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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, 1997
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, 1998, the aggregate market value of
common stock held by non-affiliates of the registrant was $1,622,597.
The number of outstanding common shares of the registrant as of March 1,
1998 was 2,596,155
PART I
ITEM 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 are licensed
in 26 states and the District of Columbia and 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
s u bsidiaries in the fourth quarter of 1997. In connection with these
transactions, the Company and LOTS have further agreed that, with respect to
one of the subsidiaries, the new credit insurance business produced by that
subsidiary s former customer accounts, which have now been transferred to LOTS,
will continue to be written on the policy or certificate forms of the
subsidiary until September 30, 1999, or an earlier date which may be agreed to
by the parties. This premium and the related insurance risk will also be
reinsured 100% to American Republic.
The Sale of Assets transaction, which has 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 ), is expected to close in April 1998. The reinsurance transaction
involving the fourth quarter credit insurance business as well as certain
related transactions are also expected to close at that time. At the Special
Meeting, the Company s shareholders also approved a Plan of Liquidation and
Dissolution pursuant to which the Company intends to liquidate its remaining
assets, provide for all liabilities, redeem its preferred stock at $10 per
share and then distribute all remaining cash to its common shareholders.
The Company has not written any new individual life insurance business
since 1992. 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
termination of marketing activities and the operations of the Individual Life
Insurance Division and the sale of the 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 for cash in the amount of $4.85 million.
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) 730-6320.
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 its wholly-owned subsidiaries, principally Consumers Life
Insurance Company (a Delaware life insurance company) ( Consumers Life ),
Consumers Car Care Corporation (a Pennsylvania business corporation) and, until
late 1996, Interstate (a Pennsylvania business corporation). Investors Fidelity
Life Assurance Corp. (an Ohio life insurance company) is a subsidiary of
Consumers Life. Until its sale in August 1997, Consumers Life Insurance Company
of North Carolina (a Texas life insurance company) was also a subsidiary of
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. Both the individual life
insurance and the auto auction segments were presented as discontinued
operations in the Company s consolidated financial statements beginning in 1996.
As a result of the sale of the credit insurance and related operations to LOTS
and the transfer of all of the inforce credit insurance business to American
Republic, which is acting as LOTS financial partner, the Automotive Resource
Division has now also been presented as a discontinued operation in the
Consolidated Financial Statements. See Note 5 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
As a result of the operating losses incurred by the Company since 1993, in
March 1996, the Company announced its plans to explore various alternatives for
selling or merging its remaining business units. Direct contacts were made with
over 45 potential buyers to solicit their interest in participating in an
auction process to acquire the Company or its assets and business operations.
This auction process was intended to achieve maximum value and a timely sale
through simultaneous exposure to a wide range of potential purchasers. Separate
groups of potential bidders were solicited for the Company s auto auction
business and for its credit insurance business. After evaluating numerous
offers for the sale of the auto auction business, in late 1996, the Company
sold that business and the related operating assets for $4.85 million.
The Company received 11 letters of intent for either the sale of its
credit insurance operations or the sale of the entire Company (excluding the
auto auction business). Four bidders were selected to perform due diligence
reviews and submit final offers. After detailed discussions and negotiations
were conducted with the four bidders concerning the final offers which they
submitted, the Company signed a letter of intent with one of those bidders,
LaSalle Group, Inc. ( LaSalle ) on September 29, 1996 involving a proposed
merger of the Company with LaSalle. On October 30, 1996, the Company entered
into a merger agreement (the Merger Agreement ) with LaSalle pursuant to which
the Company would have become a wholly-owned subsidiary of LaSalle and the
holders of the Company s common stock would have received cash of approximately
$3.78 per share. The transaction was approved by the common shareholders on
March 25, 1997 subject to the approval of certain state insurance regulators.
However, on May 15, 1997, LaSalle disclosed to the Company that it was unlikely
that its original source of funding for the merger would be available by
June 15 and that it was in the process of securing alternate funding. At that
time, the Company exercised its right to renew its search for another acquiror
to protect the Company in the event LaSalle s funding would not be available.
The Company then requested that certain previous bidders for the Company s
credit insurance business resubmit their bids for consideration.
On July 25, 1997, the Merger Agreement with LaSalle was terminated
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the merger transaction. Following
the receipt and evaluation by the Company of four new offers for the credit
insurance business, the Company signed a letter of intent on July 28, 1997 to
sell its credit insurance operations to LOTS, subject to a due diligence review
by LOTS. On September 19, 1997, an amended letter of intent was signed by the
parties and an Asset Purchase Agreement was subsequently signed on December 30,
1997. As indicated above, certain transactions contemplated by the Asset
Purchase Agreement required the approval of certain state insurance regulators
and the Company s preferred and common shareholders before being settled.
At the Special Meeting referred to above, the Company s shareholders also
approved a Plan of Liquidation and Dissolution (the Plan of Liquidation )
whereby, following the Sale of Assets, the Company would be liquidated by (i)
the sale of its remaining assets, (ii) the payment of all claims, liabilities
and expenses, (iii) the redemption and cancellation of all outstanding shares
of Preferred Stock at par value, and (iv) the pro rata distribution of all
remaining cash to the holders of Common Stock. The liquidation process is
expected to be concluded in approximately five years by a final liquidating
distribution to the shareholders of the Company. During that period, the
Company will consider and evaluate any other viable proposals for the sale of
the Company or its assets which would provide greater value to 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.
OPERATIONS
The Company's principal subsidiaries, which, until October 1, 1997, were
engaged in the marketing of credit insurance business, are Consumers Life
Insurance Company and Investors Fidelity Life Assurance Corp. Together these
companies are licensed in 26 states and the District of Columbia. 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 in Item 1 - General, 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. Although one
of the Company s insurance subsidiaries has agreed to allow all new credit
insurance premiums produced by the customer accounts which were sold to LOTS
to be written on the policy or certificate forms of the subsidiary until
September 30, 1999, all of this business will be reinsured 100% to American
Republic. 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 relating to the sale of the Company
s credit insurance accounts and the payment of certain corporate costs and
other fixed overhead expenses.
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 credit 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. Premiums
collected are remitted to the Company net of commissions. Credit insurance
generally is written on a decreasing term basis with the policy benefit
initially being the full amount of the loan and thereafter decreasing in
amounts corresponding to the repayment schedule. 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 recent years by the increase in the number of
automobiles which are leased instead of purchased. This is principally due to
the lack of availability of approved credit insurance products applicable to
leases and to a reluctance on the part of automobile dealers to emphasize the
sale of credit insurance products on lease transactions. (The Company had
credit insurance products available for lease transactions in most of the
states in which it actively marketed.)
The Company also marketed, in an agency capacity, extended service
automobile warranty products through its wholly-owned subsidiary, Consumers Car
Care Corporation. 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. The Company continued to provide all
policyholder administrative functions for this business pursuant to a service
agreement until May 1, 1995.
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.
As a result of the disposal of the remaining insurance business of the
individual life insurance division, the operating results of this segment are
included with discontinued operations for all periods presented in the
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
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. See Note 5 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K for further information concerning the sale and its impact on the
Company s operating results. 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.
In 1996, prior to the sale of the business, approximately 28,000 cars were
registered for sale at Interstate through the regular weekly consignment
auction, and approximately 57% of all vehicles registered were sold. In 1995,
approximately 35,000 cars were registered for sale at Interstate through the
regular weekly consignment auction, and approximately 56% of those vehicles
were sold. Auction fees were generally paid by the seller for each vehicle
sold and an additional fee was paid by the purchaser. The purchaser s fees
varied according to the price paid for the automobile.
INVESTMENTS
The Company's general investment policy with respect to assets of its
insurance subsidiaries has historically been to invest primarily in fixed
maturity securities 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
m o r tgage-backed securities which provided competitive yields on assets
supporting these interest sensitive products. In order to provide the liquidity
necessary to consummate the Sale of Assets transaction with American Republic
and LOTS and to eliminate the market risk on the bond portfolio, the Company
sold substantially all of its bonds in late 1997 and early 1998.
The Company s mortgage loan portfolio, which relates primarily to
commercial real estate, has declined significantly during the past three years,
from $9.9 million at the end of 1994 to $2 million at December 31, 1997. The
r e duction is primarily attributable to the sale of certain mortgages,
refinancings and early payoffs. The mortgage portfolio has generally been
concentrated in the Central Pennsylvania area. The Company considers 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.
Investments in government and corporate bonds have historically been
limited to those with a Moody s or Standard & Poors rating of A or better. The
Company bought U.S. Treasury Notes for their yield and superior liquidity
features. The Company also purchased U.S. Government agency bonds and corporate
bonds provided such bonds were part of large liquid issues (over $100 million)
and, in the case of corporate bonds, represented economic balance and
diversification. The Company also bought foreign bonds denominated in U.S.
dollars (Yankee Bonds), thereby avoiding exposure to foreign currency risk.
Short-term investments are maintained primarily to meet anticipated cash
requirements arising from operations. As of December 31, 1997, the fixed
maturities portfolio did not contain any non-investment grade securities. The
Company defines a non-investment grade security as any security rated below
Baa3 by Moody s Investors Service and below BBB by Standard and Poor s Rating
Service. The assets of the Company's non-insurance subsidiaries generally have
been invested in short-term instruments.
The following table sets forth the Company's investment results for the
periods indicated:
Years Ended December 31,
1997 1996 1995
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
(Restated) (Restated)
Interest:
Fixed maturities $1,934 6.7 $2,364 6.2 $2,175 6.8
Mortgage loans 189 8.7 421 9.0 692 8.1
Policy loans 33 6.6 58 13.9 (2)
Short-term
investments 486 4.4 265 4.5 221 4.7
Real estate 157 (1) 332 30.7 (3)
Other 82 9.7 17 1.0 3 0.2
2,691 6.3 3,257 6.5 3,481 7.2
Investment expenses (675) (1.6) (680) (0.9) (702) (0.1)
Total net investment
income $2,016 4.7 $2,577 5.6 $2,779 6.3
Less net investment
income attributable
to discontinued
operations 1,953 2,518 2,739
Net investment income
attributable to
continuing operations $63 $59 $40
(1) Represents rental income related to three properties classified as non-
investment real estate.
(2) Includes $27,000 in interest which should have been included in 1994
income. If this income had been included in 1994, the yield in 1995 would
have been 7.4% and the 1994 yield would have been 7.3%.
(3) Includes $170,000 in rental income related to a property classified as
non-investment real estate. Excluding this income, the real estate yield
is 6.8%.
COMPETITION
Prior to the sale of its customer accounts to LOTS as of October 1, 1997,
the Company competed with numerous other credit insurance companies, many of
which were larger than the Company and had greater financial and marketing
resources. The principal competitive factors in the automobile credit insurance
industry are commission levels, the quality of training for dealers, the
variety of related products, the availability of dealer incentive programs and
the level of administrative support and efficiency of claims handling
procedures.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the states in which they are 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. The Company's insurance subsidiaries
are subject to periodic examination by the insurance departments in the states
of their formation and are also subject to joint regulatory agency examination
and market conduct examinations in the other states in which they are
authorized to do business.
Certain states in which the Company is licensed have regulations limiting
the credit insurance premium rates or the commissions payable to agents or, in
some cases, limiting both rates and commissions payable. In addition, some
states have regulations that require credit insurance claims ratios to be a
specified percentage of earned premiums. If an insurer's claims ratio is below
the prescribed benchmark, it is required to reduce premium rates and,
conversely, if the claims ratio is higher than the benchmark, the insurer may
request an increase in premium rates.
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 17 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 various states in which it does business. 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.
The purchase of more than 10% of the outstanding shares of the Company's
common stock by one or more affiliated parties would require the prior
approval of certain state insurance departments which regulate the Company.
EMPLOYEES AND AGENTS
As of December 31, 1997, the Company had approximately 42 full-time
employees, including its management and sales personnel. In addition, as of
that date there were approximately 900 licensed agents selling credit
insurance and vehicle extended service contracts, most of whom were full-
time employees of automobile dealers, banks and other financial institutions.
On January 1, 1998, all of the Company s remaining 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. As of March 31, 1998, the Company had eight full-time employees.
The Company has adequate insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. The Company does not
have similar coverage for its agents. 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 44,500 square
feet of office space. Prior to 1993, the Company leased the entire facility at
an annual rental of $421,000, plus insurance, taxes and utilities. As a result
of the termination in 1992 of all new business functions in the Individual Life
Insurance Division and the transaction with LOTS discussed earlier in this Item
1, the Company now occupies approximately 48% of the available office space.
The Company has leased about 33% of the remaining space to third party tenants.
Annual rental income to the Company under these sub-leases totals $84,000. In
March of 1994, the Company exercised its option to acquire a 50% interest in
its home office building, which reduced the Company s annual rent to $204,000.
The option price was approximately $1.75 million. Except as otherwise noted,
the remaining business operations of the Company and all of the subsidiaries
are conducted at the above address in Camp Hill, Pennsylvania.
In connection with its credit insurance operations, Consumers Life
maintained a branch office in leased facilities in Philadelphia, Pennsylvania
until December 31, 1997. The branch office primarily provided supervision,
sales and service for credit insurance agents doing business in the eastern
Pennsylvania, Delaware and New Jersey areas. Annual rental for this office was
approximately $27,000.
