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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, 2001
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______.
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
(717) 730-6306
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
------------------- ------------------------------
registered
- ----------
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange 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) Not listed
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. [ ]
The number of outstanding common shares of the registrant as of March 1,
2002 was 2,576,810. Based on the closing price on March 1, 2002, the aggregate
market value of common stock held by non-affiliates of the registrant was
$103,072.
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") was formed in 1966 as 20th
Century Corporation (a Pennsylvania corporation) and adopted its present name in
1980. The Company is an insurance holding company which, until late 1997, was a
leading provider, through its subsidiaries, of credit life and credit disability
insurance in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and
Virginia. In connection with its credit insurance operations, the Company also
marketed, as an agent, an automobile extended service warranty product. The
Company operated through various wholly-owned subsidiaries since it was formed;
however, all of these subsidiaries have either been sold or liquidated and
dissolved except for Consumers Life Insurance Company, a Delaware life insurance
company ("Consumers Life"). In January 2002, the Company signed an agreement to
sell Consumers Life and its state insurance licenses. The sale transaction must
be approved by the Delaware Department of Insurance.
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 assumed universal life business
back to the direct writer of the business. The Company, through a wholly-owned
subsidiary, 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 the auto auction subsidiary in
November 1996.
On March 24, 1998, the Company's shareholders approved the sale of the
Company's credit insurance and related products business, which was the
Company's only remaining business operation following the previous sales, as
discussed below, of its individual life insurance and its auto auction
businesses. The credit insurance business was sold to Life of the South
Corporation, a Georgia-based financial services holding company ("LOTS").
Pursuant to the terms of the agreements the Company entered into with LOTS and
American Republic Insurance Company ("American Republic"), LOTS' financial
partner in the transaction, the Company sold (i) its credit insurance and fee
income accounts to LOTS, (ii) its September 30, 1997 inforce block of credit
insurance business to American Republic and (iii) one of its wholly-owned
subsidiaries to LOTS.
In addition to approving the sale of the inforce credit insurance business,
at the Special Meeting on March 24, 1998, the Company's shareholders also
approved a Plan of Liquidation and Dissolution (the "Plan of Liquidation"),
pursuant to which the Company is now liquidating its remaining assets and
settling or providing for its liabilities. If the Board of Directors proceeds
with the Plan of Liquidation, the Company will eventually distribute its
remaining cash to its preferred shareholders. The Company does not expect to be
able to make any distribution to its common shareholders.
The Plan of Liquidation permits the Board of Directors to also consider
other alternatives to liquidating the Company if such alternatives are deemed by
the Board to be in the best interest of the Company and its shareholders. In
that regard, in February 2002, the Company entered into an option agreement (the
"Option Agreement") with a New York-based investor group. The Option Agreement
permits the investor group to acquire a 51% interest in the Company's common
stock for $108,000, which was deposited into an escrow account in March 2002.
The execution of the Option Agreement followed a review by the Board of
Directors of various proposals to acquire the Company. The option is exercisable
within 15 business days following the completion by the Company of a tender
offer to its preferred shareholders. The tender offer, if accepted by all of the
preferred shareholders, will result in the payment to those shareholders of
substantially all of the Company's remaining net assets. If the option is
exercised, the investor group intends to merge or otherwise combine certain
existing and start-up businesses into the Company. The Board considered a
transaction of this type in lieu of the Plan of Liquidation because it has the
potential to produce future value for the common shareholders while protecting
the rights of the preferred shareholders. As indicated in the preceding
paragraph, the common shareholders are not expected to receive any distribution
under the Plan of Liquidation. For additional information regarding the terms of
the Option Agreement, see Note 17 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
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 1513 Cedar Cliff Drive, Camp Hill,
2
Pennsylvania 17011. Its telephone number is (717) 761-4230.
OPERATIONS
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.
INVESTMENTS
The Company's insurance subsidiaries historically invested primarily in
fixed maturity securities (bonds) and, to a lesser extent, in mortgages with
terms which were generally seven years or less. Investments in mortgages allowed
the Company to obtain higher yields while maintaining maturities in the five to
seven year range. The Company's only remaining fixed maturity securities are
bonds which Consumers Life is required to maintain on deposit with various state
insurance departments. The Company's mortgage loan portfolio has declined
significantly during the past six years, from $9.9 million at the end of 1994 to
$13,000 at December 31, 2001. The remaining loan in the portfolio is scheduled
to be paid in full by June 2002.
Since the approval of the Plan of Liquidation, the Company has maintained
all of its remaining investable funds in short-term securities in order to
provide the liquidity necessary to pay current expenses and dividends to
preferred shareholders and to eliminate the market risk associated with bond
investments. The Company also intends to invest the funds which arise from the
sale or liquidation of its investment in Consumers Life in short-term
securities. See Note 5 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K for information concerning investment
results for the years ended December 31, 2001, 2000, and 1999.
COMPETITION
Inasmuch as the Company no longer conducts any insurance or other
operations, it no longer competes with other organizations.
REGULATION
Consumers Life is subject to regulation and supervision in the states in
which it is licensed. The extent of such regulation varies from state to state,
but, in general, each state has statutory restrictions and a supervisory agency
which has broad discretionary administrative powers. Such regulation is designed
primarily to protect policyholders and relates to the licensing of insurers and
their agents, the approval of policy forms, the methods of computing financial
statement reserves, the form and content of financial reports and the type and
concentration of permitted investments. Consumers Life is also subject to
periodic examination by the Delaware Department of Insurance. Although this
subsidiary now has no direct policyholders, the Delaware Department continues to
monitor the company's statutory capital and surplus and other aspects of its
financial compliance with state insurance laws and regulations.
The dividends which a life insurance company may distribute are subject to
regulatory requirements based upon minimum statutory capital and surplus and/or
statutory earnings. Additionally, the amount of dividends a life insurance
company can pay is subject to certain tax considerations. See Notes 3 and 15 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K.
The Company is also subject to regulation under the insurance holding
company laws of the state of Delaware. These laws generally require insurance
holding companies and insurers that are subsidiaries of holding companies to
register and file certain reports, including information concerning their
capital structures, ownership, financial condition and general business
operations, and require prior regulatory agency approval of changes in control
of an insurer, most dividends and intercorporate transfers of assets within the
holding company structure.
EMPLOYEES AND AGENTS
As of March 1, 2002, the Company had only 2 full-time employees. On
January 1, 1998, all of the Company's sales personnel resigned and became
employees of LOTS in connection with the transactions discussed earlier in this
3
Item 1, and certain other administrative employees were terminated. During 1998,
1999 and 2000, six accounting and administrative employees were also terminated.
Consumers Life no longer has any licensed agents.
The Company maintains insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. There can be no
assurance that the Company will be able to continue to obtain such coverage in
the future or that it will not experience uninsured losses.
ITEM 2. PROPERTIES
From September 1989 to July 2000, the Company maintained its executive and
business offices in a building located at 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania. The office building contained approximately 44,000 square feet of
office space (approximately 39,000 square feet of leasable space). Prior to
1994, the Company leased the entire facility at an annual rental of $421,000,
plus insurance, taxes and utilities. In March of 1994, the Company exercised its
option to acquire a 50% interest in its home office building for $1.75 million,
which reduced the Company's annual rent on the portion of the building it did
not own to $204,000. The Company's lease terminated in July 1999.
As a result of the sale of all of its insurance operations and the adoption
of the Plan of Liquidation, the Company occupied only a small portion of the
leasable space in the office building. The Company subleased portions of the
building to third party tenants pursuant to various short-term leases and
received $14,000 and $175,000 in 2000 and 1999, respectively, from these
subleases. In August 2000, the Company and its co-owner sold the office
building. The Company reported a gain of approximately $9,000 on the sale
transaction and also collected approximately $56,000 in penalties from the buyer
as a result of the buyer's delays in closing on the transaction.
The Company now leases approximately 1,200 square feet of office space on a
month-to-month basis at 1513 Cedar Cliff Drive, Camp Hill, Pennsylvania. The
monthly rent for this facility is $1,300. The Company also leases approximately
1,100 square feet of warehouse space which it utilizes for the storage of its
records. The monthly rent for this space is approximately $640. The warehouse
lease, which terminates on May 31, 2002, is renewable for additional one-year
terms at nominal increases in rent each year. Both the office space and the
warehouse space are adequate for the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several lawsuits which are ordinary and routine
litigation incidental to the business operations it previously conducted. None
of these lawsuits is expected to have a materially adverse effect on the
Company's net assets in liquidation or changes in its net assets in liquidation.
See Note 12 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K for additional information concerning litigation
matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2001 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Consumers Financial Corporation common stock was traded on the NASDAQ
National Market System with a ticker symbol of CFIN until June 1, 1998 when it
was delisted by NASDAQ for non-compliance with NASDAQ's market value of public
float requirements. The Company's Convertible Preferred Stock, Series A, was
also traded on the NASDAQ National Market System until March 16, 1998, when it
was also delisted by NASDAQ for non-compliance with the public float requirement
of a minimum of 750,000 shares. Since the shareholders of the Company approved
the Plan of Liquidation and Dissolution on March 24, 1998, the Company did not
appeal the delisting decision for either the common or preferred stock, nor did
it take any steps to come into compliance with the new rules or attempt to seek
inclusion on the NASDAQ Small Cap Market.
Quarterly high and low bid prices for the Company's common and preferred
stock, based on information provided by The National Association of Securities
Dealers through the NASD OTC Bulletin Board, are presented below. Such prices do
not reflect prices in actual transactions and exclude retail mark-ups and
mark-downs and broker commissions.
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
2001 2001 2001 2001 2000 2000 2000 2000
------- ------- ------- ------- ------- ------- ------- -------
Common Stock
- ------------
High 0.02 0.01 0.10 0.08 0.10 0.15 0.14 0.08
Low 0.01 0.01 0.01 0.04 0.07 0.05 0.08 0.02
Convertible Preferred Stock
- ---------------------------
Series A
- --------
High 3.75 3.75 3.00 3.40 2.75 4.00 4.00 3.88
Low 3.75 1.62 1.62 2.05 2.00 2.50 2.50 3.00
As of March 1, 2002, there were 6,692 shareholders of record who
collectively held 2,576,810 common shares and 98 shareholders of record of the
Convertible Preferred Stock, Series A, who held 452,614 shares. The number of
recordholders presented above excludes individual participants in securities
positions listings.
