-----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, KZ11OxO44k5ug1bezIdeW9cw3hvgA4Z+a853mpbVVYB1wsAQ3+6/0qx7ttLfRYpq dgaL+mK+DGE1KfkCZku8qQ== 0000100320-98-000005.txt : 19980219 0000100320-98-000005.hdr.sgml : 19980219 ACCESSION NUMBER: 0000100320-98-000005 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19980218 SROS: NASD 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/A SEC ACT: SEC FILE NUMBER: 001-12455 FILM NUMBER: 98544255 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/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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, 1997, the aggregate market value of common stock held by non-affiliates of the registrant was $9,625,839. The number of outstanding common shares of the registrant was 2,610,397 as of March 1, 1997. PART I ITEM 1. BUSINESS GENERAL Consumers Financial Corporation (the "Company") is an insurance holding company which, through its subsidiaries, is a leading provider of credit life and credit disability insurance in the Middle Atlantic region of the United States. The Company also owns and administers a small block of universal life insurance business, but no longer markets those products. The insurance subsidiaries are licensed in 33 states and the District of Columbia and currently conduct the majority of their business in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and Virginia. Credit insurance, which accounted for $30 million, or 88%, of the Company's total premium revenues in 1996, is marketed primarily through approximately 900 automobile dealers. In connection with its credit insurance operations, the Company also markets, as an agent, an automobile extended service warranty contract and, until mid-1996, assumed through reinsurance, certain underwriting risks on a small block of warranty business. Universal life insurance, which accounted for $3.7 million of premium and policy charge revenues, or 11% of the Company's total premiums and policy charges in 1996, was marketed, until 1992, through general agents, personal producing general agents and independent brokers. Additional information regarding the termination of marketing activities in the Individual Life Division and the sale of the majority of the Division s in-force business appears below under "Operations." The Company, through its wholly-owned subsidiary, Interstate Auto Auction, Inc. ("Interstate"), has also conducted wholesale and retail automobile auctions of used vehicles for automobile dealers, banks and leasing companies. See Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in the Form 10-K for a discussion of the sale of the operating assets of Interstate in November 1996 for cash in the amount of $4.85 million. 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 operates through its wholly-owned subsidiaries, principally Consumers Life Insurance Company (a Delaware life insurance company) ( Consumers Life ), Consumers Car Care Corporation (a Pennsylvania business corporation) and, until late 1996, Interstate (a Pennsylvania business corporation). Consumers Life Insurance Company of North Carolina (a North Carolina life insurance company) and Investors Fidelity Life Assurance Corp. (an Ohio life insurance company) are subsidiaries of Consumers Life Insurance Company. 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 numbers are (717) 761-4230 and (800) 933-3018. The Company has historically operated in three industry segments: the Automotive Resource Division, which markets credit insurance and other products and services to its automobile dealer customers, the Individual Life Insurance Division and the Auto Auction Division. These segments exclude the corporate activities of Consumers Financial Corporation which are insignificant in relation to the three segments. The Automotive Resource segment consists principally of credit life and credit disability insurance which is sold primarily through automobile dealers and, to a limited extent, through banks and other financial institutions. This segment also generates commission revenues on sales of automobile warranty contracts and revenues from other related products and services. The Individual Life segment emphasized the sale of universal life products which were introduced in 1985, and had previously marketed whole-life, term, endowment and annuity products. Until its sale in 1996, the Auto Auction segment operated an automobile auction of used vehicles for automobile dealers, banks and leasing companies. Both the individual life insurance and the auto auction segments have been presented as discontinued operations in the Company s consolidated financial statements. See Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. In March 1992, the Company announced its decision to terminate the operations of its Individual Life Insurance Division. The phase-out plan included discontinuing the sale of insurance policies and the sale of the Company s existing block of individual business. Effective October 1, 1992, the Company sold its block of whole life, term and annuity products to an unaffiliated insurer but continued to administer the block of universal life policies. As of December 31, 1994, the Company sold its in-force block of direct universal life insurance business to an unaffiliated insurer. As part of that transaction, the Company irrevocably assigned to the same insurer, all of its right, title and interest to a block of universal life business which had been assumed previously from another unaffiliated insurer. The Company continued to administer these blocks of universal life business until May 1, 1995 . The Company continues to own and administer an assumed block of universal life business issued by an unaffiliated insurer. In March 1997, the Company signed a definitive agreement with the direct writer whereby that company will recapture this business and pay the Company a recapture consideration of $1.05 million. See Note 21 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for further information regarding this transaction. In March 1996, the Company announced that it had retained a financial advisor to assist management in evaluating various alternatives to best serve the interests of its shareholders. The recent losses incurred in the Company s core credit insurance operation lead to this action in order to preserve shareholder value. The various alternatives which were considered include the sale of the insurance operations (either the existing business and the marketing organization or only the marketing organization), the sale of the auto auction business, the sale of the entire Company or a combination of the Company with another organization. During 1996, the Company solicited bids for both the insurance operations and the auto auction business. In October 1996, the Company entered into a merger agreement (the Merger Agreement ) with LaSalle Group, Inc., pursuant to which the Company will become a wholly-owned subsidiary of LaSalle. This transaction, which was approved by the Company s common shareholders on March 25, 1997, is subject to the approval of various state insurance department regulators. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information with respect to this matter. The following table sets forth for the periods indicated the contribution to revenues, which are comprised of premiums written (before reinsurance ceded), policy charges, net investment income, realized investment gains and other revenues, of each of the product lines within the Company's remaining industry segment. Information relating to the discontinued individual life insurance and auto auction segments has been excluded.
Years Ended December 31, (in thousands) 1996 1995 1994 Automotive Resource Division Credit Insurance: Life $13,542 $14,742 $15,444 Disability 18,923 20,973 21,739 Warranty contracts 1,191 1,684 1,647 Other products and services 87 129 170 33,743 37,528 39,000 Corporate 19 21 10 Net realized investment losses- not allocated (160) (120) (476) Total revenues (before reinsurance ceded) $33,602 $37,429 $38,534
The following table sets forth for the periods indicated the contribution to pre-tax income (loss) of each of the product lines within the Company s remaining industry segment. Information relating to the discontinued individual life insurance and auto auction segments has been excluded.