Investors Fidelity Life Assurance Corp. maintained an office in leased
facilities in Columbus, Ohio until December 31, 1997. This office primarily
provided sales support and supervision for credit insurance agents in the State
of Ohio. Annual rental for this office was approximately $13,000 plus
insurance, taxes and utilities.
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 14 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 1997 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise. However, at the Special Meeting held on March 24, 1998,
the holders of Preferred Stock and Common Stock, each voting separately as a
class, approved (i) the Sale of Assets transaction, in which the Company sold
its inforce block of credit insurance business to American Republic, financial
partner of LOTS and (ii) the Plan of Liquidation whereby the Company will wind
up its affairs and ultimately be liquidated and dissolved.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Consumers Financial Corporation common stock is currently traded on the
NASDAQ National Market System with its ticker symbol being CFIN. The Company s
Convertible Preferred Stock, Series A was also traded on the NASDAQ National
Market System until March 16, 1998, when it was delisted by NASDAQ for non-
compliance with the new public float requirement of a minimum of 750,000 shares
under Maintenance Standard 1, pursuant to NASD Marketplace Rule 4450(a)(3)
which became effective on February 23, 1998. The Company has also received
notice from NASDAQ that its common stock was not in compliance with the new
market value of public float requirement, and if the Company does not come
into compliance with the new Marketplace Rule on or before May 28, 1998, the
common stock will be subject to delisting. Since the shareholders of the
Company approved the Plan of Liquidation and Dissolution on March 24, 1998,
the Company does not intend to appeal the delisting decision for either the
preferred or common stock, take any steps to come into compliance with the
Marketplace Rules or attempt to seek inclusion on the NASDAQ Small Cap Market.
1997 QUARTERLY STOCK PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Common Stock
High 3 3/4 3 3/4 2 1/4 1 3/16
Low 3 11/16 2 1/2 1 1/8 1
Convertible Preferred
Stock, Series A
High 8 1/4 8 1/2 8 1/2 8 1/4
Low 8 1/4 8 1/4 8 7
Directors, officers and employees of the Company have a sizeable ownership
position in the Company, which has been derived from the Company s longstanding
belief that this ownership position would provide a strong incentive for all
parties involved to enhance shareholder value. At December 31, 1997, the
Company s Employee Stock Ownership Plan held 8% of the total common stock
outstanding.
As of December 31, 1997, there were 6,699 shareholders of record who
collectively held 2,596,155 common shares and 113 shareholders of record of the
Convertible Preferred Stock, Series A, who held 481,461 shares.
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 were declared in either 1997, 1996 or 1995; however, common stock
dividends had been paid for 14 consecutive years through 1994. The Convertible
Preferred Stock, Series A, dividends are paid quarterly on the first day of
January, April, July and October. The annual Convertible Preferred Stock,
Series A, cash dividend is $.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)
Years Ended December 31,
dollar amounts in thousands,
except per share 1997 1996 1995 1994 1993
(Restated) (Restated) (Restated) (Restated)
Total revenues (excluding change
in unearned premiums) $40 $378 $664 $201 $1,936
Premiums written (37) 353 685 622 987
Net investment income 63 59 40 54 111
Net return on average investments 4.9% 5.4% 6.0% 6.7% 7.2%
Loss from continuing operations (1,441) (1,737) (1,429) (2,062) (781)
Discontinued operations (4,919) 503 (172) 850 (34)
Loss before cumulative
effect of change in
accounting principles (6,360) (1,234) (1,601) (1,212) (815)
Cumulative effect of change
in accounting principles 299 (710)
Net loss (6,360) (1,234) (1,601) (913) (1,525)
Basic and diluted income
(loss) per common share:
Loss from continuing
operations (0.73) (0.83) (0.71) (0.94) (0.45)
Discontinued operations (1.89) 0.19 (0.07) 0.32 (0.01)
Loss before cumulative effect
of change in accounting
principles (2.62) (0.64) (0.78) (0.62) (0.46)
Cumulative effect of change
in accounting principles 0.11 (0.26)
Net loss (2.62) (0.64) (0.78) (0.51) (0.72)
December 31,
1997 1996 1995 1994 1993
Total assets $85,035 $114,619 $123,322 $125,276 $144,393
Total debt 0 0 2,537 3,389 4,683
Shareholders equity and
redeemable preferred stock 6,724 13,343 15,671 15,226 19,502
Shareholders equity per
common share 0.78 3.31 4.20 3.96 5.41
Cash dividends declared per
common share NONE NONE NONE 0.05 0.05
NOTE 1: The financial data for the years ended December 31, 1993 through
1996 has been restated to reflect the operating results of the
Company s Automotive Resource Division as a discontinued operation.
NOTE 2: The earnings per share amounts presented above have been computed in
accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128). Adoption of SFAS 128 did not result
in the restatement of any per share amounts for years prior to 1997.
For further discussion of the calculation of per share amounts under
SFAS 128, see Note 18 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
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 1997
operating performance as well as its financial position at December 31, 1997 is
presented below. Information relating to 1996 and 1995 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.
OVERVIEW
The most significant event affecting the Company in 1997 was the
termination of the planned merger with LaSalle Group, Inc. (the "Merger"). As
discussed below, the Company entered into an Agreement and Plan of Merger with
LaSalle in October of 1996 in order to preserve shareholder value in light of
the Company's recurring operating losses which had significantly reduced its
total capital and its liquidity position. The Merger would have resulted in the
cash payment of $3.78 per share to the Company's common shareholders. The
Company was forced to terminate the Merger because, despite repeated assurances
to the contrary, LaSalle was unable to provide the cash funds necessary to
complete the Merger.
Since the Company had received no other viable offers to acquire the
entire organization, the Board of Directors and management determined that
selling the Company's remaining business operations, liquidating all of its
assets and distributing cash to the Company's shareholders was necessary in
order to fully provide for the Company's obligations to its preferred
shareholders and to preserve some value for the common shareholders. Therefore,
following the termination the Merger and the review and evaluation of new bids
for the Company's credit insurance operations, the Company signed an Asset
Purchase Agreement (the "Agreement") on December 30, 1997 to sell its credit
insurance and fee income business as well as the stock of one of its insurance
subsidiaries to Life of the South Corporation, a Georgia-based financial
services holding company ("LOTS"). The Board of Directors also adopted a plan
of liquidation and dissolution (the "Plan of Liquidation and Dissolution")
pursuant to which the Company will be liquidated and dissolved in accordance
with provisions of the Pennsylvania Business Corporation Law. The Plan of
Liquidation and Dissolution was approved by the Company s shareholders on
March 24, 1998.
RESULTS OF OPERATIONS
As stated above, in December 1997, the Company entered into an Agreement
to sell its remaining business operations, following the sale of its auto
auction business in 1996 and the sale in early 1997 of the rest of its
individual life insurance business. Consequently all of these businesses have
been presented in the Consolidated Financial Statements appearing elsewhere in
this Form 10-K as discontinued operations. The Company's continuing operations
now consist principally of (i) earned premiums and related acquisition and
claims costs associated with a very small closed block of extended service
contract business, (ii) investment income on existing assets, (iii) fee income
from LOTS from the sale of the Company's customer accounts and (iv) overhead
expenses. A discussion of the material factors which affected the Company's
results from continuing operations and, where applicable, the results from its
discontinued operations is presented below. Information for 1996 and 1995 is
also presented for comparative purposes.
CONTINUING OPERATIONS
The Company's pre-tax loss from continuing operations decreased from a
restated level of $2.3 million in 1996 to a loss of $1.7 million in 1997. In
1995, the restated loss was $1.9 million. As indicated above, continuing
operations are now limited primarily to fee revenues from LOTS, investment
income and corporate expenses. The block of extended service business produces
a relatively insignificant amount of operating income or loss. A decrease in
corporate expenses in 1997 is the major reason for the reduced loss from
continuing operations compared to 1996. The 1997 results were adversely
affected by a $744,000 write-down of the Company's real estate holdings,
including its home office building which is classified with property
and equipment.
DISCONTINUED OPERATIONS - AUTOMOTIVE RESOURCE DIVISION
Premium revenues from credit insurance, the Division's principal product,
declined 13.1% in 1997 following a 9.5% decrease in 1996 compared to 1995.
Credit insurance premiums in 1997 totaled $26.1 million in 1997 compared to
premiums of $30 million and $33.1 million in 1996 and 1995, respectively. The
decline in premium revenues in all periods is the result of the cancellation by
the Company of unprofitable accounts in several states over the past few years,
but it also reflects the loss of accounts and the Company's inability to
attract new accounts because of its financial condition.
As shown in Note 5 of the Notes to Consolidated Financial Statements, the
pre-tax operating results of this discontinued division, including the
estimated pre-tax loss on disposal of the business, declined significantly in
1997 to a loss of $5.5 million compared to a restated loss of $1.3 million in
1996 and a restated loss of $875,000 in 1995. A $3.1 million estimated loss on
the sale of the credit insurance business in 1998, which has been reflected
in the 1997 financial statements as a write-down of deferred policy
acquisition costs, and a $381,000 charge for employee severance payments are
the major reasons for the decline in operating results of this discontinued
segment. Increased life and disability claims on business retained by the
Company (i.e., business not reinsured to producer-owned captives) also
contributed to the poorer operating results in 1997.
Effective January 1, 1998, the Company will reinsure its September 30,
1997 inforce block of credit insurance business and 100% of the credit
insurance premiums written and processed in the fourth quarter of 1997 to
American Republic Insurance Company ("American Republic"), which is acting as
LOTS' financial partner in this transaction. LOTS and the Company have also
agreed that, with respect to the Company's principal insurance subsidiary, new
credit insurance business produced by that subsidiary's former customer
accounts, which have now been transferred to LOTS, will continue to be written
on the policy or certificate forms of the subsidiary until September 30, 1999,
or an earlier date which may be agreed to by the parties. This premium and
the related insurance risk will also be reinsured 100% to American Republic.
DISCONTINUED OPERATIONS - INDIVIDUAL LIFE INSURANCE DIVISION
Operations in the Individual Life Insurance Division in 1996 and 1995 were
limited to one closed block of assumed universal life business, following the
sale of the Division's direct universal life business in 1994 and the sale of
its traditional whole life and term business in 1992. In March 1997, the
Company completed a reinsurance transaction with World Insurance Company
("World"), which was effective January 1, 1998, pursuant to which World
recaptured the universal life insurance business previously assumed by the
Company from World through a joint venture agreement which began in 1987. World
initially paid a recapture consideration to the Company in the amount of $1.
05 million. In exchange, the Company transferred to World assets supporting
the net statutory basis policy reserves for this business. Based on the
recapture consideration received, the Company wrote off $1.4 million in
deferred policy acquisition costs which were not recoverable. This write-off,
which totaled $914,000 on an after-tax basis, was presented as a loss on
disposal of the discontinued segment in the Company's 1996 financial
statements.
During 1997, the parties agreed to make certain adjustments to the
recapture consideration which, together with a $123,000 loss on bonds sold in
1997 in order to close the transaction, resulted in an additional loss on
disposal of $167,000, net of income tax benefits, which has been reported in
1997. In 1996, excluding the $914,000 write-off, the Division reported pre-tax
income of $393,000 compared to restated pre-tax income of $83,000 in 1995. The
Division's operating results for 1996 and 1995 reflect the elimination of any
continuing overhead and indirect costs which had previously been allocated to
this Division.
DISCONTINUED OPERATIONS - AUTO AUCTION DIVISION
In November 1996, the Company sold the auto auction business and related
operating assets (property and equipment and inventories) of Interstate Auto
Auction to ADESA Pennsylvania, Inc. for cash of $4.85 million. The Division's
pre-tax income for the first nine months of 1996, which excluded any continuing
overhead, was $554,000 compared to income of $732,000, as restated to eliminate
any continuing overhead, in 1995. The operating results of the auto auction
after September 30, 1996, when the Company finalized its plan to dispose of the
business, were included with the gain realized on the disposal of the auction
business. The auction generated an $84,000 pre-tax loss ($57,000 after taxes)
during this period. Approximately $1.7 million of the proceeds from the sale of
the auto auction business was used to repay the remaining amount due on the
Company's bank loans.
During 1997, the Company incurred $22,000 of final expenses relating to
the auction business which have been presented as an additional loss on
disposal of the discontinued business.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's financial
position at December 31, 1997 and 1996 is presented below.
INVESTED ASSETS
Invested assets at December 31, 1997 were $41 million compared to $51.2
million at the end of 1996. A substantial portion of the decline is the result
of the settlement on the reinsurance transaction with World, in which the
Company transferred approximately $8.8 million in cash and investments to
World. In addition, the asset base at December 31, 1996 included approximately
$500,000 which was required in the first quarter of 1997 to pay the Federal
and state income taxes on the gain from the sale of the Company's auto auction
business in 1996.
During the fourth quarter of 1997, the Company sold a substantial portion
of its bond portfolio in connection with the planned sale of its credit
insurance business to LOTS. At the closing of the transaction, which is
expected to occur in April 1998, the Company will deliver cash to cover the
statutory reserve liabilities reinsured to American Republic, as LOTS'
financial partner.
The bonds were sold in 1997 not only to provide the liquidity necessary
to close the transaction but also to eliminate the market risk on the
portfolio during the period prior to closing. The proceeds from the sale of
the securities were reinvested in money market funds. As a result, 80% of the
Company's total invested assets at the end of 1997 were short-term investments.