Dividends on both the Company's common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. No common stock
dividends have been paid since 1994. See Note 13 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K for a description of
the restrictions on the Company's ability to pay dividends to common
shareholders. The Convertible Preferred Stock, Series A dividends are paid
quarterly and generally on the first day of January, April, July and October at
an annual rate of $.85 per share. Since the Company usually does not have
sufficient liquid funds to pay the preferred dividends, it must rely on
Consumers Life to provide it with the required funds. In that regard, all
distributions to the Company from Consumers Life are subject to approval by the
Delaware Insurance Department. See Note 3 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
5
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the Consolidated Financial Statements and the Notes thereto.
(NOT COVERED BY INDEPENDENT AUDITOR'S REPORT)
For the For the
period from period from
March 25, 1998 January 1, Year ended
(dollar amounts in thousands, Years ended December 31, to 1998 December 31,
except per share) 2001 2000 1999 December to 1997
31,1998 March 24, 1998
- ---------------------------------------------- ---------- ---------- --------- --------- ------------ --------------
Total revenues (excluding change
in unearned premiums) $ 261 $ 40
Premiums written (refunds) (4) (37)
Net investment income 60 63
Net return on average investments 4.8% 4.9%
- ---------------------------------------------- ---------- ---------- --------- --------- ------------ --------------
Loss from continuing operations (88) (1,441)
Discontinued operations 112 (4,919)
Net income (loss) 24 (6,360)
Basic and diluted income (loss) per
common share:
Loss from continuing operations (0.08) (0.73)
Discontinued operations 0.04 (1.89)
Net loss (0.04) (2.62)
- ---------------------------------------------- ---------- ---------- --------- --------- ------------ --------------
Increase (decrease) in net assets
in liquidation:
Excess of benefits and expenses
over revenues ($521) ($1,823) ($252) ($132)
Decrease (increase) in liability for
under funded pension plan 1,122 (388) (734)
Adjustment of assets to estimated net
realizable value 108 88
Adjustment of liabilities to estimated
settlement amounts 62 210
Preferred stock dividends (386) (391) (406) (307)
Adjustment of preferred stock to
estimated liquidation value 748 938 303 (175)
Other 51 92 62 16
Net decrease $ 0 $ 0 ($383) ($1,332)
- ---------------------------------------------- ---------- ---------- --------- --------- ------------ --------------
December 31,
---------- --------- --------- ------------ --------------
2001 2000 1999 1998 1997
---------- --------- --------- ------------ --------------
Total assets $ 3,021 $ 25,305 $ 44,748 $ 62,688 $ 85,035
Net assets in liquidation 0 0 0 383
Total debt 0 0 0 0 0
Shareholders' equity 1,806
Shareholders' equity per common share 0.78
Cash dividends declared per common
share NONE NONE NONE NONE NONE
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's net assets
in liquidation at December 31, 2001 and the changes in its net assets in
liquidation for the year then ended is presented below. Information relating to
2000 and 1999 is also presented for comparative purposes. This analysis should
be read in conjunction with the Consolidated Financial Statements and the
related Notes appearing elsewhere in this Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's preferred and common shareholders approved the sale of the Company's
credit insurance and related products business, which was the Company's only
remaining business operation. In connection with the sale of its in force credit
insurance business, the Company also sold its credit insurance customer accounts
and one of its life insurance subsidiaries. At the Special Meeting, the
shareholders also approved a Plan of Liquidation and Dissolution (the Plan of
Liquidation), pursuant to which the Company has been liquidating its remaining
assets and paying or providing for all of its liabilities so that it can
distribute its remaining cash to its preferred shareholders. If the Company
proceeds with the Plan of Liquidation, it is unlikely that any cash will be
available for distribution to the common shareholders.
As discussed in Item 1 of this Form 10-K, the Company's Board of Directors
may consider other alternatives to liquidating the Company, if such alternatives
are deemed by the Board to be in the best interest of the Company and its
shareholders. In August 2001, the Board solicited proposals for interest in
acquiring control of the Company and received proposals from several investor
groups that had expressed such an interest. Following a review of the proposals
which were received, the Company selected one group to whom it granted an option
to acquire a 51% interest in the Company. In accordance with the terms of the
Option Agreement, which was entered into on February 13, 2002, the option is
exercisable within 15 business days following the completion by the Company of a
tender offer to its preferred shareholders. The tender offer, if accepted by all
of the preferred shareholders, will result in the payment to those shareholders
of substantially all of the Company's remaining net assets. If the option is
exercised, the investor group intends to merge or otherwise combine certain
existing and start-up businesses into the Company. The Board of Directors
considered a transaction of this type in lieu of the Plan of Liquidation because
it has the potential to produce future value for the common shareholders while
protecting the rights of the preferred shareholders. As indicated above, the
common shareholders are not expected to receive any distribution under the Plan
of Liquidation. If the option is exercised, the liquidation of the Company would
be discontinued. However, since there is no assurance at this time that the
option will be exercised, the Company continues to proceed with the Plan of
Liquidation. For additional information regarding the terms of the Option
Agreement, see Note 17 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
As a result of the approval of the Plan of Liquidation, the Company adopted
a liquidation basis of accounting in its financial statements for periods
subsequent to March 24, 1998. Under liquidation accounting rules, assets are
stated at their estimated net realizable values and liabilities are stated at
their anticipated settlement amounts. Prior to March 25, 1998, the Company
reported the results of its operations and its asset and liability amounts using
accounting principles applicable to going concern entities. If the option
discussed above is exercised, and the Company resumes business operations, it
would again adopt accounting principles applicable to going concern entities.
As discussed below, during 1999, the Company's net assets in liquidation,
which represent the amount available for distribution to common shareholders,
were reduced to zero. Consequently, all subsequent decreases in the Company's
7
net assets have reduced the estimated liquidation value of the preferred stock.
During the year ended December 31, 2001, the estimated liquidation value of the
preferred stock decreased by $748,000 due to an excess of benefits and expenses
over revenues of $521,000 and preferred shareholder dividends of $386,000.
During 2000, the estimated liquidation value of the preferred stock declined by
$938,000 primarily as a result of a $432,000 increase in the amount necessary to
fully fund the Company's pension plan and $391,000 in preferred shareholder
dividends. In 1999, the Company's net assets in liquidation decreased from
$383,000 to zero and the estimated liquidation value of the preferred stock also
declined by $303,000. The $686,000 in reductions reported in 1999 were
principally due to a $252,000 excess of benefits and expenses over revenues for
the year, a $388,000 increase in the liability for the Company's under funded
pension plan and $406,000 in preferred dividends. These reductions were
partially offset by a $210,000 adjustment of certain liabilities to their
estimated settlement amounts and other miscellaneous increases in net assets.
CHANGES IN NET ASSETS IN LIQUIDATION
Since the sale of the credit insurance business and the adoption of the
Plan of Liquidation, the Company's revenues, benefits and expenses have
consisted principally of (i) fee revenues from the sale of the Company's
customer accounts (see discussion below regarding the discontinuation of these
fee revenues), (ii) investment income on the remaining invested assets and (iii)
corporate expenses, primarily salaries, professional fees and, pension expense
and home office rent and related costs. A discussion of the material factors
which affected the Company's changes in net assets in liquidation for the years
ended December 31, 2001, 2000 and 1999 is presented below.
YEAR ENDED DECEMBER 31, 2001
As indicated above, since the Company has no net assets available for
common shareholders, all decreases in net assets must be deducted from the
estimated liquidation value of the Company's preferred stock. During 2001, the
estimated liquidation value of the preferred stock decreased by $748,000. As a
result, at December 31, 2001, the 452,614 shares of preferred stock outstanding
have an estimated liquidation value of $2,538,000.
The $748,000 reduction in the estimated liquidation value of the preferred
stock for the year ended December 31, 2001 is attributable to an excess of
benefits and expenses over revenues of $521,000 and preferred shareholder
dividends of $386,000. The Company's total expenses in 2001 were significantly
impacted by $216,000 in litigation settlement costs. The Company also incurred
approximately $89,000 in legal fees in connection with the above settlements and
other corporate matters, including legal fees relating to the Option Agreement.
In addition, revenues for the period were adversely affected by the fact that
the Company is no longer receiving any fee revenues from the sale of its credit
insurance customer accounts as the result of the settlement of a dispute with
the purchaser, as discussed more fully below. Fee revenues of approximately
$200,000 and $373,000 were reported in 2000 and 1999, respectively. The
Company's investment income also decreased from $301,000 last year to $150,000
in 2001 because of a continuing decline in investable assets (due to negative
cash flows) and a significant drop in short-term interest rates. A $108,000
increase in the estimated net realizable value of the insurance licenses of the
Company's subsidiary, based on the expected selling price of those licenses,
partially offset the decreases discussed above.
YEAR ENDED DECEMBER 31, 2000
During 2000, the estimated liquidation value of the preferred stock
decreased by $938,000. The 456,061 shares of preferred stock outstanding at
December 31, 2000 had an estimated liquidation value of $3,320,000, or $7.28 per
share on that date.
The decrease in the liquidation value of the preferred stock in 2000 was
primarily the result of a $432,000 increase in the Company's liability for its
under funded pension plan and $391,000 in dividends to the preferred
shareholders. An excess of expenses over revenues (excluding pension expense)
also contributed to the decline in the liquidation value. Effective in March
2000, the Company terminated the pension plan as part of the Plan of
Liquidation. Following the receipt of all regulatory approvals and each
participant's election as to his or her form of benefit payment (lump sum or
annuity), the plan's final liability was determined using a government-mandated
interest rate to compute the lump sum benefits. Because the prescribed interest
rate had declined from the rate used by the Company to estimate its December 31,
1999 liability to the plan, the total liability to participants, and the
Company's corresponding liability to the plan, increased compared to the
8
estimate at the end of 1999. Consequently, the Company had to contribute
$966,000 to the plan, or $432,000 more than the $534,000 which had been
established at December 31, 1999 as the unfunded liability.
For the year ended December 31, 2000, the Company reported an excess of
benefits and expenses over revenues of $1,823,000, which includes pension
expense of $1,554,000 (an offsetting increase in net assets of $1,122,000 is
stated separately on the Statements of Changes in Net Assets in Liquidation,
resulting in the net reduction of $432,000 referred to above). Excluding
pension expense, the excess expenses in 2000 totaled $269,000. These excess
expenses are largely attributable to a $173,000 decrease in fee revenues
received from the sale of the credit insurance accounts and to increased legal
fees, as discussed more fully below.
The agreement with the purchaser of the Company's credit insurance
operations provided that the proceeds from the sale of the customer accounts
were to be received as fee revenues until September 2002, based on the amount of
credit insurance premiums produced by those accounts. However, as discussed in
Note 12 of the Notes to Consolidated Financial Statements appearing elsewhere in
this Form 10-K, a dispute arose during 1999 between the Company and the
purchaser regarding the payment of investment income on the assets which were
transferred to the purchaser in connection with the sale of the in force credit
insurance business. Because of the dispute, the purchaser began withholding the
fee revenues from the Company to offset the investment income it believed it was
due. In late 2000, the parties settled this dispute, and, pursuant to this
settlement, the purchaser paid the Company $250,000 in settlement of all prior
amounts withheld and in lieu of any future fee revenue payments. Since the
settlement amount was $116,000 less than the amount of fee revenues due from the
purchaser, the Company included a $116,000 charge off in its 2000 expenses.