Years Ended December 31, (in thousands) 1996 1995 1994 Automotive Resource Division: Credit insurance: Life ($577) ($1,094) ($1,059) Disability (1,996) (1,511) (1,422) Warranty contracts 31 219 321 Other products and services 42 (6) (22) (2,500) (2,392) (2,182) Corporate (874) (307) (401) (3,374) (2,699) (2,583) Realized investment losses (160) (120) (476) Pre-tax loss from continuing operations ($3,534) ($2,819) ($3,059)
OPERATIONS The Company's principal subsidiaries, which are engaged in the credit insurance and, until 1992, the individual life insurance business, are Consumers Life Insurance Company, Consumers Life Insurance Company of North Carolina and Investors Fidelity Life Assurance Corp. Together these companies are licensed in 33 states and the District of Columbia. As noted in Item 1. - General, the Company disposed of a significant portion of its individual life insurance business in October 1992 and December 1994 and, in March 1997, entered into an agreement to dispose of its remaining individual life business. The following table sets forth the amounts of life insurance in force at the dates indicated:
December 31, (in thousands) 1996 1995 1994 Direct and assumed: Credit $1,418,853 $1,434,897 $1,427,252 Individual life 596,690 697,176 838,667 2,015,543 2,132,073 2,265,919 Reinsurance ceded (927,916) (947,363) (1,184,134) Net in force $1,087,627 $1,184,710 $1,081,785
For information concerning future policy benefits and unearned premiums, see Notes 1 and 10 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. Reserves for life insurance are developed using generally accepted actuarial principles which are widely recognized in the insurance industry. Methods of developing credit disability insurance claims reserves vary widely in the industry. The Company's methods of establishing credit disability claims reserves are based on its prior claims experience. During the last three years, the difference between actual claims on credit disability policies and amounts reserved has not been significant. Automotive Resource Division The Company sells credit insurance in connection with consumer credit transactions, substantially all of which are automobile purchases. Credit life insurance provides funds in the event of the insured's death for payment of a specified loan or loans owed by the insured. Similarly, credit disability insurance provides for the periodic paydown of such loans during the term of the insured's disability. In most cases, the entire premium is paid at the time the insurance is issued. Premiums collected are remitted to the Company net of commissions. Credit insurance generally is written on a decreasing term basis with the policy benefit initially being the full amount of the loan and thereafter decreasing in amounts corresponding to the repayment schedule. The primary beneficiary under credit insurance is the lender, with any proceeds in excess of the unpaid portion of the loan payable to a named second beneficiary or the insured's estate. The Company underwrites all of its credit insurance certificates as to certain health matters including cancer, heart disease, AIDS and AIDS related complex (ARC). The Company also establishes maximum age limits beyond which individuals are not eligible for coverage. The Company believes that its comprehensive training programs increase the ability of its automobile dealer accounts to sell insurance to a significant percentage of automobile purchasers, which creates a larger and more diverse pool of insureds, thereby reducing its mortality and morbidity risk. The Company typically experiences a higher level of claims on disability policies during the first quarter of each year. In April 1996, the Company discontinued marketing its credit insurance products in the state of North Carolina as a result of continued losses on that business. Written premiums in North Carolina were $327,000 in 1996 and $1.8 million in 1995. Certain credit insurance accounts in Virginia were also cancelled in 1996 because of unprofitable results. Those accounts produced premium revenues of $914,000 and $1,434,000 in 1996 and 1995, respectively. In July 1995, the Company discontinued marketing credit insurance in Kentucky. Written premiums in that state were $844,000 in 1995. The Company's success in selling credit insurance is dependent upon establishing and maintaining favorable relationships with automobile dealers. To accomplish these goals, the Company provides finance and insurance training programs which assist dealers in arranging financing and increasing sales of credit insurance; it offers certain dealers the opportunity to participate in profits of the credit insurance business generated by them through reinsurance arrangements; and it provides administrative support and claims handling procedures to dealers. The Company also seeks the endorsement of local and state automobile dealer and other credit insurance producing member associations. In that regard, during 1996, the Company lost the Pennsylvania Automotive Association endorsement which it held since 1987. The Company does not believe the loss of the Pennsylvania endorsement will have a materially adverse impact on its future operating results, although the loss of the endorsement could result in the loss of up to 15% of the Company s Pennsylvania credit insurance premium revenues and service contract commission income. To assist the Company in developing dealer relationships, the Company employs two home office sales managers, one finance and insurance training specialist and 16 salaried field representatives who solicit and service accounts. The Company's dealer relationships may be terminated by the Company or the dealers at any time without penalty. In addition to its direct sales efforts, the Company also purchases closed blocks of credit insurance from unaffiliated companies and administers the purchased business until all coverages expire. The credit insurance business is the major source of the Company's revenues and, until 1991, provided the majority of its profits as well. As indicated above, approximately 88% of the Company's premium revenues during 1996 were derived from its credit insurance business. Automobile sales account for substantially all of the credit insurance sold by the Company, and have been and will continue to be affected, directly and indirectly, by automobile prices, interest rates, the availability of consumer credit and general economic conditions. The credit insurance industry and the Company s credit business have both been adversely affected in recent years by the increase in the number of automobiles which are leased instead of purchased. This is principally due to the lack of availability of approved credit insurance products applicable to leases and to a reluctance on the part of automobile dealers to emphasize the sale of credit insurance products on lease transactions. The Company has credit insurance products available for lease transactions in most of the states in which it actively markets. Effective July 31, 1996, the Company and its joint venture partner cancelled an agreement whereby the companies shared in the profits or losses from the credit insurance business written by the Company in Pennsylvania, the Company s most profitable credit insurance state. As a result, on credit insurance premiums produced in Pennsylvania after July 31, the Company will now retain the profits or losses which were previously shared with the joint venture partner. As consideration for terminating the venture, the Company has agreed to pay its former partner $500,000 in cash at the time the merger with LaSalle is consummated. In the event the LaSalle merger is not completed, any payment to the joint venture partner will be determined under a separate calculation. The Company's ability to retain credit insurance premiums written is limited by applicable statutory surplus requirements. For this reason, the Company reinsures substantial percentages of its credit insurance premiums on a written basis under quota share agreements with unaffiliated insurance companies. These reinsurance agreements provide statutory surplus relief, thereby increasing the Company's capacity to write credit insurance. An effect of this reinsurance is, however, to reduce the profit that the Company might otherwise realize on its credit insurance business. The agreements contain an experience adjustment computation which results in the ultimate cost of this reinsurance being a stated percentage of the amount of statutory surplus provided. Security funds are maintained by the Company in amounts which are generally proportional to the ceded unearned premiums. This reinsurance does not discharge the Company's primary liability as the original insurer. See Note 20 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for information concerning certain regulatory matters involving these reinsurance treaties. The Company also markets, in an agency capacity, extended service automobile warranty products through its wholly-owned subsidiary, Consumers Car Care Corporation. These products are underwritten by unaffiliated insurance companies, administered by unaffiliated third party administrators and sold primarily through automobile dealers, who also sell the Company's credit insurance. Until mid-1996, the Company also assumed, through another subsidiary, a portion of the risks on these extended service contracts pursuant to a reinsurance arrangement with one of the unaffiliated insurers who underwrite the business. Other related products and services are 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 of Phoenix, Arizona. In early 1993, the Company rejected offers it received for the sale of its universal life business after determining that the offers were too low in relation to the projected future profits on that block of business. 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, Jacksonville, Florida, for $5.5 million. The Company continued to provide all policyholder administrative functions for this business pursuant to a service agreement until May 1, 1995. The Company had experienced continuing losses in its individual life operation due to insufficient premium levels to support the cost of operations. With the sale of the direct universal life business and the AMEX business to American Merchants and the termination of operations of CLMC Insurance Agency, Inc. (a general agency which marketed life insurance and annuity products through unaffiliated insurers), significant reductions were made in various direct and indirect costs. Although the remaining block of assumed universal life business has generally been profitable, the Company has signed an agreement with the direct writer of the business whereby the direct writer will recapture the business effective January 1, 1997 and pay the Company a recapture consideration of $1.05 million. See Note 21 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information regarding this transaction. As a result of the agreement to dispose of the remaining insurance business of the individual life insurance division, the operating results of this segment have been presented as discontinued operations in the Consolidated Financial Statements appearing elsewhere in this Form 10-K. Auto Auction Division As indicated previously, the business and the related operating assets of Interstate were sold in November 1996 for cash of $4.85 million. See Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for further information concerning the sale and its impact on the Company s operating results. Prior to the sale, Interstate conducted wholesale automobile auctions of used vehicles at its facility in Mercer, Pennsylvania (about 50 miles north of Pittsburgh). The Youngstown Auto Auction business acquired in July of 1993 to expand the Company s auction operations, relocated to Lordstown, Ohio in 1994 in order to attract additional accounts and business to the auction. The Company subsequently ceased all operations at Lordstown effective December 31, 1994 and transferred a portion of its business operations to Interstate. In January 1995, Interstate began conducting the bi-weekly bank repossession auction previously held at Lordstown. This resulted in the termination, as of the end of 1994, of all of Lordstown s expenses while maintaining a portion of its revenue base at Interstate with virtually no incremental costs. Interstate s customers include automobile dealers and leasing companies. In connection with its weekly auctions, Interstate provides a body shop repair and conditioning service and an arbitration service through which disputes between buyers and sellers can be resolved. In 1996, prior to the sale of the business, approximately 28,000 cars were registered for sale at Interstate through the regular weekly consignment auction, and approximately 57% of all vehicles registered were sold. In 1995, approximately 35,000 cars were registered for sale at Interstate through the regular weekly consignment auction, and approximately 56% of those vehicles were sold. In 1994, approximately 32,000 cars were registered and 59% of the cars registered were sold. Auction fees are generally paid by the seller for each vehicle sold and an additional fee is paid