture and because of $160,000 in realized investment gains. Profits from the
joint venture totaled $243,000 from March 25, 1998 to the end of the year
compared to a $20,000 loss in 1999. The unfunded liability in the Company's
pension plan increased significantly because of the drop in long-term interest
rates in 1998. A decrease in rates generally increases a plan's liabilities,
while higher rates reduced the liabilities.
From January 1, 1998 to March 24, 1998, the period prior to the adoption
of the liquidation basis of accounting, the Company reported net income of
$24,000 (a loss of $.04 per share) as a result of a $112,000 gain from the
1997 disposal of its discontinued credit insurance business. The gain
represented an adjustment to certain estimates made in 1997 when the loss was
initially reported.
For the year ended December 31, 1997, the Company reported a loss from
continuing operations of $1.4 million ($.73 per share) and a loss from
discontinued operations of $4.9 million ($1.89 per share). The loss from
continuing operations was in large part due to a $744,000 write-down of the
Company's real estate holdings, including its home office building. The loss
from discontinued operations was principally attributable to a $3.9 million
loss on the disposal of the Company's credit insurance business and an
additional $825,000 operating loss from that segment prior to its sale. A loss
of $167,000 was also reported from the sale of the final portion of the
Company's individual life insurance business in early 1997.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING
LIQUIDATION PERIOD
As explained earlier, the liquidation of the Company is expected to
continue until late in 2002 when all fee payments and the potential
distribution from the contingency fund are received. Until that time, certain
corporate expenses will continue to be incurred and investment income will
continue to earn on existing invested funds. The Board of Directors may
determine during this period that the amount of funds available for ultimate
distribution to shareholders would be increased by transferring all of the
Company's remaining net assets into a liquidating trust, in which case the
trustees of such trust would be responsible for liquidating all remaining
assets, paying all liabilities and making any distributions to the preferred
and common shareholders.
Based on management's estimates, which exclude the potential savings, if
any, from the use of a liquidating trust, the Company believes that its future
operating expenses and other changes in net assets, including preferred stock
dividends, will exceed fee income and other revenues during the liquidation
period by approximately $500,000 to $700,000. Actual income and expenses and
other net asset changes could vary significantly from the present estimates
due to the uncertainties regarding (i) when certain assets will be liquidated,
(ii) when the distribution to the preferred shareholders occurs, (iii) the
outcome of the investment income dispute discussed earlier, (iv) the level of
actual expenses which will be incurred and (v) the ultimate resolution of any
future contingencies which may arise.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's net
assets in liquidation at December 31, 1999 and 1998 is presented below.
CAPITAL RESOURCES
Given its plans to liquidate and eventually dissolve, the Company has
made no commitments for capital expenditures and does not intend to make any
such commitments in the future. The Company's net assets in liquidation
declined by $383,000 for the year ended December 31, 1999. As discussed
earlier, the reduction is attributable to a $252,000 net loss for the year, a
$388,000 increase in the Company's pension plan liability and preferred stock
dividends of $406,000. These decreases were partially offset by a $210,000
adjustment of certain liabilities to their estimated settlement amounts and a
$303,000 reduction in the estimated liquidation value of the Company's
preferred stock. The amount of the ultimate pension liability, and
consequently the need for any further increase or decrease in the liability,
is dependent on a number of factors, the most important of which is the
prescribed interest rate which is in effect at the time the plan is
terminated.
For the year ended December 31, 1999, the Company's investments
decreased by $900,000, from $4.5 million at the beginning of the year to $3.6
million at December 31, 1999. The decline is primarily attributable to the
payment of $406,000 in preferred dividends and the payment of $625,000 to the
Company's pension plan. In 1998, invested assets decreased from $41 million at
the end of 1997 to $4.5 million at December 31, 1998 as a result of the
transfer of more than $35 million to the purchaser of the Company's credit
insurance business in connection with the sale of that business. Total
investments at both December 31, 1999 and 1998 consisted principally of (i)
U.S. Treasury Notes, owned by the Company's insurance subsidiary, which are on
deposit with numerous state insurance departments in connection with licensing
requirements, (ii) three mortgage loans secured by commercial real estate,
including one loan granted to the co-owner of the Company's home office
building and secured by the co-owner's one-half interest in the building and
(iii) short-term investments, principally money market funds.
LIQUIDITY
The Company's subsidiaries have historically met most of their cash
requirements from funds generated from operations, while the Company has
generally relied on its principal operating subsidiaries to provide it with
sufficient cash funds to maintain an adequate liquidity position. As a result
of the Company's decision to sell its remaining operations, liquidate all of
its net assets and distribute cash to its shareholders, the Company's
principal sources of cash funds are the fee income discussed earlier,
investment income on existing assets and proceeds from the sale of non liquid
assets. These funds must be used to settle all remaining liabilities as they
become due, to pay operating expenses until the Company is dissolved and to
pay dividends on the preferred stock until a final distribution is made to the
preferred shareholders. The adequacy of the Company's liquidity position in
the future will be principally dependent on its ability to sell its home
office building and other non liquid assets and the timing of such sales, as
well as on the outcome of the investment income dispute referred to above and
the level of operating expenses the Company must incur during the liquidation
period.
SINKING FUND FOR REDEEMABLE PREFERRED STOCK
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment was
due in July 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by
the redemption value of the shares acquired. As a result of the Company's
purchases of preferred stock prior to 1998, no sinking fund payment was due in
1998, and the required payment due for 1999 was reduced from $550,000 to
$414,610. The purchase of 18,000 preferred shares in 1999 further reduced the
sinking fund deficiency to $234,610 at December 31, 1999.
INFLATION
Because of the Company's current plans to liquidate its assets, pay all
of its liabilities, distribute any remaining cash to its shareholders and
ultimately dissolve within the next three years, the effects of inflation on
the Company are minimal.
YEAR 2000 COMPLIANCE
Because the Company is no longer conducting any business operations and
is in the process of liquidating its remaining assets, it is relying, both
directly and indirectly, on fewer computer systems than in the past to
maintain all of its financial and other records and file all required
financial reports with state insurance departments and other regulators. In
fulfilling its continuing, although limited, responsibilities, the Company
directly utilizes on three computer systems, one for its general ledger
accounting, one for the preparation of prescribed regulatory reports to state
insurance departments and one for maintenance of its shareholder records
(since the Company continues to perform its own stock transfer agent
functions).
Prior to December 31, 1999, the Company received written assurances from
each of its software vendors that their respective systems were tested and
would operate problem free during and after the year 2000. The Company also
obtained a year 2000 certification from the purchaser of its credit insurance
business (since it continues to receive certain financial reports from that
company) stating that all of its hardware and software systems were tested and
were year 2000 compliant.
As of March 1, 2000, the Company has had no significant year 2000
computer software problems. Based upon the information outlined above,
management does not believe that the Company s very limited operations will be
adversely impacted by any year 2000 computer problems during the remainder of
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable
to the Company because, a December 31, 1999, the Company qualifies as a small
business issuer under Regulation S-B of the Federal Securities Laws, A small
business issuer is defined as any United States or Canadian issuer with
revenues or public float of less than $25 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation,
integrity and objectivity of the financial information contained in this Form
10-K. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Such statements
include informed estimates and judgements of management for those transactions
that are not yet complete or for which the ultimate effects cannot be
precisely determined. Financial information presented in this annual report is
consistent with that in the financial statements.
Accounting procedures and related systems of internal control have been
established to provide reasonable assurance that the books and records reflect
the transactions of the Company and that established policies and procedures
are properly implemented by qualified personnel. Such systems are evaluated
regularly to determine their effectiveness.
The consolidated financial statements for the year ended December 31,
1999 have been audited by Stambaugh-Ness, P.C., independent auditors. The
consolidated financial statements for the years ended December 31, 1998 and
1997 have been audited by Arthur Andersen LLP, independent auditors. Such
audits were conducted in accordance with generally accepted auditing
standards, and included a review and evaluation of our internal accounting
control structure, tests of the accounting records and other auditing
procedures which the auditors considered necessary to express their informed
professional opinions on the consolidated financial statements.
The Board of Directors, with the assistance of its Audit Committee,
monitors the financial and accounting operations of the Company. The
Committee, composed of non-employee members of the Board of Directors, meets
periodically with representatives of its independent auditing firm to discuss
the scope of its audit and related reports. The Company s independent
auditors have at all times full and free access to the Audit Committee,
without management present, to discuss any matter that they believe should be
brought to the attention of the Committee.
James C. Robertson R. Fredric Zullinger
Chairman, Chief Executive Officer Senior Vice President and
and President Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated statement of net assets in
liquidation of Consumers Financial Corporation and subsidiaries as of December
31, 1999 and the related consolidated statement of changes in net assets in
liquidation for the year then ended. These financial statements and the
schedules referred to below are the responsibility of the Company s
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As described in Note 4 to the financial statements, the shareholders of
Consumers Financial Corporation approved a plan of liquidation on March 24,
1998, and the Company commenced liquidation shortly thereafter. As a result,
the Company changed its basis of accounting for periods subsequent to March
24, 1998 from the going-concern basis to the liquidation basis. Accordingly,
the carrying values of the remaining assets as of December 31, 1999, are
presented at estimated realizable values and all liabilities are presented at
estimated settlement amounts.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated net assets in liquidation
of Consumers Financial Corporation and subsidiaries as of December 31, 1999
and the consolidated changes in their net assets in liquidation for the year
then ended, in conformity with generally accepted accounting principles
applied on the basis described in the preceding paragraph.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in
the index of financial statement schedules at Item 14(a) are presented for
purposes of complying with the Securities and Exchange Commission s rules and
are not part of the basic financial statements. The 1999 amounts included in
these schedules have been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
STAMBAUGH-NESS, P.C.
York, Pennsylvania
March 14, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying statements of operations, shareholders'
equity and cash flows of Consumers Financial Corporation (a Pennsylvania
corporation) and subsidiaries for the year ended December 31, 1997 and for the
period from January 1, 1998 to March 24, 1998. In addition, we have audited
the statement of net assets in liquidation as of December 31, 1998, and the
related statement of changes in net assets in liquidation for the period from
March 25, 1998 to December 31, 1998. These financial statements and the
schedules referred to below are the responsibility of the Company s
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 4 to the financial statements, the shareholders of
Consumers Financial Corporation approved a plan of liquidation on March 24,
1998, and the Company commenced liquidation shortly thereafter. As a result,
the Company has changed its basis of accounting for periods subsequent to
March 24, 1998 from the going-concern basis to the liquidation basis.