The Company also incurred approximately $169,000 in legal fees during 2000,
principally in connection with the above-referenced dispute and other litigation
matters.
YEAR ENDED DECEMBER 31, 1999
During 1999, the Company's net assets in liquidation declined by $383,000
and the estimated liquidation value of the preferred stock also declined by
$303,000. These decreases were principally the result of an excess of benefits
and expenses over revenues of $252,000, a $388,000 increase in the liability for
the Company's under funded pension plan and $406,000 in preferred stock
dividends. These reductions were partially offset by a $210,000 adjustment of
certain liabilities to their estimated settlement amounts. The 1999 excess of
benefits and expenses over revenues was principally due to (i) higher than
expected audit, actuarial and legal fees and salary expenses (in part due to the
Company's inability to sell its life insurance subsidiary), (ii) delays in
selling the Company's home office building, which resulted in higher than
anticipated rent and maintenance costs for the year and (iii) a loss from a
terminated joint venture which was expected to generate income.
The Company's unfunded pension liability increased by $388,000 in 1999
principally because of the Company's decision in early 2000 to terminate the
plan. This decision resulted in the use of an interest rate in computing the
December 31, 1999 plan liabilities which was intended to approximate the rate
which would be in effect when the plan actually terminated. For continuing
plans, different assumptions regarding interest rates are generally utilized.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD
If the option discussed above is not exercised by the investor group, the
Board of Directors intends to continue with the liquidation of the Company. The
option to acquire control of the Company is not exercisable by the investor
group until after the Company completes a tender offer to its preferred
shareholders. The Company believes that most of the preferred shareholders will
elect to surrender their shares in the tender offer. Therefore, if the investor
group does not exercise its option, the Company would use the assets remaining
in the Company (comprised of cash which had been allocated to the preferred
shares not tendered plus a cash reserve) to cover its operating expenses during
the remainder of the liquidation period, to pay any remaining liabilities and to
make a final distribution to the preferred shareholders who did not previously
tender their shares.
The time frame for completing the liquidation is dependent upon a number of
factors, the most significant of which is the timing of the proposed sale of the
Company's life insurance subsidiary, since substantially all of the Company's
assets are held by the subsidiary and are restricted as to their use by state
insurance regulations. In January, the Company entered into an agreement to sell
the subsidiary and its 25 state insurance licenses. In February 2002, the
purchasers filed a Form A with the Delaware Insurance Department seeking the
Department's approval of the change in control.
9
The Company is also a defendant in several small lawsuits which must be
settled or resolved in court prior to the final distribution to shareholders.
While management believes the plaintiffs' claims in these cases are without
merit, the ultimate outcome of these matters cannot be determined at this time.
Furthermore, the Company may be entitled to all or a portion of the assets in a
contingency fund established by the Company and the purchaser of its credit
insurance business based on the claims experience of the in force credit
insurance business from October 1, 1997 to September 30, 2002. However, based on
the claims experience to date, as provided by the purchaser, it does not appear
likely that the Company will receive any portion of the contingency fund.
As a result of the foregoing, a final distribution under the Plan of
Liquidation cannot be made to the preferred shareholders until (i) the life
subsidiary is sold, (ii) the Company has resolved its remaining litigation
matters and (iii) a determination is made regarding the amount of any
contingency fund distribution which might be payable to the Company.
Based on current estimates, management believes that the Company's future
expenses and other changes in net assets, including preferred stock dividends,
will exceed its revenues during the remainder of the liquidation period by
approximately $400,000 to $475,000. Actual revenues and expenses and other net
asset changes could vary significantly from the present estimates due to the
uncertainties regarding (i) when the remaining non liquid assets, particularly
the stock of the life insurance subsidiary, will be liquidated, (ii) when the
tender offer to the preferred shareholders occurs, (iii) the level of actual
expenses which will be incurred and (iv) the ultimate resolution of all current
contingencies and any contingencies which may arise in the future.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's net assets
in liquidation and its total invested assets at December 31, 2001 and 2000 is
presented below.
CAPITAL RESOURCES
Since adopting the Plan of Liquidation, the Company has made no commitments
for capital expenditures and, if the company proceeds with the liquidation
process, it does not intend to make any such commitments in the future.
However, if the Company is acquired pursuant to the Option Agreement discussed
above, the Company's plans regarding capital expenditures and related
commitments could change.
During the year ended December 31, 2001, the Company's cash and invested
assets decreased from $3,479,000 to $2,745,000, primarily because of a $521,000
excess of expenses over revenues (most of which were cash items) and the payment
of $386,000 in preferred shareholder dividends. The Company also benefited from
the collection of a $284,000 receivable during 2001. For the year ended
December 31, 2000, the Company's cash and invested assets declined by $389,000
to $3,479,000 at the end of the year. That reduction was primarily attributable
to the $966,000 payment to the Company's pension plan, in order to fully fund
the plan, the payment of $391,000 in preferred stock dividends and an excess of
expenses paid over revenues collected. These decreases were partially offset by
a $1,150,000 increase in invested assets resulting from the sale of the
Company's 50% interest in its home office building. The sale of the home office
building also resulted in the payoff of a $1,176,000 mortgage granted to the
co-owner of the building. The mortgage proceeds along with the proceeds from the
building sale were invested in short-term securities.
Invested assets at both December 31, 2001 and 2000 consisted of (i) U.S.
Treasury Notes, owned by the Company's insurance subsidiary, which are on
deposit with four state insurance departments in connection with licensing
requirements, (ii) one mortgage loan, secured by commercial real estate, which
is scheduled to be paid in full by June 2002 and (iii) short-term investments,
principally money market funds and certificates of deposit (one certificate of
deposit with a balance of $50,000 is also on deposit with a state insurance
department). If the Company completes the sale of the subsidiary, as discussed
above, at closing, the subsidiary will transfer to the Company all of its assets
(except for the statutory deposits) and most of its liabilities, and the
purchaser will pay the Company an amount equal to the fair value of the
statutory deposits plus $10,000 for each of the subsidiary's 25 state insurance
licenses.
LIQUIDITY
10
Historically, the Company's subsidiaries met most of their cash
requirements from funds generated from operations, while the Company generally
relied on those subsidiaries to provide it with sufficient cash funds to
maintain an adequate liquidity position. As a result of the Company's decision
to sell its remaining operations, liquidate all of its net assets and distribute
cash to its shareholders, the Company's principal sources of cash funds are
investment income and proceeds from the sales of non liquid assets. If the
Company continues with the Plan of Liquidation, these funds must be used to
settle all remaining liabilities as they become due, to pay expenses until the
Company is dissolved and to pay dividends on the preferred stock until a final
distribution is made to the preferred shareholders. Alternatively, if the
Company is acquired in connection with the Option Agreement discussed above,
substantially all of the Company's remaining liquid assets will be available to
complete the tender offer to the preferred shareholders. The adequacy of the
Company's liquidity position during the remainder of the liquidation period will
be principally dependent on its ability to sell its remaining non liquid assets
and the timing of such sales, as well as on the level of expenses the Company
must incur during the liquidation period. The Company's liquidity has been
particularly affected by the fact that virtually all of its assets are held by
its insurance subsidiary, since dividends and other distributions to the Company
from that subsidiary must be approved by the Delaware Insurance Department. As
discussed previously, the planned sale of the subsidiary will eliminate
significant liquidity restrictions for the Company.
SINKING FUND FOR REDEEMABLE PREFERRED STOCK
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment was
due in July 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by the
redemption value of the shares acquired. As a result of the Company's purchases
of preferred stock prior to 1998, no sinking fund payment was due in 1998, and
the required payment due for 1999 was reduced from $550,000 to $414,610. The
purchase of 18,000 preferred shares in 1999, 7,400 shares in 2000 and 3,447
shares in 2001 further reduced the 1999 sinking fund deficiency to $126,140. On
July 1, 2000, an additional $550,000 sinking fund payment became due but was not
paid. On July 1, 2001, another $550,000 sinking fund payment became due but was
also not paid. Consequently, at December 31, 2001, the total sinking fund
deficiency was $1,226,140.
INFLATION
If the Company proceeds with the Plan of Liquidation, it intends to
liquidate its assets, pay all of its liabilities, distribute any remaining cash
to its shareholders and ultimately dissolve within the next year. Under those
circumstances, the effects of inflation on the Company are not material. If the
Company is acquired pursuant to the Option Agreement, the effects of inflation
on the Company may change.
11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at December 31, 2001, the Company qualifies as a "small
business issuer" under Regulation S-B of the Federal Securities Laws. A small
business issuer is defined as any United States or Canadian issuer with revenues
or public float of less than $25 million.
12
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 judgments 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, 2001
and 2000 have been audited by Stambaugh Ness, PC, independent auditors. Such
audits were conducted in accordance with auditing standards generally accepted
in the United States of America, and included a review and evaluation of our
internal accounting control structure, tests of the accounting records and other
auditing procedures which the auditors considered necessary to express their
informed professional opinion on the consolidated financial statements.
The Board of Directors monitors the financial and accounting operations of
the Company. The Board meets periodically with representatives of its
independent auditing firm to discuss the scope of the audit and related reports.
The Company's independent auditors have at all times full and free access to
the Board of Directors, without management present, to discuss any matter that
they believe should be brought to the attention of the Board.