by the purchaser. The purchaser s fees vary according to the price paid for the automobile. BEST'S RATINGS In both 1996 and 1995, Consumers Life Insurance Company received a C rating (Marginal) from A.M. Best Company, principally because of its substantial amount of financial reinsurance and its relatively small capital base. In 1994 Consumers had a C- rating (Marginal). In 1992 and 1993, Consumers had an NA-9 rating (Not Rated at Company Request), which is assigned to any company which is otherwise eligible for a letter rating, but has requested that the rating not be published. The NA-9 designation was requested by Consumers while it completed the restructuring of its individual life insurance operations. In 1991, Consumers was rated "B" (Good). Consumers two operating subsidiaries, Consumers Life Insurance Company of North Carolina and Investors Fidelity Life Assurance Corp., are currently rated NR-2 (Insufficient Operating Experience). Best's letter ratings range from A++ (Superior) to D (Below Minimum Standards), with letters E and F assigned to companies under state supervision or in liquidation. Best's ratings are based on a comparative analysis of the statutory financial condition and operating performance of the companies, rated as determined by their publicly available reports. INVESTMENTS The Company's general investment policy with respect to assets of its insurance subsidiaries has been to invest primarily in fixed maturity securities and, to a lesser extent, in mortgages with intermediate terms (generally not more than seven years). Investments in mortgages have 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 mortgage loan portfolio, which relates primarily to commercial real estate, is concentrated in the central Pennsylvania area. Specifically, about 73% of the $2.3 million in mortgage loan balances at December 31, 1996 are secured by properties within a 60 mile radius of Harrisburg. The Company considers this strategy to be conservative because this region has historically not been particularly susceptible to wide economic swings in recessionary times, due to the diversity of industries throughout the area and the presence of government operations and military installations. During the past two years, the Company has substantially reduced its investments in mortgage loans in order to improve its liquidity. See the Management s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K for further information concerning mortgage loans and investments. Investments in government and corporate bonds are limited to those with a Moody s or Standard & Poors rating of A or better. The Company buys U.S. Treasury Notes for their yield and superior liquidity features. The Company also purchases U.S. Government agency bonds and corporate bonds provided such bonds are part of large liquid issues (over $100 million) and, in the case of corporate bonds, represent economic balance and diversification. The Company may also buy foreign bonds denominated in U.S. dollars (Yankee Bonds), thereby avoiding exposure to foreign currency risk. Short-term investments are maintained primarily to meet anticipated cash requirements arising from operations. As of December 31, 1996, the fixed maturities portfolio did not contain any non-investment grade securities. The Company defines a non- investment grade security as any security rated below Baa3 by Moody s Investors Service and below BBB by Standard and Poor s Rating Service. The assets of the Company's non-insurance subsidiaries generally have been invested in short-term instruments. The following table sets forth the Company's investment results for the periods indicated:
Years Ended December 31, 1996 1995 1994 Net Net Net Investment Yield Investment Yield Investment Yield Income % Income % Income % Interest: Fixed maturities $2,364 6.2 $2,175 6.8 $2,773 6.4 Mortgage loans 421 9.0 692 8.1 2,138 10.1 Policy loans 33 6.6 58 13.9 (2 250 6.6 ) Short-term investments 223 4.5 186 4.4 168 3.3 Real estate 157 (1) 332 30.7 (3 177 15.5 Other 59 2.7 38 1.8 117 6.3 3,257 6.5 3,481 7.2 5,623 7.4 Investment expenses (680) (0.9) (702) (0.9) (649) (0.9) Total net investment income 2,577 5.6 2,779 6.3 4,974 6.5 Less net investment income discontinued 490 543 2,096 operations Net investment income attributable to continuing $2,087 $2,236 $2,878 operations
(1) Represents rental income related to three properties classified as non- investment real estate. (2) Includes $27,000 in interest which should have been included in 1994 income. If this income had been included in 1994, the yield in 1995 would have been 7.4% and the 1994 yield would have been 7.3%. (3) Includes $170,000 in rental income related to a property classified as non-investment real estate. Excluding this income, the real estate yield is 6.8%. COMPETITION The Company competes with numerous other credit insurance companies, many of which are larger than the Company and have greater financial and marketing resources. The principal competitive factors in the automobile credit insurance industry are commission levels, the quality of training for dealers, the variety of related products, the availability of dealer incentive programs and the level of administrative support and efficiency of claims handling procedures. The Company believes that it is able to compete successfully on the basis of these factors. The Company pays relatively high commissions in order to remain competitive in states that do not mandate maximum commissions. In states which have established maximum commissions by regulation, there is generally no commission competition among companies. The elimination of the existing commission limits in Pennsylvania, Maryland and Nebraska, the only states where the Company has any significant amount of business which regulate commission levels, could have a detrimental effect on the Company's business because agents could negotiate for higher commissions on the sale of credit insurance without a corresponding increase in premiums. The Company is not aware that any of these states is considering elimination of maximum commission regulations. Because the Company markets its extended service warranty products primarily in connection with its marketing of credit insurance to automobile dealers, its ability to sell this product is a function of its ability to compete in the credit insurance market. The availability of financially sound insurance underwriters and capable third party warranty administrators are additional factors which affect the Company's ability to market its extended service warranty products effectively. The marketing areas for the auto auction included western Pennsylvania, western New York, eastern Ohio and the West Virginia panhandle. Interstate competed with five automobile auctions in its market areas. The principal competitive factors in this business are the quality of management, the amount of auction fees charged, location in relation to major metropolitan markets, the quality of the physical plant and facilities and other services offered, such as title guarantees. The Company was able to compete effectively on the basis of these factors. REGULATION The Company's insurance subsidiaries are subject to regulation and supervision in the states in which they are licensed. The extent of such regulation varies from state to state, but, in general, each state has statutory restrictions and a supervisory agency which has broad discretionary administrative powers. Such regulation is designed primarily to protect policyholders and relates to the licensing of insurers and their agents, the approval of policy forms, the methods of computing financial statement reserves, the form and content of financial reports and the type and concentration of permitted investments. The Company's insurance subsidiaries are subject to periodic examination by the insurance departments in the states of their formation and are also subject to joint regulatory agency examination and market conduct examinations in the other states in which they are authorized to do business. Certain states in which the Company is licensed have regulations limiting the credit insurance premium rates or the commissions payable to agents or, in some cases, limiting both rates and commissions payable. In addition, some states have regulations that require credit insurance claims ratios to be a specified percentage of earned premiums. If an insurer's claims ratio is below the prescribed benchmark, it is required to reduce premium rates and, conversely, if the claims ratio is higher than the benchmark, the insurer may request an increase in premium rates. The dividends which a life insurance company may distribute are subject to regulatory requirements based upon minimum statutory capital and surplus and/or statutory earnings. In addition to regulatory considerations, the overall financial strength of each operating entity is considered before dividends are paid. Additionally, the amount of dividends a life insurance company can pay is subject to certain tax considerations. See Notes 2 and 17 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. The Company is also subject to regulation under the insurance holding company laws of various states in which it does business. These laws vary from state to state, but generally require insurance holding companies and insurers that are subsidiaries of holding companies to register and file certain reports, including information concerning their capital structures, ownership, financial condition and general business operations, and require prior regulatory agency approval of changes in control of an insurer, most dividends and intercorporate transfers of assets within the holding company structure. The purchase of more than 10% of the outstanding shares of the Company's common stock by one or more affiliated parties would require the prior approval of certain state insurance departments which regulate the Company. EMPLOYEES AND AGENTS As of December 31, 1996, the Company had approximately 54 full-time employees, including its management and sales personnel. In addition, as of that date there were approximately 900 licensed agents selling credit insurance and vehicle extended service contracts, most of whom were full-time employees of automobile dealers, banks and other financial institutions. The Company has adequate insurance coverage against employee dishonesty, theft, forgery and alteration of checks and similar items. The Company does not have similar coverage for its agents. There can be no assurance that the Company will be able to continue to obtain such coverage in the future or that it will not experience uninsured losses. ITEM 2. PROPERTIES Since September 1989, the Company has maintained its executive and business offices in a leased building located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania. The office building contains approximately 44,500 square feet of office space. Prior to 1993, the Company leased the entire facility at an annual rental of $421,000, plus insurance, taxes and utilities. As a result of the termination in 1992 of all new business functions in the Individual Life Insurance Division, the Company now occupies approximately 67% of the available office space. The Company has leased about 66% of the remaining space to third party tenants. Annual rental income to the Company under these sub-leases totals $83,000. In March of 1994, the Company exercised its option to acquire a 50% interest in its home office building, which reduced the Company s annual rent to $204,000. The option price was approximately $1.75 million. In late 1996, the Company, along with the other 50% owner, granted an option to purchase the home office building to an unrelated third party. The option expired in March 1997 and was not renewed. Except as otherwise noted, the business operations of the Company and all of the subsidiaries are conducted at the above address in Camp Hill, Pennsylvania. In connection with its insurance operations, Consumers Life Insurance Company maintains a branch office in leased facilities in Philadelphia, Pennsylvania. The branch office primarily provides supervision, sales and service for credit insurance agents doing business in the eastern Pennsylvania, Delaware and New Jersey areas. Annual rental for this office is approximately $27,000. Investors Fidelity Life Assurance Corp. maintains an office in leased facilities in Columbus, Ohio. This office primarily provides sales support and supervision for credit insurance agents in the State of Ohio. Annual rental for this office is approximately $13,000 plus insurance, taxes and utilities. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits which are ordinary and routine litigation incidental to its business. None of these lawsuits is expected to have a materially adverse effect on the Company's financial condition or operations. See Note 14 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information concerning litigation matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the Fourth Quarter of 1996 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 and Convertible Preferred Stock, Series A, are traded on the NASDAQ, National Market System. Ticker symbols are CFIN and CFINP, respectively.