Accordingly, the carrying values of the remaining assets as of December 31,
1998, are presented at estimated realizable values and all liabilities are
presented at estimated settlement amounts.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Consumers Financial Corporation and subsidiaries for the year ended December
31, 1997 and for the period from January 1, 1998 to March 24, 1998, their net
assets in liquidation as of December 31, 1998 and the changes in their net
assets in liquidation for the period from March 25, 1998 to December 31, 1998,
in conformity with generally accepted accounting principles applied on the
bases described in the preceding paragraph.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in
the index of financial statement schedules at Item 14(a) are presented for
purposes of complying with the Securities and Exchange Commission s rules and
are not part of the basic financial statements. The 1998 and 1997 amounts
included in these schedules have been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 16, 1999
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 1999 AND 1998
(dollar amounts in thousands) 1999 1998
Assets
Investments:
Fixed maturities $896 $1,043
Mortgage loans on real estate 1,552 1,600
Other invested assets 75
Short-term investments 1,146 1,732
Total investments 3,594 4,450
Cash 274 172
Accrued investment income 19 36
Reinsurance recoverable 11,404 20,488
Other receivables 484 1,102
Prepaid reinsurance premiums 27,644 34,840
Deferred policy acquisition costs 50
Property and equipment 1,179 1,018
Other real estate 187
Other assets 150 345
Total assets 44,748 62,688
Liabilities
Future policy benefits 9,078 17,645
Unearned premiums 27,644 35,163
Other policy claims and benefits payable 2,365 2,882
Other liabilities 1,329 1,800
40,416 57,490
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 1999, 463,461 shares; 1998, 481,461
shares; net of $303 reduction in 1999 to reflect estimated liquidation 4,332 4,815
value
Total liabilities and redeemable preferred stock 44,748 62,305
Net assets in liquidation $0 $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
Year ended For the period
December 31, from March 25,
(in thousands) 1999 1998
to December 31,
1998
Revenues:
Earned premiums $319 $521
Net investment income 210 487
Net realized investment gains (losses) (5) 160
Net fees from sale of customer accounts 373 305
Joint venture income (loss) (20) 243
Gain on disposal of discontinued business 84
Gain on recapture of assumed business by direct writer 65
Miscellaneous 131 270
1,073 2,070
Benefits and expenses:
Policyholder benefits 396 177
Rent and related costs 121 243
Salaries, wages and employee benefits 367 296
Professional fees 197 355
Taxes, licenses and fees 30 142
Loss on sale of other assets 286
Miscellaneous 214 176
1,325 1,675
Income (loss) before income tax expense (252) 395
Income tax expense (527)
Increase in liability for underfunded pension plan (388) (734)
Adjustment of assets to estimated realizable value 88
Adjustment of liabilities to estimated settlement amounts 210
Decrease in unrealized appreciation of debt securities (43) (32)
Preferred stock dividends (406) (307)
Adjustment of preferred stock to estimated liquidation value 303 (175)
Retirement of treasury shares-preferred 105 57
Purchase of treasury shares-common (9)
Decrease in net assets for the period (383) (1,332)
Net assets at beginning of period 383 1,715
Net assets at end of period $0 $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED BALANCE SHEET
MARCH 24, 1998
(UNAUDITED)
(dollar amounts in thousands)
ASSETS
Investments:
Fixed maturities $4,076
Mortgage loans on real estate 1,887
Other invested assets 261
Short-term investments 31,964
Total investments 38,188
Cash 289
Accrued investment income 188
Receivables 23,880
Prepaid reinsurance premiums 37,981
Deferred policy acquisition costs 25
Property and equipment 1,320
Other real estate 780
Other assets 731
$103,382
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
Liabilities:
Future policy benefits $17,649
Unearned premiums 38,918
Other policy claims and benefits payable 4,047
Due to reinsurer on sale of credit insurance business 34,719
Other liabilities 1,664
Income taxes:
Current 415
Deferred (442)
Total liabilities 96,970
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500 shares;
issued 514,261 shares; outstanding 481,461 shares; redemption
amount $4,815; net of treasury stock of $271 4,697
Shareholders equity:
Common stock, $.01 stated value, authorized 10,000,000 shares;
issued 3,019,110 shares; outstanding 1998, 2,595,617 shares;
1997, 2,596,155 shares 30
Capital in excess of stated value 7,989
Net unrealized appreciation of debt securities, net of income taxes 58
Deficit (4,891)
Treasury stock (1,471)
Total shareholders equity 1,715
$103,382
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period from Year ended
January 1, 1998 to December 31,
(in thousands, except per share amounts) March 24, 1998 1997
Revenues:
Premiums written ($4) ($37)
Decrease in unearned premiums 87 393
Premium income 83 356
Net investment income 60 63
Realized investment gains (losses) 24 (176)
Fees and other income 181 190
Total revenues 348 433
Benefits and expenses:
Death and other benefits 83 460
Amortization of deferred policy acquisition costs 10
Operating expenses 368 1,639
Total benefits and expenses 451 2,109
Loss from continuing operations before income
tax benefit (103) (1,676)
Income tax benefit (15) (235)
Loss from continuing operations (88) (1,441)
Discontinued operations:
Loss from operations of discontinued
businesses (net of income taxes) (825)
Gain (loss) on disposal of discontinued
businesses (net of income taxes) 112 (4,094)
112 (4,919)
Net income (loss) $24 ($6,360)
Basic and diluted income (loss) per common share:
Loss from continuing operations ($0.08) ($0.73)
Discontinued operations 0.04 (1.89)
Net loss ($0.04) ($2.62)
Weighted average number of shares outstanding 2,596 2,601
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Capital
in Accumulated other
excess comprehensive income
(dollar amounts in thousands) Common stock stated Fixed Equity
Shares Amount value maturities securities
BALANCE, JANUARY 1, 1997 3,021 $30 $7,966 $65 $5
Net loss for the year
Change in net unrealized appreciation for
the year (11) (5)
Total comprehensive income (loss)
Preferred stock dividends
Accretion of difference between fair
value and mandatory redemption value
of preferred stock
Purchase of treasury shares
Retirement of treasury shares-common (2) (10)
Retirement of treasury shares-
preferred 33
BALANCE, DECEMBER 31, 1997 3,019 30 7,989 54 0
Net income for the period
Change in net unrealized appreciation for 4
the period
Total comprehensive income
Preferred stock dividends
Accretion of difference between fair
value and mandatory redemption value
of preferred stock
BALANCE, MARCH 24, 1998 3,019 $30 $7,989 $58 $0
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Retained
earnings Treasury stock Total
(dollar amounts in thousands) (deficit) Shares Amount amount
BALANCE, JANUARY 1, 1997 $2,009 (410) $142 $8,650
Net loss for the year (6,360) (6,360)
Change in net unrealized appreciation for (16)
the year
Total comprehensive income (loss) 6,376
Preferred stock dividends (409) (409)
Accretion of difference between fair
value and mandatory redemption value
of preferred stock (36) (36)
Purchase of treasury shares (15) (56) (56)
Retirement of treasury shares-common 2
Retirement of treasury shares-preferred 10 33
BALANCE, DECEMBER 31, 1997 (4,796) (423) (1,471) 1,806
Net income for the period 24 24
Change in net unrealized appreciation for
the period 4
Total comprehensive income 28
Preferred stock dividends (109) (109)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (10) (10)
BALANCE, MARCH 24, 1998 ($4,891) (423) ($1,471) $1,715
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
from
January 1, 1998 Year ended
to December 31,
(in thousands) March 24, 1998 1997
Cash flows from operating activities:
Net income (loss) $24 ($6,360)
Adjustments to reconcile net loss to cash
provided by (used in) operating actvities:
Provision for permanent decline in value of
investments 158
Deferred policy acquisition costs incurred (9,771)
Amortization of deferred policy acquisition costs 12,615
Provision for permanent decline in value of property
and equipment and other real estate 942
Other amortization and depreciation 24 483
Change in future policy benefits (2,696)
Change in unearned premiums (6,183)
Change in amounts due reinsurers (142) (1,226)
Income taxes (15) (1,601)
Change in prepaid reinsurance premiums 7,765
Change in receivables 1,497 4,618
Change in other liabilities (376) 415
Other (434) 186
Total adjustments 554 5,705
Net cash provided by (used in) operating activities 578 (655)
Cash flows from investing activities:
Purchase of investments (3) (39,231)
Maturity of investments 1,000 2,195
Sale of investments 1,829 46,424
Net assets transferred in sale of insurance business (3,647) (8,175)
Purchase of property and equipment
Net cash provided by (used in) investing activities (821) 1,213
Cash flows from financing activities:
Purchase of treasury stock, including 8 1/2%
redeemable preferred stock (64)
Cash dividends to shareholders (109) (409)
Net cash used in financing activities (109) (473)
Net increase (decrease) in cash (352) 85
Cash at beginning of year 641 556
Cash at end of period $289 $641
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Income taxes $111 $90
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Company Overview
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and its liquidity position. As a result,
in late 1997, the Company signed an agreement to sell its core credit
insurance and related products business, which had been its only remaining
business operation, following the sales in 1994 and 1997 of all of its
universal life insurance business and the 1996 sale of its auto auction
business. Settlement on the sale of the credit insurance business took place
in May 1998. The Company s income or loss from operations now consists
principally of (i) earned premium and related costs associated with a small,
closed block of extended service contract business which was recaptured by the
direct writer in late 1999, (ii) fee revenues received from Life of the South
Corporation, a Georgia-based financial services holding company which acquired
the Company s credit insurance business and its credit insurance accounts
(LOTS), (iii) investment income on remaining assets and (iv) corporate
expenses.
On March 24, 1998, the Company s shareholders approved a plan of
liquidation and dissolution (the Plan of Liquidation and Dissolution) pursuant
to which the Company intends to liquidate its remaining assets, provide for
all of its liabilities, make cash distributions to its preferred shareholders
and distribute the remaining cash, if any, to its common shareholders. (see
Note 4.)