James C. Robertson R. Fredric Zullinger
Chairman, Chief Executive Officer Senior Vice President and
and President Chief Financial Officer
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated statements of net assets in
liquidation of Consumers Financial Corporation and subsidiaries as of December
31, 2001 and 2000 and the related consolidated statements of changes in net
assets in liquidation for each of the three years in the period ended December
31, 2001. These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 4 to the financial statements, the shareholders of
Consumers Financial Corporation approved a plan of liquidation on March 24,
1998, and the Company commenced liquidation shortly thereafter. As a result, the
Company changed its basis of accounting for periods subsequent to March 24, 1998
from the going-concern basis to the liquidation basis. Accordingly, the carrying
values of the remaining assets as of December 31, 2001 and 2000 are presented at
estimated realizable values and all liabilities are presented at estimated
settlement amounts.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated net assets in liquidation of
Consumers Financial Corporation and subsidiaries as of December 31, 2001 and
2000 and the consolidated changes in their net assets in liquidation for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America applied
on the basis described in the preceding paragraph.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 14(a) are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. The amounts included in these schedules
have been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
STAMBAUGH NESS, PC
York, Pennsylvania
March 7, 2002
14
- -------------------------------------------------------------------------------------------------------
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------
(dollar amounts in thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------
Assets:
Investments:
Fixed maturities $ 930 $ 951
Mortgage loans on real estate 13 50
Short-term investments 1,795 2,471
- -------------------------------------------------------------------------------------------------------
Total investments 2,738 3,472
Cash 7 7
Accrued investment income 9 27
Reinsurance recoverable 7,866
Other receivables 14 307
Prepaid reinsurance premiums 13,466
Deferred policy acquisition costs 40
Other assets 253 120
- -------------------------------------------------------------------------------------------------------
Total assets 3,021 25,305
- -------------------------------------------------------------------------------------------------------
Liabilities:
Future policy benefits 6,536
Unearned premiums 13,466
Other policy claims and benefits payable 1,369
Other liabilities 483 614
- -------------------------------------------------------------------------------------------------------
483 21,985
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500 shares;
issued and outstanding 2001, 452,614 shares; 2000, 456,061 shares; net of
$1,989 reduction in 2001 and $1,241 in 2000 to reflect estimated liquidation value 2,538 3,320
- -------------------------------------------------------------------------------------------------------
Total liabilities and redeemable preferred stock 3,021 25,305
- -------------------------------------------------------------------------------------------------------
Net assets in liquidation $ 0 $ 0
======================================================================================================
See notes to consolidated financial statements.
15
- ----------------------------------------------------------------------------------------------
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ----------------------------------------------------------------------------------------------
(in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------
Revenues:
Earned premiums $ 319
Net investment income $ 150 $ 301 210
Net fees from sale of customer accounts 200 373
Joint venture income (loss) (3) 35 (20)
Gain on recapture of assumed business by direct writer 65
Miscellaneous 121 142 126
- ----------------------------------------------------------------------------------------------
268 678 1,073
- ----------------------------------------------------------------------------------------------
Benefits and expenses:
Policyholder benefits 396
Rent and related costs 23 57 138
Salaries and employee benefits 196 214 285
Litigation settlement costs 216
Pension expense 1,554 82
Write-down of fee income receivable 116
Professional fees 147 254 197
Taxes, licenses and fees 32 61 30
Miscellaneous 175 245 197
- ----------------------------------------------------------------------------------------------
789 2,501 1,325
- ----------------------------------------------------------------------------------------------
Excess of benefits and expenses over revenues (521) (1,823) (252)
Decrease (increase) in liability for under funded pension plan 1,122 (388)
Adjustment of assets to estimated realizable value 108 88
Adjustment of liabilities to estimated settlement amounts 62 210
Increase (decrease) in unrealized appreciation of debt securities 28 44 (43)
Preferred stock dividends (386) (391) (406)
Adjustment of preferred stock to estimated liquidation value 748 938 303
Retirement of treasury shares-preferred 23 48 105
- ----------------------------------------------------------------------------------------------
Decrease in net assets for the period 0 0 (383)
Net assets at beginning of period 0 0 383
- ----------------------------------------------------------------------------------------------
Net assets at end of period $ 0 $ 0 $ 0
==============================================================================================
See notes to consolidated financial statements.
16
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND1999
1. COMPANY OVERVIEW
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and its liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products business,
which had been its only remaining business operation, following the sales in
1994 and 1997 of all of its universal life insurance business and the 1996 sale
of its auto auction business. Since the sale of its credit insurance business,
the Company's revenues, benefits and expenses have consisted principally of (i)
fee revenues received from Life of the South Corporation, the Georgia-based
company which acquired the Company's credit insurance business and its credit
insurance accounts (LOTS), (ii) investment income on remaining assets and (iii)
corporate expenses. However, see Note 12 for information concerning the
discontinuation of the fee revenues.
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution (the Plan of Liquidation) pursuant to which the
Company is liquidating its remaining assets and paying or providing for all of
its liabilities. If the Company proceeds with the Plan of Liquidation, all of
its remaining cash will eventually be distributed to the preferred shareholders
(see Note 4). As discussed more fully in Note 17, in February 2002, the Company
entered into an option agreement with an investor group pursuant to which the
investor group may obtain a controlling interest in the Company's common stock.
If the option is exercised, the liquidation of the Company would be
discontinued. Since there is no assurance at this time that the option will be
exercised, the Company continues to proceed with the Plan of Liquidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
- -----------------------------
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its wholly-owned subsidiaries (the Company), the most
significant of which is Consumers Life Insurance Company (Consumers Life). Since
December 2000, Consumers Life has been Consumers Financial Corporation's only
subsidiary. Consumers Financial Corporation itself is also sometimes referred to
herein as the Company. All material intercompany accounts and transactions have
been eliminated.
Liquidation basis of accounting
- ----------------------------------
The financial statements have been prepared on the basis of generally
accepted accounting principles (GAAP) which, as to Consumers Life, vary from
reporting practices prescribed or permitted by regulatory authorities. As a
result of the approval of the Plan of Liquidation and Dissolution referred to
above and discussed in Note 4, the Company adopted a liquidation basis of
accounting for periods subsequent to March 24, 1998. Under the liquidation basis
of accounting, assets are stated at their estimated net realizable values and
liabilities are stated at their anticipated settlement amounts. Amounts
determined in accordance with the liquidation basis of accounting do not differ
significantly from the accounting policies discussed below. Certain prior year
amounts have been reclassified to conform with classifications used for 2001.
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
financial statement date. All bonds and notes are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized appreciation and depreciation, net of income taxes, if
applicable, reported as a separate component of the changes in net assets in
liquidation. All certificates of deposits maturing after one year are deemed to
be held to maturity. Mortgage loans on real estate are carried at the unpaid
principal balance. Short-term investments are carried at cost.
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. 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.
17
Realized gains and losses and provisions for permanent losses on
investments are included in the determination of the excess of benefits and
expenses over revenues. The "specific identification" method is used in
determining the cost of investments sold.
Fair values of financial instruments
- ----------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, based on interest rates which would currently be
offered for similar loans to borrowers with similar credit ratings.
Deferred policy acquisition costs
- ------------------------------------
Prior to the discontinuation of its insurance operations, the Company
deferred the costs of acquiring new insurance business. The costs deferred
consisted principally of commissions, certain sales salaries and other expenses
that varied with and were primarily related to the production of new business.
Deferred policy acquisition costs were expensed when such costs were deemed not
to be recoverable from future earned premiums and investment income or, when
applicable, from the estimated proceeds to be received from the sale of the
related insurance business. At December 31, 2001, the Company had no deferred
policy acquisition costs. At December 31, 2000, the Company's only unamortized
policy acquisition costs related to commissions paid in connection with certain
annuity business assumed during 2000 (see Note 10).
Future policy benefits
- ------------------------
Prior to the conversion of the Company's remaining indemnity reinsurance
agreements to assumption reinsurance, the liability for future policy benefits
for individual life insurance was 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 past experience, as adjusted to provide for
possible adverse deviation from the estimates. Benefit reserves for universal
life products represented policy account balances before applicable surrender
charges plus certain deferred policy initiation fees that were recognized in
income over the term of the policies. At December 31, 2001, the Company had no
liability for future policy benefits.
Unearned premiums
- ------------------
Prior to the conversion of the Company's remaining indemnity reinsurance
agreements to assumption reinsurance, unearned premiums for credit life and
disability insurance contracts were 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. At December 31, 2001, the Company had no liability for unearned
premiums.
Income taxes
- -------------
The Company and its subsidiary provide income taxes, for financial
reporting purposes, on the basis of the liability method.
Use of estimates
- ------------------
18
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
3. BASIS OF FINANCIAL STATEMENTS
The more significant accounting principles applied in the preparation of
the financial statements that differ from life insurance statutory accounting
practices prescribed or permitted by regulatory authorities (which are primarily
designed to demonstrate solvency) are as follows:
(a) Bonds eligible for amortization are reported at amortized value,
whereas in the accompanying financial statements, only bonds which are
classified as held-to-maturity securities are stated at amortized
cost, and available-for-sale securities are carried at fair value.
Other securities are carried at values prescribed by the National
Association of Insurance Commissioners' Accounting Practices and
Procedures manual.
(b) 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.
(c) Certain assets are reported as assets in the statements of net assets
in liquidation rather than being charged directly to surplus and
excluded from the statutory balance sheets.
(d) Commission allowances pertaining to financing-type reinsurance
agreements are not included in results of operations or changes in net
assets in liquidation
Dividends and other distributions to the Company from Consumers Life are
limited in that Consumers Life is required to maintain minimum capital and
surplus in each of the states in which it is licensed, determined in accordance
with regulatory accounting practices. The amount of minimum capital and surplus
required is $8.6 million. At December 31, 2001, Consumers Life does not meet the
minimum capital and surplus requirements in eight of the states in which it is
licensed, and it has agreed to a temporary suspension of its insurance license
in one of those states. No actions have been taken with respect to this matter
by the insurance departments of the other states. Since the Company does not
intend to write any new insurance business through Consumers Life and has signed
an agreement to sell the subsidiary (see Note 17), a temporary suspension of any
of Consumers Life's licenses will have no material adverse effect on the
Company. However, if any of the licenses are revoked rather than suspended, the
total consideration the Company will receive when Consumers Life is sold will be
reduced.
Under Delaware insurance laws, distributions are subject to further
restrictions relating to capital and surplus and operating earnings.
Accordingly, under normal circumstances, at December 31, 2001, approximately
$2.47 million of Consumers Life's net assets cannot be transferred to the parent
company and $221,000 is available for transfer during 2002. However, because of
its prior operating losses and its current capital and surplus position, the
Company is not permitted to pay any dividends without prior approval from the
Delaware Insurance Department. Also, any loans or advances to the Company must
be reported to and approved by the Delaware Department. The Company does not
have sufficient cash funds available to pay dividends to its shareholders
without the amounts which may be transferred from Consumers Life. During 2001
and 2000, the Delaware Insurance Department approved the payment by Consumers
Life of cash dividends totaling $212,500 and $160,000, respectively. No
dividends were approved or paid in 1999.
The reported statutory capital and surplus of Consumers Life was $2.2
million at December 31, 2001 and $3.0 million at December 31, 2000. Consumers
Life reported statutory net losses of $418,000 in 2001 and $316,000 in 2000.
Insurance laws require Consumers Life to deposit certain amounts with
various state insurance departments in order to maintain its licenses. The
approximate carrying amount of such deposits at December 31, 2001 and 2000 was
$1.4 million.