The Company sold most of its remaining bonds in early 1998.
Prior to the sale of its various insurance operations, the Company s
general investment policy emphasized fixed maturity securities (primarily
bonds) with Moody's or Standard and Poor's ratings of A or better and mortgage
loans with terms generally not more than seven years. The Company did not
invest in non-investment grade securities because the greater returns on such
investments did not justify the potentially greater risks.
During 1997, the Company increased its loan loss reserves for mortgage
loans and investment and non-investment real estate by $229,000. Loan loss
reserves were increased by $35,000 and $93,000 in 1996 and 1995, respectively.
Management believes that its reserves at December 31, 1997 are adequate to
cover any possible losses which may develop in its mortgage loan and real
estate portfolios. The carrying value of these investments at December 31,
1997 was $2.9 million compared to $3.4 million at the end of 1996.
LIQUIDITY
Liquidity refers to a company s ability to meet its financial obligations
and commitments as they come due. The Company s operating subsidiaries have
historically met most of their cash requirements from funds generated from
operations. However, the recurring operating losses incurred by the subsidiar-
ies have significantly reduced the subsidiaries and, in turn, the Company s
liquidity positions, resulting in the decision to sell the Company s remaining
business, liquidate all assets, distribute cash to the shareholders and
ultimately dissolve.
The principal sources of cash funds of the life insurance subsidiaries
have historically been premiums and investment income, as well as proceeds from
sales and maturities of investments. These companies used cash primarily to pay
commissions, claims and operating expenses. Credit insurance was the Company s
principal product line and credit insurance premiums were therefore the
Company s principal source of premium revenues. Credit insurance premium levels
during the past five years are substantially lower than the premium levels
prior to the economic recession in the early 1990's. This continued reduction
in cash funds has depleted most of the Company s short-term cash reserves and
has caused a decline in its long-term investment base. The assessment by the
Company s management and its Board of Directors that this decrease in revenues
and the related decline in operating results could not be reversed within a
reasonable period of time led to the decision in early 1996 to evaluate other
alternatives to best serve the interests of its shareholders, which, in turn,
led to the plan referred to above and discussed elsewhere in this Management
s Discussion.
CAPITAL RESOURCES
The Company s total equity decreased significantly in 1997 due primarily
to the $6.3 million net loss. The decrease is also attributable to $409,000 in
dividends paid to preferred shareholders. Total equity, including redeemable
preferred stock, was $6.5 million at December 31, 1997 compared to $13.3
million at the end of 1996. Shareholders equity per common share also
decreased from $3.31 at December 31, 1996 to $.78 at the end of 1997.
INFLATION
Because of the Company s current plans to liquidate its assets, distribute
cash to its shareholders and ultimately dissolve, the effects of inflation on
the Company are minimal.
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 years ended December 31,
1997, 1996 and 1995 have been audited by Arthur Andersen LLP, independent
auditors. Such audits were conducted in accordance with generally accepted
auditing standards, and include a review and evaluation of our internal
accounting control structure, tests of the accounting records and other audi-
ting procedures they consider necessary to express their informed professional
opinion 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 balance sheets of Consumers
Financial Corporation (a Pennsylvania corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements and the sche-
dules 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 ob-
tain 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted account-
ing principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 5 of the Notes
to Consolidated Financial Statements, the Company has discontinued the opera-
tions of its credit insurance, individual life insurance and auto auction
segments and has adopted a plan of liquidation and dissolution. As further
discussed in Note 5, the Company has suffered recurring losses from operations
that have significantly reduced its net capital and liquidity position and
it has significantly reduced its number of employees, all of which raise
substantial doubt about the Company s ability to continue as a going concern.
Management s plans in regard to these matters are also described in Note 5.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
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 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 31, 1998
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(dollar amounts in thousands) 1997 1996
ASSETS
Investments:
Fixed maturities $5,857 $42,618
Mortgage loans on real estate 2,086 2,286
Policy loans 518
Other invested assets 295 984
Short-term investments 32,763 4,783
Total investments 41,001 51,189
Cash 641 556
Accrued investment income 268 731
Receivables 16,639 20,290
Prepaid reinsurance premiums 9,572 17,338
Deferred policy acquisition costs 13,570 18,949
Property and equipment 1,350 2,168
Other real estate 783 1,115
Other assets 1,211 2,283
$85,035 $114,619
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
Liabilities:
Future policy benefits $21,467 $35,386
Unearned premiums 49,994 56,178
Other policy claims and benefits payable 2,539 2,736
Other liabilities 4,556 5,495
Income taxes:
Current 430 1,185
Deferred (445) 296
Total liabilities 78,541 101,276
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible,
authorized 632,500 shares; issued 1997,
514,261 shares; 1996, 536,500 shares;
outstanding 1997 and 1996, 481,461
shares; redemption amount 1997 and 1996,
$4,815; net of treasury stock of $271
in 1997 and $453 in 1996 4,688 4,693
Shareholders equity:
Common stock, $.01 stated value,
authorized 10,000,000
shares; issued 1997, 3,019,110 shares,
1996, 3,021,496 shares; outstanding
1997, 2,596,155 shares, 1996,
2,611,532 shares 30 30
Capital in excess of stated value 7,989 7,966
Net unrealized appreciation of debt
and equity securities,
net of income taxes 54 70
Retained earnings (deficit) (4,796) 2,009
Treasury stock (1,471) (1,425)
Total shareholders equity 1,806 8,650
$85,035 $114,619
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except
per share amounts) 1997 1996 1995 (Restated) (Restated)
Revenues:
Premiums written ($37) $353 $685
Decrease (increase) in
unearned premiums 393 64 (291)
Premium income 356 417 394
Net investment income 63 59 40
Realized investment losses (176) (69) (120)
Fees and other income 190 35 59
Total revenues 433 442 373
Benefits and expenses:
Death and other benefits 460 581 512
Amortization of deferred policy
acquisition costs 10 12 7
Operating expenses 1,639 2,118 1,798
Total benefits and expenses 2,109 2,711 2,317
Loss from continuing operations
before income tax benefit (1,676) (2,269) (1,944)
Income tax benefit (235) (532) (515)
Loss from continuing operations (1,441) (1,737) (1,429)
Discontinued operations:
Loss from operations of
discontinued business (net
of income taxes) (825) (382) (172)
Gain (loss) on disposal of
discontinued business
(net of income taxes) (4,094) 885
(4,919) 503 (172)
Net loss ($6,360) ($1,234) ($1,601)
Basic and diluted income (loss)
per common share:
Loss from continuing operations ($0.73) ($0.83) ($0.71)
Discontinued operations (1.89) 0.19 (0.07)
Net loss ($2.62) ($0.64) ($0.78)
Weighted average number of
shares outstanding 2,601 2,614 2,634
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Capital Net unrealized
excess appreciation Retained
Common stock stated Fixed Equity earnings
(dollar amounts in thousands) Shaares Amount value maturities securities (deficit)
BALANCE, JANUARY 1, 1995 3,061 $31 $8,129 $197 $22 $5,734
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year 2,648 9
Preferred stock dividends (409)
Accretion of difference between fair
value and mandatory redemption value
of preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (30) (1) (113)
Net loss for the year (1,601)
BALANCE, DECEMBER 31, 1995 3,031 30 8,016 674 31 3,688
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (609) (26)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (10) (50)
Net loss for the year (1,234)
BALANCE, DECEMBER 31, 1996 3,021 30 7,966 65 5 2,009
Change in net unrealized appreciation
(depreciation) of fixed maturities and
equity securities for the year (11) (5)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares-common (2) (10)
Retirement of treasury shares-preferred 33
Net loss for the year (6,360)
BALANCE, DECEMBER 31, 1997 3,019 $30 $7,989 $54 $0 ($4,796)
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Treasury stock Total
(dollar amounts in thousands) Shares Amount amount
BALANCE, JANUARY 1, 1995 (382) ($1,337) $10,605
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year 2,657
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (58) (202) (202)
Retirement of treasury shares 30 114
Net loss for the year (1,601)
BALANCE, DECEMBER 31, 1995 (410) (1,425) 11,014
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (635)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (10) (50) (50)
Retirement of treasury shares 10 50
Net loss for the year (1,234)
BALANCE, DECEMBER 31, 1996 (410) (1,425) 8,650
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (16)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (15) (56) (56)
Retirement of treasury shares-common 2 10
Retirement of treasury shares-preferred 33
Net loss for the year (6,360)
BALANCE, DECEMBER 31, 1997 (423) ($1,471) $1,806
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands) 1997 1996 1995
Cash flows from operating activities:
Net loss ($6,360) ($1,234) ($1,601)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Provision for permanent decline in
value of investments 158 50
Deferred policy acquisition costs
incurred (9,771) (8,987) (11,005)
Amortization of deferred policy
acquisition costs 12,615 11,964 10,734
Provision for permanent decline in
value of property and equipment
and other real estate 942
Other amortization and depreciation 483 433 613
Change in future policy benefits (2,696) 454 2,063
Change in unearned premiums (6,183) (1,765) 1,392
Amounts due reinsurers (1,226) 2 (86)
Income taxes (1,601) (22) (318)
Change in prepaid reinsurance premiums 7,765 1,266 580
Change in receivables 4,618 3,455 3,225
Change in other liabilities 415 (695) (117)
Other 186 (88) 81
Total adjustments 5,705 6,067 7,162
Net cash provided by (used in) operating
activities (655) 4,833 5,561
Cash flows from investing activities:
Purchase of investments (39,231) (13,140) (9,657)
Maturity of investments 2,195 6,484 7,027
Sale of investments 46,424 6,598 2,190
Purchase of property and equipment (24) (371)
Transfer of assets in sale of universal
life business (8,175)
Net cash provided by (used in) investing
activities 1,213 (82) (811)
Cash flows from financing activities:
Principal payments on debt (2,537) (852)
Receipts from universal life and investment
products 4,775 4,938
Withdrawals on universal life and
investment products (6,425) (9,029)
Purchase of treasury stock, including
8 1/2% redeemable preferred stock (64) (50) (201)
Cash dividends to shareholders (409) (409) (409)
Net cash used in financing activities (473) (4,646) (5,553)
Net increase (decrease) in cash 85 105 (803)
Cash at beginning of year 556 451 1,254
Cash at end of year $641 $556 $451
Supplemental disclosures of cash flow
information:
Cash paid (received) during the year for:
Interest $255 $305
Income taxes $90 $154 $75
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. COMPANY OVERVIEW
The Company has incurred operating losses over the past five years which
have significantly reduced its net worth and its liquidity position. 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 opera-
tion, following the sales in 1994 and 1997 of all of its universal life
insurance business and the 1996 sale of its auto auction business. After the
sale of the credit insurance business, the Company s income or loss from
continuing operations will consist principally of (i) earned premium and
related costs associated with a small, closed block of extended service
contract business, (ii) fee revenues which will be received from 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, redeem its preferred stock at par value and distribute all
remaining cash to its common shareholders. Inasmuch as certain payments from
LOTS will be received over a five-year period, the final distribution to the
common shareholders will not be made until late in 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Consumers Financial Corporation 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. See Note 5 with respect to the sale of the Company s inforce
credit insurance business and its credit insurance and fee income accounts.
Basis of financial statements
The financial statements have been prepared on the basis of generally
accepted accounting principles (GAAP) which, as to the life insurance company
s u bsidiaries, vary from reporting practices prescribed or permitted by
regulatory authorities. Certain prior year amounts have been reclassified to
conform with classifications used for 1997.
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 are Consumers Life Insurance Company (Consumers Life) and
Consumers Car Care Corporation. Investors Fidelity Life Assurance Corp.
(Investors Fidelity) and Consumers Reinsurance Company are subsidiaries of
Consumers Life. All material intercompany accounts and transactions have been
eliminated.
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.
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. Equity securities
(common and non-redeemable preferred stocks) held by the insurance subsidiaries
are stated at fair value.
Mortgage loans on real estate are carried at the unpaid principal balance.
Policy loans are carried at their unpaid balance. Other invested assets,
excluding real estate partnerships, and short-term investments are carried at
cost. Investments in real estate partnerships are reported at equity.
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 operating income. 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. The
fair values for equity securities are based on quoted market prices and are
recognized in the balance sheet (see Note 6).
Mortgage loans and policy 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. The
carrying amounts for policy loans approximate their fair values.
Long-term debt: The carrying amount for long-term debt approximates its
fair value.
Deferred policy acquisition costs
The costs of acquiring new business, including costs incurred subsequent
to the year of issue in excess of the ultimate level costs, principally
commissions, certain sales salaries and those home office expenses that vary
with and are primarily related to the production of new business, have been
deferred. Deferred policy acquisition costs related to universal life-type
policies and investment products were amortized in relation to the present
value of expected gross profits on the policies. Acquisition costs relating
to single premium credit insurance have been amortized so as to charge
each year's operations in direct proportion to premiums earned. Deferred policy
acquisition costs are expensed when such costs are 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 cost. 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 the lower of cost or fair value, less estimated
selling costs.
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.