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Consumers
Financial Corporation (the Company) and its wholly-owned subsidiaries, the
most significant of which is Consumers Life Insurance Company (Consumers
Life). All material intercompany accounts and transactions have been
eliminated.
Liquidation basis of accounting
The financial statements have been prepared on the basis of generally
accepted accounting principles (GAAP) which, as to the life insurance company
subsidiaries, vary from reporting practices prescribed or permitted by
regulatory authorities. As a result of the approval of the Plan of Liquidation
and Dissolution referred to above and discussed in Note 4, the Company adopted
a liquidation basis of accounting for the periods subsequent to March 24,
1998. Under the liquidation basis of accounting, assets are stated at their
estimated net realizable values and liabilites are stated at their anticipated
settlement amounts. Amounts determined in accordance with the liquidation
basis of accounting do not significantly differ from the accounting policies
discussed below.
Prior to March 25, 1998, the Company reported the results of its
operations and its asset and liability amounts using accounting principles
applicable to going concern entitites, as discussed below. Certain prior year
amounts have been reclassified to conform with classifications used for 1999.
Investments
Fixed maturities includes bonds, notes and certificates of deposit
maturing after one year. Management determines the appropriate classification
of bonds and notes at the time of purchase and reevaluates such designation as
of each balance sheet date. These securities are classified as held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost. All other bonds and notes are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of income taxes, reported as a separate component of
shareholders equity. The amortized cost of fixed maturity securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
All certificates of deposits maturing after one year are deemed to be held to
maturity.
Mortgage loans on real estate are carried at the unpaid principal
balance. Short-term investments are carried at cost. Other invested assets,
comprised of real estate partnerships, are reported at estimated net
realizable value.
Interest on fixed maturities and short-term investments is credited to
income as it accrues on the principal amounts outstanding, adjusted for
amortization of premiums and discounts computed by the interest method.
Dividends are recorded as income on the ex-dividend dates. Loan origination
and commitment fees are amortized, using the interest method, over the life of
the mortgage loan. The accrual of interest on mortgage loans is generally
discontinued when the full collection of principal is in doubt, or when the
payment of principal or interest has become contractually 90 days past due.
Realized gains and losses and provisions for permanent losses on
investments are included in the determination of pre-tax income or loss. Net
unrealized appreciation or depreciation of debt securities and preferred and
common stocks, which represents the difference between fair value and
aggregate cost, is included in a separate shareholders' equity account. The
"specific identification" method is used in determining the cost of
investments sold.
Fair values of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality and maturity of the investments.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for similar loans to borrowers with similar credit ratings.
Deferred policy acquisition costs
Prior to the discontinuation of its insurance operations, the Company
deferred the costs of acquiring new insurance business. The costs deferred
consisted principally of commissions, certain sales salaries and other
expenses that varied with and were primarily related to the production of new
business. Acquisition costs relating to single premium credit insurance were
amortized so as to charge each year's operations in direct proportion to
premiums earned. Deferred policy acquisition costs were expensed when such
costs were deemed not to be recoverable from future earned premiums and
investment income or, when applicable, from the estimated proceeds to be
received from the sale of the related insurance business.
Property and equipment and depreciation
Property and equipment are stated at estimated net realizable value.
Depreciation is being provided on the straight-line method over the estimated
useful lives of the assets.
Other real estate
Real estate is carried at estimated net realizable value.
Future policy benefits
The liability for future policy benefits for individual life insurance
has been provided on a net level premium method based on estimated investment
yields, withdrawals, mortality and other assumptions which were appropriate at
the time the policies were issued. Such estimates were based upon industry
data and the Companies' past experience, as adjusted to provide for possible
adverse deviation from the estimates. Benefit reserves for universal life
products represent policy account balances before applicable surrender charges
plus certain deferred policy initiation fees that are recognized in income
over the term of the policies.
Unearned premiums
Unearned premiums for credit life and disability insurance contracts
have been computed based upon the original and remaining term of the related
policies as follows: decreasing term credit life on the Rule of 78's method,
level term credit life using the Pro Rata method and credit disability using a
65% - 35% weighted average of the Rule of 78's and Pro Rata methods.
Income taxes
The Company and its subsidiaries provide income taxes, for financial
reporting purposes, on the basis of the liability method as required by
Statement of Financial Accounting Standards No. 109.
Earnings per share
For periods prior to the adoption of the liquidation basis of
accounting, basic and diluted earnings per share are calculated in accordance
with Statement of Financial Accounting Standards No. 128.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
3. BASIS OF FINANCIAL STATEMENTS
The more significant accounting principles applied in the preparation of
the financial statements that differ from life insurance statutory accounting
practices prescribed or permitted by regulatory authorities (which are
primarily designed to demonstrate solvency) are as follows:
(a) In accordance with NAIC requirements, all bonds eligible for
amortization are reported at amortized value, whereas in the
accompanying financial statements, only bonds which are classified
as held-to-maturity securities are stated at amortized cost, and
available-for-sale securities are carried at fair value. Other
securities are carried at values prescribed by or deemed
acceptable to the NAIC for statutory accounting purposes.
(b) Deferred income taxes, if applicable, are provided as described in
Note 15.
(c) The statutory liabilities for the interest maintenance reserve and
asset valuation reserve, designed to lessen the impact on surplus
of market fluctuations of securities and mortgage loans, have not
been provided in the financial statements.
(d) Certain assets are reported as assets rather than being charged
directly to surplus and excluded from the balance sheets.
(e) Commission allowances pertaining to financing-type reinsurance
agreements are not included in results of operations or changes in
net assets in liquidation
Dividends and other distributions to the Company from Consumers Life are
limited in that Consumers Life is required to maintain minimum capital and
surplus in each of the states in which it is licensed, determined in
accordance with regulatory accounting practices. The amount of minimum capital
and surplus required is $8.6 million. As a result of reductions in its capital
and surplus over the past four years, at December 31, 1999, Consumers Life
does not meet the minimum capital and surplus requirements in four of the
states in which it is licensed. Consequently, it has agreed to temporary
suspension of its insurance license in two of those states. No actions have
been taken with respect to this matter by the insurance departments of the
other two states. Since the Company does not intend to write any new insurance
business through Consumers Life and is currently attempting to sell the
subsidiary, the temporary suspension of two licenses has no material effect on
the Company.
Under Delaware insurance laws, distributions are subject to further
restrictions relating to capital and surplus and operating earnings.
Accordingly, under normal circumstances, at December 31, 1999, approximately
$5 million of Consumers Life's net assets cannot be transferred to the parent
company and $433,000 is available for transfer during 2000. However, because
of its prior operating losses and its current capital and surplus position,
the Company is not permitted to pay any dividends without prior approval from
the Delaware Department of Insurance. Also, any loans or advances to the
parent company of a material amount must be reported to the insurance
department. The Company may have limited cash funds available to pay dividends
in excess of amounts transferred from Consumers Life.
The reported statutory capital and surplus of Consumers Life was $4.3
million at December 31, 1999 and $5.0 million at December 31, 1998. Consumers
Life reported a statutory net loss of $1.5 million in 1999, while Consumers
Life and its former insurance subsidiary, Investors Fidelity Life Assurance
Corp., reported combined statutory net income of $281,000 in 1998.
Insurance laws require Consumers Life to deposit certain amounts with
various state insurance departments in order to maintain its licenses. The
approximate carrying amount of such deposits at December 31, 1999 and 1998 was
$1.0 million.
4. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION
On December 30, 1997, the Company entered into agreements with LOTS and
American Republic Insurance Company (American Republic), pursuant to which the
Company (i) sold its credit insurance and fee income accounts to LOTS
effective October 1, 1997, (ii) sold its September 30, 1997 inforce block of
credit insurance business to American Republic, LOTS financial partner in the
transaction, effective January 1, 1998 and (iii) sold one of its wholly-owned
reinsurance subsidiaries to LOTS as of August 31, 1998. LOTS and the Company
also agreed that, with respect to Consumers Life, new credit insurance
business produced by that subsidiary s former customer accounts, which were
transferred to LOTS, would continue to be written on the policy or certificate
forms of the subsidiary until September 30, 1999. The parties subsequently
modified their agreement to extend the September 30 date to November 15, 1999
with respect to Pennsylvania premiums only. This premium and the related
insurance risk were also reinsured 100% to American Republic.
The sale of the inforce block of business referred to in (ii) above was
completed on May 13, 1998 after the required approvals of the Company s
preferred and common shareholders and state insurance regulators in the states
of Delaware and Ohio were received. Settlement on the sale of the reinsurance
subsidiary referred to in (iii) above occurred on September 28, 1998,
following the approval in late August of the insurance regulators in the state
of Arizona.
The sale of the inforce block of business resulted in an after-tax loss
of approximately $3,705,000, of which $3,919,000 was reflected in the
Company s fourth quarter 1997 financial statements through a write-down of
deferred policy acquisition costs. The 1997 loss included an $819,000 loss
from operations from September 30, 1997 (the measurement date) to December 31,
1997. An offsetting gain on disposal of $214,000, which resulted from
adjustments to certain estimates made in 1997, was included in the Company s
1998 financial statements. As a result of the sale of the Company s credit
insurance and related operations to LOTS, in the accompanying financial
statements, the operating results of the credit insurance and related fee
income business have been reported as discontinued operations for all periods
prior to the adoption of the liquidation basis of accounting.
In addition to approving the sale of the inforce credit insurance
business, at the Special Meeting of Shareholders held on March 24, 1998, the
Company s shareholders also approved a Plan of Liquidation and Dissolution,
pursuant to which the Company is now liquidating its remaining assets and
providing for all of its liabilities. The Company eventually intends to make a
cash distribution to its preferred shareholders and ultimately distribute its
remaining cash, if any, to its common shareholders. Pursuant to the terms of
its agreement with LOTS, the Company will continue receiving payments from
LOTS until September 30, 2002 from the sale of the Company s customer
accounts. In 2002, the Company may also receive a payment from a contingency
fund established by the parties based on the claims experience on the inforce
credit insurance business sold to LOTS. As a result, the distribution, if any,
to the Company s common shareholders will not be made until late in 2002, when
all amounts due from LOTS have been received. The Company has made substantial
personnel reductions during the past several years as a result of the
discontinuation of its various businesses. As of March 1, 2000, three people
were employed on a full-time basis by the Company.