4. PLAN OF LIQUIDATION AND RELATED MATTERS
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's shareholders approved the sale of the in force credit insurance
19
business as well as the Plan of Liquidation referred to in Note 1, pursuant to
which the Company has been liquidating its remaining assets and providing for
its liabilities. If the Company proceeds with the Plan of Liquidation, it will
eventually distribute its remaining cash to its preferred shareholders. The
Company does not expect to be able to make any payment to its common
shareholders under the Plan of Liquidation.
In August 2001, the Company's Board of Directors solicited proposals for
interest in acquiring control of the Company and received proposals from several
investor groups that had expressed such an interest. Following a review of the
proposals which were received, the Company selected one investor group with whom
it entered into an option agreement in February 2002. The option agreement
permits the investor group to acquire a 51% interest in the Company's common
stock. The terms of the option agreement are described in Note 17. The Board of
Directors considered a transaction of this type in lieu of the Plan of
Liquidation because it has the potential to produce future value for the common
shareholders while protecting the rights of the Company's preferred
shareholders. As indicated above, the common shareholders are not expected to
receive any distribution under the Plan of Liquidation. If the investor group
does not exercise its option to acquire the Company, the Board of Directors
intends to continue with the Plan of Liquidation.
5. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement purposes as described
in Note 1, consist of the following at December 31, 2001:
- -----------------------------------------------------------------------------------------
Quoted or
Amortized estimated Carrying
(in thousands) cost fair value amount
- -----------------------------------------------------------------------------------------
Fixed maturities - bonds issued by United States
government and government agencies and authorities $ 875 $ 930 $ 930
Mortgage loans on real estate 13 13 13
Short-term investments 1,795 1,795 1,795
- -----------------------------------------------------------------------------------------
Total investments $ 2,683 $ 2,738 $ 2,738
=========================================================================================
A portion of the Company's invested assets is restricted as to use in that
deposits are required with various state insurance departments in order to
maintain licenses in those states (see Note 3).
At December 31, 2001 and 2000, the Company held only one mortgage loan, a
first mortgage lien secured by income-producing real estate located in central
Pennsylvania. This loan, which had a principal balance of $13,278 and $50,212 at
the end of 2001 and 2000, respectively, exceeded 10% of the Company's net assets
in liquidation at December 31, 2001 and 2000.
During 2000 and 1999, the Company held one non-performing mortgage loan
where the mortgagor had filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in late 1997. Interest in the amount of $39,965 was excluded
from investment income in 1999 due to the non-performing status of this loan. As
a result of an agreement reached with the bankruptcy trustee, from November 1999
to May 2000, the Company received approximately $32,000 in lease payments from a
tenant at the mortgaged property. Such payments were applied first to legal
costs incurred by the Company and then to accrued late fees and unpaid interest.
The trustee sold this property in June 2000, at which time the principal balance
on this loan was paid in full along with $47,000 in unpaid interest.
20
Net investment income is applicable to the following investments:
- --------------------------------------------------
Years ended December 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------
Interest:
Fixed maturities $ 52 $ 55 $ 60
Mortgage loans 3 119 109
Short-term investments 95 127 80
- --------------------------------------------------
150 301 249
Investment expenses (39)
- --------------------------------------------------
Total $ 150 $ 301 $ 210
==================================================
The amortized cost and estimated fair values of investments in debt
securities at December 31, 2001 and 2000 are as follows:
- -------------------------------------------------------------------------------------
2001 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 $ 875 $ 55 $ 0 $ 930
- -------------------------------------------------------------------------------------
Totals $ 875 $ 55 $ 0 $ 930
=====================================================================================
- -------------------------------------------------------------------------------------
2001 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 $ 873 $ 28 $ 0 $ 901
- -------------------------------------------------------------------------------------
Totals $ 873 $ 28 $ 0 $ 901
=====================================================================================
All debt securities held by the Company at December 31, 2001 have
contractual maturities between 2003 and 2005. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
The Company did not sell any investments in debt securities during 2001 or
2000. Proceeds from the sales of investments in debt securities during 1999 were
$850,000. There were no gains or losses on those sales.
6. OTHER RECEIVABLES
- ---------------------------------------------------------
December 31,
(in thousands) 2001 2000
- ---------------------------------------------------------
Joint venture experience refund $ 287
Other $ 14 126
- ---------------------------------------------------------
14 413
Less allowance for uncollectible accounts (106)
- ---------------------------------------------------------
Balance $ 14 $ 307
=========================================================
21
7. DEFERRED POLICY ACQUISITION COSTS
- -----------------------------------------------------------
Individual
(in thousands) Credit Life Total
- -----------------------------------------------------------
Balance, January 1, 1999 $ 0 $ 50 $ 50
Amortization (50) (50)
- -----------------------------------------------------------
Balance, December 31, 1999 0 0 0
Costs deferred 50 50
Amortization (10) (10)
- -----------------------------------------------------------
Balance, December 31, 2000 0 40 40
Amortization (40) (40)
- -----------------------------------------------------------
Balance, December 31, 2001 $ 0 $ 0 $ 0
===========================================================
8. PROPERTY AND EQUIPMENT
- ------------------------------------------------------------
December 31,
(in thousands) 2001 2000
- ------------------------------------------------------------
Property and equipment:
Data processing equipment and software $ 26 $ 26
Furniture and equipment 31 31
- ------------------------------------------------------------
57 57
Less accumulated depreciation (57) (57)
- ------------------------------------------------------------
Balance $ 0 $ 0
============================================================
In August 2000, the Company sold its home office building at a price which
exceeded the carrying value of the property by approximately $9,000.
9. POLICY LIABILITIES
At December 31, 2001, the Company had no future policy benefits liability
or unearned premiums liability as a result of the conversion of its remaining
indemnity reinsurance agreements to assumption reinsurance during 2001 and the
termination of three small retained policies during the year. Future policy
benefits and unearned premiums at December 31, 2000 do not include any deduction
for reinsurance ceded under indemnity reinsurance agreements (see Note 10). All
but $39,000 of the Company's future policy benefits liability at December 31,
2000 was reinsured to other insurers pursuant to indemnity agreements.
Similarly, all of the Company's unearned premiums liability at December 31, 2000
was reinsured to other insurers under indemnity-type agreements.
22
At December 31, 2000, future policy benefits and unearned premiums related
to reinsurance ceded are classified as Reinsurance Recoverable and Prepaid
Reinsurance Premiums, respectively, as follows:
(in thousands)
- -------------------------------------------------------------------- -------
Future Policy Benefits and Other Policy Claims and Benefits Payable $ 7,905
Reinsurance Recoverable 7,866
- -------------------------------------------------------------------- -------
Net liability $ 39
==================================================================== =======
Unearned Premiums $13,466
Prepaid Reinsurance Premiums 13,466
- -------------------------------------------------------------------- -------
Net liability $ 0
==================================================================== =======
Life insurance in force net of reinsurance ceded was $58,000 at December
31, 2000.
10. REINSURANCE
The sale of the credit insurance business of Consumers Life was completed
pursuant to an indemnity reinsurance agreement with American Republic. The
reinsurance transactions through which Consumers Life and its former
subsidiaries sold their individual life insurance business included the use of
both indemnity and assumption agreements. Consumers Life remained contingently
liable for insurance risks ceded under indemnity agreements, while such risks
were legally transferred to the reinsurer when assumption agreements were
utilized.
Effective December 31, 2000, Consumers Life converted one of its four
remaining indemnity reinsurance agreements to assumption reinsurance, thereby
eliminating the contingent risk on that block of reinsured business. As of
January 1, 2001, a similar conversion to assumption reinsurance was completed on
another indemnity agreement. Effective October 1, 2001, Consumers Life converted
its remaining two indemnity agreements to assumption reinsurance. As a result of
these transactions, Consumers Life no longer has any direct policyholder
obligations.
During 1999, Consumers Life was a party to a financing-type reinsurance
agreement in which it assumed approximately $2 million in individual life
insurance premiums and an equal amount of policy liabilities. This agreement
terminated in January 2000. During 2000, the Company entered into a similar
agreement with another insurer in which it assumed approximately $2.5 million of
annuity premiums and policy liabilities. The effects of these financing-type
agreements have been removed from the financial statements except for the cost
of the financing, which amounted to $40,000 in 2001, $10,000 in 2000 and $25,000
in 1999. These costs are presented with Miscellaneous expenses on the
Consolidated Statements of Changes in Net Assets in Liquidation.
In 2001, refunds (negative premiums) ceded to other companies under
indemnity reinsurance agreements totaled approximately $737,000. Refunds ceded
in 2000 were approximately $1.8 million, while premiums ceded in 1999 were
approximately $11.9 million. The negative premiums in 2001 and 2000 are the
result of the termination in late 1999 of the fronting arrangement whereby,
following the sale of the credit insurance operations to LOTS in early 1998,
credit insurance business continued to be written on Consumers Life's
certificate forms in 1998 and most of 1999 and ceded 100% to American Republic.
Once all new business ceased, the refund of unearned premiums was the only
premium activity which remained.
Incurred benefits and losses reinsured under indemnity reinsurance
agreements were $3.8 million in 2001 compared to $9.0 million in 2000 and $12.6
million in 1999. These amounts have been deducted in arriving at Policyholder
Benefits in the Consolidated Statements of Changes in Net Assets in Liquidation.
However, Future Policy Benefits and Unearned Premiums at December 31, 2000 do
not include any deduction for reinsurance ceded under the indemnity reinsurance
agreements. Instead, the amounts related to such reinsurance are classified as
Reinsurance Recoverable and Prepaid Reinsurance Premiums (see Note 9). These
asset and liability amounts have both been eliminated from the Consolidated
Statements of Net Assets in Liquidation at December 31, 2001 as a result of the
conversion of the indemnity reinsurance agreements to assumption reinsurance
during 2001.
23
11. PENSION AND OTHER RETIREMENT PLANS
Prior to October 1, 1999, the Company had a defined benefit pension plan
and two defined contribution plans in effect. As of March 22, 2000, the pension
plan was terminated, and, following approval from the Pension Benefit Guaranty
Corporation and receipt of a favorable determination letter from the Internal
Revenue Service, all benefits due under the plan were distributed to the plan
participants in November and December 2000. Benefits under this plan had been
frozen as of July 31, 1996. The Company contributed approximately $966,000 to
the plan during 2000 so that the plan could pay the required benefits to the
participants.
Effective October 1, 1999, the Company also terminated its employee stock
ownership plan. In October 2000, after receiving a favorable determination
letter from the Internal Revenue Service, the plan assets, consisting
principally of common stock of the Company, were distributed to the
participants.
The Company's remaining defined contribution plan covers all current
employees and provides for annual contributions in amounts determined by the
Board of Directors. Such contributions are based upon the annual compensation of
each employee. Company contributions were $4,400 in 2001, $10,500 in 2000 and
$11,100 in 1999.
