-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSDIYHLTwuL3r897mwCAPxRCmOo3hLpLdEN3rw+8uRD79hdS7GMg5i8H2N7swWtl nhTQSOE0r1Sdap8f8xzNMw== 0000100320-00-000001.txt : 20000329 0000100320-00-000001.hdr.sgml : 20000329 ACCESSION NUMBER: 0000100320-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS FINANCIAL CORP CENTRAL INDEX KEY: 0000100320 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 231666392 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12455 FILM NUMBER: 580874 BUSINESS ADDRESS: STREET 1: 1200 CAMP HILL BY PASS STREET 2: P O BOX26 CITY: CAMP HILL STATE: PA ZIP: 17001-0026 BUSINESS PHONE: 7177614230 MAIL ADDRESS: STREET 1: 1200 CAMP HILL BYPASS STREET 2: PO BOX 26 CITY: CAMP HILL STATE: PA ZIP: 17001-0026 FORMER COMPANY: FORMER CONFORMED NAME: TWENTIETH CENTURY CORP DATE OF NAME CHANGE: 19800620 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K < X > Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 0-2616 CONSUMERS FINANCIAL CORPORATION 1200 CAMP HILL BY-PASS CAMP HILL, PA 17011 PENNSYLVANIA 23-1666392 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None Not listed Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered Common stock (no par) (voting) Not listed 8 1/2% Preferred Stock Series A (Par Value $1.00 per share) (non-voting) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing such requirements for the past 90 days. Yes XX No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Based on the closing price on March 1, 2000, the aggregate market value of common stock held by non-affiliates of the registrant was $180,481. The number of outstanding common shares of the registrant as of March 1, 2000 was 2,578,295. PART I TEM 1. BUSINESS GENERAL Consumers Financial Corporation (the "Company") is an insurance holding company which, until October 1, 1997, was a leading provider, through its subsidiaries, of credit life and credit disability insurance in the Middle Atlantic region of the United States. The insurance subsidiaries previously conducted the majority of their business in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and Virginia, marketing credit insurance products primarily through automobile dealers. In connection with its credit insurance operations, the Company also marketed, as an agent, an automobile extended service warranty product. Effective October 1, 1997, the Company transferred all of its credit insurance and fee income accounts to Life of the South Corporation ( LOTS ), a Georgia-based financial services holding corporation. On January 1, 1998, LOTS hired substantially all of the sales and marketing personnel of the company and assumed the administration of the Company s credit insurance business. In addition, effective January 1, 1998, the Company also reinsured to American Republic Insurance Company ( American Republic ), a financial partner of LOTS in this transaction, 100% of its credit insurance business which was inforce on September 30, 1997 (the Sale of Assets ) and reinsured 100% of the credit insurance business written on the policy or certificate forms of the Company s subsidiaries in the fourth quarter of 1997. In connection with these transactions, the Company and LOTS also agreed that, with respect to one of the subsidiaries, the new credit insurance business produced by that subsidiary s former customer accounts, which were transferred to LOTS, would continue to be written on the policy or certificate forms of the subsidiary until September 30, 1999, which date was extended by the parties to November 15, 1999 with respect to Pennsylvania business only. This premium and the related insurance risk were also reinsured 100% to American Republic. Settlement on the Sale of Assets transaction, which received the approval of state insurance regulators and the approval of the Company s preferred and common shareholders at a special meeting held on March 24, 1998 (the Special Meeting ), took place in May 1998. At the Special Meeting, the Company s shareholders also approved a Plan of Liquidation and Dissolution (the Plan of Liquidation ) pursuant to which the Company is liquidating its remaining assets in order to provide for all of its liabilities, distribute cash to its preferred shareholders, up to their liquidation preference, and distribute any remaining cash to its common shareholders. The assets and liabilities of the Company may be transferred to a liquidating trust if the Board of Directors determines that the use of a liquidating trust provides the best alternative for liquidating the Company. If the Company s assets and liabilities are transferred to such a trust, all distributions to shareholders would then be made directly from the liquidating trust after the satisfaction of all liabilities. In 1992, the Company sold all of its traditional whole-life, term and annuity business. In 1994, the Company reinsured substantially all of its universal life insurance business to a third party insurer and, effective January 1, 1997, it sold its remaining block of universal life business back to the direct writer of the business. Additional information regarding the sale of the Individual Life Insurance Division s in-force business appears below under "Operations." The Company, through its wholly-owned subsidiary, IAAC, Inc., formerly Interstate Auto Auction, Inc. ("Interstate"), also conducted wholesale and retail automobile auctions of used vehicles for automobile dealers, banks and leasing companies. The Company sold the business and the related operating assets of Interstate in November 1996. Additional information regarding the termination of the auto auction operations appears below under Operations. The term "Company" when used herein refers to Consumers Financial Corporation and its subsidiaries unless the context requires otherwise. The Company's executive offices are located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania 17011. Its telephone number is (717) 761-4230. The Company was formed in 1966 as 20th Century Corporation (a Pennsylvania business corporation) and adopted its present name on May 30, 1980. The Company operated through various wholly-owned subsidiaries since it was formed; however, all of these subsidiaries have been either sold or liquidated except for Consumers Life Insurance Company, a Delaware life insurance company ( Consumers Life ). Prior to the discontinuation of its business operations, as discussed above, the Company operated in three industry segments: the Automotive Resource Division, which marketed credit insurance and other products and services to its automobile dealer customers, the Individual Life Insurance Division and the Auto Auction Division. These segments did not include the corporate activities of Consumers Financial Corporation which previously were insignificant in relation to the three segments. All three segments are now presented as discontinued operations in the Company s consolidated financial statements for all periods presented. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. OPERATIONS The Company's principal subsidiary, Consumers Life, was engaged in the marketing of credit insurance business until October 1, 1997. Consumers Life is licensed in 25 states and the District of Columbia. In September 1999, IFLAC Corp. (formerly Investors Fidelity Life Assurance Corp.), an Ohio life insurance company which previously marketed credit insurance in that state, surrendered its certificate of authority to conduct insurance operations and was then liquidated. In August 1997, the Company sold another wholly-owned subsidiary, Consumers Life Insurance Company of North Carolina, which had also been engaged in the sale of credit insurance. As noted previously in this Item 1, the Company sold its credit insurance customer accounts to LOTS as of October 1, 1997 and, effective January 1, 1998, the Company transferred to American Republic, through reinsurance, its September 30, 1997 inforce block of credit insurance business and 100% of the credit insurance business written in the fourth quarter of 1997. As a result of these transactions with LOTS and American Republic, the Company has no remaining business segments, since it sold the remainder of its individual life insurance business as of January 1, 1997 and sold its auto auction business in November 1996. The information appearing below briefly describes the three business segments in which the Company previously operated. The activities of the Company are now restricted primarily to the collection of investment income on the Company s remaining invested assets, the collection of fee revenues from LOTS from the sale of the Company s credit insurance accounts and the payment of certain corporate costs and other fixed overhead expenses. Since the reinsurance treaty between Consumers Life and American Republic is an indemnity agreement, Consumers Life would become liable for the insurance risks transferred in the event American Republic is unable to meet its obligations under the reinsurance agreement. AUTOMOTIVE RESOURCE DIVISION Prior to the sale of its credit insurance and fee income accounts to LOTS as of October 1, 1997, the Company marketed and retained the risk on credit insurance in connection with consumer loan transactions, substantially all of which were automobile purchases. Credit life insurance provides funds in the event of the insured's death for payment of a specified loan or loans owed by the insured. Similarly, credit disability insurance provides for the periodic paydown of such loans during the term of the insured's disability. In most cases, the entire premium is paid at the time the insurance is issued. The primary beneficiary under credit insurance is the lender, with any proceeds in excess of the unpaid portion of the loan payable to a named second beneficiary or the insured's estate. The credit insurance business was the major source of the Company's revenues and, until 1991, provided the majority of its profits as well. Automobile sales accounted for substantially all of the credit insurance sold by the Company. The credit insurance industry and the Company s credit business were both adversely affected in the early 1990's by the increase in the number of automobiles which were being leased instead of purchased, not only because there was a general lack of availability of approved credit insurance products applicable to leases but also due to a reluctance on the part of automobile dealers to emphasize the sale of credit insurance products on lease transactions. The Company also marketed, in an agency capacity, extended service automobile warranty products through a subsidiary. These products were underwritten by unaffiliated insurance companies, administered by unaffiliated third party administrators and sold primarily through automobile dealers who also sold the Company's credit insurance. Other related products and services were also offered to the Company's automobile dealer customers. INDIVIDUAL LIFE INSURANCE DIVISION In March of 1992, the Company announced the termination of this Division's marketing activities and announced its intent to sell its existing blocks of whole-life, term, annuity and universal life business. Effective October 1, 1992, the traditional whole-life, term and annuity business was sold for $5.6 million to the Londen Insurance Group located in Phoenix, Arizona. Effective December 31, 1994, the Company coinsured its direct universal life business and irrevocably assigned all its right, title and interest in a block of assumed universal life business (coinsured from AMEX Life Assurance Company on a 90% quota share basis) to American Merchants Life Insurance Company, located in Jacksonville, Florida, for $5.5 million. Effective January 1, 1997, the Company sold its remaining block of individual life insurance business back to the direct writer of the business. The direct writer paid the Company a recapture consideration of $1.05 million in March 1997 when the transaction closed. AUTO AUCTION DIVISION As indicated previously, the business and the related operating assets of Interstate were sold in November 1996 for cash of $4.85 million. Prior to the sale, Interstate conducted wholesale automobile auctions of used vehicles at its facility in Mercer, Pennsylvania (about 50 miles north of Pittsburgh). Interstate s customers included automobile dealers and leasing companies. In connection with its weekly auctions, Interstate provided a body shop repair and conditioning service and an arbitration service through which disputes between buyers and sellers were resolved. INVESTMENTS The Company's insurance subsidiaries have historically invested primarily in fixed maturity securities (bonds) and, to a lesser extent, in mortgages with intermediate terms (generally not more than seven years). Investments in mortgages allowed the Company to obtain higher yields while maintaining maturities in the five to seven year range. Prior to the sale of the Company s direct universal life business, the Company's investment policy also included investing in certain mortgage-backed securities which provided competitive yields on assets supporting these interest sensitive products. The Company s only remaining fixed maturity securities are bonds and a certificate of deposit which Consumers Life is required to maintain on deposit with various state insurance departments. The Company s mortgage loan portfolio, which relates primarily to commercial real estate, has declined significantly during the past five years, from $9.9 million at the end of 1994 to $1.6 million at December 31, 1999. The reduction is primarily attributable to the sale of certain mortgages, refinancings and early payoffs. Approximately $1.1 million of the mortgage balance at the end of 1999 relates to a loan issued to the co-owner of the Company s home office building. Upon the sale of the office building, which is scheduled to occur in June 2000, this loan will be repaid in full. The mortgage portfolio has generally been concentrated in the Central Pennsylvania area. The Company considered this strategy to be conservative because this region has historically not been particularly susceptible to wide economic swings in recessionary times, due to the diversity of industries throughout the area and the presence of government operations and military installations. Since the approval of the Plan of Liquidation, the Company has maintained all of its remaining investable funds in short-term securities in order to provide the liquidity necessary to pay current expenses and dividends to preferred shareholders and to eliminate the market risk associated with bond investments. The Company also intends to invest the funds which arise from the eventual liquidation of its mortgage loan investments and the office building in short-term securities. The following table sets forth the Company's investment results for the periods indicated: Years ended December 31, 1999 1998 1997 Net Net Net Investment Yield Investment Yield Investment Yield Income % Income % Income % Interest: Fixed maturities $60 6.4 $175 5.0 $1,934 6.7 Mortgage loans 109 7.0 139 7.8 189 8.7 Short term 80 5.5 733 4.3 486 4.4 investments Other 82 9.7 249 6.3 1,047 5.5 2,691 6.3 Investment expenses (39) (0.7) (85) (0.4) (675) (1.6) Total net investment income 210 5.6 962 5.1 2,016 4.7 Less investment income for period subsequent to adoption of liquidation basis of accounting 210 487 Net investment income for period prior to adoption of liquidation basis of accounting 0 475 2,016 Less net investment income attributable to discontinued operations 0 415 1,953 Net investment income attributable to continuing operations $0 $60 $63
COMPETITION Inasmuch as the Company no longer conducts any insurance or other operations, it no longer competes with other organizations. REGULATION Consumers Life is subject to regulation and supervision in the states in which it is licensed. The extent of such regulation varies from state to state, but, in general, each state has statutory restrictions and a supervisory agency which has broad discretionary administrative powers. Such regulation is designed primarily to protect policyholders and relates to the licensing of insurers and their agents, the approval of policy forms, the methods of computing financial statement reserves, the form and content of financial reports and the type and concentration of permitted investments. Consumers Life is also subject to periodic examination by the Delaware Department of Insurance. Although this subsidiary now has only three direct policyholders, the Delaware Department continues to monitor the company s statutory capital and surplus and other aspects of its financial compliance with state insurance laws and regulations. The dividends which a life insurance company may distribute are subject to regulatory requirements based upon minimum statutory capital and surplus and/or statutory earnings. In addition to regulatory considerations, the overall financial strength of each operating entity is considered before dividends are paid. Additionally, the amount of dividends a life insurance company can pay is subject to certain tax considerations. See Notes 3 and 15 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. The Company is also subject to regulation under the insurance holding company laws of certain states. These laws vary from state to state, but generally require insurance holding companies and insurers that are subsidiaries of holding companies to register and file certain reports, including information concerning their capital structures, ownership, financial condition and general business operations, and require prior regulatory agency approval of changes in control of an insurer, most dividends and intercorporate transfers of assets within the holding company structure. EMPLOYEES AND AGENTS As of March 1, 2000, the Company had only 3 full-time employees and 1 part-time employee. On January 1, 1998, all of the Company s sales personnel resigned and became employees of LOTS in connection with the transactions discussed earlier in this Item 1, and certain other administrative employees were terminated. The Company has adequate insurance coverage against employee dishonesty, theft, forgery and alteration of checks and similar items. There can be no assurance that the Company will be able to continue to obtain such coverage in the future or that it will not experience uninsured losses. ITEM 2. PROPERTIES Since September 1989, the Company has maintained its executive and business offices in a leased building located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania. The office building contains approximately 44,000 square feet of office space (approximately 39,000 square feet of leasable space). Prior to 1994, the Company leased the entire facility at an annual rental of $421,000, plus insurance, taxes and utilities. In March of 1994, the Company exercised its option to acquire a 50% interest in its home office building for $1.75 million, which reduced the Company s annual rent on the portion of the building it does not own to $204,000. As a result of the sale of all of its insurance operations and the adoption of the Plan of Liquidation, the Company has occupied only about 14% of the leasable office space during the past several years. Since 1998, the Company has leased about 45% of the leasable space to third party tenants pursuant to various short-term leases, and received $175,000, $87,000 and $57,000 in 1999, 1998 and 1997, respectively, from these subleases. The Company s lease terminated in July 1999, and since that time, the Company and its co-owner have shared in the sublease income and the operating costs of the office building. In September 1999, the Company and its co-owner signed an agreement to sell the office building to a local investor. Closing on the sale transaction is expected to take place in June 2000, at which time the Company anticipates leasing a minimal amount of office space elsewhere in order to complete the liquidation process. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits which are ordinary and routine litigation incidental to its business. None of these lawsuits is expected to have a materially adverse effect on the Company's financial condition or operations. See Note 12 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information concerning litigation matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1999 to the shareholders of the Company for their consideration through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Consumers Financial Corporation common stock was traded on the NASDAQ National Market System with a ticker symbol of CFIN until June 1, 1998 when it was delisted by NASDAQ for non-compliance with NASDAQ s new market value of public float requirements. The Company s Convertible Preferred Stock, Series A was also traded on the NASDAQ National Market System until March 16, 1998, when it was also delisted by NASDAQ for non-compliance with the new public float requirement of a minimum of 750,000 shares. Since the shareholders of the Company approved the Plan of Liquidation and Dissolution on March 24, 1998, the Company did not appeal the delisting decision for either the common or preferred stock, nor did it take any steps to come into compliance with the new rules or attempt to seek inclusion on the NASDAQ Small Cap Market. Quarterly high and low bid prices for the Company s common and preferred stock, based on information provided by The National Association of Securities Dealers through the NASD OTC Bulletin Board, are presented below. Such prices do not reflect prices in actual transactions and exclude retail mark-ups and mark-downs and broker commissions.