A summary of the results of operations of the discontinued segments is
presented below:
For the period from January 1, 1998 to March 24, 1998
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $4,127 $158 $4,285
Gain from operations before income taxes
Income taxes
Gain from operations
Gain on disposal before income taxes $112 $112
Income taxes
Gain on disposal 112 112
Gain from discontinued operations $112 $112
Year ended December 31, 1997
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $29,712 $1,892 (a) $6 $31,610
Loss from operations before income tax
benefit ($1,457) ($1,457)
Income tax benefit (632) (632)
Loss from operations (825) (825)
Loss on disposal before income tax
benefit (4,061) ($253) ($22) (4,336)
Income tax benefit (142) (86) (14) (242)
Loss on disposal (3,919) (167) (8) (4,094)
Loss from discontinued operations ($4,744) ($167) ($8) ($4,919)
(a) Includes renewal premiums which are 100% ceded under indemnity
reinsurance agreement with third party reinsurer.
5. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement purposes as
described in Note 1, consist of the following at December 31, 1999:
Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
Fixed maturities:
Bonds-United States government and
government agencies and authorities $863 $846 $846
Certificates of deposit 50 50 50
Total fixed maturities 913 896 896
Mortgage loans on real estate 1,552 1,552 1,552
Short-term investments 1,146 1,146 1,146
Total investments $3,611 $3,594 $3,594
A portion of the Company's invested funds is restricted as to use in
that deposits are required with various state insurance departments in order
to maintain licenses in those states (see Note 3).
At December 31, 1999 and 1998, one mortgage loan with a balance of
$295,360 was non-performing. The mortgagor on this loan filed a voluntary
petition under Chapter 11 of the Bankruptcy Code in late 1997. Interest on
this loan of $39,965 and $13,383 was excluded from investment income in 1999
and 1998, respectively, due to its non-performing status. As a result of an
agreement reached with the bankruptcy trustee, the Company is now receiving
approximately $4,800 per month in lease payments from a tenant at the
mortgaged property. In accordance with that agreement, such payments are being
applied first to legal costs incurred by the Company and then to accrued late
fees, interest and principal. The trustee is actively seeking alternate
sources of financing for the property and is also attempting to sell the
property.
At December 31, 1999, all three of the Company's investments in mortgage
loans were secured by commercial real estate located in Central Pennsylvania.
Such investments consist of first mortgage liens on completed income-
producing properties. Each of the loans exceeded 10% of the Company s net
assets in liquidation at December 31, 1999 and 1998. The Company s largest
loan, which had a balance of $1,175,760 at the end of 1999, was granted to the
owner of the other one-half interest in the Company s home office building and
is secured by the owner s interest in the building. In connection with the
planned sale of the building in June 2000, this loan will be repaid in full.
At December 31, 1998, the Company s remaining real estate was classified
as non-investment real estate, since the Company intended to sell this
property. Accumulated depreciation on the property at the end of 1998 was
$27,000. In 1999, the Company sold this property and reported a loss of
approximately $2,000.
Net investment income is applicable to the following investments:
Years ended December 31,
(in thousands) 1999 1998 1997
Interest:
Fixed maturities $60 $175 $1,934
Mortgage loans 109 139 189
Short-term investments 80 733 486
Other 82
249 1,047 2,691
Investment expenses (39) (85) (675)
Total net investment income 210 962 2,016
Less investment income for periods subsequent
to adoption of liquidation basis of accounting 210 487
Net investment income for periods prior to
adoption of liquidation basis of accounting 0 475 2,016
Less net investment income attributable to
discontinued operations 0 415 1,953
Net investment income attributable to
continuing operations $0 $60 $62
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1999 and 1998 are as follows:
1999 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $863 $3 $20 $846
Totals $863 $3 $20 $846
1998 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $967 $26 $993
Totals $967 $26 $993
All debt securities held by the Company at December 31, 1999 have
contractual maturities between 2001 and 2005. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Proceeds from the sales of investments in debt securities during 1999
were $850,000. There were no gains or losses on those sales. Proceeds from
such sales in 1998 were $3.7 million. Gross gains of $58,000 and gross losses
of $6,000 were realized on those sales. Proceeds from sales in 1997 were $48
million. Gross gains of $446,000 and gross losses of $247,000 were realized on
those sales.
Realized investment gains (losses) are applicable to the following
investments:
Years ended December 31,
(in thousands) 1999 1998 1997
Fixed maturities $146 $249
Other invested assets ($5) 38 (219)
Total (5) 184 30
Realized investment losses (gains) for
periods subsequentto adoption of liquidation
basis of accounting 5 (160)
Realized investment gains for periods
prior to adoption of liquidation basis
of accounting 0 24 30
Realized investment gains attributable
to discontinued operations (206)
Realized investment gains (losses)
attributable to continuing operations $0 $24 ($176)
6. OTHER RECEIVABLES
December 31,
(in thousands) 1999 1998
Joint venture experience refund $251 $223
Federal income tax refund 520
Fees due from purchaser of customer
accounts 204 249
Other 29 110
Balance $484 $1,102
7. DEFERRED POLICY ACQUISITION COSTS
Individual
(in thousands) Credit Life Total
Balance, January 1, 1997 16,414 2,535 16,949
Costs deferred 9,771 9,771
Amortization (9,515) (9,515)
Write-off attributable to sale of inforce
universal life insurance business (2,535) (2,535)
Write-off attributable to 1998 sale of
inforce credit insurance business (3,100) (3,100)
Balance, December 31, 1997 13,570 0 13,570
Costs deferred 133 133
Amortization (25) (83) (108)
Write-off attributable to sale of
inforce credit insurance business (13,545) (13,545)
Balance, December 31, 1998 0 50 50
Amortization (50) (50)
Balance, December 31, 1999 $0 $0 $0
8. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE
December 31,
(in thousands) 1999 1998
Property and equipment:
Data processing equipment and software $73 $122
Furniture and equipment 151 223
Home office building, including 1,746 1,538
1,970 1,883
Less accumulated depreciation (791) (865)
Balance $1,179 $1,018
December 31,
(in thousands) 1999 1998
Other real estate - warehouse $214
Less accumulated depreciation (27)
Balance $0 $187
9. POLICY LIABILITIES
The composition of future policy benefits and unearned premiums at
December 31, 1999 and the assumptions pertinent thereto are as follows:
Life Future Interest
insurance policy Unearned rates: years
(in thousands) in force benefits premiums of issue
Individual life $19,597 $1,449 4 1/2% - 11 1/2%
1961 - 1992
Credit life 716,879 $10,823 (a)
1990 - 1999
Credit disability 7,629 16,821 (a)
1990-1999
Balance $736,476 $9,078 $27,644
(a) There are no interest rate assumptions in the credit reserve
factors.
Mortality and withdrawal assumptions generally are based on industry
data and the life insurance companies' prior experience. The mortality tables
predominantly used in calculating benefit reserves are the 1955 - 1960 Basic
Select and Ultimate for males (special graduation) and the 1965 - 1970 Basic
Select and Ultimate for males (special graduation).
The withdrawal assumptions for individual life insurance are
predominantly Linton B and Linton C.
Future policy benefits reported to regulatory authorities were less than
the above total by approximately $80,000 at December 31, 1999.
Future policy benefits and unearned premiums do not include any
deduction for reinsurance ceded to other companies. At December 31, 1999 and
1998, all but $39,000 of the Company s future policy benefits liability was
reinsured to other insurers in connection with the discontinuation of the
Company s insurance operations. Similarly, all of the Company s unearned
premiums liability at December 31, 1999 was reinsured to other insurers, and
all but $323,000 of the unearned premiums liability at December 31, 1998 was
reinsured. Future policy benefits and unearned premiums related to such
reinsurance are classified as Reinsurance Recoverable and Prepaid Reinsurance
Premiums, respectively, as shown in the following table.
December 31,
(in thousands) 1999 1998
Future Policy Benefits and Other Policy Claims and Benefits $ 11,443 $ 20,527
Payable
Reinsurance Recoverable 11,404 20,488
Net liability $ 39 $ 39
Unearned Premiums $ 27,644 $ 35,163
Prepaid Reinsurance Premiums 27,644 34,840
Net liability $ 0 $ 323
Life insurance in force net of reinsurance ceded was $58,000 at December
31, 1999 and 1998.
10. REINSURANCE
Prior to the 1998 sale of its credit insurance business, as discussed in
Note 4, and the sales of its individual life insurance business in 1992
through 1997, the Company routinely ceded and, in some instances, assumed
reinsurance. The sale of the credit insurance business of Consumers Life was
completed pursuant to an indemnity reinsurance agreement with American
Republic. The reinsurance transactions through which the Company sold its
individual life insurance business included the use of both indemnity and
assumption agreements. The insurance companies remain contingently liable for
insurance risks ceded under indemnity agreements, while such risks are legally
transferred to the reinsurer when assumption agreements are utilized.
Historically, the insurance companies also entered into various
financing-type reinsurance agreements with unaffiliated reinsurers. Such
agreements, which primarily involved credit insurance, were designed to
minimize the reduction of statutory capital and surplus arising at the time
premiums were written. These financing-type agreements were terminated as of
January 1, 1998 when the American Republic agreements became effective. During
1998, Consumers Life entered into another financing-type reinsurance agreement
in which it assumed approximately $2 million in individual life insurance
premiums and an equal amount of policy liabilities. The effects of all
financing-type agreements have been removed from the financial statements
except for the cost of the financing, which amounted to $25,000 in both 1999
and 1998 and $660,000 in 1997. These costs are included with Operating
Expenses on the Consolidated Statements of Operations and are presented with
Miscellaneous Expenses on the Consolidated Statements of Changes in Net Assets
in Liquidation.
Excluding premiums reinsured under financing-type agreements, premiums
ceded to other companies were $11.9 million, $17.7 million and $4.9 million in
1999, 1998, and 1997, respectively.
Incurred benefits and losses reinsured in 1999 were $12.6 million
compared to $16.4 million in 1998 and $6.8 million in 1997. These amounts have
been deducted in arriving at Death and Other Benefits in the Consolidated
Statements of Operations and in computing Policyholder Benefits in the
Consolidated Statements of Changes in Net Assets in Liquidation. However,
Future Policy Benefits and Unearned Premiums at December 31, 1999 and 1998 do
not include any deduction for reinsurance ceded. Instead, the amounts related
to such reinsurance are classified as Reinsurance Recoverable and Prepaid
Reinsurance Premiums (see Note 9).