A reconciliation of beginning and ending balances of the pension plan's
projected benefit obligation for the year ended December 31, 2000 is presented
below.
- ----------------------------------------------------------
(in thousands)
- ----------------------------------------------------------
Projected benefit obligation, beginning of year $ 3,499
Increase due to changes in assumptions 247
Benefits to participants (3,965)
Interest cost 219
- ----------------------------------------------------------
Benefit obligation, end of year $ 0
==========================================================
A reconciliation of beginning and ending balances of the pension plan's
assets for the year ended December 31, 2000 is as follows.
- ------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------
Fair value of plan assets, beginning of year $ 2,965
Employer contributions 966
Investment income 176
Benefits to participants (3,965)
Market value adjustment related to liquidation of plan assets (131)
Administrative expenses (11)
- ------------------------------------------------------------------------
Fair value of plan assets, end of year $ 0
========================================================================
24
Net periodic pension cost for the years ended December 31, 2000 and 1999 is
computed below:
- -------------------------------------------------------------------------
(in thousands) 2000 1999
- -------------------------------------------------------------------------
Net periodic pension cost consists of
the following components:
Interest cost on projected benefit obligation $ 219 $ 216
Expected return on plan assets (189) (150)
Amortization of prior year losses 1,594 38
Other amortization and deferral (70) 3
- -------------------------------------------------------------------------
Net periodic pension cost $1,554 $ 107
=========================================================================
Rates used in determining pension expense for the years ended December 31,
2000 and 1999 were as follows:
- ------------------------------------------------------
2000 1999
- ------------------------------------------------------
Discount rate (pre-retirement period) 6.35% 6.35%
Discount rate (post-retirement period) 6.35% 6.35%
Annual rate of return on plan assets 6.35% 6.35%
Annual rate of increase in compensation N/A N/A
======================================================
12. COMMITMENTS AND CONTINGENCIES
Rental expense in 2001, 2000 and 1999 was approximately $23,000, $57,000
and $138,000, respectively.
From March 1994 until August 2000, the Company owned a 50% interest in its
home office building, which it sold in August 2000. The Company leased the
portion of the building it did not own at a rate of $17,000 per month until July
1999 when its lease expired. The building lease was classified as an operating
lease. The Company also subleased a portion of the unused space in the building
to third party tenants until April 2000. Income from these subleases totaled
$14,000 in 2000 and $175,000 in 1999. The Company has no other significant lease
commitments.
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 was 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. The Company filed two counterclaims against this
agency seeking damages for losses the Company sustained as a result of the
agency's alleged breach of the partnership agreement and to recover an unpaid
loan made to the agency. In December 2000, the trial for the Company's claim for
recovery of the unpaid loan took place, and, in January 2001, the court awarded
a $90,000 judgment in favor of the Company. In August 2001, the parties settled
this matter through mediation. As a result of this settlement, the Company
agreed to pay the agency $210,000 in cash and to mark as satisfied the $90,000
judgment the Company had previously been awarded. The $90,000 receivable had
been fully reserved in the Company's financial statements.
During 1999, a dispute arose between the Company and the purchaser of its
credit insurance business relating to the payment of investment income on the
assets which were transferred to the purchaser. Subsequent to the closing of the
transaction, the purchaser claimed that the Company owed it approximately
$1,400,000 for investment earnings on the amount transferred. In October 1999,
the purchaser informed the Company that it would begin withholding from the
Company the fee revenue payments which were contractually due to the Company
from the sale of the credit insurance accounts. At September 30, 2000, fee
revenues totaling $421,000 had been withheld by the purchaser. In October 2000,
25
the parties settled this dispute. Pursuant to the terms of the settlement
agreement, the purchaser paid the Company $250,000 in settlement of all prior
amounts withheld and in lieu of any future fee revenue payments. In addition,
the Company agreed to permit the purchaser to withdraw $500,000 from a
contingency fund established by the parties at the time of the sale. The total
balance in the fund at the time of withdrawal was approximately $1,500,000.
Although the Company may be entitled to receive all or a portion of the
contingency fund in late 2002 (based on the claims experience of the in force
block of business sold to the purchaser), the Company agreed to the partial
withdrawal following its review of the claims experience to date, which showed
that it is unlikely the Company will ultimately receive any portion of the fund.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company or its subsidiaries.
In the opinion of management, based on opinions of legal counsel, adequate
reserves, if deemed necessary, have been established for these matters and their
outcome will not have a significant effect on the Company's net assets in
liquidation or its changes in net assets in liquidation. The Company has taken
certain income tax positions in previous years that it believes are appropriate.
If such positions were to be successfully challenged by the Internal Revenue
Service, the Company could incur additional income taxes as well as interest and
penalties. Management believes that the ultimate outcome of any such challenges
will not have a material effect on the Company's financial statements.
13. REDEEMABLE PREFERRED STOCK
The Redeemable Convertible Preferred Stock (the Preferred Stock) has a
liquidation preference of $10.00 per share and is convertible at any time,
unless previously redeemed, into shares of common stock at the rate of 1.482
shares of common stock for each share of Preferred Stock (equivalent to a
conversion price of $6.75 per share). The Preferred Stock is redeemable at the
option of the Company at a redemption price of $10.00 per share.
Annual dividends at the rate of $.85 per share are cumulative from the date
of original issue and are payable quarterly on the first day of January, April,
July and October. At December 31, 2001, the Company was not in arrears with
respect to payment of dividends on the Preferred Stock. Except in certain
limited instances, the holders of the Preferred Stock have no voting rights.
The terms of the Preferred Stock require the Company to make annual
payments to a sinking fund. The first such payment was due in July 1998. The
Preferred Stock terms also provide that any purchase of preferred shares by the
Company will reduce the sinking fund requirements by the redemption value of the
shares purchased. As a result of the Company's purchases of Preferred Stock
prior to 1998, no sinking fund payment was due in 1998, and the required payment
for 1999 was reduced from $550,000 to $414,610. The purchase of 18,000 preferred
shares in 1999, 7,400 shares in 2000 and 3,447 shares in 2001 further reduced
the 1999 sinking fund deficiency to $126,140. On July 1, 2000, an additional
$550,000 sinking fund payment became due but was not paid. On July 1, 2001,
another $550,000 sinking fund payment became due but was also not paid.
Consequently, at December 31, 2001, the total sinking fund deficiency was
$1,226,140.
When the Company is in arrears as to preferred dividends or sinking fund
appropriations for the Preferred Stock, dividends to holders of the Company's
common stock as well as purchases, redemptions or acquisitions by the Company of
shares of the Company's common stock are restricted. If the Company is in
default with respect to the payment of preferred dividends and the aggregate
amount of the deficiency is equal to four quarterly 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.
At December 31, 2001 and 2000, the redemption value of the Preferred Stock
exceeded the net assets available to redeem these shares by $1,989,000 and
$1,241,000, respectively. Accordingly, the carrying amount for the Preferred
Stock has been reduced to reflect the net assets available. At December 31, 2001
and 2000, 670,539 and 675,646 shares of common stock, respectively, were
reserved for the conversion of the Preferred Stock.
In connection with the potential acquisition of a controlling interest in
the common stock of the Company, as discussed in Note 17, the Company intends to
give all of the preferred shareholders an opportunity to tender their shares in
exchange for a cash payment. If this tender offer is completed, those preferred
shareholders who do not elect to tender their shares will remain shareholders of
the Company and will continue to be entitled to the same rights and preferences
as currently exist for the preferred stock.
26
14. INCOME TAXES
Under tax laws in effect prior to 1984, a portion of the gain from
operations of Consumers Life was not taxed when incurred but was accumulated in
a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform
Act of 1984, the balance in the Policyholders' Surplus Account of Consumers Life
was frozen as of December 31, 1983 and additional amounts are no longer
accumulated in this account. However, distributions from the account continue to
be taxed, as under previous laws, if any of the following conditions occur:
(a) The Policyholders' Surplus Account exceeds a prescribed maximum, or
(b) Distributions, other than stock dividends, are made by Consumers Life
to the Company in excess of Shareholders' Surplus, as defined by prior
law, or
(c) Consumers Life ceases to qualify for taxation as a life insurance
company.
At December 31, 2001 and 2000, the Policyholders' Surplus Account for
Consumers Life was approximately $439,000. Based on its current plans, the
Company does not believe it is probable that Consumers Life will incur any
additional taxes with regard to its Policyholders' Surplus Account.
There are currently no significant amounts of retained earnings in excess
of statutory surplus upon which neither current nor deferred income taxes have
been provided.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 2001 and
2000, the Company had no material deferred tax liabilities and only one material
deferred tax asset relating to net operating loss carry forwards. This deferred
tax asset, which totaled $2,013,000 and $1,869,000 at the end of 2001 and 2000,
respectively, has been fully offset by a valuation allowance.
The Company files a consolidated Federal income tax return with Consumers
Life. At December 31, 2001, Consumers Life had available approximately $5.9
million of Federal net operating losses, which will be carried forward to future
years. Of this amount, $163,000 may only be used to offset future taxable
income of the life insurance company sub-group. The net operating losses will
expire at various times from 2009 to 2016. However, if the planned sale of
Consumers Life is completed, these loss carry forwards will no longer be
available to offset any future taxable income of the Company.
15. SEGMENT INFORMATION
As a result of the disposal of its auto auction business in 1996, the
disposal of its remaining block of individual life insurance business in early
1997 and the disposal of its credit insurance business in 1998, the Company has
no remaining business segments.
As discussed in Note 4, following the sale of its credit insurance
business, the Company began liquidating its remaining assets and paying or
providing for its liabilities. If the Company proceeds with the Plan of
Liquidation, the Company intends to eventually distribute all of its remaining
cash to its preferred shareholders pursuant to the Plan of Liquidation. The
Company's revenues, benefits and expenses now consist principally of investment
income on remaining assets and corporate expenses. If the Company is acquired as
a result of the proposed transaction described in Note 17, any new businesses
which are merged into or otherwise combined with the Company will be reported as
new business segments in the Company's financial statements.
16. REGULATORY MATTERS
As discussed in Note 17, in February 2002, Black Diamond Insurance Group,
Inc. filed a Form A with the Delaware Insurance Department in connection with
its planned acquisition of Consumers Life. The Company expects that regulatory
approval of this transaction will be received within 60 days.
In August 2000, Consumers Life signed a Consent Order issued by the
Delaware Insurance Department in which the Department claimed that Consumers
Life had violated certain provisions of the Delaware Holding Company statutes in
27
that it had not obtained prior approval from the Department for certain
intercompany transactions. The Department did not impose any fines or other
sanctions but did require that Consumers Life obtain prior approval from the
Department for all transactions with the Company and for any disbursements in
excess of $10,000.