1996 QUARTERLY STOCK PRICES 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Common Stock High 4 3 1/2 3 3/8 3 15/16 Low 3 3 2 1/2 2 3/4 Convertible Preferred Stock Series A High 9 1/2 9 1/2 9 3/8 9 1/2 Low 8 8 1/4 8 1/4 8 1/4
Directors, officers and employees of Consumers Financial Corporation have a sizeable ownership position in Consumers, which is derived from the Company s belief that this provides a strong incentive for all parties involved to enhance shareholder value. At December 31, 1996, the Company s Employee Stock Ownership Plan held 10% of the total common stock outstanding. As of December 31, 1996, there were 6,834 shareholders of record who collectively held 2,611,532 common shares and 130 shareholders of record of the Convertible Preferred Stock, Series A, who held 481,461 shares. Dividends on both the Company s common stock and Convertible Preferred Stock, Series A, are declared by the Board of Directors. No common stock dividends were declared in either 1996 or 1995; however, common stock dividends had been paid for 14 consecutive years through 1994. The 1994 common stock cash dividend was $.05 per share. The Convertible Preferred Stock, Series A, dividends are paid quarterly on the first day of January, April, July and October. The annual Convertible Preferred Stock, Series A, cash dividend is $.85 per share. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain information contained in or derived from the Consolidated Financial Statements and the Notes thereto. (Not covered by Independent Auditor s Report) Years Ended December 31, (dollar amounts in thousands, except per 1996 1995 1994 1993 1992 share amounts) (Restated) (Restated) (Restated) Total revenues (before reinsurance ceded) $33,602 $37,430 $38,534 $37,169 $34,864 Premiums written (before reinsurance ceded) 30,350 33,832 34,916 31,944 29,623 Net investment income 2,087 2,236 2,878 3,403 4,270 Net return on average investments 5.4% 6.0% 6.7% 7.2% 7.4% Loss from continuing operations (2,706) (2,072) (2,513) (2,513) (2,838) Discontinued operations 1,472 471 1,301 685 3,361 Income (loss) before cumulative effect of change in accounting principles (1,234) (1,601) (1,212) (815) 523 Cumulative effect of change in accounting 299 (710) Net income (loss) (1,234) (1,601) (913) (1,525) 523 Income (loss) per common and common equivalent share: Loss from continuing operations (1.20) (0.96) (1.10) (0.71) (0.63) Discontinued operations 0.56 0.18 0.48 0.25 0.65 Income (loss) before cumulative effect In accounting principles (0.64) (0.78) (0.62) (0.46) 0.02 Cumulative effect of change in 0.11 (0.26) Net income (loss) (0.64) (0.78) (0.51) (0.72) 0.02 December 31, 1996 1995 1994 1993 1992 Total assets 114,619 123,322 125,276 144,393 174,003 Total debt 0 2,537 3,389 4,683 5,987 Shareholders equity and redeemable 13,343 15,671 15,226 19,502 21,295 Shareholders equity per common share 3.31 4.20 3.96 5.41 5.91 Return on average total equity, including preferred stock (7.9%) (9.9%) (5.1%) (7.4%) 2.8% Cash dividends declared per common share NONE NONE 0.05 0.05 0.05 Life insurance in force (before reinsurance 2,015,543 2,132,073 2,265,919 2,489,330 2,917,021 ceded) NOTE: The financial data for the years ended December 31, 1992 through 1995 has been restated to reflect the operating results of the Company s individual life insurance and auto auction businesses as discontinued operations. 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 1996 operating performance as well as its financial position at December 31, 1996 is presented below. Information relating to 1995 and 1994 is also presented for comparative purposes. This analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes. OVERVIEW Because of the recurring losses in the Company s core credit insurance business, in early 1996, the Company began evaluating alternatives to best serve the interests of its shareholders. The Company considered several alternatives, including the following: (1) the sale of its insurance operations, (2) the sale of its credit insurance marketing organization (with retention and ongoing administration of inforce business), (3) the sale of its auto auction business, (4) the sale of the Company, (5) the reorganization of the Company or (6) the combination of the Company with another organization in the same or other line of business. In January 1996, the Company engaged a financial advisor to assist in evaluating the many alternatives to maximize shareholder value. The Company subsequently solicited bids for both its credit and universal life insurance operations and its auto auction business. In October 1996, the Company entered into an Agreement and Plan of Merger with LaSalle Group, Inc. ( LaSalle ) whereby the Company will become a wholly-owned subsidiary of LaSalle. The merger transaction, which is subject to insurance regulatory approval, was approved by the Company s common shareholders on March 25, 1997. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information with respect to the pending merger. LaSalle's strategic plan following the merger includes focusing on and rebuilding the Company's core credit insurance operation by combining it with other credit insurance businesses LaSalle plans to acquire. Accordingly, in November 1996, the Company sold the business and related operating assets of Interstate Auto Auction, Inc. to an unrelated third party for cash in the amount of $4.85 million. In addition, in March 1997, the Company signed an agreement to sell its remaining block of individual life insurance business, following the sale of other blocks of individual life business in both 1992 and 1994. As a result of these sale transactions, in the Company's consolidated financial statements appearing elsewhere in this Form 10-K, the operating results and the net gain from disposal of both the individual life insurance and the auto auction segments have been reported as discontinued businesses for all periods presented. Further information regarding these transactions is presented later in this analysis and in Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. The Company reported a net loss for 1996 of $1.2 million ($.64 per share) compared to a loss of $1.6 million ($.78 per share) in 1995 and a loss of $913,000 ($.51 per share) in 1994. However, the loss from continuing operations was $2.7 million in 1996 compared to losses of $2.1 million and $2.5 million, on a restated basis, in 1995 and 1994, respectively. The higher 1996 loss from continuing operations is due primarily to the costs incurred by the Company in connection with valuing and offering for sale the Company's various businesses. Discontinued operations for 1996 include not only the operating results of each of the discontinued segments but also a $1.8 million gain on the disposal of the auto auction business and related assets and a loss of $914,000 arising from the write-off of deferred policy acquisition costs based on the consideration to be received in 1997 from the sale of the individual life insurance business. The Company's remaining business segment, the Automotive Resource Division, continued to report operating losses in 1996. The Division's credit insurance results declined slightly from 1995 due to higher disability claims, which offset significantly lower general expenses. A more detailed discussion of the operating performance of each of the Company's business segments, including the two discontinued businesses, is presented later in this analysis under Results of Operations. The following table compares revenues and operating results for each of the past three years. Amounts for 1995 and 1994 have been restated to reflect the operating results of the individual life insurance and auto auction businesses as discontinued operations.