Recognition of premium revenue and related costs
Revenues for universal life-type policies and investment products consist
of policy charges for the cost of insurance, policy administration, and
surrenders assessed during the period, and expenses include interest credited
to policy account balances and benefit claims incurred in excess of policy
account balances. For credit insurance, premiums are earned over the terms of
the policies, as discussed above. Policy and contract claims include provisions
for claims reported and claims incurred but not reported. The Company believes
that the liabilities for claims and related expenses are adequate. Anticipated
investment income is considered in determining whether future earned premiums
on existing credit insurance will be sufficient to cover the present value of
future benefits and maintenance expenses and to recover the unamortized portion
of deferred policy acquisition costs.
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.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). Under SFAS 128, the calculation of
primary and fully diluted earnings per share has been replaced with basic and
diluted earnings per share. The basic earnings per share calculation differs
from primary earnings per share in that it excludes the dilutive effects of
options, warrants and convertible securities, while the calculation of diluted
earnings per share is about the same as the previous fully diluted earnings per
share calculation. Adoption of SFAS 128 had no effect on the per share amounts
previously reported for 1996 and 1995 because the Company s stock options and
convertible securities are anti-dilutive for those periods.
3. BASIS OF FINANCIAL STATEMENTS
The more significant GAAP 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) Investments in securities of unaffiliated companies are reported as
described in Note 2, rather than in accordance with valuations
established by the National Association of Insurance Commissioners
(NAIC). Pursuant to NAIC valuations, bonds eligible for amortization
are reported at amortized value; other securities are carried at
values prescribed by or deemed acceptable to the NAIC, including
common stocks, other than stocks of affiliates, at market value.
(b) Costs of acquiring new business are deferred and amortized rather
than being charged to operations as incurred.
(c) The liability for future policy benefits and expenses on individual
life insurance is based on conservative estimates of expected
mortality, morbidity, interest, withdrawals, and future maintenance
and settlement expenses, rather than on statutory rates for
mortality and interest. For credit life insurance, the liability is
based upon the unearned premium reserve, computed as described in
Note 2, rather than on statutory rates for mortality and interest.
The credit disability policy liability, principally the unearned
premium reserve, is calculated as described in Note 2, while the
statutory liability is computed using predominantly the average of
the Rule of 78's and Pro Rata methods.
(d) Deferred income taxes, if applicable, are provided as described in
Note 17.
(e) 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.
(f) Certain assets are reported as assets rather than being charged
directly to surplus and excluded from the balance sheets.
(g) Commission allowances pertaining to financing-type reinsurance
agreements are not included in results of operations.
(h) Loan origination fees are deferred and recognized over the life of
the applicable mortgage as an adjustment of yield rather than being
reported in income as received.
(i) Revenues for universal life-type policies and investment products
consist of policy charges primarily for the cost of insurance rather
than premiums due and/or collected on such policies. Expenses
include interest credited to policy account balances and benefit
claims incurred in excess of policy account balances rather than the
increase in benefit reserves and gross benefit claims incurred for
these types of policies.
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 $5.5 million. All distributions are further limited by Delaware
state insurance laws to the greater of previous year earnings, computed in
accordance with statutory accounting principles, or 10% of statutory capital
and surplus as of the end of the previous year. In some instances such payments
may require the prior approval of the insurance department. Accordingly, based
on amounts reported to regulatory authorities, at December 31, 1997,
approximately $1.7 million of Consumers Life's net assets cannot generally be
transferred to the parent company and $619,000 is available for transfer during
1998 as long as the minimum capital and surplus requirements mentioned above
are maintained. 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 subsidiaries. In addition, separate restrictions apply to the surplus note
owed to the Company by a subsidiary of Consumers Life. Payment of interest and
repayment of principal on the note are permitted by the applicable state
insurance department as long as the subsidiary's statutory capital and surplus
exceeds $3 million.
The reported statutory capital and surplus of the life insurance
subsidiaries was $6.4 million at December 31, 1997 and $5.9 million at December
31, 1996. The insurance companies combined statutory net loss was $1.4 million
in 1997. In 1996, the companies reported combined net income of $29,000 and in
1995 they reported a net loss of $3.6 million.
Insurance laws require that certain amounts be deposited with various
state insurance departments for the benefit and protection of policyholders. The
approximate carrying amounts of such deposits at December 31, 1997 and 1996
were $1.9 million and $5.3 million, respectively.
For statutory reporting purposes, the Company utilizes an accelerated
method of reserving disability unearned premiums which allows the Company to
recognize revenue in a manner which more appropriately matches its incidence of
claims. In addition to the use of this unearned premium method, which was
approved by the Delaware Insurance Department, the insurance subsidiaries have
also received approval from their respective domiciliary states to carry as an
admitted asset a receivable for certain credit insurance premiums,
net of commissions, which have been collected by the companies agents but have
not yet been remitted to the companies. At December 31, 1997 and 1996, the
premiums in process of collection receivable totaled $1.5 million and $1.8
million, respectively.
4. TERMINATION OF PENDING MERGER
On October 30, 1996, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with LaSalle Group, Inc. (LaSalle) and an
affiliate of LaSalle whereby the Company would have become a wholly-owned
subsidiary of LaSalle (the Merger). The Merger was subject to, among other
things, the approval of insurance regulators in the four states in which the
Company s insurance subsidiaries were domiciled and the approval of the
Company s common shareholders. Although the shareholders voted to approve the
Merger at a meeting held on March 25, 1997, LaSalle disclosed to the Company on
May 15, 1997 that its original source of funding for the Merger was not likely
to be available within a reasonable period of time and that it was in the
process of securing alternate funding. At that time, the Company exercised its
right to renew its search for another acquiror to protect the Company in the
event LaSalle s funding would not be available.
On July 28, 1997, the Merger Agreement with LaSalle was terminated
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the Merger transaction. On
July 28, 1997, the Company entered into a letter of intent to sell its credit
insurance operations to Life of the South Corporation, a Georgia-based
financial services holding company (LOTS), as described more fully in Note 5.
5. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION
The operating losses incurred by the Company over the past five years have
significantly reduced the Company s net worth and its liquidity position.
Consequently, in March 1996, the Company announced its plans to explore various
alternatives for selling or merging its remaining business operations, which
included credit insurance and related products, the auto auction business
conducted through Interstate and a closed block of assumed universal life
business. The Company had previously sold its traditional whole life, term and
annuity business in 1992 and the majority of its universal life business in
1994, both of which were part of the individual life insurance division.
Direct contacts were made with numerous potential buyers to solicit their
interest in participating in an auction process to acquire either the Company
or its various business operations and assets. Separate groups of potential
bidders were solicited for the Company s credit insurance business and auto
auction business. Because the direct writer of the assumed individual life
business, World Insurance Company (World), had an option to recapture that
business, the Company conducted negotiations with World to sell the remaining
inforce business back to World.
After evaluating numerous offers for the sale of the auto auction
business, in November 1996, the Company sold Interstate s auto auction
business, all of its property, plant and equipment and inventories and the
Interstate name to ADESA Pennsylvania, Inc., an unrelated third party, for
cash of $4.85 million. The sale resulted in an after-tax gain of approximately
$1.8 million in the fourth quarter of 1996. The gain on disposal includes a
loss from operations of $84,000 from September 30, 1996 (the measurement date)
to December 31, 1996, less an income tax benefit of $28,000. Accordingly,
in the accompanying financial statements, Interstate s operating results have
been reported as discontinued operations for all periods presented.
Interstate s non-operating net assets, principally cash, receivables,
investments and trade payables, were retained by the Company.
In March 1997, the Company completed a reinsurance transaction with World,
in which World recaptured the individual life insurance business previously
assumed by the Company from World through a joint venture agreement. World
initially paid the Company a recapture consideration equal to $1.05 million in
exchange for the transfer to World of assets supporting the net statutory basis
policy reserves for this business. The recapture transaction resulted in an
after-tax loss of approximately $900,000 which was reported by the Company in
the fourth quarter of 1996. During 1997, the parties agreed to make certain
adjustments to the recapture consideration which, together with a $123,000 loss
on bonds sold in 1997 in order to close the transaction, resulted in an
additional loss on disposal of $167,000, net of income tax benefits. As
indicated above, the Company had previously sold all of its other individual
life insurance business. Accordingly, in the accompanying financial statements,
the operating results of the Company s individual life insurance division have
been reported as discontinued operations for all periods presented.
As indicated in Note 4, the Company renewed its search for either another
acquiror or a purchaser of its credit insurance business in May 1997, following
notification from LaSalle that its original source of funding for the pending
Merger would probably not be available within a reasonable period of time. The
Company requested that certain previous bidders for its credit insurance
business (the Company s only remaining business segment at that time) resubmit
their bids for consideration. Following the receipt and evaluation by the
Company of four new offers for its credit insurance business, the Company
signed a letter of intent on July 28, 1997 to sell the credit insurance and
related operations to LOTS, subject to a due diligence review by LOTS. In
September 1997, an amended letter of intent was signed by the parties and an
Asset Purchase Agreement was subsequently signed on December 30, 1997.
The Asset Purchase Agreement provides for the sale of the Company s credit
insurance and fee income accounts to LOTS effective October 1, 1997 and the
transfer of the Company s marketing personnel and credit insurance
administrative functions to LOTS effective January 1, 1998. With respect to the
sale of the customer accounts, the Company will receive fees from LOTS over a
five-year period based on the amount of credit insurance premiums produced by
the customer accounts which were sold. Unlike the transactions described below,
the above transactions were not subject to any further conditions and have
therefore been completed. Accordingly, the Company has included approximately
$132,000, before income taxes, in its 1997 financial statements, representing
the fees earned by the Company in the fourth quarter.
In addition to the above transactions, the Asset Purchase Agreement also
provides for (i) the sale, effective January 1, 1998, of the Company s
September 30, 1997 inforce block of credit insurance business to American
Republic Insurance Company, an Iowa-domiciled insurance company (American
Republic), which is acting as LOTS financial partner in this transaction and
(ii) the sale of one of the Company s wholly-owned reinsurance subsidiaries to
LOTS as of January 1, 1998. The sale of the inforce business referred to
in (i) above required the approval of the Company s preferred and common
shareholders and the approval of insurance regulators in Delaware and Ohio,
the domiciliary states of the two insurance subsidiaries which produced the
credit insurance business. The Company s shareholders approved the transaction
at a special meeting held on March 24, 1998 (the Special Meeting). The
Delaware and Ohio insurance departments approved the reinsurance agreements
which provide for the transfer of the insurance business on February 17, 1998
and March 30, 1998, respectively. The sale of the subsidiary referred to in (
ii) above requires the approval of the insurance regulators in the state of
Arizona, the subsidiary s state of domicile, which approval has not yet
been received.
Based upon the reinsurance consideration to be received for the sale in
1998 of the inforce credit insurance business, the transaction will result in
an after-tax loss of approximately $3.9 million, which has been reflected in
the Company s 1997 financial statements through a write-down of deferred policy
acquisition costs. The estimated loss on disposal includes a loss from
operations of approximately $800,000 from September 30, 1997 (the measurement
date) to December 31, 1997, net of an income tax benefit of $363,000.
As a result of the planned 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 presented, and,
accordingly, the operating results for periods prior to 1997 have been
restated.
At the Special Meeting, the Company s preferred and common shareholders
also approved the Plan of Liquidation and Dissolution, pursuant to which the
Company intends to liquidate its remaining assets, provide for all of its
liabilities, redeem its preferred stock at par value ($10 per share) and
distribute all remaining cash to its common shareholders. Pursuant to the terms
of the Asset Purchase Agreement, the Company will receive payments from LOTS
over a five-year period based on the amount of credit insurance premiums
produced by the customer accounts sold by the Company to LOTS. 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 from October
1, 1997 to September 30, 2002. As a result, the final distribution to the
Company s common shareholders will not be made until late in 2002 when the
amounts due from LOTS have been received. The Company has made substantial
reductions in its number of employees during the past several years as a result
of the events described above. As of March 31, 1998, eight people are employed
by the Company. During the liquidation period, the Company intends to outsource
most of the functions which will continue to be required.
A summary of the results of operations of the discontinued segments is
presented below:
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)
1996
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $33,315 $4,349 (a) $2,688 $40,352
Income (loss) from operations before
income tax expense (benefit) ($1,266) $393 $554 ($319)
Income tax expense (benefit) (297) 134 226 63
Income (loss) from operations (969) 259 328 (382)
Gain (loss) on disposal before income
rax expense (1,385) 3,031 1,646
Income tax expense (benefit) (471) 1,232 761
Gain (loss) on disposal (914) 1,799 885
Income (loss) from discontinued operations ($969) ($655) $2,127 $503
/TABLE
1995
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $36,766 $5,781 (a) $3,221 $45,768
Income (loss) from operations before
income tax expense (benefit) ($875) $83 $732 ($60)
Income tax expense (benefit) (232) 28 316 112
Income (loss) from operations ($643) $55 $416 ($172)
(a) Includes renewal premiums which are 100% ceded under indemnity reinsurance
agreement with third party reinsurer.
If the Company had reinsured all of its credit insurance business to
American Republic as of December 31, 1997, the Company s remaining assets and
liabilities would consist principally of $5.8 million in cash and invested
assets (primarily bonds, mortgage loans and short-term investments), $1.4
million in receivables, $2.6 million in property and equipment, non-investment
real estate and other assets, $1.2 million in policy liabilities on a closed
block of extended service contract business and $2.1 million in other
liabilities.
6. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement purposes as
described in Note 1, consist of the following at December 31, 1997:
Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
Fixed maturities:
Bonds:
United States government and
government agencies and authorities $5,253 $5,333 $5,333
Public utilities 20 21 21
All other 352 353 353
5,625 5,707 5,707
Certificates of deposit 150 150 150
Total fixed maturities 5,775 5,857 5,857
Mortgage loans on real estate 2,086 2,086 2,086
Other invested assets 295 295 295
Short-term investments 32,763 32,763 32,763
Total investments $40,919 $41,001 $41,001
A portion of the Company's invested funds is restricted as to use.
Deposits are required with various state insurance departments for the benefit
and protection of policyholders (see Note 3).
At December 31, 1997 and 1996, no mortgage loans or other loans were
considered to be non-performing loans.
At December 31, 1997, approximately 86% of the Company's investments in
mortgage loans were secured by commercial real estate and the remaining mort-
gage loans were secured by residential real estate. Approximately 78% of the
loans involved properties located in Central Pennsylvania. Such investments
consist principally of first mortgage liens on completed income-producing
properties, primarily office buildings. Two mortgage loans exceeded 10% of
shareholders equity at December 31, 1997 and one mortgage loan exceeded 10% of
shareholders equity at December 31, 1996. The Company s mortgage loan
valuation reserves at December 31, 1997 and 1996 were $50,000 and $100,000,
respectively.
At December 31, 1997 and 1996, all the Company s real estate is classified
as non-investment real estate, since the Company intends to sell these
properties. Accumulated depreciation on the properties at the time they were
reclassified totaled $22,663.
Net investment income is applicable to the following investments:
Years ended December 31,
(in thousands) 1997 1996 1995
(Restated) (Restated)
Interest:
Fixed maturities $1,934 $2,364 $2,175
Mortgage loans 189 421 692
Policy loans 33 58
Other invested assets 82 17 3
Short-term investments 486 265 221
Real estate income 157 332
2,691 3,257 3,481
Less investment expenses (675) (680) (702)
Total net investment income 2,016 2,577 2,779
Less net investment income
attributable to discontinued
operations 1,953 2,518 2,739
Net investment income
attributable to
continuing operations $63 $59 $40
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1997 and 1996 are as follows:
1997 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 $4,365 $81 $2 $4,444
Corporate securities 373 1 374
Mortgage-backed securities 887 7 5 889
Totals $5,625 $89 $7 $5,707
1996 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 $24,749 $409 $139 $25,019
Corporate securities 16,665 121 262 16,524
Mortgage-backed securities 901 2 33 870
Totals $42,315 $532 $434 $42,413
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. 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.
Amortized Estimated
(in thousands) cost fair value
Due in 1998 $210 $210
Due in 1999-2003 2,768 2,819
Due in 2004 - 2008 840 869
Due after 2008 920 920
4,738 4,818
Mortgage-backed securities 887 889
Totals $5,625 $5,707
Proceeds from the sales of investments in debt securities during 1997 were
$48 million. Gross gains of $446,000 and gross losses of $247,000 were
realized on those sales. Proceeds from such sales in 1996 were $4.1 million.
Gross gains of $6,000 and gross losses of $20,000 were realized on those
sales. Proceeds from sales in 1995 were $4.1 million. Gross gains of $3,000
and gross losses of $29,000 were realized on those sales.
Realized investment gains (losses) are applicable to the following
investments:
Years ended December 31,
(in thousands) 1997 1996 1995
(Restated) (Restated)
Fixed maturities $249 ($14) ($27)
Investment real estate (93)
Other invested assets (219) (55)
30 (69) (120)
Less realized investment gains
attributable to discontinued
operations 206
Realized investment losses
attributable to continuing
operations ($176) ($69) ($120)
7. RECEIVABLES
December 31,
(in thousands) 1997 1996
Amounts due from agents $1,902 $2,981
Reinsurance receivable 13,271 17,543
Federal income tax refund 524
Other 1,378 805
17,075 21,329
Less allowance for
uncollectible accounts (436) (1,039)
Balance $16,639 $20,290
8. DEFERRED POLICY ACQUISITION COSTS
Individual
(in thousands) Credit Life Total
Balance, January 1, 1995 $16,878 $4,777 $21,655
Costs deferred 10,917 88 11,005
Amortization (10,153) (581) (10,734)
Balance, December 31, 1995 17,642 4,284 21,926
Costs deferred 8,905 82 8,987
Amortization (10,133) (446) (10,579)
Write-off attributable to
1997 sale of inforce
universal life insurance
business (1,385) (1,385)
Balance, December 31, 1996 16,414 2,535 18,949
Costs deferred 9,771 9,771
Amortization (9,515) (9,515)
Write-off attributable to
sale ofinforce 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
9. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE
December 31,
(in thousands) 1997 1996
Property and equipment:
Data processing equipment and software $2,062 $2,062
Furniture and equipment 1,071 1,087
Home office building, including
improvements 1,788 2,501
4,921 5,650
Less accumulated depreciation (3,571) (3,482)
Balance $1,350 $2,168
December 31,
(in thousands) 1997 1996
Other real estate:
Commercial office building $625 $762
Warehouse 214 306
Townhouse development 103
839 1,171
Less accumulated depreciation (56) (56)
Balance $783 $1,115
All of the Company s real estate is classified as non-investment real
estate since these properties are listed for sale.
11. POLICY LIABILITIES
The composition of future policy benefits and unearned premiums at
December 31, 1997 and the assumptions pertinent thereto are as follows:
Life Future Investment
insurance policy Unearned yields: years
in force benefits premiums of issue
Individual life $202,868 $9,682 4 1/2% - 11 1/2%
1961-1992
Credit life 1,280,659 $19,405 (a)
1987-1997
Credit disability 11,785 30,589 (a)
1987-1997
Balance $1,483,527 $21,467 $49,994
(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 $905,000 at December 31, 1997.
Future policy benefits and unearned premiums do not include any deduction
for reinsurance ceded to other companies. At December 31, 1997 and 1996, future
policy benefits relating to such reinsurance totaled $12.2 million and $16.1
million, respectively. These amounts have been classified with Receivables.
Unearned premiums with respect to reinsured business totaled $9.6 million and
$17.3 million at December 31, 1997 and 1996, respectively. These unearned
premiums are separately stated on the Consolidated Balance Sheets as Prepaid
Reinsurance Premiums. Insurance in force net of reinsurance ceded was $928,000
at December 31, 1997.
Transactions affecting the Company s credit disability claim liabilities
and reserves, net of reinsurance, are summarized as follows:
1997 1996
Balance as of January 1 $12,340 $11,250
Less reinsurance recoverable 3,667 3,267
Net balance as of January 1 8,673 7,983
Incurred claims related to:
Current year 7,952 7,344
Prior year 171 (425)
Total incurred claims 8,123 6,919
Paid claims related to:
Current year 2,307 2,161
Prior years 4,471 4,068
Total paid claims 6,778 6,229
Net balance as of December 31 10,018 8,673
Plus reinsurance recoverable 2,717 3,667
Balance as of December 31 $12,735 $12,340
11. REINSURANCE
The life insurance companies routinely cede and, in certain instances,
assume reinsurance. Ceded insurance is treated as a risk and liability of the
assuming companies. Net premium income, benefits, and expenses are presented
net of non-financing reinsurance ceded and include non-financing reinsurance
assumed.
The life insurance companies have entered into various financing-type
reinsurance agreements with unaffiliated insurance companies. Such agreements
are primarily designed to minimize the reduction of statutory capital and
surplus arising at the time premiums are written. In connection with these
agreements, the insurance subsidiaries have received and reported, in the
aggregate, approximately $22.8 million at December 31, 1997 as an advance of
future statutory profits on the blocks of business reinsured under these
agreements. The life insurance subsidiaries are obligated to repay the advances
from future statutory profits. The effects of these agreements have been
removed from the financial statements except for the cost of this financing,
which amounted to $660,000, $608,000 and $603,000 in 1997, 1996 and 1995,
respectively. All of these financing-type reinsurance agreements were termina-
ted effective January 1, 1998 when the Company s credit insurance business was
reinsured to American Republic (see Note 5).
Excluding premiums reinsured under financing-type agreements, credit
insurance premiums ceded to other companies were $3.4 million, $10.4 million
and $12 million in 1997, 1996 and 1995, respectively.
Incurred benefits and losses reinsured in 1997 were $5.2 million compared
to $6.2 million in 1996 and $6.7 million in 1995. These amounts have been
deducted in arriving at death and other benefits and the increase in future
policy benefits in the Consolidated Statements of Operations.
At December 31, 1997 and 1996, reinsurance recoverable for paid and unpaid
benefits was $13.2 million and $17.5 million, respectively. Reinsurance
recoverable is classified with Receivables.
12. NOTES PAYABLE
In 1990, the Company obtained financing in the form of a $10 million term
loan. In 1993, the terms of this loan were restructured, resulting in the
elimination or modification of several financial covenants, a reduction in the
Company s required debt service payments and the transfer of a portion of the
remaining balance to Interstate pursuant to a separate loan agreement. In 1995,
the Company further restructured the new loans. These restructuring changes
included an extension of the maturity date of the loans, the removal of several
additional financial covenants and the transfer of an additional portion of the
remaining loan balance directly to Interstate. A balloon payment was due at the
end of the term. The interest rate on these loans was one percentage point
above the bank s prime rate. The Company assigned all of the outstanding
common stock of Consumers Life, Interstate and Consumers Car Care Corporation
as security for its loan, while Interstate s property and equipment and its
inventories were separately pledged for Interstate s loan. The security for
each loan was cross- collateralized to the other loan. Both of these loans
were repaid in full in 1996 in connection with the sale of the Company s auto
auction business, resulting in a release of the liens on Interstate s property
and equipment and the release of the stock of the subsidiaries (see Note 5).
Interest costs incurred on long-term debt were $230,000 in 1996 and
$286,000 in 1995.
13. PENSION AND OTHER RETIREMENT PLANS
The Company has a defined benefit pension plan and two profit sharing
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. As a result,
contributions to the plan, which have approximated $200,000 per year in recent
years, were approximately $100,000 in 1997 and will decrease further in
future years.
The profit sharing plans, which include an employee stock ownership plan,
provide for annual contributions in amounts to be determined by the Board of
Directors. Such contributions are based upon the annual compensation of each
employee; however, no Company contributions were made in either 1997, 1996 or
1995.
The funded status of the plan is as follows:
December 31,
(in thousands) 1997 1996
Actuarial present value of:
Vested benefit obligation $2,891 $3,000
Accumulated benefit obligation $2,891 $3,016
Actuarial present value of projected
benefit obligation $2,891 $3,016
Plan assets at fair value 2,665 2,727
Projected benefit obligation in
excess of plan assets (226) (289)
Unrecognized net losses 472 472
Unrecognized net liability
at transition 61 74
Unrecognized reduction in
projected benefit obligation (126) (136)
Unamortized prior year loss (407) (410)
Accrued pension cost ($226) ($289)
(in thousands) 1997 1996 1995
Net periodic pension
cost included the
following components:
Service cost during the period $139 $172
Interest cost on projected benefit
obligation $212 213 196
Actual return on plan assets (175) (175) (161)
Net amortization and deferral 37 2 2
Net periodic pension cost $74 $179 $209
Rates used in determining pension expense and related obligations were:
1997 1996 1995
Discount rate for expense
computation, beginning of year 7.50% 7.50% 7.50%
Assumed annual rate of return
on plan assets 7.50% 7.50% 7.50%
Discount rate for projected
benefit obligation,
end of year 7.50% 7.50% 7.50%
Assumed annual rate of increase
in compensation N/A 3.00% 3.00%
14. COMMITMENTS AND CONTINGENCIES
Rental expense in 1997, 1996 and 1995 was approximately $345,000, $351,000
and $355,000, 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 continues to lease the entire
building, which is classified as an operating lease, but at monthly rent of
$17,000 through July 1999, although the Company has subleased a portion of the
office space which it does not otherwise occupy. The Company has no other
significant leases.
In August 1997, the Company received a notice of proposed adjustment from
the Internal Revenue Service as a result of a recently completed tax
examination for the years ended December 31, 1992 and 1993. The Company is
currently seeking to have the adjustment rescinded. Based on the current status
of the matter, the Company does not believe it is probable that a material
amount of additional taxes will be due.
In connection with the cancellation of a joint venture agreement in 1996,
the Company had agreed to pay $500,000 in cash to its former joint venture
partner at the time the planned Merger with LaSalle was consummated. As a
result of the termination of the Merger Agreement, as discussed in Note 5,
the $500,000 payment will not be made. The Agreement with the joint
venture partner provided that in the event the Merger with LaSalle was not
completed, any payment to the joint venture partner would be determined under
a separate calculation as follows: (a) if the Company entered into a
transaction similar to the LaSalle transaction in which it was acquired by or
merged with another entity, the parties agreed to negotiate a mutually
acceptable termination price; (b) if the Company entered into a transaction
whereby, as part of a plan to terminate its insurance operations and sell all
of its assets, it sold its credit insurance marketing organization to an
unrelated third party, the Company agreed to pay its former partner a pro rata
share of the proceeds, if any, it receives from the sale of the marketing
organization. The Company agreed to make such payments to the joint venture
partner as consideration for terminating the venture, which will allow the
purchaser of the Company s credit insurance business to retain the profits or
losses on credit insurance premiums previously reinsured to the partner.