1999 QUARTERLY BID PRICES 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Common Stock High 0.16 0.10 0.07 0.15 Low 0.10 0.07 0.07 0.07 Convertible Preferred Stock Series A High 8.88 8.50 4.75 2.75 Low 8.50 4.25 2.00 2.00
As of December 31, 1999, there were 6,724 shareholders of record who collectively held 2,578,295 common shares and 107 shareholders of record of the Convertible Preferred Stock, Series A, who held 463,461 shares. The number of recordholders presented above excludes individual participants in securities positions listings. Dividends on both the Company s common stock and Convertible Preferred Stock, Series A, are declared by the Board of Directors. No common stock dividends have been paid since 1994. See Note 13 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for a description of the restrictions on the Company's ability to pay dividends to common shareholders. The Convertible Preferred Stock, Series A dividends are paid quarterly on the first day of January, April, July and October at an annual rate of $.85 per share. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain information contained in or derived from the Consolidated Financial Statements and the Notes thereto. (NOT COVERED BY INDEPENDENT AUDITOR S REPORT) For the For the period from period from Year ended March 25, 1998 January 1, 1998 (dollar amounts in thousands, December 31, to to except per share) 1999 December 31,1998 March 24, 1998 Years ended December 31, 1997 1996 1995 Total revenues (excluding change in unearned premiums) $261 $40 $378 $664 Premiums written (4) (37) 353 685 Net investment income 60 63 59 40 Net return on average 4.8% 4.9% 5.4% 6.0% investments Loss from continuing (88) (1,441) (1,737) (1,429) operations Discontinued operations 112 (4,919) 503 (172) Net income (loss) 24 (6,360) (1,234) (1,601) Basic and diluted income (loss) per common share: Loss from continuing (0.08) (0.73) (0.83) (0.71) operations Discontinued operations 0.04 (1.89) 0.19 (0.07) Net loss (0.04) (2.62) (0.64) (0.78) Increase (decrease) in net assets in liquidation: Net loss ($252) ($132) Increase in liability for underfunded (388) (734) pension plan Adjustment of liabilities to estimated settlement amounts 210 Preferred stock dividends (406) (307) Adjustment of preferred stock to estimated liquidation value 303 (175) Other 150 16 Net decrease (383) (1,332) December 31, 1999 1998 1997 1996 1995 Total assets $44,748 $62,688 $85,035 $114,619 $123,322 Net assets in liquidation 0 333 Total debt 0 0 0 0 2,537 Shareholders equity 1,806 8,650 11,014 Shareholders equity per common share 0.78 3.31 4.20 Cash dividends declared per common share NONE NONE NONE NONE NONE
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A review of the significant factors which affected the Company's net assets in liquidation at December 31, 1999 and the changes in its net assets in liquidation for the year then ended is presented below. Information relating to 1998 and 1997 is also presented for comparative purposes. This analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes appearing elsewhere in this Form 10-K. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K may include forward- looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intends", "intend", "intended", "goal", "estimate", "estimates", "expects", "expect", "expected", "project", "projected", "projections", "plans", "anticipates", "anticipated", "should", "designed to", "foreseeable future", "believe", "believes" and "scheduled" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW At the Special Meeting of Shareholders held on March 24, 1998, the Company's preferred and common shareholders approved the sale of the Company's credit insurance and related products business, which was the Company's only remaining business operation following the previous sales of its traditional and universal life insurance businesses and its auto auction business. In connection with the sale of its inforce credit insurance business, the Company also sold its credit insurance customer accounts and one of its life insurance subsidiaries. At the Special Meeting, the shareholders also approved a Plan of Liquidation and Dissolution, pursuant to which the Company is now liquidating its remaining assets so that it can pay or provide for all of its liabilities, distribute cash to its preferred shareholders, up to the liquidation preference of those shares, and distribute the remaining cash, if any, to its common shareholders. The agreement with the purchaser of the credit insurance operations provides that the proceeds from the sale of the customer accounts are to be received as fee income on a quarterly basis until September 2002, based on the amount of credit insurance premiums produced by those accounts. However, as discussed in Note 12 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K, a dispute arose during 1999 between the Company and the purchaser regarding the payment of investment income on the assets which were transferred to the purchaser in connection with the sale of the inforce credit insurance business. Until the dispute is resolved, the purchaser is withholding the above-referenced fee income from the Company to offset the investment income it believes it is due. At December 31, 1999, $137,000 of the $373,000 in net fee income reported for the year was being held by the purchaser. As required by the agreements between the parties, this matter will be settled through arbitration. The Company may also receive a payment from a contingency fund established by the Company and the purchaser based on the claims experience of the inforce credit insurance business from October 1, 1997 to September 30, 2002. However, based on the claims experience to date, as provided by the purchaser, the Company would not be entitled to any portion of the contingency fund. Because of the fee income payments and the potential payment from the contingency fund, the distribution, if any, to the Company's common shareholders will not be made until late in 2002, when all amounts due from the purchaser have been received. As a result of the approval of the Plan of Liquidation, the Company adopted a liquidation basis of accounting in its financial statements for periods subsequent to March 24, 1998. Under liquidation accounting rules, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. Prior to March 25, 1998, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entities. At December 31, 1998, the Company's net assets in liquidation totaled $383,000. During 1999, the net assets in liquidation were reduced to zero, primarily as a result of a $252,000 net loss for the year, a $388,000 increase in the liability for the Company's under funded pension plan and $406,000 in preferred dividends. These reductions were partially offset by a $210,000 adjustment of certain liabilities to their estimated settlement amounts and a $303,000 reduction in the estimated liquidation value of the Company's preferred stock. In 1998, for the period following the adoption of the liquidation basis of accounting, the Company's net assets in liquidation declined by $1.3 million, from $1.7 million to $383,000. This decrease was also the result of a net loss for the period ($132,000), an increase in the pension plan liability ($374,000) and preferred shareholder dividends ($307,000). For the period from January 1, 1998 to March 24, 1998, the Company reported net income of $24,000 (a loss of $.04 per share after giving consideration to preferred dividends), which included a $112,000 gain from the 1997 disposal of its discontinued credit insurance business. In 1997, the Company reported a loss from continuing operations of $1.4 million ($.73 per share) and a loss from discontinued operations of $4.9 million ($1.89 per share). RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS As a result of the sale of its remaining business and the adoption of the Plan of Liquidation, the Company's income and expenses now consist principally of (i) fee income from the sale of the Company's customer accounts, (ii) investment income on existing assets, and (iii) corporate expenses, primarily salaries, professional fees and home office rent and related costs. A discussion of the material factors which affected the Company's results of operations (for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998) and the changes in its net assets in liquidation (for the period from March 25, 1998 to December 31, 1998 and for the year ended December 31, 1999) is presented below. For the year ended December 31, 1999, the Company s expenses exceeded its revenues by $252,000. In 1998, the Company reported (i) net income of $24,000 from January 1, 1998 to March 24, 1998 and (ii) an excess of expenses (including income taxes) over income of $132,000 for the period from March 25, 1998 to December 31, 1998, resulting in a total net loss of $108,000. In 1997, the Company s net loss totaled $6.4 million. The losses in 1999 and 1998 improved compared to the 1997 loss because of significant expense reductions and the elimination of the substantial losses which were being incurred in the Company s credit insurance business prior to its sale. A $3.9 million loss on the disposal of that segment and an additional $825,000 operating loss from that line of business were reflected in the 1997 results of operations. The Company s net assets in liquidation at December 31, 1999 were zero. The $383,000 decline in 1999 was the result of the $252,000 net loss mentioned earlier, a $388,000 increase in the liability for the Company s under funded pension plan and $406,000 in preferred stock dividends. These reductions were partially offset by a $210,000 adjustment of certain liabilities to their estimated settlement amounts and a $303,000 reduction in the estimated liquidation value of the Company s preferred stock. The 1999 net loss is principally attributable to (i) higher than expected audit, actuarial and legal fees and salary expenses (in part due to the Company s inability to sell its life insurance subsidiary), (ii) delays in selling the Company s home office building, which resulted in higher than anticipated rent and maintenance costs for the year and (iii) a loss from a terminated joint venture which was expected to generate income. The Company's unfunded pension liability increased by $388,000 in 1999 principally because of the Company's decision in early 2000 to terminate the plan. This decision resulted in the use of a discount rate in computing the December 31, 1999 plan liabilities which is intended to approximate the rate which will be in effect when the actual termination takes place. For continuing plans, different assumptions regarding interest rates are generally utilized. The plan is expected to be terminated in late 2000, following Internal Revenue Service confirmation of its qualified status. At December 31, 1999, the plan's estimated unfunded liability was $534,000. Due to the continuing reductions in its net assets during 1999, the Company reduced the December 31, 1999 liquidation value of its preferred stock from $4.6 million ($10 per share - the liquidation preference) to $4.3 million ($9.35 per share). With respect to the home office building, in which it owns a one-half interest, the Company's lease on the half interest it does not own expired in July 1999. In accordance with the terms of the lease, the Company also paid all taxes, insurance, utilities and repairs in addition to its base rent. The Company now has no lease commitment and is responsible for only 50% of the operating costs. In September 1999, the Company and the co-owner signed an agreement to sell the property. Settlement is scheduled to occur in June 2000. For the period from March 25, 1998 to December 31, 1998, net assets in liquidation decreased by $1.3 million. The reduction was primarily due to (I) a $132,000 net loss, (ii) a $734,000 increase in the liability for the under funded pension plan and (iii) preferred shareholder dividends of $307,000. The net loss for the period was attributable to the write-off of $472,000 of deferred tax assets. On a pre-tax basis, revenues exceeded expenses by $395,000 due to a significant increase in income from a now terminated joint venture and because of $160,000 in realized investment gains. Profits from the joint venture totaled $243,000 from March 25, 1998 to the end of the year compared to a $20,000 loss in 1999. The unfunded liability in the Company's pension plan increased significantly because of the drop in long-term interest rates in 1998. A decrease in rates generally increases a plan's liabilities, while higher rates reduced the liabilities. From January 1, 1998 to March 24, 1998, the period prior to the adoption of the liquidation basis of accounting, the Company reported net income of $24,000 (a loss of $.04 per share) as a result of a $112,000 gain from the 1997 disposal of its discontinued credit insurance business. The gain represented an adjustment to certain estimates made in 1997 when the loss was initially reported. For the year ended December 31, 1997, the Company reported a loss from continuing operations of $1.4 million ($.73 per share) and a loss from discontinued operations of $4.9 million ($1.89 per share). The loss from continuing operations was in large part due to a $744,000 write-down of the Company's real estate holdings, including its home office building. The loss from discontinued operations was principally attributable to a $3.9 million loss on the disposal of the Company's credit insurance business and an additional $825,000 operating loss from that segment prior to its sale. A loss of $167,000 was also reported from the sale of the final portion of the Company's individual life insurance business in early 1997. ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD As explained earlier, the liquidation of the Company is expected to continue until late in 2002 when all fee payments and the potential distribution from the contingency fund are received. Until that time, certain corporate expenses will continue to be incurred and investment income will continue to earn on existing invested funds. The Board of Directors may determine during this period that the amount of funds available for ultimate distribution to shareholders would be increased by transferring all of the Company's remaining net assets into a liquidating trust, in which case the trustees of such trust would be responsible for liquidating all remaining assets, paying all liabilities and making any distributions to the preferred and common shareholders. Based on management's estimates, which exclude the potential savings, if any, from the use of a liquidating trust, the Company believes that its future operating expenses and other changes in net assets, including preferred stock dividends, will exceed fee income and other revenues during the liquidation period by approximately $500,000 to $700,000. Actual income and expenses and other net asset changes could vary significantly from the present estimates due to the uncertainties regarding (i) when certain assets will be liquidated, (ii) when the distribution to the preferred shareholders occurs, (iii) the outcome of the investment income dispute discussed earlier, (iv) the level of actual expenses which will be incurred and (v) the ultimate resolution of any future contingencies which may arise. FINANCIAL CONDITION A discussion of the important elements affecting the Company's net assets in liquidation at December 31, 1999 and 1998 is presented below. CAPITAL RESOURCES Given its plans to liquidate and eventually dissolve, the Company has made no commitments for capital expenditures and does not intend to make any such commitments in the future. The Company's net assets in liquidation declined by $383,000 for the year ended December 31, 1999. As discussed earlier, the reduction is attributable to a $252,000 net loss for the year, a $388,000 increase in the Company's pension plan liability and preferred stock dividends of $406,000. These decreases were partially offset by a $210,000 adjustment of certain liabilities to their estimated settlement amounts and a $303,000 reduction in the estimated liquidation value of the Company's preferred