11. PENSION AND OTHER RETIREMENT PLANS
The Company has a defined benefit pension plan and two defined
contribution plans which cover substantially all full-time employees.
Contributions under the pension plan are based upon length of service and
annual compensation of each employee. The assets of the pension plan include
principally debt securities and mortgages. Effective July 31, 1996, the
Company froze the benefits payable to participants under the pension plan.
In January 2000, the Company notified the participants of the pension plan of
its intent to terminate the plan, subject to the approval of the Pension
Benefit Guaranty Corporation (PBGC). Accordingly, in April 2000, the Company
intends to file an application for such approval with the PBGC and will also
request a determination letter confirming the qualified status of the plan
from the Internal Revenue Service.
The defined contribution plans, which include an employee stock
ownership plan, provide for annual contributions in amounts determined by the
Board of Directors. Such contributions are based upon the annual compensation
of each employee. Company contributions in 1999 were $11,100, while no
contributions were made in either 1998 or 1997. With respect to the employee
stock ownership plan, in September 1999, the Company notified the plan
participants of its intent to terminate the plan and also requested a
determination letter confirming the plan s qualified status from the Internal
Revenue Service.
The funded status of the plan is as follows:
December 31,
(in thousands) 1999 1998
Actuarial present value of:
Vested benefit obligation $3,499 $3,121
Accumulated benefit obligation $3,499 $3,121
Actuarial present value of projected
benefit obligation $3,499 $3,121
Plan assets at fair value 2,965 2,457
Projected benefit obligation in excess of plan assets 534 664
Unrecognized net loss arising from difference between
actual experience and assumed experience 1,192 831
Unrecognized net liability at transition 37 49
Unrecognized prior service cost (107) (117)
Unamortized prior year loss (1,122) (763)
Unfunded projected benefit obligation $534 $664
Reconciliations of beginning and ending balances of the plan's projected
benefit obligation and its assets are presented below.
December 31,
(in thousands) 1999 1998
Projected benefit obligation, beginning of year $3,121 $2,891
Increase due to changes in assumptions 414 529
Benefits to participants (252) (502)
Interest cost 216 203
Projected benefit obligation, end of year $3,499 $3,121
December 31,
(in thousands) 1999 1998
Fair value of plan assets, beginning of year $2,457 $2,694
Employer contributions 600 100
Investment income 170 175
Benefits to participants (252) (502)
Administrative expenses (10) (10)
Fair value of plan assets, end of year $2,965 $2,457
Net periodic pension cost is computed below:
(in thousands) 1999 1998 1997
Net periodic pension cost included
in the following components:
Interest cost on projected benefit $216 $203 $212
obligation
Expected return on plan assets (150) (161) (175)
Net amortization and deferral 41 171 37
Net periodic pension cost $107 $213 $74
Rates used in determining pension expense and related obligations were:
1999 1998 1997
Discount rate (pre-retirement period) 6.35% 6.50% 7.50%
Discount rate (post-retirement period) 6.35% 6.00% 7.50%
Annual rate of return on plan assets 6.35% 6.50% 7.50%
Annual rate of increase in compensation N/A N/A N/A
12. COMMITMENTS AND CONTINGENCIES
Rental expense in 1999, 1998 and 1997 was approximately $138,000,
$245,000 and $345,000, respectively.
In 1989, the Company entered into an agreement for the lease of office
space. The facility contains approximately 44,500 square feet of office space.
The term of the lease is ten years with an option to renew for one additional
term of five years. Until March 1994, monthly lease payments were $35,000. In
March 1994, the Company exercised its option to acquire a 50% interest in this
property at a price of $1.75 million. The Company continued to lease the
portion of the building it did not own, but at monthly rent of $17,000 through
July 1999 when its lease expired. The Company also leases a portion of the
unused office space to various third party tenants. Income from these leases
totaled $175,000 in 1999, $87,000 in 1998 and $57,000 in 1997. Effective
August 1, 1999, the Company and its co-owner share equally in the rent from
these tenants and in the operating costs of the building.
The building lease was classified as an operating lease. The Company has
no other significant leases.
In connection with the cancellation of a joint venture agreement in
1996, the Company agreed to pay its former joint venture partner a pro rata
share of the proceeds it receives from the sale of its credit insurance
accounts. Accordingly, over the next three years, the Company will pay its
former partner approximately 19% of any gross fee revenues received from LOTS
for the sale of its customer accounts.
Reinsurance risks would give rise to liability to the insurance
companies only in the event that the reinsuring company might be unable to
meet its obligations under the reinsurance agreements in force.
In November 1997, the Company and a third party reinsurer were sued by a
former general agency with whom the Company had a partnership agreement. The
partnership agreement provided that the agency would market universal life
insurance business for the Company, pursuant to specific criteria established
by the Company, and would also be entitled to a share of the profits, if any,
which arose from the business produced. The claimant is seeking monetary
damages to compensate it for the Company s alleged failure to share profits
and for other alleged losses resulting from the Company s rejection of policy
applications involving unacceptable risks. While management believes this
claim is completely without merit and intends to vigorously defend itself in
this matter, the ultimate outcome of this claim cannot be determined at this
time. The Company has filed two counterclaims against this agency seeking
damages for losses the Company sustained as a result of the agency s alleged
breach of the partnership agreement and to recover an unpaid loan made to the
agency.
During 1999, a dispute arose between the Company and the purchaser of
its credit insurance business relating to the payment of investment income on
the assets which were transferred to the purchaser. Subsequent to the closing
of the transaction, the purchaser claimed that the Company owes it
approximately $1,400,000 for investment earnings on the amount transferred for
the period from October 1, 1997, the effective date of the agreement, to May
13, 1998, the date of settlement on the sale transaction. In October 1999, the
purchaser informed the Company that it would begin withholding from the
Company the fee income payments which are contractually due to the Company
from the sale of the credit insurance accounts. For the year ended December
31, 1999, net fee income totaled $373,000, of which $137,000 has been withheld
by the buyer and is included with Receivables on the Consolidated Statements
of Net Assets in Liquidation. The Company believes the purchaser s claim for
investment income is without merit and intends to take all actions necessary
to collect the fee income amounts to which it is contractually entitled. As
required by the agreements entered into by the parties, this matter will be
settled through arbitration. The ultimate outcome of this dispute cannot be
determined at this time.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company or its
subsidiaries. In the opinion of management, based on opinions of legal
counsel, adequate reserves, if deemed necessary, have been established for
these matters and their outcome will not result in a significant effect on the
financial condition or future operating results of the Company or its
subsidiaries. The Company has taken certain income tax positions in previous
years that it believes are appropriate. If such positions were to be
successfully challenged by the Internal Revenue Service, the Company could
incur additional income taxes as well as interest and penalties. Management
believes that the ultimate outcome of any such challenges will not have a
material effect on the Company s financial statements.
13. REDEEMABLE PREFERRED STOCK
The Redeemable Convertible Preferred Stock (the Preferred Stock ) has a
liquidation preference of $10.00 per share and is convertible at any time,
unless previously redeemed, into shares of common stock at the rate of 1.482
shares of common stock for each share of Preferred Stock (equivalent to a
conversion price of $6.75 per share). The Preferred Stock is redeemable at the
option of the Company at a redemption price of $10.00 per share.
Annual dividends at the rate of $.85 per share are cumulative from the
date of original issue and are payable quarterly on the first day of January,
April, July and October. As of December 31, 1999, the Company is not in
arrears with respect to payment of dividends on the Preferred Stock. Except in
certain limited instances, the holders of the Preferred Stock have no voting
rights.
The terms of the Preferred Stock require the Company to make annual
payments to a sinking fund. The first such payment was due in July 1998. The
Preferred Stock terms also provide that any purchase of preferred shares by
the Company will reduce the sinking fund requirements by the redemption value
of the shares purchased. As a result of the Company s purchases of Preferred
Stock prior to 1998, no sinking fund payment was due in 1998, and the required
payment for 1999 was reduced from $550,000 to $414,610. The purchase of 18,000
preferred shares in 1999 further reduced the sinking fund deficiency to
$234,610 at December 31, 1999.
When the Company is in arrears as to preferred dividends or sinking fund
appropriations for the Preferred Stock, dividends to holders of the Company's
common stock as well as purchases, redemptions or acquisitions by the Company
of shares of the Company's common stock are restricted. If the Company is in
default in an aggregate amount equal to four quarterly preferred dividends,
the holders of the Preferred Stock shall be entitled, only while such
arrearage exists, to elect two additional members to the then existing Board
of Directors.
Prior to March 25, 1998, the difference between the fair value of the
Preferred Stock at the date of issue and the mandatory redemption value was
recorded through periodic accretions, using the interest method, resulting in
a charge to retained earnings ($9,000 in 1998 and $36,000 in 1997). Upon the
adoption of the liquidation basis of accounting in March 1998, the unaccreted
difference of $175,000 was recorded as a reduction in the Company s net
assets. At December 31, 1999, the redemption value of the Preferred Stock
exceeded the net assets available to redeem these shares by $303,000.
Accordingly, the carrying amount for the Preferred Stock has been reduced to
reflect the net assets available.
At December 31, 1999 and 1998, 686,608 and 713,275 shares of common
stock, respectively, were reserved for the conversion of the Preferred Stock.
14. STOCK OPTIONS
At December 31, 1998 and 1997, the Company had 132,000 outstanding stock
options which were exercisable at $2.25 per share. During 1999, all of these
options expired. In addition, 17,000 options expired in 1997. No options were
exercised during the three year period ended December 31, 1999.
15. INCOME TAXES
Under tax laws in effect prior to 1984, a portion of the gain from
operations of Consumers Life was not taxed when incurred but was accumulated
in a memorandum "Policyholders' Surplus Account." As a result of the Tax
Reform Act of 1984, the balance in the Policyholders' Surplus Account of
Consumers Life was frozen as of December 31, 1983 and additional amounts are
no longer accumulated in this account. However, distributions from the account
continue to be taxed, as under previous laws, if any of the following
conditions occur:
(a) The Policyholders' Surplus Account exceeds a prescribed maximum,
or
(b) Distributions, other than stock dividends, are made by Consumers
Life to the Company in excess of Shareholders' Surplus, as defined
by prior law, or
(c) Consumers Life ceases to qualify for taxation as a life insurance
company.