The transaction with LOTS meets the criteria described in (b) above,
and the Company therefore will pay approximately 19% of the gross fee revenues
received from LOTS to the former partner.
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.
In connection with the sale of Interstate s business, as discussed in Note
5, the Company provided the buyer with limited indemnifications with respect to
certain potential environmental liabilities asserted within two years from the
closing date. The Company does not believe that these limited indemnifications
will have a materially adverse effect on the Company's financial position or
results of operations.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company or its subsidia-
ries. 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
s financial statements.
15. 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 initially 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. Except in certain limited instances, the holders of
the Preferred Stock have no voting rights. Beginning July 1, 1998, a sinking
fund will be established requiring annual payments sufficient to redeem 10% of
the number of shares of Preferred Stock initially issued, calculated to redeem
all of the Preferred Stock by July 1, 2007.
If, at any time, 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.
The difference between the fair value of the Preferred Stock at the date
of issue and the mandatory redemption value is being recorded through periodic
accretions, using the interest method, with the related charge to retained
earnings ($36,000 in 1997, 1996 and 1995).
At December 31, 1997 and 1996, 713,275 shares of common stock were
reserved for the conversion of the Preferred Stock.
16. STOCK OPTIONS
In May 1982, the shareholders of the Company approved a Stock Option Plan
which permitted the granting of incentive stock options (as defined in the
Internal Revenue Code). The Plan provided for the granting of stock options to
purchase shares of the Company's common stock at at price not less than its
fair market value on the date of grant. Options granted under the Plan expire
not later than six years from the date of grant. The Plan authorized 300,000
shares for purchase upon the exercise of such options, which were made
available from either authorized but unissued shares or shares issued and
reacquired by the Company.
In May 1989, the shareholders of the Company approved the Stock Incentive
Plan which permits the granting of any or all of the following types of awards:
(1) stock options, including incentive stock options and non-qualified stock
options and (2) stock appreciation rights (SAR) either in tandem with stock
options or free standing. This Plan was intended to enhance the 1982 Stock
Option Plan. All officers and salaried key employees of the Company and its
subsidiaries and affiliates were eligible to be participants. Persons who
served only as directors were not eligible. The Plan provided for the issuance
of up to 250,000 shares of Common Stock (the Stock). The shares of Stock
deliverable under the Plan consisted in whole or in part of authorized and
unissued shares or treasury shares.
The purchase price per share of Stock under any stock option is determined
by the Personnel Committee, but cannot be less than 100% of the fair market
value of the Stock on the date of the grant of such option. The term of each
option is fixed by the Personnel Committee. Options are exercisable at such
time or times as determined by the Committee, but no option is exercisable
after the expiration of six years from the date the option is granted.
The grant price with respect to a freestanding SAR or an SAR granted in
tandem with an option is the fair market value of the Stock on the date of the
grant. Upon exercise of an SAR, the participant is entitled to receive up to,
but no more than, an amount in cash or Stock equal to the excess of the fair
market value of the shares with respect to which the SAR is exercised
(calculated as of the exercise date) over the grant price of the SAR. Payment
by the Company upon a participant's exercise could be in cash or Stock, as the
Committee may determine. With respect to SARs granted together with options,
any related option will no longer be exercisable to the extent the SAR is
exercised and the exercise of any option will cancel the related SAR to the
extent of such exercise.
The changes in option shares outstanding during the past three years are
as follows:
Option Price
shares per share
Balance, January 1, 1995 230,794 2.25 - 5.25
Options terminated (67,794) 5.00 - 5.25
Options granted 16,000 2.25 - 5.00
Balance, December 31, 1995 179,000 2.25
Options terminated upon
exercise of SAR s (30,000) 2.25
Balance, December 31, 1996 149,000 2.25
Options terminated upon
exercise of SAR s (17,000) 2.25
Balance, December 31, 1997 132,000 2.25
During 1997, 17,000 SAR s were exercised, resulting in cash payments of
$24,708 based on an average market price of $3.70 on the dates of exercise. At
December 31, 1997, 133,117 shares were reserved for options which are available
to be granted and all of the 132,000 outstanding options were exercisable.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123 - Accounting for Stock-Based Compensation. As permitted by the statement,
the Company has elected to continue to account for stock-based compensation
using the intrinsic value method under Accounting Principles Board Opinion
No. 25. Accordingly, no compensation expense has been recognized for stock
options. The Company believes the computation of compensation expense based on
the fair value method of accounting, as defined in SFAS No. 123, would have no
material effect on the results of operations.
17. INCOME TAXES
Under tax laws in effect prior to 1984, a portion of the life insurance
companies' gain from operations was not currently taxed 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 for each company
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 to shareholders
in excess of Shareholders' Surplus as defined by prior law, or
(c) A company ceases to qualify for taxation as a life insurance
company.
At December 31, 1997, the Policyholders Surplus Account for one of the
insurance subsidiaries exceeded the prescribed maximum by approximately $1.1
million, resulting in an additional tax liability of approximately $372,000,
which has been included in the Company s 1997 financial statements. At December
31, 1997 the Policyholders' Surplus Accounts for the life insurance companies
combined totaled approximately $439,000. Based on its current plans, the
Company does not believe it is probable that it 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, 1997
and 1996 are as follows:
(in thousands) 1997 1996
Deferred tax liabilities:
Fixed maturities $28 $33
Deferred policy acquisition
costs 4,614 6,366
Other 168 359
4,810 6,758
Deferred tax assets:
Future policy benefits
and financial reinsurance 5,252 5,796
Net operating loss carryforwards 2,011 1,589
Other 225 301
7,488 7,686
Valuation allowance for
deferred tax assets (2,233) (1,224)
5,255 6,462
Net deferred tax liability (asset) ($445) $296
Significant components of income tax expense (benefit) are as follows:
(in thousands) 1997 1996 1995
Current:
Federal ($18) ($539) ($106)
State 56 10 65
Total current 38 (529) (41)
Deferred (273) (3) (474)
Income tax benefit related to
continuing operations (235) (532) (515)
Income tax expense (benefit) included
with discontinued operations:
Current (412) 1,392 177
Deferred (462) (567) (65)
(874) 825 112
Total income tax expense
(benefit) ($1,109) $293 ($403)
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 income tax expense or benefit and the expected Federal income tax
expense at the applicable statutory rates is as follows:
(in thousands) 1997 1996 1995
Loss from continuing
operations before
income tax benefit ($1,676) ($2,269) ($1,944)
Income tax benefit at
34% statutory
rate on pre-tax loss (570) (771) (661)
Tax related to decrease in
Policyholders
Surplus Account 372
Effect of rate difference on net
operating loss carryback 288
Adjustment of prior
year s income tax expense (67) (8) 50
Dividends received deduction (6) (11) (10)
State income taxes 36 17 35
Items not includable for
tax purposes 34 20 12
Other, net (34) (67) 59
Actual income tax benefit ($235) ($532) ($515)
The Company and all but one of its subsidiaries file a consolidated
Federal income tax return. One insurance company subsidiary files a separate
return. At December 31, 1997 the life insurance companies have available
approximately $5.9 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 companies. Approximately $3.6 million of these net
operating losses are subject to limitations on their use under Internal Revenue
Code Section 382 and the consolidated return regulations. This operating loss
will expire in 2004. The remaining $2.3 million of net operating losses will
expire in 2009 and 2012.
18. 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.
Years ended December 31,
(in thousands, except per share amounts) 1997 1996 1995
Loss from continuing operations ($1,441) ($1,737) ($1,429)
Preferred stock dividends (409) (409) (409)
Accretion of carrying value of
preferred stock (36) (36) (36)
Numerator for basic loss
per share - loss attributable
to common shareholders (1,886) (2,182) (1,874)
Effect of dilutive securities 0 0 0
Numerator for diluted loss per share ($1,886) ($2,182) ($1,874)
Denominator for basic loss per share -
weighted average shares 2,601 2,614 2,634
Effect of dilutive securities 0 0 0
Denominator for diluted loss per share 2,601 2,614 2,634
Basic and diluted loss per common share ($0.73) ($0.83) ($0.71)
The preferred stock is convertible into 713,275 shares of common stock
(see Note 15). Options to purchase 132,000 common shares were outstanding at
December 31, 1997 (see Note 16). None of the common shares contingently issu-
able upon the conversion of the preferred stock or upon the exercise of the
stock options have been included in the computation of diluted per share
information because the effect would be antidilutive.
19. 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 planned disposal of its credit insurance business in the second
quarter of 1998, the Company has no remaining business segments.
As discussed in Note 5, following the sale of its credit insurance
business, the Company intends to liquidate its remaining assets, provide for
its liabilities, redeem its preferred stock and distribute all remaining cash
to its common shareholders pursuant to a Plan of Liquidation and Dissolution.
The Company s income or loss from continuing operations now consists
principally of (i) earned premiums and related costs associated with an
insignificant block of extended service contract business which is in run-off,
(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 will be
received from LOTS over a five- year period, and because any distribution which
may be due to the Company from the contingency fund cannot be determined
until September 30, 2002, the Company will be unable to make a final
distribution to its common shareholders until late in 2002.
20. REGULATORY MATTERS
In connection with the proposed sale of the Company s September 30, 1997
inforce block of credit insurance to LOTS (pursuant to reinsurance agreements
which the insurance subsidiaries have entered into with American Republic), the
insurance subsidiaries filed the reinsurance agreements with the insurance
regulators in their respective domiciliary states and have obtained the
required regulatory approval. In connection with the sale of the Company s
Arizona- domiciled insurance company to LOTS, LOTS has filed documents with
the Arizona Insurance Department in order to obtain its approval. This Form A
filing is currently under review by the Arizona insurance regulators.
In June 1997, the Company redomesticated its North Carolina insurance
subsidiary to the state of Texas in connection with the sale of the subsidiary
in August 1997 to Safeguard Health Enterprises, Inc. located in Anaheim,
California. The redomestication was required by the North Carolina Insurance
Department in order to sell the subsidiary, since that department no longer
permits North Carolina domestic companies to have their principal administra-
tive offices located outside the state. The sale of the stock of the
subsidiary resulted in a gain to the Company of approximately $234,000.
In September 1996, the Delaware Insurance Department notified Consumers
Life that its level of investments in subsidiaries exceeded the amount permit-
ted under Delaware Insurance laws by approximately $1.5 million and that the
company s capital and surplus should be reduced by the amount of such excess.
As indicated above, the company sold one of its subsidiaries in August 1997,
resulting in the elimination of the excess investment in subsidiaries problem.
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, 1997, each of the Company's insurance
subsidiaries have more than sufficient capital to meet the NAIC's RBC
requirements. However, if the effects of the surplus relief reinsurance
treaties are excluded from the statutory financial statements, certain of the
insurance subsidiaries would not meet minimum required RBC levels.
The Company has received correspondence from and conducted discussions
w i th various state insurance departments concerning the surplus relief
reinsurance agreements, capital levels and unprofitable operations of certain
of the Company s insurance subsidiaries. These insurance departments have
indicated their expectation that the insurance subsidiaries would be sold or
merged or otherwise raise additional capital. Failure to complete the
reinsurance and related transactions with American Republic and LOTS could
subject the Company's insurance subsidiaries to possible sanctions which may
include, among other things, restrictions on operations, mandatory asset
dispositions and other forms of regulatory intervention. The financial
statement impact, if any, of such regulatory actions cannot presently
be determined.
21. SUBSEQUENT EVENTS
On January 1, 1998, substantially all of the Company s former marketing
personnel, who resigned from the Company on December 31, 1997, became employees
of LOTS pursuant to the terms of the Asset Purchase Agreement. In addition,
LOTS assumed administrative responsibilities for all of the Company s credit
insurance business as of that date.
On February 17, 1998, the Delaware Insurance Department approved the
reinsurance transaction between Consumers Life and American Republic whereby,
effective January 1, 1998, Consumers Life will reinsure its September 30, 1997
block of inforce credit insurance business and all new credit insurance
business produced on or after October 1, 1997 to America Republic. On March
30, 1998, the Ohio Insurance Department approved a similar reinsurance
transaction between Investors Fidelity and American Republic involving
that subsidiary s September 30, 1997 inforce business and new business
issued subsequently.
On March 24, 1998, the Company s preferred and common shareholders, each
voting separately as a class, approved the sale of the Company s
September 30, 1997 inforce block of credit insurance to LOTS and also
approved the Company s Plan of Liquidation and Dissolution. The sale of the
insurance business will be accomplished through reinsurance agreements which
were entered into in January 1998 between American Republic, LOTS
financial partner, and each of the Company s two credit insurance
subsidiaries. The reinsurance transactions are expected to be settled in
April 1998, although the Company has included the estimated loss from these
transactions in its 1997 financial statements (see Note 5). Under the Plan
of Liquidation and Dissolution, the Company will ultimately be dissolved
after distributing all of its remaining assets to its shareholders, as
discussed in Note 5.