stock. The amount of the ultimate pension liability, and consequently the need for any further increase or decrease in the liability, is dependent on a number of factors, the most important of which is the prescribed interest rate which is in effect at the time the plan is terminated. For the year ended December 31, 1999, the Company's investments decreased by $900,000, from $4.5 million at the beginning of the year to $3.6 million at December 31, 1999. The decline is primarily attributable to the payment of $406,000 in preferred dividends and the payment of $625,000 to the Company's pension plan. In 1998, invested assets decreased from $41 million at the end of 1997 to $4.5 million at December 31, 1998 as a result of the transfer of more than $35 million to the purchaser of the Company's credit insurance business in connection with the sale of that business. Total investments at both December 31, 1999 and 1998 consisted principally of (i) U.S. Treasury Notes, owned by the Company's insurance subsidiary, which are on deposit with numerous state insurance departments in connection with licensing requirements, (ii) three mortgage loans secured by commercial real estate, including one loan granted to the co-owner of the Company's home office building and secured by the co-owner's one-half interest in the building and (iii) short-term investments, principally money market funds. LIQUIDITY The Company's subsidiaries have historically met most of their cash requirements from funds generated from operations, while the Company has generally relied on its principal operating subsidiaries to provide it with sufficient cash funds to maintain an adequate liquidity position. As a result of the Company's decision to sell its remaining operations, liquidate all of its net assets and distribute cash to its shareholders, the Company's principal sources of cash funds are the fee income discussed earlier, investment income on existing assets and proceeds from the sale of non liquid assets. These funds must be used to settle all remaining liabilities as they become due, to pay operating expenses until the Company is dissolved and to pay dividends on the preferred stock until a final distribution is made to the preferred shareholders. The adequacy of the Company's liquidity position in the future will be principally dependent on its ability to sell its home office building and other non liquid assets and the timing of such sales, as well as on the outcome of the investment income dispute referred to above and the level of operating expenses the Company must incur during the liquidation period. SINKING FUND FOR REDEEMABLE PREFERRED STOCK The terms of the Company's 8.5% redeemable preferred stock require the Company to make annual payments to a sinking fund. The first such payment was due in July 1998. The preferred stock terms also provide that any purchase of preferred shares by the Company will reduce the sinking fund requirements by the redemption value of the shares acquired. As a result of the Company's purchases of preferred stock prior to 1998, no sinking fund payment was due in 1998, and the required payment due for 1999 was reduced from $550,000 to $414,610. The purchase of 18,000 preferred shares in 1999 further reduced the sinking fund deficiency to $234,610 at December 31, 1999. INFLATION Because of the Company's current plans to liquidate its assets, pay all of its liabilities, distribute any remaining cash to its shareholders and ultimately dissolve within the next three years, the effects of inflation on the Company are minimal. YEAR 2000 COMPLIANCE Because the Company is no longer conducting any business operations and is in the process of liquidating its remaining assets, it is relying, both directly and indirectly, on fewer computer systems than in the past to maintain all of its financial and other records and file all required financial reports with state insurance departments and other regulators. In fulfilling its continuing, although limited, responsibilities, the Company directly utilizes on three computer systems, one for its general ledger accounting, one for the preparation of prescribed regulatory reports to state insurance departments and one for maintenance of its shareholder records (since the Company continues to perform its own stock transfer agent functions). Prior to December 31, 1999, the Company received written assurances from each of its software vendors that their respective systems were tested and would operate problem free during and after the year 2000. The Company also obtained a year 2000 certification from the purchaser of its credit insurance business (since it continues to receive certain financial reports from that company) stating that all of its hardware and software systems were tested and were year 2000 compliant. As of March 1, 2000, the Company has had no significant year 2000 computer software problems. Based upon the information outlined above, management does not believe that the Company s very limited operations will be adversely impacted by any year 2000 computer problems during the remainder of 2000. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The requirements for certain market risk disclosures are not applicable to the Company because, a December 31, 1999, the Company qualifies as a small business issuer under Regulation S-B of the Federal Securities Laws, A small business issuer is defined as any United States or Canadian issuer with revenues or public float of less than $25 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Company is responsible for the preparation, integrity and objectivity of the financial information contained in this Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such statements include informed estimates and judgements of management for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Financial information presented in this annual report is consistent with that in the financial statements. Accounting procedures and related systems of internal control have been established to provide reasonable assurance that the books and records reflect the transactions of the Company and that established policies and procedures are properly implemented by qualified personnel. Such systems are evaluated regularly to determine their effectiveness. The consolidated financial statements for the year ended December 31, 1999 have been audited by Stambaugh-Ness, P.C., independent auditors. The consolidated financial statements for the years ended December 31, 1998 and 1997 have been audited by Arthur Andersen LLP, independent auditors. Such audits were conducted in accordance with generally accepted auditing standards, and included a review and evaluation of our internal accounting control structure, tests of the accounting records and other auditing procedures which the auditors considered necessary to express their informed professional opinions on the consolidated financial statements. The Board of Directors, with the assistance of its Audit Committee, monitors the financial and accounting operations of the Company. The Committee, composed of non-employee members of the Board of Directors, meets periodically with representatives of its independent auditing firm to discuss the scope of its audit and related reports. The Company s independent auditors have at all times full and free access to the Audit Committee, without management present, to discuss any matter that they believe should be brought to the attention of the Committee. James C. Robertson R. Fredric Zullinger Chairman, Chief Executive Officer Senior Vice President and and President Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Consumers Financial Corporation We have audited the accompanying consolidated statement of net assets in liquidation of Consumers Financial Corporation and subsidiaries as of December 31, 1999 and the related consolidated statement of changes in net assets in liquidation for the year then ended. These financial statements and the schedules referred to below are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 4 to the financial statements, the shareholders of Consumers Financial Corporation approved a plan of liquidation on March 24, 1998, and the Company commenced liquidation shortly thereafter. As a result, the Company changed its basis of accounting for periods subsequent to March 24, 1998 from the going-concern basis to the liquidation basis. Accordingly, the carrying values of the remaining assets as of December 31, 1999, are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated net assets in liquidation of Consumers Financial Corporation and subsidiaries as of December 31, 1999 and the consolidated changes in their net assets in liquidation for the year then ended, in conformity with generally accepted accounting principles applied on the basis described in the preceding paragraph. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statement schedules at Item 14(a) are presented for purposes of complying with the Securities and Exchange Commission s rules and are not part of the basic financial statements. The 1999 amounts included in these schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. STAMBAUGH-NESS, P.C. York, Pennsylvania March 14, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Consumers Financial Corporation We have audited the accompanying statements of operations, shareholders' equity and cash flows of Consumers Financial Corporation (a Pennsylvania corporation) and subsidiaries for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998. In addition, we have audited the statement of net assets in liquidation as of December 31, 1998, and the related statement of changes in net assets in liquidation for the period from March 25, 1998 to December 31, 1998. These financial statements and the schedules referred to below are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 4 to the financial statements, the shareholders of Consumers Financial Corporation approved a plan of liquidation on March 24, 1998, and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for periods subsequent to March 24, 1998 from the going-concern basis to the liquidation basis. Accordingly, the carrying values of the remaining assets as of December 31, 1998, are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Consumers Financial Corporation and subsidiaries for the year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998, their net assets in liquidation as of December 31, 1998 and the changes in their net assets in liquidation for the period from March 25, 1998 to December 31, 1998, in conformity with generally accepted accounting principles applied on the bases described in the preceding paragraph. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statement schedules at Item 14(a) are presented for purposes of complying with the Securities and Exchange Commission s rules and are not part of the basic financial statements. The 1998 and 1997 amounts included in these schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 16, 1999 CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION DECEMBER 31, 1999 AND 1998
(dollar amounts in thousands) 1999 1998 Assets Investments: Fixed maturities $896 $1,043 Mortgage loans on real estate 1,552 1,600 Other invested assets 75 Short-term investments 1,146 1,732 Total investments 3,594 4,450 Cash 274 172 Accrued investment income 19 36 Reinsurance recoverable 11,404 20,488 Other receivables 484 1,102 Prepaid reinsurance premiums 27,644 34,840 Deferred policy acquisition costs 50 Property and equipment 1,179 1,018 Other real estate 187 Other assets 150 345 Total assets 44,748 62,688 Liabilities Future policy benefits 9,078 17,645 Unearned premiums 27,644 35,163 Other policy claims and benefits payable 2,365 2,882 Other liabilities 1,329 1,800 40,416 57,490 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued and outstanding 1999, 463,461 shares; 1998, 481,461 shares; net of $303 reduction in 1999 to reflect estimated liquidation 4,332 4,815 value Total liabilities and redeemable preferred stock 44,748 62,305 Net assets in liquidation $0 $383
See notes to consolidated financial statements. CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION Year ended For the period December 31, from March 25, (in thousands) 1999 1998 to December 31, 1998 Revenues: Earned premiums $319 $521 Net investment income 210 487 Net realized investment gains (losses) (5) 160 Net fees from sale of customer accounts 373 305 Joint venture income (loss) (20) 243 Gain on disposal of discontinued business 84 Gain on recapture of assumed business by direct writer 65 Miscellaneous 131 270 1,073 2,070 Benefits and expenses: Policyholder benefits 396 177 Rent and related costs 121 243 Salaries, wages and employee benefits 367 296 Professional fees 197 355 Taxes, licenses and fees 30 142 Loss on sale of other assets 286 Miscellaneous 214 176 1,325 1,675 Income (loss) before income tax expense (252) 395 Income tax expense (527) Increase in liability for underfunded pension plan (388) (734) Adjustment of assets to estimated realizable value 88 Adjustment of liabilities to estimated settlement amounts 210 Decrease in unrealized appreciation of debt securities (43) (32) Preferred stock dividends (406) (307) Adjustment of preferred stock to estimated liquidation value 303 (175) Retirement of treasury shares-preferred 105 57 Purchase of treasury shares-common (9) Decrease in net assets for the period (383) (1,332) Net assets at beginning of period 383 1,715 Net assets at end of period $0 $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED BALANCE SHEET MARCH 24, 1998 (UNAUDITED) (dollar amounts in thousands) ASSETS Investments: Fixed maturities $4,076 Mortgage loans on real estate 1,887 Other invested assets 261 Short-term investments 31,964 Total investments 38,188 Cash 289 Accrued investment income 188 Receivables 23,880 Prepaid reinsurance premiums 37,981 Deferred policy acquisition costs 25 Property and equipment 1,320 Other real estate 780 Other assets 731 $103,382 LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY Liabilities: Future policy benefits $17,649 Unearned premiums 38,918 Other policy claims and benefits payable 4,047 Due to reinsurer on sale of credit insurance business 34,719 Other liabilities 1,664 Income taxes: Current 415 Deferred (442) Total liabilities 96,970 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued 514,261 shares; outstanding 481,461 shares; redemption amount $4,815; net of treasury stock of $271 4,697 Shareholders equity: Common stock, $.01 stated value, authorized 10,000,000 shares; issued 3,019,110 shares; outstanding 1998, 2,595,617 shares; 1997, 2,596,155 shares 30 Capital in excess of stated value 7,989 Net unrealized appreciation of debt securities, net of income taxes 58 Deficit (4,891) Treasury stock (1,471) Total shareholders equity 1,715 $103,382
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF OPERATIONS For the period from Year ended January 1, 1998 to December 31, (in thousands, except per share amounts) March 24, 1998 1997 Revenues: Premiums written ($4) ($37) Decrease in unearned premiums 87 393 Premium income 83 356 Net investment income 60 63 Realized investment gains (losses) 24 (176) Fees and other income 181 190 Total revenues 348 433 Benefits and expenses: Death and other benefits 83 460 Amortization of deferred policy acquisition costs 10 Operating expenses 368 1,639 Total benefits and expenses 451 2,109 Loss from continuing operations before income tax benefit (103) (1,676) Income tax benefit (15) (235) Loss from continuing operations (88) (1,441) Discontinued operations: Loss from operations of discontinued businesses (net of income taxes) (825) Gain (loss) on disposal of discontinued businesses (net of income taxes) 112 (4,094) 112 (4,919) Net income (loss) $24 ($6,360) Basic and diluted income (loss) per common share: Loss from continuing operations ($0.08) ($0.73) Discontinued operations 0.04 (1.89) Net loss ($0.04) ($2.62) Weighted average number of shares outstanding 2,596 2,601