(in thousands, except per 1996 1995 1994 share amounts) Total revenues by business unit: Automotive Resource Division: (principally credit insurance) $33,743 $37,528 $39,000 Corporate 19 21 10 Realized investment losses-not (160) (120) (476) $33,602 $37,429 $38,534 Pre-tax loss from continuing operations: Automotive Resource Division ($2,500) ($2,392) ($2,182) Other (874) (307) (401) (3,374) (2,699) (2,583) Realized investment losses (160) (120) (476) Pre-tax loss from continuing (3,534) (2,819) (3,059) operations Income tax benefit (828) (747) (546) Loss from continuing operations (2,706) (2,072) (2,513) Discontinued operations, net of 1,472 471 1,301 income taxes Loss before cumulative effect of change in accounting principle (1,234) (1,601) (1,212) Cumulative effect of change in accounting principle 299 Net loss ($1,234) ($1,601) ($913) Income (loss) per common share: Loss from continuing operations ($1.20) ($0.96) ($1.10) Discontinued operations 0.56 0.18 0.48 Loss before cumulative effect change in accounting (0.64) (0.78) (0.62) Cumulative effect of change in accounting principle 0.11 Net loss ($0.64) ($0.78) ($0.51)
RESULTS OF OPERATIONS The Company's pre-tax operating results for the past three years can be best understood through an analysis of each of its three business units. The Automotive Resource Division, the Company's core business, is now the only continuing business segment. The Division's principal product is credit insurance, which it markets primarily through automobile dealers in six key states. It also markets automobile extended service contracts in a general agency capacity and generates other revenues from services it provides to approximately 900 automobile dealer customers. The Individual Life Insurance Division has not written any new business since 1992. Closing on the sale of the Division's remaining block of insurance business took place on March 27, 1997. Auto auction operations were conducted through the Company's subsidiary, Interstate Auto Action, Inc., until the sale of Interstate's business and operating assets in late 1996. Automotive Resource Division Premium revenues from credit insurance, the Division's principal product, declined 9.5% in 1996 from $33.1 million to $30 million. In 1995, premiums decreased 3.3% from the $34.3 million in premiums written in 1994. The cancellation of unprofitable business played a major part in the reduction in premiums in both 1996 and in 1995. As a result of continued unprofitable results, all of the Division's accounts in the state of North Carolina and numerous accounts in Virginia and Ohio were canceled during 1996. A similar action was taken in the state of Kentucky in 1995. Excluding these accounts, the 1996 drop in premium revenues was nominal. The Division's credit insurance premium production remains significantly below pre-1990 levels due to the declines which occurred during the economic recession of the early 1990's. A consequence of the decline in written premiums has been a reduction in earned premiums, which in turn has resulted in a substantial increase in operating expense ratios since 1989. Higher expense ratios have been a key reason for the unprofitable operating results the Division has experienced in recent years. During 1996, the Company lost the endorsement of the Pennsylvania Automotive Association which it held since 1987. The Company believes that the loss of the endorsement will have some effect on its future premium production in Pennsylvania, although it is not expected to have a materially adverse impact on future operating results. The Division's pre-tax operating results for 1996 declined from a $2.4 million loss in 1995 to a loss of $2.5 million. A significant increase in the credit disability claims ratio on retained business (i.e., business not reinsured to captive insurance companies) offset a $900,000 reduction in general expenses. General expenses in both years now include expenses which had previously been allocated to the discontinued Individual Life Insurance Division and, to a lesser extent, the discontinued Auto Auction Division. The Company does not believe the level of disability claims in 1996 and the claims ratio in 1996 are an indication of any unfavorable trend. In that regard, claims ratios in the first two months of 1997 are well below the ratios for the same period in 1996. While the Division's expense ratio improved in 1996, the present ratio is still higher than the ratio which is required to return the Division to profitability. As noted above, the increased expense ratio compared to the ratio in the late 1980's is a key reason for the Division's continued losses. In July 1996, the Company and its joint venture partner canceled an agreement whereby the companies shared in the profits from the credit insurance business written by the Company in Pennsylvania, the Company's most profitable credit insurance state. As a result, on credit premiums produced in Pennsylvania after July, the Company will now retain the profits or losses which were previously shared with the joint venture partner. As consideration for terminating the venture, the Company has agreed to pay its former partner $500,000 in cash at the time the above-referenced merger with LaSalle is consummated. In the event the LaSalle merger is not completed, any payment to the joint venture partner will be determined under a separate calculation. If the proposed merger with LaSalle is completed, LaSalle's strategy to return the Company's credit insurance operation to profitability will include acquisitions of other credit insurance companies and other blocks of credit insurance business, expansion of the Company's marketing territory and growth in existing markets. LaSalle intends to provide additional capital not only to finance growth by also to build the insurance subsidiaries' capital base in order to improve the ratings of those companies by insurance rating agencies. Individual Life Insurance Division Operations in the Individual Life Insurance Division in 1996 and 1995 were limited to one closed block of assumed universal life business, following the sale of the Division's direct universal life business in 1994 and the sale of its traditional whole life and term business in 1992. In March 1997, the Company signed an agreement with World Insurance Company ("World"), pursuant to which World will recapture the universal life business previously assumed by the Company from World through a joint venture agreement which began in 1987. World will pay a recapture consideration to the Company in the amount of $1.05 million. In exchange, the Company will transfer to World assets supporting the net statutory basis policy reserves for this business. Based on the recapture consideration to be received, the Company has written off $1.4 million in deferred policy acquisition costs which are not recoverable. This write-off, which totaled $914,000 on an after-tax basis, has been presented as a loss on disposal of the discontinued segment in the Company's 1996 financial statements. Excluding the write-off, the Division reported pre-tax income of $393,000 in 1996 compared to restated pre-tax income of $83,000 in 1995. The Division's operating results for 1996 reflect the elimination of any continuing overhead and indirect costs which had previously been allocated to this Division. The results for prior periods have been restated to also eliminate these costs. These reallocated costs totaled $292,000 in 1996 and $330,000 in 1995. Higher than normal claims costs in the first half of 1995 adversely affected the results for that year and are the principal reason for the lower earnings in 1995. Auto Auction Division On November 6, 1996, the Company sold the auto auction business and related operating assets (property and equipment and inventories) of Interstate Auto Auction to ADESA Pennsylvania, Inc. for cash of $4.85 million. The Division's pre-tax income for the first nine months of 1996, which excludes any continuing overhead, was $554,000 compared to income of $732,000, as restated to eliminate any continuing overhead, in 1995. The operating results of the auto auction after September 30, 1996, when the Company finalized its plan to dispose of the business, have been included with the gain realized on the disposal of the auction business. The auction generated an $84,000 pre-tax loss ($57,000 after taxes) during this period. Approximately $1.7 million of the proceeds from the sale of the auto auction business was used to repay the remaining amount due on the Company's bank loans. FINANCIAL CONDITION A discussion of the important elements affecting the Company's financial position at December 31, 1996 and 1995 is presented below. Invested Assets Invested assets at December 31, 1996 totaled $51.2 million compared to $49 million at the end of 1995. The $3.1 million in proceeds received from the sale of the auto auction business, after repayment of the bank debt, is the primary reason for the increase in investments. Those proceeds were invested principally in bonds. Approximately $750,000 of the proceeds will be required in 1997 for Federal and state income taxes on the gain from this sale. The invested asset base also increased as a result of the sale of $1.2 million in non-investment real estate for cash, the proceeds from which were reinvested in bonds. In addition, during 1996, the Company completed the sale of all but one of the town homes in a real estate development acquired in 1995 through foreclosure. This property, which had a $1.5 million carrying value at December 31, 1995, was classified as non-investment real estate. The proceeds from the sales of the town home units have also been reinvested primarily in bonds. The increases discussed above were partially offset by a $923,000 reduction in the carrying value of the Company's bond portfolio as a result of higher interest rates since the end of 1995. The Company's bond portfolio is carried at fair value pursuant to the requirements of Statement of Financial Accounting Standards No. 115, based on the Company's determination that all of its bonds should be considered as "available-for-sale", although the Company has no current intentions to sell any of these securities (except for approximately $8.3 million in bonds which were sold in 1997 in order to complete the above- referenced sale transaction with World - see the Individual Life Insurance Division section of this Management s Discussion and Analysis). The unrealized appreciation or depreciation on available-for-sale securities is reported as a separate component of shareholders' equity. The Company s general investment policy