QUARTERLY FINANCIAL DATA
(UNAUDITED)
1997
(in thousands. except 1st Quarter 2nd Quarter 3rdQuarter 4th Quarter
per share amounts) (Restated) (Restated) (Restated)
Total revenues - continuing operations ($49) $271 ($18) ($164)
Loss from continuing operations before
income tax expense (benefit) ($262) ($86) ($104) ($1,224)
Income tax expense (benefit) (124) 7 (79) (39)
Loss from continuing operations (138) (93) (25) (1,185)
Discontinued operations (472) (604) 127 (3,970)
Net income (loss) ($610) ($697) $102 ($5,155)
Per share data:
Loss from continuing operations ($0.10) ($0.08) ($0.06) ($0.49)
Discontinued operations (0.18) (0.23) 0.05 (1.53)
Net loss ($0.28) ($0.31) ($0.01) ($2.02)
1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(Restated) (Restated) (Restated) (Restated)
Total revenues-continuing operations $219 $163 $35 ($39)
Loss from continuing operations before
income tax expense (benefit) ($444) ($373) ($512) ($940)
Income tax expense (benefit) (124) 68 (275) (201)
Loss from continuing operations (320) (441) (237) (739)
Discontinued operations (104) 198 12 397
Net loss ($424) ($243) ($225) ($342)
Per share data:
Loss from continuing operations ($0.16) ($0.21) ($0.14) ($0.32)
Discontinued operations (0.04) 0.07 0.01 0.15
Net loss ($0.20) ($0.14) ($0.13) ($0.17)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The firm of Ernst & Young LLP ("E&Y") served as the Company's Independent
Auditors from October 23, 1990 to November 26, 1996. On that date, E&Y advised
the Company that it could no longer continue as the Company's independent
public accountants, and that it could not perform the audit of the Company's
1996 financial statements. E&Y made this determination because it had provided
certain financial advisory services to the Company in connection with the
Company's efforts to sell or merge its business operations. These services, in
E&Y's judgment, impaired the firm's independence as it related to the Company's
1996 financial statements. E&Y further advised the Company that its
independence with respect to the Company's 1995 financial statements was not
impaired; however, E&Y recommended that the Company retain new auditors to
re-audit the 1995 financial statements to avoid any delays that might otherwise
arise in the filing and review of a proxy statement covering a proposed
merger of the Company with a subsidiary of LaSalle, or periodic reports to
be filed thereafter.
E&Y's report on the Company's financial statements for 1995 did not
contain an adverse opinion or disclaimer of opinion, nor was the report
qualified or modified as to uncertainty, audit scope or accounting principles.
Further, through November 26, 1996, there were no disagreements between the
Company and E&Y on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure and no reportable events
have occurred.
E&Y's decision that it could not perform the audit of the Company's 1996
financial statements was acknowledged by the Audit Committee of the Company's
Board of Directors on November 26, 1996. On the same date, the Audit Committee
acted to retain Arthur Andersen LLP to perform the audit of the Company's 1996
financial statements and the re-audit of the 1995 financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of the Company is currently divided into three (3)
groups, with the directors in each group serving terms of three (3) years and
until their successors are duly elected and qualified.
Rev. Sterling P. Martz, a director with the Company since 1968, reached
the mandatory age for retirement established by the Board of Directors on July
31, 1996. However, at its July 1996 meeting, the Board of Directors requested
that Rev. Martz continue to serve as a Director until the planned merger with
LaSalle was completed or the Company otherwise disposed of its business
operations. Rev. Martz is expected to retire from the Board effective March 24,
1998, as further discussed below.
Due to the on-going attempts by the Company and its Board of Directors 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 is completed. It is expected that following
the approval of the Sale of Assets and the Plan of Liquidation by the
shareholders of the Company, three (3) of the six (6) current Directors will
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 Directors who are expected to continue to serve are James
C. Robertson, Chairman, Edward J. Kremer and John E. Groninger. Those
Directors retiring effective March 24, 1998 are Leon A. Guida, Dr. Robert G.
Little, Jr. and Rev. Sterling P. Martz.
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, 1998.
PRINCIPAL OCCUPATION FOR THE PAST
NAME FIVE YEARS, OFFICE (IF ANY) HELD IN DIRECTOR TERM
(AGE) THE COMPANY AND OTHER INFORMATION SINCE EXPIRES
Leon A. Guida Retired, Former Co-Owner and General 1986 1996
(73) Manager, S & H Pontiac, Harrisburg,
PA
*James C. Robertson Chairman of the Board, President and 1967 1996
(66) Chief Executive Officer of the
Company
*Sterling P. Martz Retired Clergyman, Winfield, PA 1968 1996
(77)
*Edward J. Kremer President, Hanna, Kremer & Tilghman 1983 1997
(67) Insurance, Inc., Salisbury, MD;
Director and Chairman of the Board,
Delmar Bancorp, Delmar, MD
John E. Groninger President, John E. Groninger, Inc., 1968 1998
(71) Juniata Concrete, Inc., Republic
Development Corp., and Juniata Lumber
& Supply Co., Mexico, PA; Director,
Juniata Valley Financial Corp.,
Mifflintown, PA
*Robert G. Little, Jr., Partner, Little's Veterinary 1966 1998
D.V.M. (68) Hospital, Williamsport, PA; Director,
Bucktail Bank and Trust Co.,
Williamsport, PA
* Denotes Member of Executive Committee
The following information is provided as of March 1, 1998 for each
e x ecutive officer of the Company and the principal executives of its
subsidiaries. All of the executive officers listed also serve as executive
officers of the life insurance subsidiaries. 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 66 President and Chief Executive Officer
William J. Walsh, Jr. 55 Executive Vice President and Chief
Operating Officer
R. Fredric Zullinger 49 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 current-
ly serves as Chairman of the Board, President and Chief Executive Officer of
the Company.
Mr. Walsh joined the Company in 1976 as Vice President-Finance. He was
appointed Executive Vice President and Chief Operating Officer of the Company
in 1985 and currently serves in that capacity.
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
T h e following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1997, 1996 and 1995 of the Chief Executive Officer and the
n a m e d executive officers whose annual compensation exceeded $100,000
(hereinafter referred to as "named executive officers").
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
OTHER ALL
ANNUAL OTHER
Name and Principal Position Year SALARY BONUS COMPENSATION COMPENSATION
James C. Robertson, 1997 - 0 - (1) - 0 - $5,700 (2) - 0 -
Chairman, President and
Chief Executive Officer
1996 $88,998 (1) - 0 - $7,950 (2) $73,016 (3)
1995 $145,000 - 0 - $6,300 (2) - 0 -
William J. Walsh, Jr., 1997 $114,000 - 0 - - 0 - - 0 -
Executive Vice President
and Chief Operating Officer
1996 $114,000 - 0 - - 0 - $18,605 (3)
1995 $114,000 - 0 - - 0 - - 0 -
Ralph R. Byrnes, 1997 $112,869 (4) - 0 - - 0 - - 0 -
Senior Vice President,
Automotive Resource Division
1996 $109,500 $30,000 - 0 - $20,362 (3)
1995 $109,500 - 0 - - 0 - - 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. In 1996 Mr. Robertson earned $83,654
as a salaried employee and $5,344 as a non-salaried officer of the
Company. Mr. Robertson was not compensated for any services performed in
his capacity as President and CEO of the Company in 1997.
(2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman of
the Board of the Company, including fees which were deferred.
(3) Represents distribution from the Company s Excess Benefit Plan which was
terminated in July 1997.
(4) Mr. Byrnes resigned as an Executive Officer and employee of the Company
effective December 31, 1997 and became an officer and employee of LOTS
effective January 1, 1998, as a result of the sale of the credit insurance
accounts of the Company to LOTS.
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 1997.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
The table below presents information with respect to the stock options and
stock appreciation rights ("SARS") awarded under the Company's 1989 Stock
Incentive Plan ("1989 Plan") to the named executive officers and held by them
at December 31, 1997. The 1989 Plan was approved by the shareholders, and
provides for the grant of both options that qualify as incentive stock options
under the Internal Revenue Code and non-qualified (non-statutory) stock
options. The option price is 100% of the fair market value on the date of
grant ($2.25) and the maximum term to exercise the grant is six (6) years.
The options have accompanying SARS which permit the holder to receive common
stock or cash equal to the excess of the fair market value covered by the
option over the option price. To the extent that accompanying SARS are
exercised, the corresponding stock options are canceled and the shares subject
to the option are charged against the maximum number of shares authorized
under the 1989 Plan. When a stock option is exercised, the related SAR is
likewise surrendered. All of the options listed in the table were granted in
1993 in place of an equal number of options that were awarded in May 1989
and subsequently canceled.
Number of Securities
Underlying Value of
Unexercised Unexercised
Options/SARS In-The-Money Options/SARS
Shares at Fiscal at Fiscal
Acquired Value Year-End (#) Year-End ($)(2)
on Exercise Realized Exercisable (E) Exercisable (E)
Name (#) ($) Unexercisable (U) Unexercisable (U)
William J. Walsh, Jr. - 0 - - 0 - 25,000 (E) - 0 -
Ralph R. Byrnes (1) - 0 - - 0 - 25,000 (E) - 0 -
(1) Mr. Byrnes resigned as an Executive Officer and employee effective
December 31, 1997 and became an officer and employee of LOTS effective
January 1, 1998 as a result of the sale of the credit insurance accounts
of the Company to LOTS.
(2) The values in this column are based on the difference between the market
value of the Company s common stock on December 31, 1997 and the exercise
price of the options.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Personnel Committee of the Board of Directors (the "Committee")
administers and approves 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 and review
with the full Board all aspects of compensation. In addition to reviewing and
evaluating the performance and compensation levels of the CEO and the other
Executive Officers, the Committee considers management succession and the
implementation and administration of the Company's various incentive plans,
including the stock option and bonus plans.
COMPENSATION PHILOSOPHY
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. Each year the Committee,
along with the CEO, reviewed an annual salary plan for the Company's officers
which was based on industry, peer group and national surveys along with
performance judgments as to the past and expected future contributions of the
individual officers.
The compensation for the CEO and the other Executive Officers has
consisted of a base salary, potential annual bonuses and long-term stock option
incentives. The Committee considered the total compensation for the CEO and
each of the Executive Officers in establishing each element of compensation.
Base salaries were fixed at levels competitive in the market compared to other
comparably sized companies with officers having equal responsibilities engaged
in similar businesses as the Company. With the exception of the senior market-
ing Executive Officer, who resigned effective December 31, 1997 as a result of
the LOTS transaction, the CEO and remaining Executive Officers of the Company
do not have employment contracts with the Company. Annual bonuses and long
term stock option incentives have been used by the Company as a form of
compensation and are tied to the Company's success at achieving significant
financial performance goals, as well as increasing shareholder value. Under
the Company's bonus program, the CEO and the other Executive Officers were
paid a percentage of their annual base salary as determined by pre-established
increases to the Company's pre-tax earnings. Since the criteria established by
the Company for awarding bonuses has not been met, no bonuses have been earned
by the CEO and the other Executive Officers since 1989 under this bonus
program. Grants of stock options with accompanying stock appreciation
rights ("SARS") have been used by the Company to retain and motivate the CEO
and the other Executive Officers to improve the long-term stock market
performance of the Company's common stock. In its decision to grant incentive
stock options the Committee looks to the expected value of the Company's common
stock during the period of time available to exercise the options. No stock
options or SARS were granted by the Company to the CEO or the other Executive
Officers during fiscal year 1997.
CEO COMPENSATION
In 1996, Mr. Robertson stated his intention to retire from the Board of
Directors and resign as President and CEO upon the closing of the merger or the
sale of the Company. While Mr. Robertson continues to serve in these capaci-
ties, 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.
In 1997 Mr. Robertson did not receive any compensation in his capacity as a
non-salaried employee while serving as President and CEO, however, he continues
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 reasonable based upon Mr. Robertson's
experience and knowledge of the Company during this period in which the Company
is attempting to sell its assets and liquidate the Company.
This report is submitted by the Personnel Committee of the Company's Board
of Directors.
Leon A. Guida, Chairman John E. Groninger Rev. Sterling P. Martz
STOCK PRICE PERFORMANCE COMPARISON
CUMULATIVE TOTAL RETURN
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
Consumers Financial Corp. 100 123 115 141 154 43
(CFIN)
Peer Group (CFIN) 100 111 104 158 194 330
NASDAQ Stock Market (U.S) 100 115 112 159 195 240
*Assumes $100 invested on December 31, 1992 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
a r e a s follows: ACCEL International Corporation, CNL Financial
Corporation, American Bankers Insurance Group and US Life Corporation.
PENSION PLAN BENEFITS
T h e Company has a defined benefit plan, the Consumers Financial
Corporation 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. The Plan was amended effective
January 1, 1989 to reflect changes mandated by ERISA and, as of the same date,
a supplemental non-qualified Excess Benefit Plan was adopted covering certain
employees, primarily those with higher compensation levels. 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 Company also terminated the Excess Benefit Plan in 1996 and distributed
the plan assets to the participants.
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 compensa-
tion, 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, 1997, the estimated monthly defined benefit payable upon
retirement at age 65 for each of the named executive officers is as follows:
William J. Walsh, Jr., $2,429 and Ralph R. Byrnes, $2,794. Amounts shown are
straight-life annuity amounts and are not reduced by a joint and survivorship
provision which is available to the named executive officers. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 1, 1998, 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
Beneficial of
Title of Class Name and Address of Beneficial Owner Ownership Class
Common Consumers Financial Corporation and 240,630 8.0%
Subsidiaries Employee Stock Ownership Plan
(ESOP) (1)1200 Camp Hill By-Pass, Camp Hill,
PA 17011
Common Various wholly-owned subsidiaries 422,955 14.0%
of Consumers Financial Corporation,
1200 Camp Hill By-Pass,Camp Hill, PA 17011
(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.