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Capital in Accumulated other excess comprehensive income (dollar amounts in thousands) Common stock stated Fixed Equity Shares Amount value maturities securities BALANCE, JANUARY 1, 1997 3,021 $30 $7,966 $65 $5 Net loss for the year Change in net unrealized appreciation for the year (11) (5) Total comprehensive income (loss) Preferred stock dividends Accretion of difference between fair value and mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares-common (2) (10) Retirement of treasury shares- preferred 33 BALANCE, DECEMBER 31, 1997 3,019 30 7,989 54 0 Net income for the period Change in net unrealized appreciation for 4 the period Total comprehensive income Preferred stock dividends Accretion of difference between fair value and mandatory redemption value of preferred stock BALANCE, MARCH 24, 1998 3,019 $30 $7,989 $58 $0
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Retained earnings Treasury stock Total (dollar amounts in thousands) (deficit) Shares Amount amount BALANCE, JANUARY 1, 1997 $2,009 (410) $142 $8,650 Net loss for the year (6,360) (6,360) Change in net unrealized appreciation for (16) the year Total comprehensive income (loss) 6,376 Preferred stock dividends (409) (409) Accretion of difference between fair value and mandatory redemption value of preferred stock (36) (36) Purchase of treasury shares (15) (56) (56) Retirement of treasury shares-common 2 Retirement of treasury shares-preferred 10 33 BALANCE, DECEMBER 31, 1997 (4,796) (423) (1,471) 1,806 Net income for the period 24 24 Change in net unrealized appreciation for the period 4 Total comprehensive income 28 Preferred stock dividends (109) (109) Accretion of difference between fair value and mandatory redemption value of preferred stock (10) (10) BALANCE, MARCH 24, 1998 ($4,891) (423) ($1,471) $1,715
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF CASH FLOWS For the period from January 1, 1998 Year ended to December 31, (in thousands) March 24, 1998 1997 Cash flows from operating activities: Net income (loss) $24 ($6,360) Adjustments to reconcile net loss to cash provided by (used in) operating actvities: Provision for permanent decline in value of investments 158 Deferred policy acquisition costs incurred (9,771) Amortization of deferred policy acquisition costs 12,615 Provision for permanent decline in value of property and equipment and other real estate 942 Other amortization and depreciation 24 483 Change in future policy benefits (2,696) Change in unearned premiums (6,183) Change in amounts due reinsurers (142) (1,226) Income taxes (15) (1,601) Change in prepaid reinsurance premiums 7,765 Change in receivables 1,497 4,618 Change in other liabilities (376) 415 Other (434) 186 Total adjustments 554 5,705 Net cash provided by (used in) operating activities 578 (655) Cash flows from investing activities: Purchase of investments (3) (39,231) Maturity of investments 1,000 2,195 Sale of investments 1,829 46,424 Net assets transferred in sale of insurance business (3,647) (8,175) Purchase of property and equipment Net cash provided by (used in) investing activities (821) 1,213 Cash flows from financing activities: Purchase of treasury stock, including 8 1/2% redeemable preferred stock (64) Cash dividends to shareholders (109) (409) Net cash used in financing activities (109) (473) Net increase (decrease) in cash (352) 85 Cash at beginning of year 641 556 Cash at end of period $289 $641 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest Income taxes $111 $90
See notes to consolidated financial statements CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. Company Overview The operating losses incurred by the Company from 1993 to 1997 significantly reduced its net worth and its liquidity position. As a result, in late 1997, the Company signed an agreement to sell its core credit insurance and related products business, which had been its only remaining business operation, following the sales in 1994 and 1997 of all of its universal life insurance business and the 1996 sale of its auto auction business. Settlement on the sale of the credit insurance business took place in May 1998. The Company s income or loss from operations now consists principally of (i) earned premium and related costs associated with a small, closed block of extended service contract business which was recaptured by the direct writer in late 1999, (ii) fee revenues received from Life of the South Corporation, a Georgia-based financial services holding company which acquired the Company s credit insurance business and its credit insurance accounts (LOTS), (iii) investment income on remaining assets and (iv) corporate expenses. On March 24, 1998, the Company s shareholders approved a plan of liquidation and dissolution (the Plan of Liquidation and Dissolution) pursuant to which the Company intends to liquidate its remaining assets, provide for all of its liabilities, make cash distributions to its preferred shareholders and distribute the remaining cash, if any, to its common shareholders. (see Note 4.) 2. Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of Consumers Financial Corporation (the Company) and its wholly-owned subsidiaries, the most significant of which is Consumers Life Insurance Company (Consumers Life). All material intercompany accounts and transactions have been eliminated. Liquidation basis of accounting The financial statements have been prepared on the basis of generally accepted accounting principles (GAAP) which, as to the life insurance company subsidiaries, vary from reporting practices prescribed or permitted by regulatory authorities. As a result of the approval of the Plan of Liquidation and Dissolution referred to above and discussed in Note 4, the Company adopted a liquidation basis of accounting for the periods subsequent to March 24, 1998. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilites are stated at their anticipated settlement amounts. Amounts determined in accordance with the liquidation basis of accounting do not significantly differ from the accounting policies discussed below. Prior to March 25, 1998, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entitites, as discussed below. Certain prior year amounts have been reclassified to conform with classifications used for 1999. Investments Fixed maturities includes bonds, notes and certificates of deposit maturing after one year. Management determines the appropriate classification of bonds and notes at the time of purchase and reevaluates such designation as of each balance sheet date. These securities are classified as held-to- maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. All other bonds and notes are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders equity. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. All certificates of deposits maturing after one year are deemed to be held to maturity. Mortgage loans on real estate are carried at the unpaid principal balance. Short-term investments are carried at cost. Other invested assets, comprised of real estate partnerships, are reported at estimated net realizable value. Interest on fixed maturities and short-term investments is credited to income as it accrues on the principal amounts outstanding, adjusted for amortization of premiums and discounts computed by the interest method. Dividends are recorded as income on the ex-dividend dates. Loan origination and commitment fees are amortized, using the interest method, over the life of the mortgage loan. The accrual of interest on mortgage loans is generally discontinued when the full collection of principal is in doubt, or when the payment of principal or interest has become contractually 90 days past due. Realized gains and losses and provisions for permanent losses on investments are included in the determination of pre-tax income or loss. Net unrealized appreciation or depreciation of debt securities and preferred and common stocks, which represents the difference between fair value and aggregate cost, is included in a separate shareholders' equity account. The "specific identification" method is used in determining the cost of investments sold. Fair values of financial instruments The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments: Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Investment securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Mortgage loans: The fair values for mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Deferred policy acquisition costs Prior to the discontinuation of its insurance operations, the Company deferred the costs of acquiring new insurance business. The costs deferred consisted principally of commissions, certain sales salaries and other expenses that varied with and were primarily related to the production of new business. Acquisition costs relating to single premium credit insurance were amortized so as to charge each year's operations in direct proportion to premiums earned. Deferred policy acquisition costs were expensed when such costs were deemed not to be recoverable from future earned premiums and investment income or, when applicable, from the estimated proceeds to be received from the sale of the related insurance business. Property and equipment and depreciation Property and equipment are stated at estimated net realizable value. Depreciation is being provided on the straight-line method over the estimated useful lives of the assets. Other real estate Real estate is carried at estimated net realizable value. Future policy benefits The liability for future policy benefits for individual life insurance has been provided on a net level premium method based on estimated investment yields, withdrawals, mortality and other assumptions which were appropriate at the time the policies were issued. Such estimates were based upon industry data and the Companies' past experience, as adjusted to provide for possible adverse deviation from the estimates. Benefit reserves for universal life products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Unearned premiums Unearned premiums for credit life and disability insurance contracts have been computed based upon the original and remaining term of the related policies as follows: decreasing term credit life on the Rule of 78's method, level term credit life using the Pro Rata method and credit disability using a 65% - 35% weighted average of the Rule of 78's and Pro Rata methods. Income taxes The Company and its subsidiaries provide income taxes, for financial reporting purposes, on the basis of the liability method as required by Statement of Financial Accounting Standards No. 109. Earnings per share For periods prior to the adoption of the liquidation basis of accounting, basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 3. BASIS OF FINANCIAL STATEMENTS The more significant accounting principles applied in the preparation of the financial statements that differ from life insurance statutory accounting practices prescribed or permitted by regulatory authorities (which are primarily designed to demonstrate solvency) are as follows: (a) In accordance with NAIC requirements, all bonds eligible for amortization are reported at amortized value, whereas in the accompanying financial statements, only bonds which are classified as held-to-maturity securities are stated at amortized cost, and available-for-sale securities are carried at fair value. Other securities are carried at values prescribed by or deemed acceptable to the NAIC for statutory accounting purposes. (b) Deferred income taxes, if applicable, are provided as described in Note 15. (c) The statutory liabilities for the interest maintenance reserve and asset valuation reserve, designed to lessen the impact on surplus of market fluctuations of securities and mortgage loans, have not been provided in the financial statements. (d) Certain assets are reported as assets rather than being charged directly to surplus and excluded from the balance sheets. (e) Commission allowances pertaining to financing-type reinsurance agreements are not included in results of operations or changes in net assets in liquidation Dividends and other distributions to the Company from Consumers Life are limited in that Consumers Life is required to maintain minimum capital and surplus in each of the states in which it is licensed, determined in accordance with regulatory accounting practices. The amount of minimum capital and surplus required is $8.6 million. As a result of reductions in its capital and surplus over the past four years, at December 31, 1999, Consumers Life does not meet the minimum capital and surplus requirements in four of the states in which it is licensed. Consequently, it has agreed to temporary suspension of its insurance license in two of those states. No actions have been taken with respect to this matter by the insurance departments of the other two states. Since the Company does not intend to write any new insurance business through Consumers Life and is currently attempting to sell the subsidiary, the temporary suspension of two licenses has no material effect on the Company. Under Delaware insurance laws, distributions are subject to further restrictions relating to capital and surplus and operating earnings. Accordingly, under normal circumstances, at December 31, 1999, approximately $5 million of Consumers Life's net assets cannot be transferred to the parent company and $433,000 is available for transfer during 2000. However, because of its prior operating losses and its current capital and surplus position, the Company is not permitted to pay any dividends without prior approval from the Delaware Department of Insurance. Also, any loans or advances to the parent company of a material amount must be reported to the insurance department. The Company may have limited cash funds available to pay dividends in excess of amounts transferred from Consumers Life. The reported statutory capital and surplus of Consumers Life was $4.3 million at December 31, 1999 and $5.0 million at December 31, 1998. Consumers Life reported a statutory net loss of $1.5 million in 1999, while Consumers Life and its former insurance subsidiary, Investors Fidelity Life Assurance Corp., reported combined statutory net income of $281,000 in 1998. Insurance laws require Consumers Life to deposit certain amounts with various state insurance departments in order to maintain its licenses. The approximate carrying amount of such deposits at December 31, 1999 and 1998 was $1.0 million. 4. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION On December 30, 1997, the Company entered into agreements with LOTS and American Republic Insurance Company (American Republic), pursuant to which the Company (i) sold its credit insurance and fee income accounts to LOTS effective October 1, 1997, (ii) sold its September 30, 1997 inforce block of credit insurance business to American Republic, LOTS financial partner in the transaction, effective January 1, 1998 and (iii) sold one of its wholly-owned reinsurance subsidiaries to LOTS as of August 31, 1998. LOTS and the Company also agreed that, with respect to Consumers Life, new credit insurance business produced by that subsidiary s former customer accounts, which were transferred to LOTS, would continue to be written on the policy or certificate forms of the subsidiary until September 30, 1999. The parties subsequently modified their agreement to extend the September 30 date to November 15, 1999 with respect to Pennsylvania premiums only. This premium and the related insurance risk were also reinsured 100% to American Republic. The sale of the inforce block of business referred to in (ii) above was completed on May 13, 1998 after the required approvals of the Company s preferred and common shareholders and state insurance regulators in the states of Delaware and Ohio were received. Settlement on the sale of the reinsurance subsidiary referred to in (iii) above occurred on September 28, 1998, following the approval in late August of the insurance regulators in the state of Arizona. The sale of the inforce block of business resulted in an after-tax loss of approximately $3,705,000, of which $3,919,000 was reflected in the Company s fourth quarter 1997 financial statements through a write-down of deferred policy acquisition costs. The 1997 loss included an $819,000 loss from operations from September 30, 1997 (the measurement date) to December 31, 1997. An offsetting gain on disposal of $214,000, which resulted from adjustments to certain estimates made in 1997, was included in the Company s 1998 financial statements. As a result of the sale of the Company s credit insurance and related operations to LOTS, in the accompanying financial statements, the operating results of the credit insurance and related fee income business have been reported as discontinued operations for all periods prior to the adoption of the liquidation basis of accounting. In addition to approving the sale of the inforce credit insurance business, at the Special Meeting of Shareholders held on March 24, 1998, the Company s shareholders also approved a Plan of Liquidation and Dissolution, pursuant to which the Company is now liquidating its remaining assets and providing for all of its liabilities. The Company eventually intends to make a cash distribution to its preferred shareholders and ultimately distribute its remaining cash, if any, to its common shareholders. Pursuant to the terms of its agreement with LOTS, the Company will continue receiving payments from LOTS until September 30, 2002 from the sale of the Company s customer accounts. In 2002, the Company may also receive a payment from a contingency fund established by the parties based on the claims experience on the inforce credit insurance business sold to LOTS. As a result, the distribution, if any, to the Company s common shareholders will not be made until late in 2002, when all amounts due from LOTS have been received. The Company has made substantial personnel reductions during the past several years as a result of the discontinuation of its various businesses. As of March 1, 2000, three people were employed on a full-time basis by the Company. A summary of the results of operations of the discontinued segments is presented below: For the period from January 1, 1998 to March 24, 1998 Individual Credit Life Auto (in thousands) Insurance Insurance Auction Total Revenues (before reinsurance ceded) $4,127 $158 $4,285 Gain from operations before income taxes Income taxes Gain from operations Gain on disposal before income taxes $112 $112 Income taxes Gain on disposal 112 112 Gain from discontinued operations $112 $112 Year ended December 31, 1997 Individual Credit Life Auto (in thousands) Insurance Insurance Auction Total Revenues (before reinsurance ceded) $29,712 $1,892 (a) $6 $31,610 Loss from operations before income tax benefit ($1,457) ($1,457) Income tax benefit (632) (632) Loss from operations (825) (825) Loss on disposal before income tax benefit (4,061) ($253) ($22) (4,336) Income tax benefit (142) (86) (14) (242) Loss on disposal (3,919) (167) (8) (4,094) Loss from discontinued operations ($4,744) ($167) ($8) ($4,919)
(a) Includes renewal premiums which are 100% ceded under indemnity reinsurance agreement with third party reinsurer. 5. INVESTMENTS AND INVESTMENT INCOME Investments, which are valued for financial statement purposes as described in Note 1, consist of the following at December 31, 1999: Quoted or Balance Amortized estimated sheet (in thousands) cost fair value amount Fixed maturities: Bonds-United States government and government agencies and authorities $863 $846 $846 Certificates of deposit 50 50 50 Total fixed maturities 913 896 896 Mortgage loans on real estate 1,552 1,552 1,552 Short-term investments 1,146 1,146 1,146 Total investments $3,611 $3,594 $3,594
A portion of the Company's invested funds is restricted as to use in that deposits are required with various state insurance departments in order to maintain licenses in those states (see Note 3). At December 31, 1999 and 1998, one mortgage loan with a balance of $295,360 was non-performing. The mortgagor on this loan filed a voluntary petition under Chapter 11 of the Bankruptcy Code in late 1997. Interest on this loan of $39,965 and $13,383 was excluded from investment income in 1999 and 1998, respectively, due to its non-performing status. As a result of an agreement reached with the bankruptcy trustee, the Company is now receiving approximately $4,800 per month in lease payments from a tenant at the mortgaged property. In accordance with that agreement, such payments are being applied first to legal costs incurred by the Company and then to accrued late fees, interest and principal. The trustee is actively seeking alternate sources of financing for the property and is also attempting to sell the property. At December 31, 1999, all three of the Company's investments in mortgage loans were secured by commercial real estate located in Central Pennsylvania. Such investments consist of first mortgage liens on completed income- producing properties. Each of the loans exceeded 10% of the Company s net assets in liquidation at December 31, 1999 and 1998. The Company s largest loan, which had a balance of $1,175,760 at the end of 1999, was granted to the owner of the other one-half interest in the Company s home office building and is secured by the owner s interest in the building. In connection with the planned sale of the building in June 2000, this loan will be repaid in full. At December 31, 1998, the Company s remaining real estate was classified as non-investment real estate, since the Company intended to sell this property. Accumulated depreciation on the property at the end of 1998 was $27,000. In 1999, the Company sold this property and reported a loss of approximately $2,000. Net investment income is applicable to the following investments: Years ended December 31, (in thousands) 1999 1998 1997 Interest: Fixed maturities $60 $175 $1,934 Mortgage loans 109 139 189 Short-term investments 80 733 486 Other 82 249 1,047 2,691 Investment expenses (39) (85) (675) Total net investment income 210 962 2,016 Less investment income for periods subsequent to adoption of liquidation basis of accounting 210 487 Net investment income for periods prior to adoption of liquidation basis of accounting 0 475 2,016 Less net investment income attributable to discontinued operations 0 415 1,953 Net investment income attributable to continuing operations $0 $60 $62
The amortized cost and estimated fair values of investments in debt securities at December 31, 1999 and 1998 are as follows: 1999 Gross Gross Estimated Available for sale Amortized unrealized unrealized fair (In thousands) cost gains losses value U.S. Treasury securities and obligations of U.S. government corporations and agencies $863 $3 $20 $846 Totals $863 $3 $20 $846
1998 Gross Gross Estimated Available for sale Amortized unrealized unrealized fair (In thousands) cost gains losses value U.S. Treasury securities and obligations of U.S. government corporations and agencies $967 $26 $993 Totals $967 $26 $993
All debt securities held by the Company at December 31, 1999 have contractual maturities between 2001 and 2005. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Proceeds from the sales of investments in debt securities during 1999 were $850,000. There were no gains or losses on those sales. Proceeds from such sales in 1998 were $3.7 million. Gross gains of $58,000 and gross losses of $6,000 were realized on those sales. Proceeds from sales in 1997 were $48 million. Gross gains of $446,000 and gross losses of $247,000 were realized on those sales. Realized investment gains (losses) are applicable to the following investments: Years ended December 31, (in thousands) 1999 1998 1997 Fixed maturities $146 $249 Other invested assets ($5) 38 (219) Total (5) 184 30 Realized investment losses (gains) for periods subsequentto adoption of liquidation basis of accounting 5 (160) Realized investment gains for periods prior to adoption of liquidation basis of accounting 0 24 30 Realized investment gains attributable to discontinued operations (206) Realized investment gains (losses) attributable to continuing operations $0 $24 ($176)
6. OTHER RECEIVABLES December 31, (in thousands) 1999 1998 Joint venture experience refund $251 $223 Federal income tax refund 520 Fees due from purchaser of customer accounts 204 249 Other 29 110 Balance $484 $1,102
7. DEFERRED POLICY ACQUISITION COSTS Individual (in thousands) Credit Life Total Balance, January 1, 1997 16,414 2,535 16,949 Costs deferred 9,771 9,771 Amortization (9,515) (9,515) Write-off attributable to sale of inforce universal life insurance business (2,535) (2,535) Write-off attributable to 1998 sale of inforce credit insurance business (3,100) (3,100) Balance, December 31, 1997 13,570 0 13,570 Costs deferred 133 133 Amortization (25) (83) (108) Write-off attributable to sale of inforce credit insurance business (13,545) (13,545) Balance, December 31, 1998 0 50 50 Amortization (50) (50) Balance, December 31, 1999 $0 $0 $0
8. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE December 31, (in thousands) 1999 1998 Property and equipment: Data processing equipment and software $73 $122 Furniture and equipment 151 223 Home office building, including 1,746 1,538 1,970 1,883 Less accumulated depreciation (791) (865) Balance $1,179 $1,018
December 31, (in thousands) 1999 1998 Other real estate - warehouse $214 Less accumulated depreciation (27) Balance $0 $187
9. POLICY LIABILITIES The composition of future policy benefits and unearned premiums at December 31, 1999 and the assumptions pertinent thereto are as follows: Life Future Interest insurance policy Unearned rates: years (in thousands) in force benefits premiums of issue Individual life $19,597 $1,449 4 1/2% - 11 1/2% 1961 - 1992 Credit life 716,879 $10,823 (a) 1990 - 1999 Credit disability 7,629 16,821 (a) 1990-1999 Balance $736,476 $9,078 $27,644
(a) There are no interest rate assumptions in the credit reserve factors. Mortality and withdrawal assumptions generally are based on industry data and the life insurance companies' prior experience. The mortality tables predominantly used in calculating benefit reserves are the 1955 - 1960 Basic Select and Ultimate for males (special graduation) and the 1965 - 1970 Basic Select and Ultimate for males (special graduation). The withdrawal assumptions for individual life insurance are predominantly Linton B and Linton C. Future policy benefits reported to regulatory authorities were less than the above total by approximately $80,000 at December 31, 1999. Future policy benefits and unearned premiums do not include any deduction for reinsurance ceded to other companies. At December 31, 1999 and 1998, all but $39,000 of the Company s future policy benefits liability was reinsured to other insurers in connection with the discontinuation of the Company s insurance operations. Similarly, all of the Company s unearned premiums liability at December 31, 1999 was reinsured to other insurers, and all but $323,000 of the unearned premiums liability at December 31, 1998 was reinsured. Future policy benefits and unearned premiums related to such reinsurance are classified as Reinsurance Recoverable and Prepaid Reinsurance Premiums, respectively, as shown in the following table.
December 31, (in thousands) 1999 1998 Future Policy Benefits and Other Policy Claims and Benefits $ 11,443 $ 20,527 Payable Reinsurance Recoverable 11,404 20,488 Net liability $ 39 $ 39 Unearned Premiums $ 27,644 $ 35,163 Prepaid Reinsurance Premiums 27,644 34,840 Net liability $ 0 $ 323
Life insurance in force net of reinsurance ceded was $58,000 at December 31, 1999 and 1998. 10. REINSURANCE Prior to the 1998 sale of its credit insurance business, as discussed in Note 4, and the sales of its individual life insurance business in 1992 through 1997, the Company routinely ceded and, in some instances, assumed reinsurance. The sale of the credit insurance business of Consumers Life was completed pursuant to an indemnity reinsurance agreement with American Republic. The reinsurance transactions through which the Company sold its individual life insurance business included the use of both indemnity and assumption agreements. The insurance companies remain contingently liable for insurance risks ceded under indemnity agreements, while such risks are legally transferred to the reinsurer when assumption agreements are utilized. Historically, the insurance companies also entered into various financing-type reinsurance agreements with unaffiliated reinsurers. Such agreements, which primarily involved credit insurance, were designed to minimize the reduction of statutory capital and surplus arising at the time premiums were written. These financing-type agreements were terminated as of January 1, 1998 when the American Republic agreements became effective. During 1998, Consumers Life entered into another financing-type reinsurance agreement in which it assumed approximately $2 million in individual life insurance premiums and an equal amount of policy liabilities. The effects of all financing-type agreements have been removed from the financial statements except for the cost of the financing, which amounted to $25,000 in both 1999 and 1998 and $660,000 in 1997. These costs are included with Operating Expenses on the Consolidated Statements of Operations and are presented with Miscellaneous Expenses on the Consolidated Statements of Changes in Net Assets in Liquidation. Excluding premiums reinsured under financing-type agreements, premiums ceded to other companies were $11.9 million, $17.7 million and $4.9 million in 1999, 1998, and 1997, respectively. Incurred benefits and losses reinsured in 1999 were $12.6 million compared to $16.4 million in 1998 and $6.8 million in 1997. These amounts have been deducted in arriving at Death and Other Benefits in the Consolidated Statements of Operations and in computing Policyholder Benefits in the Consolidated Statements of Changes in Net Assets in Liquidation. However, Future Policy Benefits and Unearned Premiums at December 31, 1999 and 1998 do not include any deduction for reinsurance ceded. Instead, the amounts related to such reinsurance are classified as Reinsurance Recoverable and Prepaid Reinsurance Premiums (see Note 9). 11. PENSION AND OTHER RETIREMENT PLANS The Company has a defined benefit pension plan and two defined contribution plans which cover substantially all full-time employees. Contributions under the pension plan are based upon length of service and annual compensation of each employee. The assets of the pension plan include principally debt securities and mortgages. Effective July 31, 1996, the Company froze the benefits payable to participants under the pension plan. In January 2000, the Company notified the participants of the pension plan of its intent to terminate the plan, subject to the approval of the Pension Benefit Guaranty Corporation (PBGC). Accordingly, in April 2000, the Company intends to file an application for such approval with the PBGC and will also request a determination letter confirming the qualified status of the plan from the Internal Revenue Service. The defined contribution plans, which include an employee stock ownership plan, provide for annual contributions in amounts determined by the Board of Directors. Such contributions are based upon the annual compensation of each employee. Company contributions in 1999 were $11,100, while no contributions were made in either 1998 or 1997. With respect to the employee stock ownership plan, in September 1999, the Company notified the plan participants of its intent to terminate the plan and also requested a determination letter confirming the plan s qualified status from the Internal Revenue Service. The funded status of the plan is as follows:
December 31, (in thousands) 1999 1998 Actuarial present value of: Vested benefit obligation $3,499 $3,121 Accumulated benefit obligation $3,499 $3,121 Actuarial present value of projected benefit obligation $3,499 $3,121 Plan assets at fair value 2,965 2,457 Projected benefit obligation in excess of plan assets 534 664 Unrecognized net loss arising from difference between actual experience and assumed experience 1,192 831 Unrecognized net liability at transition 37 49 Unrecognized prior service cost (107) (117) Unamortized prior year loss (1,122) (763) Unfunded projected benefit obligation $534 $664
Reconciliations of beginning and ending balances of the plan's projected benefit obligation and its assets are presented below.