continues to emphasize fixed maturity securities (primarily bonds) with Moody's or Standard and Poor's ratings of A or better and mortgage loans with terms generally not more than seven years. The Company has not invested in non-investment grade securities because the greater returns on such investments do not justify the potentially greater risks. During 1996, the Company increased its loan loss reserves for mortgage loans and investment and non-investment real estate by $35,000. Loan loss reserves were increased by $93,000 and $450,000 in 1995 and 1994, respectively. Management believes that its reserves at December 31, 1996 are adequate to cover any possible losses which may develop in its mortgage loan and real estate portfolios. The carrying value of these investments at December 31, 1996 was $3.4 million compared to $10.7 million at the end of 1995. During 1996, the Company's mortgage loan portfolio declined from $7 million to $2.3 million. The substantial reduction is the result of the early payoff of four mortgages with balances at the end of 1995 of $2.7 million and the sale to a local bank of seven loans with balances totaling $2 million. The proceeds from these transactions were reinvested primarily in bonds. Liquidity Liquidity refers to a company s ability to meet its financial obligations and commitments as they come due. The Company s operating subsidiaries have historically met most of their cash requirements from funds generated from operations, although, as discussed below, reduced credit insurance revenues over the past several years have had a significant impact on the insurance companies operating cash flows. The Company, as a holding company, has generally relied on its operating subsidiaries to provide it with sufficient cash funds to meet its debt service obligations, pay corporate expenses and shareholder dividends. In that regard, the life insurance subsidiaries are also subject to restrictions imposed by law on their ability to transfer cash to the Company in the form of dividends, loans or advances. Dividends and other distributions to the Company from Consumers Life are limited in that the subsidiary is required to maintain minimum capital and surplus, determined in accordance with regulatory accounting practices. All distributions are further limited by Delaware state insurance laws to the greater of the previous year s earnings, computed in accordance with statutory accounting principles, or 10% of statutory capital and surplus as of the end of the previous year. In some instances such payments may require the prior approval of the insurance department. Also, any loans or advances to the 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 and other subsidiaries. In addition, separate restrictions apply to the surplus note owed to the Company by a subsidiary of Consumers Life. Note 2 of the Notes to Consolidated Financial Statements discusses these restrictions more specifically. The Company s non-life insurance operations, particularly its insurance agency business, provide sources of cash which are not subject to regulatory restrictions. Prior to its sale, the auto auction business was also a source of significant cash flows for the Company. The principal sources of cash funds of the life insurance subsidiaries are premiums and investment income, as well as proceeds from sales and maturities of investments. These companies use cash primarily to pay commissions, claims and operating expenses. Credit insurance is the Company s principal product line and credit insurance premiums are therefore the Company s principal source of premium revenues. Credit insurance premium levels during the past five years are substantially lower than the premium levels prior to the economic recession in the early 1990's. This continued reduction in cash funds has depleted most of the Company s short-term cash reserves and has caused some decline in its long- term investment base. The assessment by the Company s management and its Board of Directors that this decrease in revenues and the related decline in operating results could not be reversed within a reasonable period of time led to the decision in early 1996 to evaluate other alternatives to best serve the interests of its shareholders. This evaluation process, in turn, led to the proposed merger transaction discussed in the Overview section of this Management s Discussion and Analysis and in Note 4 of the Notes to Consolidated Financial Statements. During 1994, the funds generated from the sale and maturity of investments exceeded the funds used to acquire new investments, which was indicative of the Company s need for additional cash for operating needs. In 1995 and 1996, as a result of additional reductions in general expenses, the Company was able to reinvest the funds it generated from the sale and maturity of other investments. During 1994, a substantial amount of investments were sold in connection with the sale of the Company s direct universal life business to a third party. Cash and other assets were transferred to the reinsurer along with the Company s liability for future policy benefits on this business. Capital Resources The Company s total equity, including redeemable preferred stock, decreased by approximately $2.2 million during 1996. The decrease is attributable to (1) the current year net loss of $1.2 million, (2) the decline in the carrying value of the bond portfolio ($923,000 less $314,000 in applicable deferred income taxes), (3) $409,000 in dividends to preferred shareholders and (4) the purchase of treasury shares at a cost of $50,000. Shareholders equity per common share also decreased from $4.20 at December 31, 1995 to $3.31 at the end of 1996. The Company continued to reduce its outstanding bank debt during 1996. During the first ten (10) months of the year, principal payments of $845,000 were made. On November 6, 1996, in conjunction with the sale of the auto auction business discussed above, the remaining $1.7 million in debt was repaid. Inflation Inflation influences the Company's Automotive Resource Division through its effects on automobile prices and interest rates. An increase in car prices not only affects the amount of credit insurance premiums collected, due to higher loan amounts, but also generally extends the term of car loans. Interest rates affect the consumers' ability to borrow funds which, in turn, affects automobile sales and ultimately the Company's marketing of credit insurance and related products. Because of regulatory standards, the Company's premium rates cannot be readily changed to reflect increased costs arising from inflationary trends. MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Company is responsible for the preparation, integrity and objectivity of the financial information contained in this Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such statements include informed estimates and judgements of management for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Financial information presented in this annual report is consistent with that in the financial statements. Accounting procedures and related systems of internal control have been established to provide reasonable assurance that the books and records reflect the transactions of the Company and that established policies and procedures are properly implemented by qualified personnel. Such systems are evaluated regularly to determine their effectiveness. The consolidated financial statements for the years ended December 31, 1996 and 1995 have been audited by Arthur Andersen LLP, independent auditors. The consolidated financial statements for the year ended December 31, 1994 have been audited by Ernst & Young LLP, independent auditors. Such audits were conducted in accordance with generally accepted auditing standards, and include a review and evaluation of our internal accounting control structure, tests of the accounting records and other auditing procedures they consider necessary to express their informed professional opinion on the consolidated financial statements. The Board of Directors, with the assistance of its Audit Committee, monitors the financial and accounting operations of the Company. The Committee, composed of non-employee members of the Board of Directors, meets periodically with representatives of its independent auditing firm to discuss the scope of its audit and related reports. The Company s independent auditors have at all times full and free access to the Audit Committee, without management present, to discuss any matter that they believe should be brought to the attention of the Committee. James C. Robertson R. Fredric Zullinger Chairman, Chief Executive Officer Chief Financial Officer and President ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Consumers Financial Corporation We have audited the accompanying consolidated balance sheets of Consumers Financial Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders equity and cash flows for the years 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 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 discussed in Note 4 of the Notes to Consolidated Financial Statements, on October 30, 1996, the Company entered into an Agreement and Plan of Merger with LaSalle Group, Inc. (LaSalle). The merger is subject to the approval of the insurance regulators in the four states in which the Company s insurance subsidiaries are domiciled. In addition, the Company is addressing regulatory matters in various states, and the Company s plans relative to those matters are discussed in Note 20. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. 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 1996 and 1995 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 28, 1997 REPORT OF INDEPENDENT AUDITORS Board of Directors Consumers Financial Corporation We have audited the accompanying consolidated statement of operations, shareholders equity and cash flows of Consumers Financial Corporation and subsidiaries for the year ended December 31, 1994. Our audit also included the 1994 amounts in the financial statement schedules listed in the index at item 14(a). These financial statements and schedules are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and the 1994 amounts in the 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 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of the operations of Consumers Financial Corporation and subsidiaries and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the 1994 amounts in the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 3 to the consolidated financial statements, in 1994 the Company changed its method of recognizing earnings on credit disability insurance. ERNST & YOUNG LLP Philadelphia, Pennsylvania March 24, 1995