The following table sets forth as of March 1, 1998, 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
TITLE OF Name of Beneficial of
CLASS Beneficial Owner Ownership (1) Class
(a)
Common Groninger, John E. 57,521 (2) 1.9
Preferred 22,410 (3) 4.4
Common Guida, Leon A. 3,000 *
Common Kremer, Edward J. 1,607 *
Common Little, Jr., Robert G. 9,143 (4) *
Preferred 218 (4) *
Common Martz, Sterling P. 4,000 (4) *
Preferred 1,400 (4) *
Common Robertson, James C. 99,775 3.3
Preferred 5,235 (5) 1.0
(b)
Common Walsh Jr., William J. 62,813 (6) 2.1
Common Zullinger, R. Fredric 54,523 (7) 1.8
(c)
Common Directors and Executive 292,382 (8) 9.5
Preferred Officers as a Group 29,263 5.7
(8 individuals)
* Denotes less than 1%
(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) Shared investment and voting power with their wives for the shares
indicated.
(5) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's
wife.
(6) Includes 21,284 shares for which Mr. Walsh has voting power as to shares
held for him in the Employee Stock Ownership Plan and 25,000 shares that
a r e acquirable through the exercise of stock options and stock
appreciation rights.
(7) Includes 14,835 shares for which Mr. Zullinger has voting power as to
shares held for him in the Employee Stock Ownership Plan, and 25,000
shares he has a right to acquire through the exercise of stock options and
stock appreciation rights.
(8) Includes shares that are acquirable through the exercise of stock
options and SAR s.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
W. John Daub III, a Director of the Company until his voluntary
resignation from the Board of Directors on April 23, 1996, is affiliated with
automobile dealerships that are master group policyholders of a life insurance
subsidiary of the Company. Those dealerships receive commissions from the
subsidiary in connection with credit insurance they sell. All commissions paid
to the dealerships affiliated with Mr. Daub are at rates comparable with
commissions paid to other non-affiliated parties. Total commissions on credit
insurance business paid by the subsidiary to the dealerships affiliated with
Mr. Daub during 1996 were $102,450.
In addition, in June 1989, the Daub Trust, a trust controlled by Mr. Daub,
purchased a reinsurance company from a life insurance subsidiary of the Company
for $155,000, its book value at that time. The Daub Trust paid $55,000 in cash
and gave the subsidiary a Note for $100,000, repayable with interest at a rate
which varies with the rate of interest earned by the reinsurance company on its
certificate of deposit investments. On December 31, 1989, the subsidiary
advanced to the Daub Trust an additional $12,000, increasing the total
outstanding loan to $112,000, plus accrued interest. The terms of the Note were
substantially the same as those which would have been offered to other non-
affiliated parties at that time. In March 1998, the note was repaid in full by
the Daub Trust.
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):
Report of Independent Public Accountants
Consolidated Balance Sheets-December 31, 1997 and 1996
Consolidated Statements of Operations - Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995
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:
(11) Statement regarding Computation of Earnings Per Common Share
(see Note 18 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K)
(21) Subsidiaries of Consumers Financial Corporation
(27) Financial Data Schedule
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997. On January 13, 1998, the Company filed a Form 8-K with
respect to (i) the Asset Purchase Agreement entered into by and among the
Company, two of its subsidiaries and LOTS, involving the sale to LOTS of
the Company s inforce block of credit insurance business, its credit
insurance and fee income accounts and all of the outstanding common stock
of one of the Company s subsidiaries, and (ii) the approval by the
Company s Board of Directors of a Plan of Liquidation and Dissolution in
conjunction with the LOTS transaction.
On March 13, 1998, the Company filed a Form 8-K to report that it had
received notices from NASDAQ stating that the Company s preferred and
common stock were not in compliance with certain NASD Marketplace Rules.
The notices further stated that the preferred and common stock were
scheduled to be delisted from the NASDAQ National Market effective March
16, 1998 and May 28, 1998, respectively. The Company reported that because
of its present plans to liquidate, it does not intend to take any steps to
come into compliance with the Marketplace Rules or to seek inclusion on
the NASDAQ Small Cap Market.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(in thousands)
Liabilities, Redeemable Preferred
Assets 1997 1996 Stock and Shareholders Equity 1997 1996
Investments, other than Liabilities:
investments in affiliates:
Fixed maturieis $1,304 Indebtedness to affiliates $267 $544
Other invested assets $67 $75 Dividend payable 109 114
67 1,379 Income taxes 296 1,290
Miscellaneous 418 41
Cash 433 186 Total liabilities 1,090 1,989
Investments in affiliates 2,117 8,867
Indebtedness of affiliates 4,866 4,765 Redeemable preferred stock:
Accrued investment income 7 Series A, 8 1/2 cumulative
convertible 4,688 4,693
Receivables 10 7
Property and equipment,
net of accumulated
depreciation 15 18 Shareholders equity:
Other assets 76 103 Common Stock 30 30
$7,584 $15,332 Capital in excess of stated value 7,989 7,966
Equity in net unrealized
appreciation of debt and
equity securities of
subsidiaries 54 70
Retained earnings (deficit) (4,796) 2,009
Treasury stock (1,471) (1,425)
Total shareholders equity 1,806 8,650
$7,584 $15,332
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands) 1997 1996 1995
(Restated) (Restated)
Revenues:
Net investment income $19 $16 $5
Net realized investment losses (10)
Other income 163 2 16
Total revenues 172 18 21
Expenses:
General expenses 563 765 221
Taxes, licenses and fees 22 9 14
Writeoff of intangible assets 50 143 145
Total expenses 635 917 380
Loss before income taxes (463) (899) (359)
Income taxes 131 103 210
Loss before equity in
income (loss) of
unconsolidated subsidiaries (594) (1,002) (569)
Equity in income (loss) of
unconsolidated subsidiaries:
Continuing operations (1,174) (735) (860)
Discontinued operations (4,592) 503 (172)
(5,766) (232) (1,032)
Net loss ($6,360) ($1,234) ($1,601)
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands) 1997 1996 1995
Cash flows from operating activities:
Net loss ($6,360) ($1,234) ($1,601)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Income taxes (1,004) 741 (29)
Change in receivables 7 127 31
Change in other liabilities 377 67 47
Equity in loss of
unconsolidated subsidiaries 6,338 998 1,736
Amortization of intangibles 50 123 217
Other 37 17 483
Total adjustments 5,805 2,073 2,485
Net cash provided by (used in)
operating activities (555) 839 884
Cash flows from investing activities:
Purchase of investments (3) (2,115) (3)
Maturity of investments 3
Sale of investments 1,304 808
Investments in and indebtedness
to affiliates (26) 2,044 827
Net cash provided by investing
activities 1,275 737 827
Cash flows from financing activities:
Principal payments on debt (1,159) (1,050)
Purchase of treasury stock (64) (50) (114)
Cash dividends to preferred
shareholders (409) (409) (409)
Net cash used in
financing activities (473) (1,618) (1,573)
Net increase (decrease) in cash 247 (42) 138
Cash at beginning of year 186 228 90
Cash at end of year $433 $186 $228
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, 1997, 1996 AND 1995
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. Cash dividends received from subsidiaries in 1997, 1996 and 1995 amounted
to $425,000, $3,343,000 and $827,000, respectively.
3. The Company files a consolidated Federal income tax return with its non-
life insurance company subsidiaries and with its consolidated life
insurance company subsidiaries, except for Consumers Reinsurance Company,
which files a separate return. With respect to the consolidated non-life
sub-group, taxes are allocated proportionately to each subsidiary within
the consolidated group. Tax expense is allocated to those subsidiaries
reporting taxable income, while a tax benefit is allocated to those
companies reporting a taxable loss. For the consolidated life insurance
sub-group, tax expense is allocated only to those companies in the group
reporting taxable income. Similarly, tax benefits for the life sub-group
are allocated only to those companies reporting a taxable loss.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Other
Deferred policy
policy Future claims and
acquisition policy Unearned benefits
Segment costs benefits premiums payable
Year ended December 31, 1997:
Automotive Resource Division: (b)
Credit insurance and fee income business $13,545 $11,785 $49,057 $2,181
Assumed warranty business 25 937 195
Individual Life Insurance Division (b) 9,682 163
Other (c)
Total $13,570 $21,467 $49,994 $2,539
Year ended December 31, 1996 (d):
Automotive Resource Division: (b)
Credit insurance and fee income business $16,378 $11,420 $54,848 $2,333
Assumed warranty business 36 1,330 178
Individual Life Insurance Division (b) 2,535 23,966 225
Other (c)
Total $18,949 $35,386 $56,178 $2,736
Year ended December 31, 1995 (d):
Automotive Resource Division: (b)
Credit insurance and fee income business $17,603 $10,411 $56,549 $2,288
Assumed warranty business 39 1,394 160
Individual Life Insurance Division (b) 4,284 26,171 408
Other (c)
Total $21,926 $36,582 $57,943 $2,856
(a) Excludes realized investment gains.
(b) The assets and liabilities of the discontinued credit
insurance and individual life insurance businesses have not
been separately stated on the consolidated balance sheets.
(c) Represents operations of Consumers Financial Corporation.
(d) Certain amounts for 1996 and 1995 have been restated to
reflect the credit insurance and related fee income business
as a discontinued operation.
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, 1997:
Automotive Resource Division: (b)
Credit insurance and fee income
business
Assumed warranty business $375 $44 $460 $10 $1
Individual Life
Insurance Division (b)
Other (c) 171 19 1,638
Total $546 $63 $460 $10 $1,639
Year ended December 31, 1996 (d):
Automotive Resource Division: (b)
Credit insurance and
fee income business
Assumed warranty business $450 $42 $581 $12 $1,110
Individual Life Insurance Division (b)
Other (c) 2 17 1,008
Total $452 $59 $581 $12 $2,118
Year ended December 31, 1995 (d):
Automotive Resource Division: (b)
Credit insurance and
fee income business
Assumed warranty business $437 $35 $512 $7 $1,327
Individual Life
Insurance Division (b)
Other (c) 16 5 471
Total $453 $40 $512 $7 $1,798
(a) Excludes realized investment gains.
(b) The assets and liabilities of the discontinued credit
insurance and individual life insurance businesses have not
been separately stated on the consolidated balance sheets.
(c) Represents operations of Consumers Financial Corporation.
(d) Certain amounts for 1996 and 1995 have been restated to
reflect the credit insurance and related fee income business
as a discontinued operation
SCHEDULE IV
REINSURANCE
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Percentage
(in thousands) Ceded to Assumed of amount
Gross other from other Net assumed
Segment amount companies companies amount to net
Year ended December 31, 1997:
Life insurance in-force $0 $0
Premium income:
Assumed warranty $356 $356 100.0%
$356 $356 100.0%
Year ended December 31, 1996 (a):
Life insurance in-force $0 $0
Premium income:
Assumed warranty $417 $417 100.0%
$417 $417 100.0%
Year ended December 31, 1995 (a):
Life insurance in-force $0 $0
Premium income:
Assumed warranty $394 $394 100.0%
$394 $394 100.0%
(a) Certain amounts for 1996 and 1995 have been restated to reflect the
presentation of the credit insurance and fee income business as a
discontinued operation.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Additions
Charged to
Balance at Charged to other Balance at
beginning costs and accounts, Deductions, end of
Description of period expenses describe describe period
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 (a) 436
$1,341 $1,210 $832 $1,719
Year ended December 31, 1996
Provision for permanent
decrease in market
value of:
Equity securities $15 $15 (b)
Mortgage loans 100 $100
Other real estate 493 $35 400 (b) 128
Other invested assets 75 75
Provision for uncollectible
receivables 1,093 233 288 (a) 1,038
$1,701 $343 $703 $1,341
Year ended December 31, 1995
Provision for permanent
decrease in market
value of:
Equity securities $15 $15
Mortgage loans 200 $100 (c) 100
Other real estate 300 $193 493
Provision for uncollectible
receivables 1,091 79 77 (a) 1,093
$1,606 $272 $177 $1,701
(a) Write-off of bad debts against reserve
(b) Write-off of reserve for assets sold
(c) Loans transferred to real estate through foreclosure
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 24, 1998
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 24, 1998
and Chairman of the
Board (Chief
Executive Officer)
/S/ William J. Walsh Executive Vice March 24, 1998
President (Chief
Operating Officer)
/S/ R. Fredric Zullinger Senior Vice March 24, 1998
President and
Treasurer (Chief
Financial Officer)
/S/ John E. Groninger Director March 24, 1998
/S/ Leon A. Guida Director March 24, 1998
/S/ Edward J. Kremer Director March 24, 1998
/S/ Dr. Robert G. Little
Jr., D.V.M. Director March 24, 1998
/S/ Rev. Sterling P. Martz Director March 24, 1998
EXHIBIT 21
SUBSIDIARIES OF CONSUMERS FINANCIAL CORPORATION
Consumers Financial Corporation (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
Investors Consolidated Reinsurance, Ltd. 31-1057420
Consumers Limited 25-1493313
Consumers II Limited 25-1718532
Consumers Life Insurance Company owns 100% of the outstanding common stock of
the following subsidiaries:
Consumers Reinsurance Company 86-0414938
Investors Fidelity Life Assurance Corp. 31-0646177