December 31, (in thousands) 1999 1998 Projected benefit obligation, beginning of year $3,121 $2,891 Increase due to changes in assumptions 414 529 Benefits to participants (252) (502) Interest cost 216 203 Projected benefit obligation, end of year $3,499 $3,121
December 31, (in thousands) 1999 1998 Fair value of plan assets, beginning of year $2,457 $2,694 Employer contributions 600 100 Investment income 170 175 Benefits to participants (252) (502) Administrative expenses (10) (10) Fair value of plan assets, end of year $2,965 $2,457
Net periodic pension cost is computed below: (in thousands) 1999 1998 1997 Net periodic pension cost included in the following components: Interest cost on projected benefit $216 $203 $212 obligation Expected return on plan assets (150) (161) (175) Net amortization and deferral 41 171 37 Net periodic pension cost $107 $213 $74
Rates used in determining pension expense and related obligations were:
1999 1998 1997 Discount rate (pre-retirement period) 6.35% 6.50% 7.50% Discount rate (post-retirement period) 6.35% 6.00% 7.50% Annual rate of return on plan assets 6.35% 6.50% 7.50% Annual rate of increase in compensation N/A N/A N/A
12. COMMITMENTS AND CONTINGENCIES Rental expense in 1999, 1998 and 1997 was approximately $138,000, $245,000 and $345,000, respectively. In 1989, the Company entered into an agreement for the lease of office space. The facility contains approximately 44,500 square feet of office space. The term of the lease is ten years with an option to renew for one additional term of five years. Until March 1994, monthly lease payments were $35,000. In March 1994, the Company exercised its option to acquire a 50% interest in this property at a price of $1.75 million. The Company continued to lease the portion of the building it did not own, but at monthly rent of $17,000 through July 1999 when its lease expired. The Company also leases a portion of the unused office space to various third party tenants. Income from these leases totaled $175,000 in 1999, $87,000 in 1998 and $57,000 in 1997. Effective August 1, 1999, the Company and its co-owner share equally in the rent from these tenants and in the operating costs of the building. The building lease was classified as an operating lease. The Company has no other significant leases. In connection with the cancellation of a joint venture agreement in 1996, the Company agreed to pay its former joint venture partner a pro rata share of the proceeds it receives from the sale of its credit insurance accounts. Accordingly, over the next three years, the Company will pay its former partner approximately 19% of any gross fee revenues received from LOTS for the sale of its customer accounts. Reinsurance risks would give rise to liability to the insurance companies only in the event that the reinsuring company might be unable to meet its obligations under the reinsurance agreements in force. In November 1997, the Company and a third party reinsurer were sued by a former general agency with whom the Company had a partnership agreement. The partnership agreement provided that the agency would market universal life insurance business for the Company, pursuant to specific criteria established by the Company, and would also be entitled to a share of the profits, if any, which arose from the business produced. The claimant is seeking monetary damages to compensate it for the Company s alleged failure to share profits and for other alleged losses resulting from the Company s rejection of policy applications involving unacceptable risks. While management believes this claim is completely without merit and intends to vigorously defend itself in this matter, the ultimate outcome of this claim cannot be determined at this time. The Company has filed two counterclaims against this agency seeking damages for losses the Company sustained as a result of the agency s alleged breach of the partnership agreement and to recover an unpaid loan made to the agency. During 1999, a dispute arose between the Company and the purchaser of its credit insurance business relating to the payment of investment income on the assets which were transferred to the purchaser. Subsequent to the closing of the transaction, the purchaser claimed that the Company owes it approximately $1,400,000 for investment earnings on the amount transferred for the period from October 1, 1997, the effective date of the agreement, to May 13, 1998, the date of settlement on the sale transaction. In October 1999, the purchaser informed the Company that it would begin withholding from the Company the fee income payments which are contractually due to the Company from the sale of the credit insurance accounts. For the year ended December 31, 1999, net fee income totaled $373,000, of which $137,000 has been withheld by the buyer and is included with Receivables on the Consolidated Statements of Net Assets in Liquidation. The Company believes the purchaser s claim for investment income is without merit and intends to take all actions necessary to collect the fee income amounts to which it is contractually entitled. As required by the agreements entered into by the parties, this matter will be settled through arbitration. The ultimate outcome of this dispute cannot be determined at this time. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. In the opinion of management, based on opinions of legal counsel, adequate reserves, if deemed necessary, have been established for these matters and their outcome will not result in a significant effect on the financial condition or future operating results of the Company or its subsidiaries. The Company has taken certain income tax positions in previous years that it believes are appropriate. If such positions were to be successfully challenged by the Internal Revenue Service, the Company could incur additional income taxes as well as interest and penalties. Management believes that the ultimate outcome of any such challenges will not have a material effect on the Company s financial statements. 13. REDEEMABLE PREFERRED STOCK The Redeemable Convertible Preferred Stock (the Preferred Stock ) has a liquidation preference of $10.00 per share and is convertible at any time, unless previously redeemed, into shares of common stock at the rate of 1.482 shares of common stock for each share of Preferred Stock (equivalent to a conversion price of $6.75 per share). The Preferred Stock is redeemable at the option of the Company at a redemption price of $10.00 per share. Annual dividends at the rate of $.85 per share are cumulative from the date of original issue and are payable quarterly on the first day of January, April, July and October. As of December 31, 1999, the Company is not in arrears with respect to payment of dividends on the Preferred Stock. Except in certain limited instances, the holders of the Preferred Stock have no voting rights. The terms of the Preferred Stock require the Company to make annual payments to a sinking fund. The first such payment was due in July 1998. The Preferred Stock terms also provide that any purchase of preferred shares by the Company will reduce the sinking fund requirements by the redemption value of the shares purchased. As a result of the Company s purchases of Preferred Stock prior to 1998, no sinking fund payment was due in 1998, and the required payment for 1999 was reduced from $550,000 to $414,610. The purchase of 18,000 preferred shares in 1999 further reduced the sinking fund deficiency to $234,610 at December 31, 1999. When the Company is in arrears as to preferred dividends or sinking fund appropriations for the Preferred Stock, dividends to holders of the Company's common stock as well as purchases, redemptions or acquisitions by the Company of shares of the Company's common stock are restricted. If the Company is in default in an aggregate amount equal to four quarterly preferred dividends, the holders of the Preferred Stock shall be entitled, only while such arrearage exists, to elect two additional members to the then existing Board of Directors. Prior to March 25, 1998, the difference between the fair value of the Preferred Stock at the date of issue and the mandatory redemption value was recorded through periodic accretions, using the interest method, resulting in a charge to retained earnings ($9,000 in 1998 and $36,000 in 1997). Upon the adoption of the liquidation basis of accounting in March 1998, the unaccreted difference of $175,000 was recorded as a reduction in the Company s net assets. At December 31, 1999, the redemption value of the Preferred Stock exceeded the net assets available to redeem these shares by $303,000. Accordingly, the carrying amount for the Preferred Stock has been reduced to reflect the net assets available. At December 31, 1999 and 1998, 686,608 and 713,275 shares of common stock, respectively, were reserved for the conversion of the Preferred Stock. 14. STOCK OPTIONS At December 31, 1998 and 1997, the Company had 132,000 outstanding stock options which were exercisable at $2.25 per share. During 1999, all of these options expired. In addition, 17,000 options expired in 1997. No options were exercised during the three year period ended December 31, 1999. 15. INCOME TAXES Under tax laws in effect prior to 1984, a portion of the gain from operations of Consumers Life was not taxed when incurred but was accumulated in a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the balance in the Policyholders' Surplus Account of Consumers Life was frozen as of December 31, 1983 and additional amounts are no longer accumulated in this account. However, distributions from the account continue to be taxed, as under previous laws, if any of the following conditions occur: (a) The Policyholders' Surplus Account exceeds a prescribed maximum, or (b) Distributions, other than stock dividends, are made by Consumers Life to the Company in excess of Shareholders' Surplus, as defined by prior law, or (c) Consumers Life ceases to qualify for taxation as a life insurance company. At December 31, 1997, the Policyholders Surplus Account for Consumers Life exceeded the prescribed maximum by approximately $1.1 million, resulting in an additional tax liability of approximately $372,000, which was included in the Company s 1997 financial statements. At December 31, 1999 and 1998, the Policyholders' Surplus Account for Consumers Life was approximately $439,000. Based on its current plans, the Company does not believe it is probable that Consumers Life will incur any additional taxes with regard to its Policyholders Surplus Account. There are currently no significant amounts of retained earnings in excess of statutory surplus upon which neither current nor deferred income taxes have been provided. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1999 and 1998 are as follows:
(in thousands) 1999 1998 Deferred tax liabilities: Fixed maturities $9 Deferred policy acquisition costs 17 Other 41 $0 $67 Deferred tax assets: Future policy benefits 60 64 Net operating loss carryforwards 2,300 2,175 Other 303 259 2,663 2,498 Valuation allowance for deferred tax assets (2,663) (2,431) 0 67 Net deferred tax asset $0 $0
Significant components of income tax expense (benefit) are as follows:
(in thousands) 1999 1998 1997 Current: Federal ($18) ($18) State 2 56 Total current (16) 38 Deferred 1 (273) Income tax benefit related to continuing operations (15) (235) Income tax benefit included with discontinued operations: Current (412) Deferred (462) (874) Income tax benefit for periods prior to adoption of liquidation basis of accounting (15) (1,109) Income tax expense for periods subsequent to adoption of liquidation basis of accounting: Current 55 Deferred 472 527 Total income tax expense (benefit) $0 $512 ($1,109)
The provision for federal income taxes is not proportional to pre-tax financial statement income or loss due to the exclusions and special deductions afforded life insurance companies under the Internal Revenue Code, as amended, and the exclusion of non-taxable and non-deductible items. A reconciliation between actual income tax benefits and the expected Federal income tax benefits at the applicable statutory rates is as follows:
For the period from Year ended January 1, 1998 to December 31, March 24, 1998 1997 Loss from continuing operations before income tax benefit ($103) ($1,676) Income tax benefit at 34% statutory rate on pre-tax loss (35) (570) Tax related to decrease in Policyholders Surplus Account 372 Adjustment of prior year s income tax expense (67) Dividends received deduction (4) (6) State income taxes 2 36 Items not includable for tax purposes 34 Other, net 22 (34) Actual income tax benefit relating to continuing operations ($15) ($235)
The Company files a consolidated Federal income tax return. At December 31, 1999, Consumers Life has available approximately $3.2 millon of Federal net operating losses. These losses will be carried forward to future years, and may only be used to offset the taxable income of the life insurance company sub-group. The net operating losses will expire at various times from 2009 to 2014. 16. PER SHARE INFORMATION Basic income (loss) per common share has been computed based upon the weighted average number of common shares outstanding. Diluted per share information is equivalent to basic per share information because the Company has no potential common shares which are dilutive for any period presented in the accompanying financial statements. The following table sets forth the computation of basic and diluted per share data for continuing operations for periods prior to the adoption of the liquidation basis of accounting.