In August 2000, Consumers Life surrendered its certificate of authority to
write insurance business in the state of Idaho because it did not meet that
state's statutory deposit requirements. Since Consumers Life is no longer
writing any insurance business, the surrender of the Idaho license has had no
material adverse effect on the Company. However, the loss of this license will
reduce the consideration the Company will receive when Consumers Life is sold
(see Note 17).
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, 2001, Consumers Life has more than sufficient capital to
meet the NAIC's RBC requirements.
17. SUBSEQUENT EVENTS
Agreement to Sell Consumers Life
- ------------------------------------
On January 31, 2002, the Company entered into a Stock Purchase Agreement to
sell all of the stock of Consumers Life to Black Diamond Insurance Group, Inc.,
a Delaware corporation. At the closing of this transaction, the Company will
receive cash equal to the fair value of the net assets of Consumers Life plus
$10,000 for each of the subsidiary's 25 state insurance licenses. The sale
transaction must be approved by the Delaware Insurance Department. In that
regard, on February 21, 2002, the purchasers filed a Form A with the Delaware
Department seeking approval of the change in control.
Option Agreement
- -----------------
On February 13, 2002, the Company entered into an option agreement (the
Option Agreement) with CFC Partners, Ltd., an unrelated investor group based in
New York (CFC Partners). The execution of the Option Agreement with CFC Partners
followed a review by the Board of Directors of various proposals to acquire a
controlling interest in the Company. The Option Agreement permits CFC Partners
to acquire a 51% interest in the Company's common stock through the issuance of
2,700,000 authorized but unissued shares. The option price of $108,000 was
deposited into an escrow account in March 2002. The option is exercisable within
15 business days following the completion by the Company of a tender offer to
its preferred shareholders, in which those shareholders will be given an
opportunity to receive a cash payment in exchange for their shares. The tender
offer, if accepted by all of the preferred shareholders, will result in the
payment to those shareholders of substantially all of the Company's remaining
net assets. Under Pennsylvania laws, the newly issued common shares will have no
voting rights until CFC Partners obtains the required approval from the common
shareholders.
Pursuant to the terms of the Option Agreement, if another offer to acquire
the Company is received prior to the exercise of the option by CFC Partners, and
the Board of Directors believes that it is in the best interest of the Company's
shareholders to accept such offer, the Company may terminate the Option
Agreement by paying $50,000 to CFC Partners and returning the escrow deposit.
The Option Agreement also provides that if CFC partners does not exercise the
option, it will forfeit $25,000 of the escrow deposit. If the option is not
exercised, the Board of Directors intends to continue with the Plan of
Liquidation.
If CFC Partners exercises its option to acquire control of the Company, it
has indicated that it intends to merge or otherwise combine certain existing and
start-up businesses into the Company. CFC Partners has further indicated that
these businesses initially will include (i) a company that will provide long
distance telephone services at discounted rates, (ii) a company which provides
services that enable its customers to deploy and migrate to E-business portals
and E-marketplaces and (iii) a company that will offer business to business
online financial services.
The sale of Consumers Life, as discussed above, is essential to completing
the Company's tender offer to the preferred shareholders because virtually all
of the Company's cash funds are held by Consumers Life and cannot be withdrawn
under Delaware insurance laws until the subsidiary is either sold or liquidated.
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Stambaugh Ness, PC serves as the Company's independent auditors
and has served in that capacity since November 29, 1999. No information relating
to this Item is required to be included in the Company's Form 10-K for the year
ended December 31, 2001.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Historically, the Board of Directors of the Company was divided into three
(3) groups, with the directors in each group serving terms of three (3) years.
However, due to the Directors' efforts over the past six years to merge, sell or
otherwise dispose of the Company or its assets, and the eventual approval by the
shareholders of the Plan of Liquidation in 1998, there has been no election of
Directors since 1995. Following the approval of the Plan of Liquidation, three
of the Company's Directors, Leon A. Guida, Dr. Robert G. Little, Jr. and Rev.
Sterling P. Martz, resigned. On November 17, 1999, Edward J. Kremer also
resigned.
If the Directors proceed with the Plan of Liquidation, the two remaining
Directors are expected to continue to serve as Directors for a limited period of
time in order to oversee the completion of the liquidation process. As discussed
in Item 1 of this Form 10-K, the Company has granted an option to an investor
group to acquire a 51% interest in the common stock of the Company. If the
option is exercised, the Company will identify three people, who are
satisfactory to the investor group, and will recommend such persons to the
current Directors to fill existing vacancies on the Board. Upon election of the
new Directors to the Board, Mr. Robertson and Mr. Groninger have indicated their
intention to resign immediately.
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, 2002.
NAME PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS, OFFICE (IF ANY) DIRECTOR
(AGE) HELD IN THE COMPANY AND OTHER INFORMATION SINCE
====================================================================================================
James C. Robertson Chairman of the Board, President and Chief
(70) Executive Officer of the Company 1967
John E. Groninger President, John E. Groninger, Inc., Juniata Concrete, Inc., Republic
(75) Development Corp., and Juniata Lumber & Supply Co., Mexico,
PA 1968
The following information is provided as of March 1, 2002 for each
executive officer of the Company. Both of the executive officers listed also
serve as executive officers of Consumers Life. 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 70 President and Chief Executive Officer
R. Fredric Zullinger 53 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Mr. Robertson joined the Company in 1967 as General Counsel and was elected
a director and President of the Company in 1968. Mr. Robertson currently serves
as Chairman of the Board, President and Chief Executive Officer of the Company.
Mr. Zullinger joined the Company in 1977 as Vice President-Accounting of
the Company's life insurance subsidiaries. He was appointed Treasurer of the
Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr.
Zullinger currently serves as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of the Company.
30
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 2001, 2000 and 1999 of the Chief Executive Officer and any
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, 2001 - 0 - (1) - 0 - $ 3,300 (2) - 0 -
Chairman, President and 2000 - 0 - (1) - 0 - $ 2,100 (2) - 0 -
Chief Executive Officer 1999 - 0 - (1) - 0 - $ 3,975 (2) - 0 -
===========================================================================================
R. Fredric Zullinger, 2001 $109,450 (3) - 0 - - 0 - - 0 -
Senior Vice President, Chief
Financial Officer and Treasurer
- -------------------------------------------------------------------------------------------
(1) Mr. Robertson's status as a salaried employee of the Company
terminated effective July 19, 1996. Mr. Robertson was not compensated
for any services performed in his capacity as President and CEO of the
Company in either 2000, 1999 or 1998.
(2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman
of the Board of the Company.
(3) Mr. Zullinger's salary and bonus in 2000 and 1999 did not exceed
$100,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted by the Company
to the named executive officers in 2001.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
At December 31, 2001, the Company had no stock options or stock
appreciation rights outstanding. Furthermore, as a result of the adoption of the
Plan of Liquidation in 1998, the Company has no current plans to grant any
options or stock appreciation rights.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Personnel Committee of the Board of Directors (the "Committee") has
historically administered and approved all forms of compensation for the Chief
Executive Officer ("CEO"), the executive officers and other officers of the
Company. The members of the Committee were independent, non-employee directors
who annually reviewed with the Board all aspects of compensation, management
succession and the implementation and administration of the Company's various
incentive plans.
COMPENSATION PHILOSOPHY
Historically, the compensation policy of the Company was 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
31
to a large degree on the annual and longer term incentive compensation plans to
attract and retain corporate officers of outstanding abilities and to motivate
them to perform to the full extent of their abilities. However, with the
adoption of the Plan of Liquidation, the Committee implemented a compensation
policy to allow an orderly and timely reduction of the officers and employees of
the Company. As a result, the Company's Chief Financial Officer, R. Fredric
Zullinger, is currently the only executive officer employed by the Company. If
the Company proceeds with the Plan of Liquidation, Mr. Zullinger is expected to
serve in his current capacity until the sale of Consumers Life is completed.
Thereafter, he is expected to provide consulting services as needed during the
remainder of the liquidation period. If the investor group which has been
granted an option to acquire a controlling interest in the Company exercises its
option, as described in Items 1 and 10 of this Form 10-K, Mr. Zullinger is
expected to serve in his current capacity until the current Directors resign.
Mr. Zullinger is entitled to a severance payment equal to approximately fifteen
months of salary when his full-time employment with the Company terminates.
CEO COMPENSATION
Mr. Robertson continues to serve as Chairman of the Board, President and
CEO of the Company. However, his status as a salaried employee of the Company
was terminated effective July 19, 1996. From that time and until December 31,
1996, Mr. Robertson was compensated at the rate of $150 per day for any work
performed for the Company in his capacity as a non-salaried employee while
serving as President and CEO. Beginning in 1997 and continuing through 2001, Mr.
Robertson did not receive any compensation in his capacity as a non-salaried
employee while serving as President and CEO, although he continued to receive
the standard retainer and board meeting fees in his role as Chairman of the
Board.
This report is submitted by the Personnel Committee of the Company's Board of
Directors.
John E. Groninger, Chairman
STOCK PRICE PERFORMANCE COMPARISON
- -----------------------------------------------------------------------------------------------
Cumulative Total Return (1)
-------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- --------- --------- ---------
(2) (2) (2)
Consumers Financial Corp. (CFIN) 100.00 26.42 3.25 N/A N/A N/A
Peer Group (3) 100.00 131.82 104.55 N/A N/A N/A
NASDAQ Stock Market (U.S.) 100.00 122.47 172.72 N/A N/A N/A
- -----------------------------------------------------------------------------------------------
(1) Assumes $100 invested on December 31, 1996 in the Company's common
stock, the Peer Group's common stock and the NASDAQ Stock Index. Total
shareholder returns assume reinvestment of dividends.
(2) As discussed in Item 5 of this Form 10-K, the Company's common stock
was delisted by NASDAQ on June 1, 1998 for noncompliance with NASDAQ's
market value of public float requirements. The Company's shareholders also
approved a Plan of Liquidation and Dissolution in March 1998, and the
Company ceased operations during that year. Therefore, any stock price
comparisons after 1998 are not considered meaningful.
(3) The peer group companies were primarily in the same segment of the
insurance industry as the Company when it conducted its insurance
operations. While none of the companies offered all of the products and
services that the Company offered, each was considered a competitor of the
Company during the periods presented. The members of the peer group are as
follows: ACCEL International Corporation, CNL Financial Corporation,
American Bankers Insurance Group and US Life Corporation.
32
PENSION PLAN BENEFITS
At December 31, 1999, the Company had a defined benefit pension plan, the
Consumers Financial Corporation and Subsidiaries Employees' Retirement Plan.