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (dollar amounts in thousands) 1996 1995 Assets Investments: Fixed maturities $42,618 $35,048 Mortgage loans on real estate 2,286 7,041 Investment real estate 1,020 Policy loans 518 482 Other invested assets 1,866 2,512 Short-term investments 3,901 2,892 Total investments 51,189 48,995 Cash 556 451 Accrued investment income 731 653 Receivables 20,290 23,820 Prepaid reinsurance premiums 17,338 18,604 Deferred policy acquisition costs 18,949 21,926 Property and equipment 2,168 4,118 Other real estate 1,115 2,645 Other assets 2,283 2,110 $114,619 $123,322 Liabilities, Redeemable Preferred Stock and Shareholders Equity Liabilities: Future policy benefits $35,386 $36,582 Unearned premiums 56,178 57,943 Other policy claims and benefits payable 2,736 2,851 Other liabilities 5,495 6,259 Income taxes: Current 1,185 299 Deferred 296 1,180 Notes payable 2,537 Total liabilities 101,276 107,651 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued 1996 and 1996m 536,500 shares; outstanding 1996 and 1995, 481,461 shares; redemption amount 4,693 4,657 1996 and 1996m $4,815; net of treasury stock of $453 in 1996 and 1995. Shareholders equity: Common stock, $.01 stated value, authorized 10,000,000 shares; issued 1996, 3,021,496 shares, 1995, 3,031,054 30 30 shares; outstanding 1996, 2,611,532 shares, 1995, 2,621,090 shares Capital in excess of stated value 7,966 8,016 Net unrealized appreciation of debt and equity 70 705 securities Retained earnings 2,009 3,688 Treasury stock (1,425) (1,425) Total shareholders equity 8,650 11,014 $114,619 $123,322
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1996, 1995 and 1994 (in thousands, except per share amounts) 1996 1995 1994 (Restated) (Restated) Revenues: Premiums written $30,350 $33,832 $34,916 Decrease (increase) in unearned premiums 1,765 (1,392) (2,345) Gross premium income 32,115 32,440 32,571 Less reinsurance ceded (11,689) (12,627) (13,267) Net premium income 20,426 19,813 19,304 Net investment income 2,087 2,236 2,878 Realized investment losses (160) (120) (476) Fees and other income 1,325 1,481 1,216 Total revenues 23,678 23,410 22,922 Benefits and expenses: Death and other benefits 11,698 10,267 8,877 Amortization of deferred policy 10,134 10,154 10,388 acquisition costs Operating expenses 5,380 5,808 6,716 Total benefits and expenses 27,212 26,229 25,981 Loss from continuing operations before income tax benefit (3,534) (2,819) (3,059) Income tax benefit (828) (747) (546) Loss from continuing operations (2,706) (2,072) (2,513) Discontinued operations: Income from operations of discontinued businesses (net of income taxes) 587 471 1,035 Gain on disposal of discontinued businesses (net of income taxes) 885 266 1,472 471 1,301 Loss before cumulative effect of change in accounting principle (1,234) (1,601) (1,212) Cumulative effect of change in accounting 299 principle Net loss ($1,234) ($1,601) ($913) Income (loss) per common and common equivalent share: Loss from continuing operations ($1.20) ($0.96) ($1.10) Discontinued operations 0.56 0.18 0.48 Loss before cumulative effect of (0.64) (0.78) (0.62) change in accounting principle Cumulative effect of change in 0.11 accounting principle Net loss ($0.64) ($0.78) ($0.51) Weighted average number of shares 2,614 2,634 2,690 outstanding
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Years Ended December 31, 1996, 1995 and 1994 Capital in Net unrealized in excess appreciation of (depreciation) Common stock stated Fixed Equity (dollar amounts in thousands, except Shares Amount value maturities securities per share amounts) Balance, January 1, 1994 3,067 $31 $8,167 $567 $32 Change in net unrealized appreciation of fixed maturities and equity (2,541) (10) securities for the year Preferred stock dividends Common stock dividends ($.05 per share) Accretion of difference between fair value and mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares (6) (38) Net loss for the year Balance, December 31, 1994 3,061 31 8,129 (1,974) 22 Change in net unrealized appreciation (depreciation) of fixed maturities 2,648 9 and equity securities for the year Preferred stock dividends Accretion of difference between fair value and mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares (30) (1) (113) Net loss for the year Balance, December 31, 1995 3,031 30 8,016 674 31 Change in net unrealized appreciation (depreciation) of fixed maturities (609) (26) and equity securities for the year Preferred stock dividends Accretion of difference between fair value and mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares (10) (50) Net loss for the year Balance, December 31, 1996 3,021 $30 $7,966 $65 $5
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (continued) Years Ended December 31, 1996, 1995 and 1994 Retained Treasury stock Total (dollar amounts in thousands, except per share amounts) earnings Shares Amount amount Balance, January 1, 1994 $7,230 (317) ($1,149) $14,878 Change in net unrealized appreciation of fixed (2,551) maturities and equity securities for the year Preferred stock dividends (412) (412) Common stock dividends ($.05 per share) (135) (135) Accretion of difference between fair value and (36) (36) mandatory redemption value of preferred stock Purchase of treasury shares (71) (226) (226) Retirement of treasury shares 6 38 Net loss for the year (913) (913) Balance, December 31, 1994 5,734 (382) (1,337) 10,605 Change in net unrealized appreciation (depreciation) 2,657 of fixed maturities and equity securities for the year Preferred stock dividends (409) (409) Accretion of difference between fair value and (36) (36) mandatory redemption value of preferred stock Purchase of treasury shares (58) (202) (202) Retirement of treasury shares 30 114 Net loss for the year (1,601) (1,601) Balance, December 31, 1995 3,688 (410) (1,425) 11,014 Change in net unrealized appreciation (depreciation) of (635) fixed maturities and equity securities for the year Preferred stock dividends (409) (409) Accretion of difference between fair value and (36) (36) mandatory redemption value of preferred stock Purchase of treasury shares (10) (50) (50) Retirement of treasury shares 10 50 Net loss for the year (1,234) (1,234) Balance, December 31, 1996 $2,009 (410) ($1,425) $8,650
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994 (in thousands) 1996 1995 1994 Cash flows from operating activities Net loss ($1,234) ($1,601) ($913) Adjustments to reconcile net loss to cash provided by (used in) operatingactivities: Deferred policy acquisition costs incurred (8,987) (11,005) (10,647) Amortization of deferred policy acquisition costs 11,964 10,734 19,663 Other amortization and depreciation 433 613 817 Change in future policy benefits 454 2,063 (14,493) Change in unearned premiums (1,765) 1,392 2,982 Amounts due reinsurers 2 (86) 2,147 Income taxes (22) (318) (721) Change in receivables 4,721 3,805 (20,230) Change in other liabilities (695) (117) 600 Cumulative effect of change in accounting (299) principle Other (38) 81 (875) Total adjustments 6,067 7,162 (21,056) Net cash provided by (used in) operating activities 4,833 5,561 (21,969) Cash flows from investing activities: Purchase of investments (13,140) (9,657) (14,180) Maturity of investments 6,484 7,027 9,035 Sale of investments 6,598 2,190 31,886 Purchase of property and equipment (24) (371) (1,104) Net cash provided by (used in) investing activities (82) (811) 25,637 Cash flows from financing activities: Principal payments on debt (2,537) (852) (1,295) Receipts from universal life and investment products 4,775 4,938 7,256 Withdrawals on universal life and investment products (6,425) (9,029) (8,547) Purchase of treasury stock, including 8 1/2% (50) (201) (265) redeemable preferred stock Cash dividends to shareholders (409) (409) (546) Net cash used in financing activities (4,646) (5,553) (3,397) Net increase (decrease) in cash 105 (803) 271 Cash at beginning of year 451 1,254 983 Cash at end of year $556 $451 $1,254 Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest $255 $305 $319 Income taxes $154 $75 $1,104
See notes to consolidated financial statements CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. Summary of Significant Accounting Policies Description of business Consumers Financial Corporation is an insurance holding company which, through its subsidiaries, is a leading provider of credit life and credit disability insurance in the Middle Atlantic region of the United States. Basis of financial statements The financial statements have been prepared on the basis of generally accepted accounting principles (GAAP) which, as to the life insurance company subsidiaries, vary from reporting practices prescribed or permitted by regulatory authorities. Certain prior year amounts have been reclassified to conform with classifications used for 1996. Principles of consolidation The consolidated financial statements include the accounts of Consumers Financial Corporation (the Company) and its wholly-owned subsidiaries, the most significant of which are Consumers Life Insurance Company (Consumers Life), Interstate Auto Auction, Inc. (Interstate) and Consumers Car Care Corporation. Consumers Life Insurance Company of North Carolina, Investors Fidelity Life Assurance Corp. and Consumers Reinsurance Company are subsidiaries of Consumers Life. All material intercompany accounts and transactions have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Investments Fixed maturities includes bonds, notes and certificates of deposit maturing after one year. Management determines the appropriate classification of bonds and notes at the time of purchase and reevaluates such designation as of each balance sheet date. These securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. All other bonds and notes are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders equity. The amortized cost of securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. All certificates of deposits maturing after one year are deemed to be held to maturity. Equity securities (common and non-redeemable preferred stocks) held by the insurance subsidiaries are stated at fair value. Mortgage loans on real estate are carried at the unpaid principal balance. Investment real estate is carried at the lower of cost or fair value. Policy loans are carried at their unpaid balance. Other invested assets, excluding real estate partnerships, and short-term investments are carried at cost. Investments in real estate partnerships are reported at