For the period from Year Ended January 1, 1998 to December 31, (in thousands, except per share amounts March 24, 1998 1997 Loss from continuing operations ($88) ($1,441) Preferred stock dividends (109) (409) Accretion of carrying value of preferred stock (10) (36) Numerator for basic loss per share - loss attributable to common shareholders (207) (1,886) Effect of dilutive securities 0 0 Numerator for diluted loss per share ($207) ($1,886) Denominator for basic loss per share - weighted average shares 2,596 2,601 Effect of dilutive securities 0 0 Denominator for diluted loss per share 2,596 2,601 Basic and diluted loss per common share ($0.08) (0.73)
The preferred stock is convertible into 686,608 shares of common stock (see Note 13). None of the common shares contingently issuable upon the conversion of the preferred stock have been included in the computation of diluted per share information because the effect would be antidilutive. 17. SEGMENT INFORMATION As a result of the disposal of its auto auction business in 1996, the disposal of its remaining block of individual life insurance business in early 1997 and the disposal of its credit insurance business in 1998, the Company has no remaining business segments. As discussed in Note 4, following the sale of its credit insurance business, the Company intends to liquidate its remaining assets, provide for its liabilities, distribute cash to its preferred shareholders, up to the redemption price, and distribute the remaining cash, if any, to its common shareholders pursuant to a Plan of Liquidation and Dissolution. The Company s income or loss from operations now consists principally of (i) earned premiums and related costs associated with an insignificant block of extended service contract business which was recaptured by the direct writer in 1999, (ii) investment income on remaining assets, (iii) fee income from LOTS from the sale of the Company s customer accounts, and (iv) overhead expenses. Because the fees related to the sale of the Company s customer accounts are being received from LOTS over a five-year period, and because any distribution which may be payable by LOTS to the Company from a contingency fund established by the parties cannot be determined until September 30, 2002, the distribution, if any, to the Company s common shareholders will not be made until late in 2002. 18. REGULATORY MATTERS In July 1999, Investors Fidelity Life Assurance Corp. (IFLAC), a subsidiary of Consumers Life, filed an application with the Ohio Department of Insurance to formally discontinue its business as a life insurance company. In September 1999, the Ohio Department issued an order accepting the surrender of IFLAC s certificate of authority. The NAIC has established certain minimum capitalization requirements based on risk-based capital (RBC) formulas. The formulas are designed to identify companies which are undercapitalized and require specific regulatory action based on requirements relating to insurance, business, asset and interest rate risks. At December 31, 1999, Consumers Life has more than sufficient capital to meet the NAIC's RBC requirements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The firm of Arthur Andersen LLP ( AA ) served as the Company s independent auditors from November 26, 1996 to November 29, 1999. On that date, the Company advised AA that it did not intend to retain AA as its independent public accountants for the audit of the Company s financial statements for the year ended December 31, 1999. The decision to terminate the services of AA was approved by the Audit Committee of the Company s Board of Directors on November 29, 1999, at which time the Audit Committee engaged the firm of Stambaugh-Ness, P.C. as the Company s independent public accountants. The decision to change from a large international accounting firm to a regional firm was based primarily on the Board of Directors desire to minimize costs during the liquidation and dissolution period in which the Company is now involved. None of AA s reports on the Company s financial statements for 1997 or 1998 contained an adverse opinion or disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope or accounting principles. Further, through November 29, 1999, there were no disagreements between the Company and AA on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, and no reportable events have occurred. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Historically, the Board of Directors of the Company was divided into three (3) groups, with the directors in each group serving terms of three (3) years and until their successors were duly elected and qualified. However, due to the Directors efforts over the past four years to merge, sell or otherwise dispose of the Company or its assets, there has been no election of Directors since 1995, and the existing Directors agreed to continue to serve beyond their terms until such a merger, sale or disposition of the Company or its assets was completed. Following the approval of the Sale of Assets transaction and the Plan of Liquidation and Dissolution by the Company s shareholders on March 24, 1998, three of the Company s Directors, Leon A. Guida, Dr. Robert G. Little, Jr. and Rev. Sterling P. Martz, resigned. On November 17, 1999, Edward J. Kremer also resigned. The two remaining Directors are expected to continue to serve as Directors for a limited period of time in order to oversee the timely liquidation of the Company in accordance with the Plan of Liquidation. The table below sets forth the period for which the current Directors have served as Directors of the Company, their principal occupation or employment for the last five(5) years, and their other major affiliations and age as of March 1, 2000.
NAME PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS, OFFICE (IF DIRECTOR (AGE) ANY) HELD IN THE COMPANY AND OTHER INFORMATION SINCE James C. Robertson Chairman of the Board, President and Chief 1967 (68) Executive Officer of the Company John E. Groninger President, John E. Groninger, Inc., Juniata Concrete, 1968 (73) Inc., Republic Development Corp., and Juniata Lumber & Supply Co., Mexico, PA; Director, Juniata Valley Financial Corp., Mifflintown, PA
The following information is provided as of March 1, 2000 for each executive officer of the Company and the principal executives of its subsidiary. All of the executive officers listed also serve as executive officers of the life insurance subsidiary. The executive officers are appointed annually by the Board of Directors and serve at the discretion of the Board.
NAME AGE OFFICE James C. Robertson 68 President and Chief Executive Officer R. Fredric Zullinger 51 Senior Vice President, Chief Financial Officer and Treasurer
Mr. Robertson joined the Company in 1967 as General Counsel and was elected a director and President of the Company in 1968. Mr. Robertson currently serves as Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Zullinger joined the Company in 1977 as Vice President-Accounting of the Company's life insurance subsidiaries. He was appointed Treasurer of the Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr. Zullinger currently serves as Senior Vice President, Chief Financial Officer and Treasurer of the Company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding the annual compensation for services in all capacities to the Company for the fiscal years ended December 31, 1999, 1998 and 1997 of the Chief Executive Officer and the named executive officers whose annual compensation exceeded $100,000 (hereinafter referred to as "named executive officers"). SUMMARY COMPENSATION TABLE Annual Other All Compensation Annual Other Name and Principal Position Year Salary Bonus Compensation Compensation James C. Robertson, 1999 - 0 - (1) $0 $2,100 (2) - 0 - Chairman, President and 1998 - 0 - (1) $0 $3,975 (2) - 0 - Chief Executive Officer 1997 - 0 - (1) $0 $5,700 (2) - 0 -
(1) Mr. Robertson s status as a salaried employee of the Company terminated effective July 19, 1996. For the remainder of 1996, Mr. Robertson was compensated at a daily rate of $150 for any work performed in his capacity as President and CEO of the Company. Mr. Robertson was not compensated for any services performed in his capacity as President and CEO of the Company in either 1999, 1998 or 1997. (2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman of the Board of the Company. OPTION/SAR GRANTS IN LAST FISCAL YEAR No stock options and/or stock appreciation rights were granted by the Company to the named executive officers in 1999. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR TABLE At December 31, 1998, 132,000 stock options and stock appreciation rights were outstanding, each with an option price of $2.25. These options had been awarded to various executive officers under the Company s 1989 Stock Incentive Plan. In May 1999, all of these options expired. As a result of the adoption of the Plan of Liquidation in 1998, the Company does not intend to grant any additional options or stock appreciation rights. PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Personnel Committee of the Board of Directors (the "Committee") has historically administered and approved all forms of compensation for the Chief Executive Officer ("CEO"), Executive Officers and other officers of the Company. The members of the Committee are independent, non-employee directors who annually reviewed with the Board all aspects of compensation, management succession and the implementation and administration of the Company's various incentive plans. COMPENSATION PHILOSOPHY Historically, the compensation policy of the Company has been based upon the philosophy that an important portion of the annual compensation of each officer should relate to and be contingent upon the performance of the Company, as well as the individual contribution of each officer. In the past, the Company relied to a large degree on the annual and longer term incentive compensation plans to attract and retain corporate officers of outstanding abilities and to motivate them to perform to the full extent of their abilities. However, with the adoption of the Plan of Liquidation, the Committee attempted to implement a compensation policy to allow an orderly and timely reduction of the officers and employees of the Company. As a result, on May 1, 1998, one (1) executive officer was separated from employment with the Company. As such, there remains only one (1) executive officer employed by the Company who is expected to serve in that capacity until late 2000. Thereafter, this individual is expected to continue providing assistance to the Company on a periodic basis during the liquidation of the Company in accordance with the Plan of Liquidation The remaining executive officer s salary has not changed since 1993 and there are no plans to increase the salary or award any bonus or incentive payments to him. However, upon the separation of the remaining executive officer from the Company, he will be entitled to a severance package equal to fifteen months of salary. No stock options or SARS were granted by the Company to the CEO or the other executive officer during 1999. CEO COMPENSATION Mr. Robertson continues to serve as Chairman of the Board, President and CEO of the Company. However, his status as a salaried employee of the Company was terminated effective July 19, 1996. From that time and until December 31, 1996, Mr. Robertson had been compensated at $150 per day for any work performed for the Company in his capacity as a non-salaried employee while serving as President and CEO. Beginning in 1997 and continuing through 1999, Mr. Robertson did not receive any compensation in his capacity as a non- salaried employee while serving as President and CEO, although he continued to receive the standard retainer and board meeting fees in his role as Chairman of the Board. The Committee believes that this arrangement with Mr. Robertson is in the best interests of the Company and is more than reasonable based upon Mr. Robertson's experience and knowledge of the Company while it is attempting to sell its assets and liquidate in accordance with the Plan of Liquidation. This report is submitted by the Personnel Committee of the Company's Board of Directors. John A. Groninger, Chairman STOCK PRICE PERFORMANCE COMPARISON CUMULATIVE TOTAL RETURN 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 Consumers Financial Corp. 100 139 140 37 5 2 (CFIN) Peer Group 100 157 157 207 164 57 NASDAQ Stock Market (U.S.) 100 141 174 213 300 542
*Assumes $100 invested on December 31, 1994 in the Company s common stock, NASDAQ Stock Index and Peer Group common stock. Total shareholder returns assume reinvestment of dividends. (1) The peer group companies are primarily in the same segment of the insurance industry that market credit life and credit disability products to automotive dealers and other financial institutions. While none of the companies offer all of the products and services of the Company, each can be considered a competitor of the Company. The members of the peer group are as follows: ACCEL International Corporation, CNL Financial Corporation, American Bankers Insurance Group and US Life Corporation. PENSION PLAN BENEFITS The Company has a defined benefit plan, the Consumers Financial Corporation and Subsidiaries Employees Retirement Plan (the Plan). The Plan was established effective January 1, 1984. Under the Plan the retirement benefit is determined by a formula which reflects compensation and years of service. Benefits are fully vested after seven (7) years of service. Compensation includes base salary, bonuses and other forms of compensation and generally corresponds to the amounts shown in the Summary Compensation Table. During 1996, the Company froze the benefits payable to participants under the Plan. The benefit formula in the Plan provides that for each year of service prior to 1975, the benefit consists of (1) 0.5% of average monthly compensation, plus (b) 1.5% of average monthly compensation in excess of $1,000 where Average Monthly Compensation is average monthly compensation for the five calendar years ending December 31, 1983. For each year of service from January 1, 1984 through December 31, 1988, the benefit consists of (a) 1.5% of monthly compensation times the number of years of service under the Plan, plus (b) 1.4% of monthly compensation in excess of the social security wage base. For each year of service from January 1, 1989 through July 31, 1996, the benefit consists of (a) 1.5% of monthly compensation times the number of years of service under the Plan, plus (b) .65% of monthly compensation in excess of the social security wage base. At December 31, 1999, the estimated monthly defined benefit payable upon retirement at age 65 for Mr. Zullinger was $1,918. This amount represents a straight-life annuity and has not been reduced by a joint and survivorship provision which is available to Mr. Zullinger. In addition, following his retirement as a salaried employee in July 1996, James C. Robertson began receiving a monthly annuity benefit in the amount of $3,667. In January 2000, the Company notified the participants of the Plan of its intent to terminate the Plan. At termination, the participants, including the above-named executive officers, will receive either a lump-sum payment or an annuity contract entitling them to receive the same monthly payment at age 65 as would have been provided by the Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 1, 2000, the number of shares of voting stock owned by any person who is known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, the only class of voting securities outstanding.
Amount and Nature of Percent Title of Class Beneficial of Title of Class Name and Address of Beneficial Owner Ownership Class Common Consumers Financial Corporation and 231,344 8.97% Subsidiaries Employee Stock Ownership Plan (ESOP) (1) 1200 Camp Hill By-Pass, Camp Hill, PA 17011 Common Peter H. Kamin 205,100 7.95% One Financial Center, Suite 1600, Boston, MA 02111
(1) The Company's Employee Stock Ownership Plan is an employee benefit plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Participating employees of the Company have the power to vote the shares allocated to them under the Plan. The Trustees of the Plan have discretionary investment powers including the power to dispose of the shares. In September 1999, the Company notified the participants of the ESOP of its intent to terminate the plan, subject to obtaining a favorable determination of the plan s qualified status from the Internal Revenue Service. At termination, the plan participants will receive the shares of the Company s common stock which are in their respective accounts. The following table sets forth as of March 1, 2000, the number of shares of the Company's Common and Preferred Stock beneficially owned by (a) each director; (b) each executive officer who is not a director; and (c) all directors and executive officers as a group.