At December 31, 1997, the Policyholders Surplus Account for Consumers
Life exceeded the prescribed maximum by approximately $1.1 million, resulting
in an additional tax liability of approximately $372,000, which was included
in the Company s 1997 financial statements. At December 31, 1999 and 1998, the
Policyholders' Surplus Account for Consumers Life was approximately $439,000.
Based on its current plans, the Company does not believe it is probable
that Consumers Life will incur any additional taxes with regard to its
Policyholders Surplus Account.
There are currently no significant amounts of retained earnings in
excess of statutory surplus upon which neither current nor deferred income
taxes have been provided.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows:
(in thousands) 1999 1998
Deferred tax liabilities:
Fixed maturities $9
Deferred policy acquisition costs 17
Other 41
$0 $67
Deferred tax assets:
Future policy benefits 60 64
Net operating loss carryforwards 2,300 2,175
Other 303 259
2,663 2,498
Valuation allowance for deferred tax assets (2,663) (2,431)
0 67
Net deferred tax asset $0 $0
Significant components of income tax expense (benefit) are as follows:
(in thousands) 1999 1998 1997
Current:
Federal ($18) ($18)
State 2 56
Total current (16) 38
Deferred 1 (273)
Income tax benefit related to
continuing operations (15) (235)
Income tax benefit included with
discontinued operations:
Current (412)
Deferred (462)
(874)
Income tax benefit for periods prior to
adoption of liquidation basis of
accounting (15) (1,109)
Income tax expense for periods subsequent
to adoption of liquidation basis of
accounting:
Current 55
Deferred 472
527
Total income tax expense (benefit) $0 $512 ($1,109)
The provision for federal income taxes is not proportional to pre-tax
financial statement income or loss due to the exclusions and special
deductions afforded life insurance companies under the Internal Revenue Code,
as amended, and the exclusion of non-taxable and non-deductible items. A
reconciliation between actual income tax benefits and the expected Federal
income tax benefits at the applicable statutory rates is as follows:
For the period from Year ended
January 1, 1998 to December 31,
March 24, 1998 1997
Loss from continuing operations before income tax benefit ($103) ($1,676)
Income tax benefit at 34% statutory
rate on pre-tax loss (35) (570)
Tax related to decrease in
Policyholders Surplus Account 372
Adjustment of prior year s income tax expense (67)
Dividends received deduction (4) (6)
State income taxes 2 36
Items not includable for tax purposes 34
Other, net 22 (34)
Actual income tax benefit relating to
continuing operations ($15) ($235)
The Company files a consolidated Federal income tax return. At December
31, 1999, Consumers Life has available approximately $3.2 millon of Federal
net operating losses. These losses will be carried forward to future years,
and may only be used to offset the taxable income of the life insurance
company sub-group. The net operating losses will expire at various times from
2009 to 2014.
16. PER SHARE INFORMATION
Basic income (loss) per common share has been computed based upon the
weighted average number of common shares outstanding. Diluted per share
information is equivalent to basic per share information because the Company
has no potential common shares which are dilutive for any period presented in
the accompanying financial statements.
The following table sets forth the computation of basic and diluted per
share data for continuing operations for periods prior to the adoption of the
liquidation basis of accounting.
For the period from Year Ended
January 1, 1998 to December 31,
(in thousands, except per share amounts March 24, 1998 1997
Loss from continuing operations ($88) ($1,441)
Preferred stock dividends (109) (409)
Accretion of carrying value of preferred stock (10) (36)
Numerator for basic loss per share - loss
attributable to common shareholders (207) (1,886)
Effect of dilutive securities 0 0
Numerator for diluted loss per share ($207) ($1,886)
Denominator for basic loss per share -
weighted average shares 2,596 2,601
Effect of dilutive securities 0 0
Denominator for diluted loss per share 2,596 2,601
Basic and diluted loss per common share ($0.08) (0.73)
The preferred stock is convertible into 686,608 shares of common stock
(see Note 13). None of the common shares contingently issuable upon the
conversion of the preferred stock have been included in the computation of
diluted per share information because the effect would be antidilutive.
17. SEGMENT INFORMATION
As a result of the disposal of its auto auction business in 1996, the
disposal of its remaining block of individual life insurance business in early
1997 and the disposal of its credit insurance business in 1998, the Company
has no remaining business segments.
As discussed in Note 4, following the sale of its credit insurance
business, the Company intends to liquidate its remaining assets, provide for
its liabilities, distribute cash to its preferred shareholders, up to the
redemption price, and distribute the remaining cash, if any, to its common
shareholders pursuant to a Plan of Liquidation and Dissolution. The Company s
income or loss from operations now consists principally of (i) earned premiums
and related costs associated with an insignificant block of extended service
contract business which was recaptured by the direct writer in 1999, (ii)
investment income on remaining assets, (iii) fee income from LOTS from the
sale of the Company s customer accounts, and (iv) overhead expenses. Because
the fees related to the sale of the Company s customer accounts are being
received from LOTS over a five-year period, and because any distribution which
may be payable by LOTS to the Company from a contingency fund established by
the parties cannot be determined until September 30, 2002, the distribution,
if any, to the Company s common shareholders will not be made until late in
2002.
18. REGULATORY MATTERS
In July 1999, Investors Fidelity Life Assurance Corp. (IFLAC), a
subsidiary of Consumers Life, filed an application with the Ohio Department of
Insurance to formally discontinue its business as a life insurance company. In
September 1999, the Ohio Department issued an order accepting the surrender of
IFLAC s certificate of authority.
The NAIC has established certain minimum capitalization requirements
based on risk-based capital (RBC) formulas. The formulas are designed to
identify companies which are undercapitalized and require specific regulatory
action based on requirements relating to insurance, business, asset and
interest rate risks. At December 31, 1999, Consumers Life has more than
sufficient capital to meet the NAIC's RBC requirements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Arthur Andersen LLP ( AA ) served as the Company s
independent auditors from November 26, 1996 to November 29, 1999. On that
date, the Company advised AA that it did not intend to retain AA as its
independent public accountants for the audit of the Company s financial
statements for the year ended December 31, 1999. The decision to terminate the
services of AA was approved by the Audit Committee of the Company s Board of
Directors on November 29, 1999, at which time the Audit Committee engaged the
firm of Stambaugh-Ness, P.C. as the Company s independent public accountants.
The decision to change from a large international accounting firm to a
regional firm was based primarily on the Board of Directors desire to
minimize costs during the liquidation and dissolution period in which the
Company is now involved.
None of AA s reports on the Company s financial statements for 1997 or
1998 contained an adverse opinion or disclaimer of opinion, nor was any such
report qualified or modified as to uncertainty, audit scope or accounting
principles. Further, through November 29, 1999, there were no disagreements
between the Company and AA on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, and
no reportable events have occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Historically, the Board of Directors of the Company was divided into
three (3) groups, with the directors in each group serving terms of three (3)
years and until their successors were duly elected and qualified. However, due
to the Directors efforts over the past four years to merge, sell or otherwise
dispose of the Company or its assets, there has been no election of Directors
since 1995, and the existing Directors agreed to continue to serve beyond
their terms until such a merger, sale or disposition of the Company or its
assets was completed. Following the approval of the Sale of Assets transaction
and the Plan of Liquidation and Dissolution by the Company s shareholders on
March 24, 1998, three of the Company s Directors, Leon A. Guida, Dr. Robert G.
Little, Jr. and Rev. Sterling P. Martz, resigned. On November 17, 1999, Edward
J. Kremer also resigned. The two remaining Directors are expected to continue
to serve as Directors for a limited period of time in order to oversee the
timely liquidation of the Company in accordance with the Plan of Liquidation.
The table below sets forth the period for which the current Directors
have served as Directors of the Company, their principal occupation or
employment for the last five(5) years, and their other major affiliations and
age as of March 1, 2000.
NAME PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS, OFFICE (IF DIRECTOR
(AGE) ANY) HELD IN THE COMPANY AND OTHER INFORMATION SINCE
James C. Robertson Chairman of the Board, President and Chief 1967
(68) Executive Officer of the Company
John E. Groninger President, John E. Groninger, Inc., Juniata Concrete, 1968
(73) Inc., Republic Development Corp., and Juniata Lumber &
Supply Co., Mexico, PA; Director, Juniata Valley
Financial Corp., Mifflintown, PA
The following information is provided as of March 1, 2000 for each
executive officer of the Company and the principal executives of its
subsidiary. All of the executive officers listed also serve as executive
officers of the life insurance subsidiary. The executive officers are
appointed annually by the Board of Directors and serve at the discretion of
the Board.
NAME AGE OFFICE
James C. Robertson 68 President and Chief Executive Officer
R. Fredric Zullinger 51 Senior Vice President, Chief Financial
Officer and Treasurer
Mr. Robertson joined the Company in 1967 as General Counsel and was
elected a director and President of the Company in 1968. Mr. Robertson
currently serves as Chairman of the Board, President and Chief Executive
Officer of the Company.
Mr. Zullinger joined the Company in 1977 as Vice President-Accounting of
the Company's life insurance subsidiaries. He was appointed Treasurer of the
Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr.
Zullinger currently serves as Senior Vice President, Chief Financial Officer
and Treasurer of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the fiscal
years ended December 31, 1999, 1998 and 1997 of the Chief Executive Officer
and the named executive officers whose annual compensation exceeded $100,000
(hereinafter referred to as "named executive officers").
SUMMARY COMPENSATION TABLE
Annual Other All
Compensation Annual Other
Name and Principal Position Year Salary Bonus Compensation Compensation
James C. Robertson, 1999 - 0 - (1) $0 $2,100 (2) - 0 -
Chairman, President and 1998 - 0 - (1) $0 $3,975 (2) - 0 -
Chief Executive Officer 1997 - 0 - (1) $0 $5,700 (2) - 0 -
(1) Mr. Robertson s status as a salaried employee of the Company terminated
effective July 19, 1996. For the remainder of 1996, Mr. Robertson was
compensated at a daily rate of $150 for any work performed in his
capacity as President and CEO of the Company. Mr. Robertson was not
compensated for any services performed in his capacity as President
and CEO of the Company in either 1999, 1998 or 1997.