Effective March 22, 2000, the pension plan was terminated, and, following
approval from the Pension Benefit Guaranty Corporation and receipt of a
favorable determination letter from the Internal Revenue Service, all benefits
due under the plan were distributed to the plan participants in November and
December 2000. Participants, including retirees already receiving benefits,
could elect to receive their termination benefits either in a lump sum payment
or in the form of an annuity purchased from a third party insurer. Benefits
under this plan had been frozen as of July 31, 1996. The Company contributed
approximately $966,000 to the plan during 2000 so that the plan could pay the
required benefits to the participants.
In connection with the termination of the pension plan, Mr. Robertson and
Mr. Zullinger both elected a lump sum payment and received distributions of
approximately $427,000 and $114,000, respectively, from the plan.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 2002, 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 (1) CLASS
===========================================================================================
Peter H. Kamin
Common One Financial Center, Suite 1600, Boston, MA 02111 205,100 7.96%
Common Stephen J. Burns 183,000 7.10%
3922 Wrexham Court, Bensalem, PA 19020
(1) Mr. Kamin and Mr. Burns each exercise sole voting and investment
power
The following table sets forth as of March 1, 2002, 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) 2.23%
Preferred 22,410 (3) 4.95%
Common Robertson, James C. 99,775 3.87%
Preferred 5,235 (4) 1.16%
(b)
Common Zullinger, R. Fredric 29,522 1.15%
(c)
Common Directors and Executive 186,818 7.25%
Preferred Officers as a Group 27,645 6.11%
(3 individuals)
(1) Except where otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment power.
(2) Includes 42,542 shares owned by Mr. Groninger's wife.
(3) Includes 1,000 shares owned by Mr. Groninger's wife.
(4) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's
wife.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2001, the Company did not enter into any
transactions in which the amount involved exceeded $60,000, with any of its
directors, executive officers, security holders known to the Company to own more
than 5% of the Company's common stock or any member of the immediate family of
any of the foregoing persons.
35
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 Statements of Net Assets in Liquidation - December 31,
2001 and 2000
Consolidated Statements of Changes in Net Assets in Liquidation - For
the years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (included in Part IV of this report):
(II) Condensed Financial Information of Registrant
(III) Supplementary Insurance Information
(IV) Reinsurance
(V) Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they
are not required, not applicable or the required information is set
forth in the financial statements or notes thereto.
3. Exhibits:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession (i)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders, including
indentures (i)
(9) Voting trust agreement (ii)
(10) Material contracts (ii)
(11) Statement re computation of per share earnings (ii)
(12) Statement re computation of ratios (ii)
(13) Annual report to security holders (ii)
(16) Letter re change in certifying accountant (ii)
(18) Letter re change in accounting principles (ii)
(21) Subsidiaries of the registrant (iii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (ii)
(24) Power of attorney (ii)
(99) Additional exhibits (ii)
(i) Information or document provided in previous filing with the
Commission
(ii) Information or document not applicable to registrant
(iii) Information or document included as exhibit to this Form 10-K.
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2001.
36
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 2001 AND 2000
- -----------------------------------------------------------------------------------------------------
(dollar amounts in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 108 $ 98
Cash 1 2
Investment in affiliate 2,905 3,630
Receivables 14 265
Other assets 7 11
- -----------------------------------------------------------------------------------------------------
Total assets 3,035 4,006
- -----------------------------------------------------------------------------------------------------
Liabilities
Indebtedness to affiliate 395 395
Dividend payable 96 97
Other liabilities 6 194
- -----------------------------------------------------------------------------------------------------
497 686
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500 shares;
issued and outstanding 2001, 452,614 shares; 2000, 456,061 shares; net of
$1,988 reduction in 2001 and $1,241 in 2000 to reflect estimated liquidation value 2,538 3,320
- -----------------------------------------------------------------------------------------------------
Total liabilities and redeemable preferred stock 3,035 4,006
- -----------------------------------------------------------------------------------------------------
Net assets in liquidation $ 0 $ 0
=====================================================================================================
See notes to condensed financial statements
37
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ---------------------------------------------------------------------------------------------
(in thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Revenues:
Net investment income $ 6 $ 5 $ 3
Fees from sale of customer accounts 51 156
Joint venture income 11 30
Miscellaneous 20 10 31
- ---------------------------------------------------------------------------------------------
26 77 220
- ---------------------------------------------------------------------------------------------
Expenses:
Salaries and employee benefits 9 26
Professional fees 43 24 2
Miscellaneous 19 11 10
- ---------------------------------------------------------------------------------------------
62 44 38
- ---------------------------------------------------------------------------------------------
Excess of revenues over (under) expenses (36) 33 182
Equity in decrease in net assets of unconsolidated subsidiaries (485) (1,794) (227)
Decrease (increase) in liability for under funded pension plan 1,122 (388)
Adjustment of assets to estimated net realizable value 108
Adjustment of liabilities to estimated settlement amounts 91
Increase (decrease) in unrealized appreciation of debt securities 28 44 (43)
Preferred stock dividends (386) (391) (406)
Adjustment of preferred stock to estimated liquidation value 748 938 303
Retirement of treasury shares - preferred 23 48 105
- ---------------------------------------------------------------------------------------------
Decrease in net assets for the period 0 0 (383)
Net assets at beginning of period 0 0 383
- ---------------------------------------------------------------------------------------------
Net assets at end of period $ 0 $ 0 $ 0
=============================================================================================
See notes to condensed financial statements
38
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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. In 2001 and 2000, the Company received dividends in the amount of $212,500
and $160,000, respectively, from its subsidiary, Consumers Life Insurance
Company. The Company received no cash dividends from its subsidiaries in
1999. During 1999, the Company received $1.3 million from an affiliate as a
partial repayment of a $4.7 intercompany note. This payment represented
substantially all of the affiliate's remaining assets. Accordingly, the
note was canceled and this affiliate was then dissolved. In addition,
during 1999, the Company repaid $1.3 million on a $1.58 million note
payable to Consumers Life. This note was also canceled, since the Company
did not have sufficient funds to repay the remaining $268,000.
3. The Company files a consolidated Federal income tax return with Consumers
Life. Tax expense and tax benefits, when applicable, are allocated
proportionately between the two companies.
39
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------
(in thousands)
Deferred Other policy
policy Future claims and
acquisition policy Unearned benefits
Segment costs benefits premiums payable
- -------------------------------------------------------------------------------------------
Year ended December 31, 2001:
- -----------------------------
Automotive Resource Division:
Individual Life Insurance Division
Other
- -------------------------------------------------------------------------------------------
Total $ 0 $ 0 $ 0 $ 0
===========================================================================================
Year ended December 31, 2000:
- -----------------------------
Automotive Resource Division $ 5,474 $ 13,466 $ 1,369
Individual Life Insurance Division $ 40 1,062
Other
- -------------------------------------------------------------------------------------------
Total $ 40 $ 6,536 $ 13,466 $ 1,369
===========================================================================================
Year ended December 31, 1999:
- -----------------------------
Automotive Resource Division $ 7,629 $ 27,644 $ 2,359
Individual Life Insurance Division 1,449 6
Other
- -------------------------------------------------------------------------------------------
Total $ 0 $ 9,078 $ 27,644 $ 2,365
===========================================================================================
40
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
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) (b)
Year ended December 31, 2001:
- -----------------------------
Automotive Resource Division
Individual Life Insurance Division
Other $ 118 $ 150 $ 40 $ 749
- ---------------------------------------------------------------------------------------------------------
Total $ 118 $ 150 $ 40 $ 749
=========================================================================================================
Year ended December 31, 2000:
- -----------------------------
Automotive Resource Division
Individual Life Insurance Division
Other $ 377 $ 301 $ 10 $ 2,491
- ---------------------------------------------------------------------------------------------------------
Total $ 377 $ 301 $ 10 $ 2,491
=========================================================================================================
Year ended December 31, 1999:
- -----------------------------
Automotive Resource Division $ 384 $ 11 $ 394
Individual Life Insurance Division
Other 484 199 2 $ 929
- ---------------------------------------------------------------------------------------------------------
Total $ 868 $ 210 $ 396 $ 929
=========================================================================================================
(a) Excludes realized investment gains and losses.
(b) Includes pension expense of $1,554 in 2000 due to termination of plan
in December 2000.
41
SCHEDULE IV
REINSURANCE
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------
(in thousands) Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Segment amount companies companies amount to net
- ----------------------------------------------------------------------------------------
Year ended December 31, 2001:
- -----------------------------
Life insurance in force $ 0 $ 0
- ----------------------------------------------------------------------------------------
Premium income $ 0 $ 0
========================================================================================
Year ended December 31, 2000:
- -----------------------------
Life insurance in-force $ 58 $ 58
- ----------------------------------------------------------------------------------------
Premium income $ 0 $ 0
========================================================================================
Year ended December 31, 1999:
- -----------------------------
Life insurance in-force $ 58 $ 58
- ----------------------------------------------------------------------------------------
Premium income:
Assumed warranty $ 319 $ 319 100.0%
- ----------------------------------------------------------------------------------------
$ 319 $ 319 100.0%
========================================================================================
NOTE:
This schedule excludes premiums ceded for discontinued lines of business.
42
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, 2001
- ----------------------------
Provision for uncollectible receivables $ 106 $ 106 (a)
- --------------------------------------------------------------------------------------------------------------------------
$ 106 $ 106 $ 0
==========================================================================================================================
Year ended December 31, 2000
- ----------------------------
Provision for permanent decrease in market value of
property and equipment $ 753 $ 753 (b)
Provision for uncollectible receivables 106 $ 106
- --------------------------------------------------------------------------------------------------------------------------
$ 859 $ 753 $ 106
==========================================================================================================================
Year ended December 31, 1999
- ----------------------------
Provision for permanent decrease in market value of:
Property and equipment $ 962 $ 209 (c) $ 753
Other real estate 92 92 (b)
Other invested assets 55 55 (b)
Provision for uncollectible receivables 106 106
- --------------------------------------------------------------------------------------------------------------------------
$ 1,215 $ 356 $ 859
==========================================================================================================================
(a) Collection of receivable ($16) and write-off of asset against
valuation allowance ($90)
(b) Write-off of valuation allowance for assets sold.
(c) Reduction in valuation allowance related to adjustment to net
realizable value.
43
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 15, 2002
44
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/ Director, President and March 15, 2002
- ----------------------------- Chairman of the Board
James C. Robertson (Chief Executive Officer)
/S/ Senior Vice President March 15, 2002
- ----------------------------- and Treasurer
R. Fredric Zullinger (Chief Financial Officer)
/S/ Director March 15, 2002
- -----------------------------
John E. Groninger
45