Amount and Nature of Percent Name of Beneficial of Title of Class Beneficial Owner Ownership (1) Class (a) Common Groninger, John E. 57,521 (2) 2.23% Preferred 22,410 (3) 4.84% Common Robertson, James C. 99,775 3.87% Preferred 5,235 (4) 1.13% (b) Common Zullinger, R. Fredric 29,523 (5) 1.15% (c) Common Directors and Executive 186,819 7.25% Preferred Officers as a Group 27,645 5.97% (3 individuals)
(1) Except where otherwise indicated, the beneficial owner of the shares exercises sole voting and investment power. (2) Includes 42,542 shares owned by Mr. Groninger's wife. (3) Includes 1,000 shares owned by Mr. Groninger's wife. (4) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's wife. (5) Includes 14,835 shares for which Mr. Zullinger has voting power as to shares held for him in the Employee Stock Ownership Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 1999, the Company did not enter into any transactions in which the amount involved exceeded $60,000, with any of its directors, executive officers, security holders known to the Company to own more than 5% of the Company s common stock or any member of the immediate family of any of the foregoing persons. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) Listing of Documents filed: 1. Financial Statements (included in Part II of this report): Reports of Independent Public Accountants Consolidated Statements of Net Assets in Liquidation - December 31, 1999 and 1998 Consolidated Statements of Changes in Net Assets in Liquidation - For the year ended December 31, 1999 and for the period from March 25, 1998 to December 31, 1998 Consolidated Balance Sheet-March 24, 1998 (unaudited) Consolidated Statements of Operations - For the period from January 1, 1998 to March 24, 1998 and for the year ended December 31, 1997 Consolidated Statements of Shareholders' Equity - For the period from January 1, 1998 to March 24, 1998 and for the year ended December 31, 1997 Consolidated Statements of Cash Flows - For the period from January 1, 1998 to March 24, 1998 and for the year ended December 31, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules (included in Part IV of this report): (II) Condensed Financial Information of Registrant (III) Supplementary Insurance Information (IV) Reinsurance (V) Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not required, not applicable or the required information is set forth in the financial statements or notes thereto. 3. Exhibits: (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (i) (3) Articles of incorporation and by-laws (i) (4) Instruments defining the rights of security holders, including indentures (i) (9) Voting trust agreement (ii) (10) Material contracts (ii) (11) Statement re computation of per share earnings (iii) (12) Statement re computation of ratios (ii) (13) Annual report to security holders (ii) (16) Letter re change in certifying accountant (i) (18) Letter re change in accounting principles (ii) (21) Subsidiaries of the registrant (iv) (22) Published report regarding matters submitted to a vote of security holders (ii) (23) Consents of experts and counsel (ii) (24) Power of attorney (ii) (27) Financial data schedule (iv) (99) Additional exhibits (ii) (i) Information or document provided in previous filing with the Commission (ii) Information or document not applicable to registrant (iii) See Note 16 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. (iv) Information or document included as exhibit to this Form 10-K. b) Reports on Form 8-K: On December 2, 1999, the Company filed a Form 8-K regarding the change in the Company s certifying accountants from Arthur Andersen LLP to Stambaugh-Ness, P.C. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF NET ASSETS IN LIQUIDATION DECEMBER 31, 1999 AND 1998
(dollar amounts in thousands) 1999 1998 Assets Investments, other than investments in affiliates $70 Cash $273 169 Investments in affiliates 5,540 2,672 Indebtedness of affiliate (surplus note) 4,706 Receivables 301 747 Other assets 10 48 Total assets 6,124 8,412 Liabilities Indebtedness to affiliates 590 2,132 Dividend payable 99 102 Underfunded pension plan 922 664 Other liabilities 181 316 1,792 3,214 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued and outstanding 1999, 463,461 shares; 1998, 481,461 shares; net of $303 reduction in 1999 to reflect estimated liquidation value 4,332 4,815 Total liabilities and redeemable preferred stock 6,124 8,029 Net assets in liquidation $0 $383
See notes to condensed financial statements. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION For the period from March 25, 1998 Year ended to December 31, 1998 (in thousands) December 31, 1999 Revenues: Net investment income $3 $7 Fees from sale of customer accounts 156 98 Joint venture income 30 47 Net realized investment gains 8 Miscellaneous 122 110 311 270 Expenses: Salaries, wages and employee benefits 26 14 Taxes, licenses and fees 26 Depreciation 2 5 Miscellaneous 10 67 38 112 Operating income before income tax benefit 273 158 Income tax benefit 493 Equity in loss of unconsolidated subsidiaries (227) (783) Increase in liability for underfunded pension plan (388) (734) Decrease in unrealized appreciation of debt securities (43) (32) Preferred stock dividends (406) (307) Adjustment of preferred stock to estimated liquidation 303 (175) value Retirement of treasury shares-preferred 105 57 Purchase of treasury shares-common (9) Decrease in net assets for the period (383) (1,332) Net assets at beginning of period 383 1,715 Net assets at end of period $0 $383
See notes to condensed financial statements. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION BALANCE SHEET March 24, 1998 (unaudited)
(in thousands) Liabilities, Redeemable Preferred Assets Stock and Shareholders' Equity Investments, other than investments in $68 Liabilities: affiliates Indebtedness to affiliates $251 Cash 227 Dividend payable 109 Accrued severance pay 341 Investments in affiliates 2,138 Miscellaneous 70 Income taxes 308 Indebtedness of affiliates 4,850 Total liabilities 1,079 Property and equipment, Redeemable preferred stock: net of accumulated depreciation 7 Series A, 8 1/2 % cumulative convertible 4,697 Other assets 201 Shareholders equity: $749 Common stock 30 Capital in excess of stated value 7,989 Equity in net unrealized appreciation of debt securities of subsidiaries 58 Deficit (4,891) Treasury stock (1,471) Total shareholders equity 1,715 $7,491
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS
For the period from January 1,1998 Year ended (in thousands) to March 24, 1998 December 31, 1997 Revenues: Net investment income $9 $19 Net realized investment losses (10) Other income 48 163 Total revenues 57 172 Expenses: General expenses 98 563 Taxes, licenses and fees 7 22 Write-off of intangible assets 50 Total expenses 105 635 Loss before income taxes (48) (463) Income taxes 3 131 Loss before equity in income (loss of unconsolidated subsidiaries (51) (594) Equity in income (loss) of unconsolidated subsidiaries: Continuing operations (37) (1,174) Discontinued operations 112 (4,592) 75 (5,766) Net income (loss) $24 ($6,360)
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS
For the period from January 1, 1998 Year ended (in thousands) to March 24, 1998 December 31, 1997 Cash flows from operating activities: Net income (loss) $24 ($6,360) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Income taxes 12 (1,004) Change in receivables 7 Change in other liabilities (11) 377 Equity in loss (income) of unconsolidated subsidiaries (793) 6,338 Amortization of intangibles 781 50 Other (107) 37 Total adjustments (118) 5,805 Net cash used in operating activities (94) (555) Cash flows from investing activities: Purchase of investments (1) (3) Maturity of investments Sale of investments 1,304 Investments in and indebtedness to affiliates (1) (26) Net cash provided by (used in) investing activities (2) 1,275 Cash flows from financing activities: Principal payments on debt Purchase of treasury stock (1) (64) Cash dividends to preferred shareholders (109) (409) Net cash used in financing activities (110) (473) Net increase (decrease) in cash (206) 247 Cash at beginning of year 433 186 Cash at end of period $227 $433
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Consumers Financial Corporation and subsidiaries. 2. The Company received no cash dividends from its subsidiaries in 1999. In 1998 and 1997, the Company received dividends of $10,000 and $425,000, respectively. During 1999, the Company received $1.3 million from an affiliate as a partial repayment of a $4.7 intercompany note. This payment represented substantially all of the affiliate s remaining assets. Accordingly, the note was cancelled and this affiliate is now being dissolved. In addition, during 1999, the Company repaid $1.3 million on a $1.58 million note payable to its wholly-owned subsidiary, Consumers Life Insurance Company. This note was also cancelled, since the Company does not have sufficient funds to repay the remaining $268,000. In 1998, the Company received certain assets and assumed certain liabilities from several of its subsidiaries in connection with the liquidation of those companies. The book value of the net assets received was $679,000. 3. The Company files a consolidated Federal income tax return with its life insurance company subsidiary. Tax expense and tax benefits are allocated proportionately between the Company and its subsidiary. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Deferred Other policy policy Future claims and acquisition policy Unearned benefits Secment costs benefits premiums payable Year ended December 31, 1999: Automotive Resource Division: Credit insurance and fee income business $7,629 $2,359 Assumed warranty business Individual Life Insurance Division 1,449 27,644 6 Other Total $0 $9,078 $27,644 $2,365 Year ended December 31, 1998: Automotive Resource Division: Credit insurance and fee income business $8,291 $34,840 $2,837 Assumed warranty business 323 Individual Life Insurance Division $50 9,354 45 Other Total $50 $17,645 $35,163 $2,882 Year ended December 31, 1997: Automotive Resource Division: Credit insurance and fee income business $13,545 $11,785 $49,057 $2,181 Assumed warranty business 25 937 195 Individual Life Insurance Division 9,682 163 Other Total $13,570 $21,467 $49,994 $2,539
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Premium Amortization income, of deferred fees and Net Death policy other Investment and other acquisition Operating Segment income Income benefits costs expenses (a) Year ended December 31, 1999: Automotive Resource Division: Credit insurance and fee income business Assumed warranty business $384 $11 $394 Individual Life Insurance Division Other 477 199 2 $929 Total $861 $210 $396 $0 $929 Year ended December 31, 1998 : Amounts attributable to period prior to adoption of liquidation basis of accounting: Automotive Resource Division: Credit insurance and fee income business Assumed warranty business $83 Individual Life Insurance Division Other $60 $368 Total 83 60 368 Amounts attributable to period subsequent to adoption of liquidation basis of accounting: Automotive Resource Division: Credit insurance and fee income business Assumed warranty 504 46 $260 104 business Individual Life Insurance Division Other 281 441 1,178 Total 785 487 260 1,282 Grand total $868 $547 $260 $1,650 Year ended December 31, 1997: Automotive Resource Division: Credit insurance and fee income business Assumed warranty business $375 $44 $460 $10 $1 Individual Life Insurance Division Other 171 19 1,638 Total $546 $63 $460 $10 $1,639
(a) Excludes realized investment gains and losses. SCHEDULE IV REINSURANCE CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Percentage (in thousands) Ceded to Assumed of amount Gross other from Net assumed Segment Amount companies companies Amount to net Year ended December 31, 1999: Life insurance in force $0 $0 Premium income: Assumed warranty $319 $319 100.0% $319 $319 100.0% Year ended December 31, 1998: Life insurance in-force $0 $0 Premium income: Assumed warranty $604 $604 100.0% $604 $604 100.0% Year ended December 31, 1997: Life insurance in-force $0 $0 Premium income: Assumed warranty $356 $356 100.0% $356 $356 100.0%
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Additions Charged to Balance at Charged to to Balance at beginning costs and other accounts, Deductions, end of of period expenses describe describe period Year ended December 31, 1999 Provision for permanent decrease in market value of: Property and equipment $962 $209 (a) $753 Other real estate 92 92 (b) Other invested assets 55 55 (b) $1,109 $356 $753 Year ended December 31, 1998 Provision for permanent decrease in market value of: Mortgage loans $50 $50 (a) Property and equipment 713 $249 $962 Other real estate 357 265 (b) 92 Other invested assets 163 108 (b) 55 Provision for uncollectible 436 436 (c) receivables $1,719 $249 $859 $1,109 Year ended December 31, 1997 Provision for permanent decrease in market value of: Mortgage loans $100 $50 (a) $50 Property and equipment $713 713 Other real estate 128 229 357 Other invested assets 75 158 70 (b) 163 Provision for uncollectible receivables 1,038 110 712 (c) 436 $1,341 $1,210 $832 $1,719
(a) Reduction in valuation allowance related to adjustment to net realizable value. (b) Write-off of valuation allowance for assets sold (c) Write-off of asset against valuation allowance SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSUMERS FINANCIAL CORPORATION By: /S/ James C. Robertson Chairman of the Board and President Date: March 14, 2000 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date /S/ James C. Robertson Director, President March 14, 2000 and Chairman of the Board (Chief Executive Officer) /S/ Senior Vice March 14, 2000 R. Fredric Zullinger President and Treasurer (Chief Financial Officer) /S / Director March 14, 2000 John E. Groninger
EXHIBIT 21 SUBSIDIARIES OF CONSUMERS FINANCIAL CORPORATION At December 31, 1999, Consumers Financial Corporation (EIN #23-1666392) owns 100% of the outstanding common stock of the following subsidiaries: Consumers Life Insurance Company 21-0706531 CLMC Insurance Agency, Inc. 25-1681245 IAAC, Inc. 25-1211251 Consumers Car Care Corporation 23-1720565 Consumers Life Insurance Company owns 100% of the outstanding common stock of IFLAC Corp. (formerly Investors Fidelity Life Assurance Corp. - EIN #31-0646177). None of these subsidiaries, except Consumers Life Insurance Company, has any assets or liabilities remaining. EX-27 2
7 YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 0 0 0 0 0 0 0 0 1,551,828 1,600,283 0 0 3,593,831 4,449,872 273,529 171,822 27,643,838 34,840,247 0 50,000 44,748,083 62,687,602 9,077,696 17,644,637 27,643,838 35,162,710 2,365,065 2,883,411 0 0 0 0 0 0 4,331,760 4,814,610 0 0 0 382,595 44,748,083 62,687,602 319,206 604,216 209,823 547,104 (5,029) 182,589 549,437 1,083,586 396,047 260,113 0 0 0 0 (251,749) 292,030 0 522,794 0 0 0 112,652 0 0 0 0 (251,749) (107,112) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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