(2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman
of the Board of the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options and/or stock appreciation rights were granted by the
Company to the named executive officers in 1999.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
At December 31, 1998, 132,000 stock options and stock appreciation
rights were outstanding, each with an option price of $2.25. These options had
been awarded to various executive officers under the Company s 1989 Stock
Incentive Plan. In May 1999, all of these options expired. As a result of the
adoption of the Plan of Liquidation in 1998, the Company does not intend to
grant any additional options or stock appreciation rights.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Personnel Committee of the Board of Directors (the "Committee") has
historically administered and approved all forms of compensation for the Chief
Executive Officer ("CEO"), Executive Officers and other officers of the
Company. The members of the Committee are independent, non-employee directors
who annually reviewed with the Board all aspects of compensation, management
succession and the implementation and administration of the Company's various
incentive plans.
COMPENSATION PHILOSOPHY
Historically, the compensation policy of the Company has been based upon
the philosophy that an important portion of the annual compensation of each
officer should relate to and be contingent upon the performance of the
Company, as well as the individual contribution of each officer. In the past,
the Company relied to a large degree on the annual and longer term incentive
compensation plans to attract and retain corporate officers of outstanding
abilities and to motivate them to perform to the full extent of their
abilities. However, with the adoption of the Plan of Liquidation, the
Committee attempted to implement a compensation policy to allow an orderly and
timely reduction of the officers and employees of the Company. As a result, on
May 1, 1998, one (1) executive officer was separated from employment with the
Company. As such, there remains only one (1) executive officer employed by the
Company who is expected to serve in that capacity until late 2000. Thereafter,
this individual is expected to continue providing assistance to the Company on
a periodic basis during the liquidation of the Company in accordance with the
Plan of Liquidation The remaining executive officer s salary has not changed
since 1993 and there are no plans to increase the salary or award any bonus or
incentive payments to him. However, upon the separation of the remaining
executive officer from the Company, he will be entitled to a severance package
equal to fifteen months of salary. No stock options or SARS were granted by
the Company to the CEO or the other executive officer during 1999.
CEO COMPENSATION
Mr. Robertson continues to serve as Chairman of the Board, President and
CEO of the Company. However, his status as a salaried employee of the Company
was terminated effective July 19, 1996. From that time and until December 31,
1996, Mr. Robertson had been compensated at $150 per day for any work
performed for the Company in his capacity as a non-salaried employee while
serving as President and CEO. Beginning in 1997 and continuing through 1999,
Mr. Robertson did not receive any compensation in his capacity as a non-
salaried employee while serving as President and CEO, although he continued to
receive the standard retainer and board meeting fees in his role as Chairman
of the Board. The Committee believes that this arrangement with Mr. Robertson
is in the best interests of the Company and is more than reasonable based upon
Mr. Robertson's experience and knowledge of the Company while it is attempting
to sell its assets and liquidate in accordance with the Plan of Liquidation.
This report is submitted by the Personnel Committee of the Company's
Board of Directors.
John A. Groninger, Chairman
STOCK PRICE PERFORMANCE COMPARISON
CUMULATIVE TOTAL RETURN
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
Consumers Financial Corp. 100 139 140 37 5 2
(CFIN)
Peer Group 100 157 157 207 164 57
NASDAQ Stock Market (U.S.) 100 141 174 213 300 542
*Assumes $100 invested on December 31, 1994 in the Company s
common stock, NASDAQ Stock Index and Peer Group common stock.
Total shareholder returns assume reinvestment of dividends.
(1) The peer group companies are primarily in the same segment of the
insurance industry that market credit life and credit disability
products to automotive dealers and other financial institutions. While
none of the companies offer all of the products and services of the
Company, each can be considered a competitor of the Company. The
members of the peer group are as follows: ACCEL International
Corporation, CNL Financial Corporation, American Bankers Insurance
Group and US Life Corporation.
PENSION PLAN BENEFITS
The Company has a defined benefit plan, the Consumers Financial
Corporation and Subsidiaries Employees Retirement Plan (the Plan). The Plan
was established effective January 1, 1984. Under the Plan the retirement
benefit is determined by a formula which reflects compensation and years of
service. Benefits are fully vested after seven (7) years of service.
Compensation includes base salary, bonuses and other forms of compensation and
generally corresponds to the amounts shown in the Summary Compensation Table.
During 1996, the Company froze the benefits payable to participants under the
Plan.
The benefit formula in the Plan provides that for each year of service
prior to 1975, the benefit consists of (1) 0.5% of average monthly
compensation, plus (b) 1.5% of average monthly compensation in excess of
$1,000 where Average Monthly Compensation is average monthly compensation for
the five calendar years ending December 31, 1983. For each year of service
from January 1, 1984 through December 31, 1988, the benefit consists of (a)
1.5% of monthly compensation times the number of years of service under the
Plan, plus (b) 1.4% of monthly compensation in excess of the social security
wage base. For each year of service from January 1, 1989 through July 31,
1996, the benefit consists of (a) 1.5% of monthly compensation times the
number of years of service under the Plan, plus (b) .65% of monthly
compensation in excess of the social security wage base.
At December 31, 1999, the estimated monthly defined benefit payable upon
retirement at age 65 for Mr. Zullinger was $1,918. This amount represents a
straight-life annuity and has not been reduced by a joint and survivorship
provision which is available to Mr. Zullinger. In addition, following his
retirement as a salaried employee in July 1996, James C. Robertson began
receiving a monthly annuity benefit in the amount of $3,667.
In January 2000, the Company notified the participants of the Plan of
its intent to terminate the Plan. At termination, the participants, including
the above-named executive officers, will receive either a lump-sum payment or
an annuity contract entitling them to receive the same monthly payment at age
65 as would have been provided by the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 1, 2000, the number of shares
of voting stock owned by any person who is known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, the only class
of voting securities outstanding.
Amount and
Nature of Percent
Title of Class Beneficial of
Title of Class Name and Address of Beneficial Owner Ownership Class
Common Consumers Financial Corporation and 231,344 8.97%
Subsidiaries Employee Stock Ownership Plan
(ESOP) (1)
1200 Camp Hill By-Pass, Camp Hill, PA 17011
Common Peter H. Kamin 205,100 7.95%
One Financial Center, Suite 1600,
Boston, MA 02111
(1) The Company's Employee Stock Ownership Plan is an employee benefit plan
which is subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). Participating employees of the Company have the
power to vote the shares allocated to them under the Plan. The Trustees
of the Plan have discretionary investment powers including the power to
dispose of the shares.
In September 1999, the Company notified the participants of the ESOP of
its intent to terminate the plan, subject to obtaining a favorable
determination of the plan s qualified status from the Internal Revenue
Service. At termination, the plan participants will receive the shares
of the Company s common stock which are in their respective accounts.
The following table sets forth as of March 1, 2000, the number of shares
of the Company's Common and Preferred Stock beneficially owned by (a) each
director; (b) each executive officer who is not a director; and (c) all
directors and executive officers as a group.
Amount and
Nature of Percent
Name of Beneficial of
Title of Class Beneficial Owner Ownership (1) Class
(a)
Common Groninger, John E. 57,521 (2) 2.23%
Preferred 22,410 (3) 4.84%
Common Robertson, James C. 99,775 3.87%
Preferred 5,235 (4) 1.13%
(b)
Common Zullinger, R. Fredric 29,523 (5) 1.15%
(c)
Common Directors and Executive 186,819 7.25%
Preferred Officers as a Group 27,645 5.97%
(3 individuals)
(1) Except where otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment power.
(2) Includes 42,542 shares owned by Mr. Groninger's wife.
(3) Includes 1,000 shares owned by Mr. Groninger's wife.
(4) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's
wife.
(5) Includes 14,835 shares for which Mr. Zullinger has voting power as to
shares held for him in the Employee Stock Ownership Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1999, the Company did not enter into
any transactions in which the amount involved exceeded $60,000, with any of
its directors, executive officers, security holders known to the Company to
own more than 5% of the Company s common stock or any member of the immediate
family of any of the foregoing persons.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
a) Listing of Documents filed:
1. Financial Statements (included in Part II of this report):
Reports of Independent Public Accountants
Consolidated Statements of Net Assets in Liquidation -
December 31, 1999 and 1998
Consolidated Statements of Changes in Net Assets in
Liquidation - For the year ended December 31, 1999
and for the period from March 25, 1998 to
December 31, 1998
Consolidated Balance Sheet-March 24, 1998 (unaudited)
Consolidated Statements of Operations - For the period
from January 1, 1998 to March 24, 1998
and for the year ended December 31, 1997
Consolidated Statements of Shareholders' Equity - For
the period from January 1, 1998 to
March 24, 1998 and for the year ended
December 31, 1997
Consolidated Statements of Cash Flows - For the period
from January 1, 1998 to March 24, 1998 and
for the year ended December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (included in Part IV of this
report):
(II) Condensed Financial Information of Registrant
(III) Supplementary Insurance Information
(IV) Reinsurance
(V) Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because
they are not required, not applicable or the required information
is set forth in the financial statements or notes thereto.
3. Exhibits:
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (i)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders,
including indentures (i)
(9) Voting trust agreement (ii)
(10) Material contracts (ii)
(11) Statement re computation of per share earnings (iii)
(12) Statement re computation of ratios (ii)
(13) Annual report to security holders (ii)
(16) Letter re change in certifying accountant (i)
(18) Letter re change in accounting principles (ii)
(21) Subsidiaries of the registrant (iv)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (ii)
(24) Power of attorney (ii)
(27) Financial data schedule (iv)
(99) Additional exhibits (ii)
(i) Information or document provided in previous filing with
the Commission
(ii) Information or document not applicable to registrant
(iii) See Note 16 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
(iv) Information or document included as exhibit to this Form 10-K.
b) Reports on Form 8-K:
On December 2, 1999, the Company filed a Form 8-K regarding the change
in the Company s certifying accountants from Arthur Andersen LLP to
Stambaugh-Ness, P.C.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 1999 AND 1998
(dollar amounts in thousands) 1999 1998
Assets
Investments, other than investments in affiliates $70
Cash $273 169
Investments in affiliates 5,540 2,672
Indebtedness of affiliate (surplus note) 4,706
Receivables 301 747
Other assets 10 48
Total assets 6,124 8,412
Liabilities
Indebtedness to affiliates 590 2,132
Dividend payable 99 102
Underfunded pension plan 922 664
Other liabilities 181 316
1,792 3,214
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 1999, 463,461 shares; 1998,
481,461 shares; net of $303 reduction in 1999 to reflect
estimated liquidation value 4,332 4,815
Total liabilities and redeemable preferred stock 6,124 8,029
Net assets in liquidation $0 $383
See notes to condensed financial statements.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
For the period
from March 25, 1998
Year ended to December 31, 1998
(in thousands) December 31, 1999
Revenues:
Net investment income $3 $7
Fees from sale of customer accounts 156 98
Joint venture income 30 47
Net realized investment gains 8
Miscellaneous 122 110
311 270
Expenses:
Salaries, wages and employee benefits 26 14
Taxes, licenses and fees 26
Depreciation 2 5
Miscellaneous 10 67
38 112
Operating income before income tax benefit 273 158
Income tax benefit 493
Equity in loss of unconsolidated subsidiaries (227) (783)
Increase in liability for underfunded pension plan (388) (734)
Decrease in unrealized appreciation of debt securities (43) (32)
Preferred stock dividends (406) (307)
Adjustment of preferred stock to estimated liquidation 303 (175)
value
Retirement of treasury shares-preferred 105 57
Purchase of treasury shares-common (9)
Decrease in net assets for the period (383) (1,332)
Net assets at beginning of period 383 1,715
Net assets at end of period $0 $383
See notes to condensed financial statements.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
BALANCE SHEET
March 24, 1998
(unaudited)
(in thousands) Liabilities, Redeemable Preferred
Assets Stock and Shareholders' Equity
Investments, other than investments in $68 Liabilities:
affiliates
Indebtedness to affiliates $251
Cash 227 Dividend payable 109
Accrued severance pay 341
Investments in affiliates 2,138 Miscellaneous 70
Income taxes 308
Indebtedness of affiliates 4,850 Total liabilities 1,079
Property and equipment, Redeemable preferred stock:
net of accumulated depreciation 7 Series A, 8 1/2 % cumulative
convertible 4,697
Other assets 201 Shareholders equity:
$749 Common stock 30
Capital in excess of stated
value 7,989
Equity in net unrealized
appreciation of debt securities
of subsidiaries 58
Deficit (4,891)
Treasury stock (1,471)
Total shareholders equity 1,715
$7,491
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
For the period
from January 1,1998 Year ended
(in thousands) to March 24, 1998 December 31, 1997
Revenues:
Net investment income $9 $19
Net realized investment losses (10)
Other income 48 163
Total revenues 57 172
Expenses:
General expenses 98 563
Taxes, licenses and fees 7 22
Write-off of intangible assets 50
Total expenses 105 635
Loss before income taxes (48) (463)
Income taxes 3 131
Loss before equity in income (loss of
unconsolidated subsidiaries (51) (594)
Equity in income (loss) of unconsolidated
subsidiaries:
Continuing operations (37) (1,174)
Discontinued operations 112 (4,592)
75 (5,766)
Net income (loss) $24 ($6,360)
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
For the period
from January 1, 1998 Year ended
(in thousands) to March 24, 1998 December 31, 1997
Cash flows from operating activities:
Net income (loss) $24 ($6,360)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Income taxes 12 (1,004)
Change in receivables 7
Change in other liabilities (11) 377
Equity in loss (income) of
unconsolidated subsidiaries (793) 6,338
Amortization of intangibles 781 50
Other (107) 37
Total adjustments (118) 5,805
Net cash used in operating activities (94) (555)
Cash flows from investing activities:
Purchase of investments (1) (3)
Maturity of investments
Sale of investments 1,304
Investments in and indebtedness to affiliates (1) (26)
Net cash provided by (used in)
investing activities (2) 1,275
Cash flows from financing activities:
Principal payments on debt
Purchase of treasury stock (1) (64)
Cash dividends to preferred shareholders (109) (409)
Net cash used in financing activities (110) (473)
Net increase (decrease) in cash (206) 247
Cash at beginning of year 433 186
Cash at end of period $227 $433
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto of Consumers Financial Corporation and subsidiaries.
2. The Company received no cash dividends from its subsidiaries in
1999. In 1998 and 1997, the Company received dividends of $10,000 and
$425,000, respectively. During 1999, the Company received $1.3
million from an affiliate as a partial repayment of a $4.7
intercompany note. This payment represented substantially all of
the affiliate s remaining assets. Accordingly, the note was
cancelled and this affiliate is now being dissolved. In addition,
during 1999, the Company repaid $1.3 million on a $1.58 million
note payable to its wholly-owned subsidiary,
Consumers Life Insurance Company. This note was also cancelled, since
the Company does not have sufficient funds to repay the remaining
$268,000.
In 1998, the Company received certain assets and assumed certain
liabilities from several of its subsidiaries in connection with the
liquidation of those companies. The book value of the net assets
received was $679,000.
3. The Company files a consolidated Federal income tax return with its
life insurance company subsidiary. Tax expense and tax benefits are
allocated proportionately between the Company and its subsidiary.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Deferred Other policy
policy Future claims and
acquisition policy Unearned benefits
Secment costs benefits premiums payable
Year ended December 31, 1999:
Automotive Resource Division:
Credit insurance and fee income business $7,629 $2,359
Assumed warranty business
Individual Life Insurance Division 1,449 27,644 6
Other
Total $0 $9,078 $27,644 $2,365
Year ended December 31, 1998:
Automotive Resource Division:
Credit insurance and fee income business $8,291 $34,840 $2,837
Assumed warranty business 323
Individual Life Insurance Division $50 9,354 45
Other
Total $50 $17,645 $35,163 $2,882
Year ended December 31, 1997:
Automotive Resource Division:
Credit insurance and fee income business $13,545 $11,785 $49,057 $2,181
Assumed warranty business 25 937 195
Individual Life Insurance Division 9,682 163
Other
Total $13,570 $21,467 $49,994 $2,539
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands)
Premium Amortization
income, of deferred
fees and Net Death policy
other Investment and other acquisition Operating
Segment income Income benefits costs expenses
(a)
Year ended December 31, 1999:
Automotive Resource Division:
Credit insurance and fee
income business
Assumed warranty business $384 $11 $394
Individual Life Insurance
Division
Other 477 199 2 $929
Total $861 $210 $396 $0 $929
Year ended December 31, 1998 :
Amounts attributable to
period prior to adoption
of liquidation basis of
accounting:
Automotive Resource
Division:
Credit insurance and fee
income business
Assumed warranty
business $83
Individual Life Insurance
Division
Other $60 $368
Total 83 60 368
Amounts attributable to
period subsequent to
adoption of liquidation
basis of accounting:
Automotive Resource
Division:
Credit insurance
and fee income
business
Assumed warranty 504 46 $260 104
business
Individual Life Insurance
Division
Other 281 441 1,178
Total 785 487 260 1,282
Grand total $868 $547 $260 $1,650
Year ended December 31, 1997:
Automotive Resource
Division:
Credit insurance and fee
income business
Assumed warranty business $375 $44 $460 $10 $1
Individual Life Insurance
Division
Other 171 19 1,638
Total $546 $63 $460 $10 $1,639
(a) Excludes realized investment gains and losses.
SCHEDULE IV
REINSURANCE
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Percentage
(in thousands) Ceded to Assumed of amount
Gross other from Net assumed
Segment Amount companies companies Amount to net
Year ended December 31, 1999:
Life insurance in force $0 $0
Premium income:
Assumed warranty $319 $319 100.0%
$319 $319 100.0%
Year ended December 31, 1998:
Life insurance in-force $0 $0
Premium income:
Assumed warranty $604 $604 100.0%
$604 $604 100.0%
Year ended December 31, 1997:
Life insurance in-force $0 $0
Premium income:
Assumed warranty $356 $356 100.0%
$356 $356 100.0%
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Additions
Charged to
Balance at Charged to to Balance at
beginning costs and other accounts, Deductions, end of
of period expenses describe describe period
Year ended December 31, 1999
Provision for permanent decrease in
market value of:
Property and equipment $962 $209 (a) $753
Other real estate 92 92 (b)
Other invested assets 55 55 (b)
$1,109 $356 $753
Year ended December 31, 1998
Provision for permanent decrease in
market value of:
Mortgage loans $50 $50 (a)
Property and equipment 713 $249 $962
Other real estate 357 265 (b) 92
Other invested assets 163 108 (b) 55
Provision for uncollectible 436 436 (c)
receivables
$1,719 $249 $859 $1,109
Year ended December 31, 1997
Provision for permanent decrease in
market value of:
Mortgage loans $100 $50 (a) $50
Property and equipment $713 713
Other real estate 128 229 357
Other invested assets 75 158 70 (b) 163
Provision for uncollectible receivables 1,038 110 712 (c) 436
$1,341 $1,210 $832 $1,719
(a) Reduction in valuation allowance related to adjustment to net
realizable value.
(b) Write-off of valuation allowance for assets sold
(c) Write-off of asset against valuation allowance
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
By: /S/
James C. Robertson
Chairman of the Board and President
Date: March 14, 2000
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
/S/
James C. Robertson Director, President March 14, 2000
and Chairman of the
Board (Chief Executive
Officer)
/S/ Senior Vice March 14, 2000
R. Fredric Zullinger President and
Treasurer
(Chief Financial
Officer)
/S / Director March 14, 2000
John E. Groninger
EXHIBIT 21
SUBSIDIARIES OF CONSUMERS FINANCIAL CORPORATION
At December 31, 1999, Consumers Financial Corporation (EIN #23-1666392) owns
100% of the outstanding common stock of the following subsidiaries:
Consumers Life Insurance Company 21-0706531
CLMC Insurance Agency, Inc. 25-1681245
IAAC, Inc. 25-1211251
Consumers Car Care Corporation 23-1720565
Consumers Life Insurance Company owns 100% of the outstanding common stock of
IFLAC Corp. (formerly Investors Fidelity Life Assurance Corp. -
EIN #31-0646177).
None of these subsidiaries, except Consumers Life Insurance Company, has
any assets or liabilities remaining.