equity. Interest on fixed maturities and short-term investments is credited to income as it accrues on the principal amounts outstanding, adjusted for amortization of premiums and discounts computed by the interest method. Dividends are recorded as income on the ex-dividend dates. Loan origination and commitment fees are amortized, using the interest method, over the life of the mortgage loan. The accrual of interest on mortgage loans is generally discontinued when the full collection of principal is in doubt, or when the payment of principal or interest has become contractually 90 days past due. Realized gains and losses and provisions for permanent losses on investments are included in the determination of operating income. Net unrealized appreciation or depreciation of debt securities and preferred and common stocks, which represents the difference between fair value and aggregate cost, is included in a separate shareholders' equity account. The "specific identification" method is used in determining the cost of investments sold. Fair values of financial instruments The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments: Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Investment securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair values for equity securities are based on quoted market prices and are recognized in the balance sheet (see Note 6). Mortgage loans and real estate and policy loans: The fair values for mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Similarly, real estate fair values are estimated using discounted cash flow analyses. The carrying amounts for policy loans approximate their fair values. Long-term debt: The carrying amount for long-term debt approximates its fair value. Deferred policy acquisition costs The costs of acquiring new business, including costs incurred subsequent to the year of issue in excess of the ultimate level costs, principally commissions, certain sales salaries and those home office expenses that vary with and are primarily related to the production of new business, have been deferred. Deferred acquisition costs applicable to individual life insurance, excluding universal life-type policies and investment products, were amortized over the premium-paying period of the related policies in the manner which will charge each year's operations in direct proportion to the estimated receipt of premium revenue over the life of the contracts. Premium revenue estimates are made using the same interest, mortality and withdrawal assumptions as are used for computing liabilities for future policy benefits. Deferred policy acquisition costs related to universal life-type policies and investment products are amortized in relation to the present value of expected gross profits on the policies. Acquisition costs relating to single premium credit insurance are being amortized so as to charge each year's operations in direct proportion to premiums earned. Property and equipment and depreciation Property and equipment are stated at cost. Depreciation is being provided on the straight-line method over the estimated useful lives of the assets. Other real estate Real estate is carried at the lower of cost or fair value. Intangibles Costs in excess of underlying net assets of acquired companies and acquired intangible assets are being amortized over the estimated periods expected to benefit (5 - 40 years) using the straight-line and other methods which provide periodic charges to operations proportionate to the anticipated benefits to be received. These intangible assets are periodically reviewed for impairment, based on an assessment of future operations, to ensure that they are appropriately valued. 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, effective January 1, 1994, credit disability using a 65% - 35% weighted average of the Rule of 78's and Pro Rata methods. (see Note 3). Recognition of premium revenue and related costs For individual life insurance contracts, excluding universal life-type policies and investment products, premiums are recognized as revenue over the premium-paying period. Future benefits and expenses are associated with earned premiums, so as to result in recognition of profits principally over the premium-paying period. This association is accomplished by means of the provision for liabilities for future benefits and the deferral and amortization of acquisition costs. Provisions are also made for the risk of adverse deviation from the reserve assumptions over the lives of the contracts. Revenues for universal life-type policies and investment products consist of policy charges for the cost of insurance, policy administration, and surrenders assessed during the period, and expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. For credit insurance, premiums are earned over the terms of the policies, as discussed above. Policy and contract claims include provisions for claims reported and claims incurred but not reported. The Company believes that the liabilities for claims and related expenses are adequate. Anticipated investment income is considered in determining whether future earned premiums on existing credit insurance will be sufficient to cover the present value of future benefits and maintenance expenses and to recover the unamortized portion of deferred policy acquisition costs. Income taxes The Company and its subsidiaries provide income taxes, for financial reporting purposes, on the basis of the liability method as required by Statement of Financial Accounting Standards No. 109. New Accounting Standards The Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), in 1996. Under the provisions of SFAS 123, companies can elect to account for stock-based compensation plans using a fair-value based method or continue measuring compensation expense for those plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations. The Company has elected to continue using the intrinsic value method to account for its stock-based compensation plans. SFAS 123 requires companies electing to continue using the intrinsic value method to make certain pro forma disclosures (see Note 16). Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121), was adopted as of January 1, 1996. SFAS 121 standardized the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The adoption of SFAS 121 had no material effect on the Company s results of operations or financial position. 2. Basis of Financial Statements The more significant GAAP applied in the preparation of the financial statements that differ from life insurance statutory accounting practices prescribed or permitted by regulatory authorities (which are primarily designed to demonstrate solvency) are as follows: (a) Investments in securities of unaffiliated companies are reported as described in Note 1, rather than in accordance with valuations established by the National Association of Insurance Commissioners (NAIC). Pursuant to NAIC valuations, bonds eligible for amortization are reported at amortized value; other securities are carried at values prescribed by or deemed acceptable to the NAIC, including common stocks, other than stocks of affiliates, at market value. (b) Costs of acquiring new business are deferred and amortized rather than being charged to operations as incurred. (c) The liability for future policy benefits and expenses on individual life insurance is based on conservative estimates of expected mortality, morbidity, interest, withdrawals, and future maintenance and settlement expenses, rather than on statutory rates for mortality and interest. For credit life insurance, the liability is based upon the unearned premium reserve, computed as described in Note 1, rather than on statutory rates for mortality and interest. The credit disability policy liability, principally the unearned premium reserve, is calculated as described in Note 1. Effective January 1, 1994, the statutory liability is computed using predominantly the average of the Rule of 78's and Pro Rata methods. Prior to 1994, the statutory liability was computed using primarily the Pro Rata method. (d) Deferred income taxes, if applicable, are provided as described in Note 17. (e) The statutory liabilities for the interest maintenance reserve and asset valuation reserve, designed to lessen the impact on surplus of market fluctuations of securities and mortgage loans, have not been provided in the financial statements. (f) Certain assets are reported as assets rather than being charged directly to surplus and excluded from the balance sheets. (g) Commission allowances pertaining to financing-type reinsurance agreements are not included in results of operations. (h) Loan origination fees are deferred and recognized over the life of the applicable mortgage as an adjustment of yield rather than being reported in income as received. (i) Revenues for universal life-type policies and investment products consist of policy charges primarily for the cost of insurance rather than premiums due and/or collected on such policies. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances rather than the increase in benefit reserves and gross benefit claims incurred for these types of policies. Dividends and other distributions to the Company from Consumers Life are limited in that Consumers Life is required to maintain minimum capital and surplus in each of the states in which it is licensed, determined in accordance with regulatory accounting practices. The amount of minimum capital and surplus required is $5.5 million. All distributions are further limited by Delaware state insurance laws to the greater of previous year earnings, computed in accordance with statutory accounting principles, or 10% of statutory capital and surplus as of the end of the previous year. In some instances such payments may require the prior approval of the insurance department. Accordingly, based on amounts reported to regulatory authorities, at December 31, 1996, approximately $8.6 million of Consumers Life's net assets cannot generally be transferred to the parent company and $585,000 is available for transfer during 1996 as long as the minimum capital and surplus requirements mentioned above are maintained. Also, any loans or advances to the parent company of a material amount must be reported to the insurance department. The Company may have limited cash funds available to pay dividends in excess of amounts transferred from subsidiaries. In addition, separate restrictions apply to the surplus note owed to the Company by a subsidiary of Consumers Life. Payment of interest and repayment of principal on the note are permitted by the applicable state insurance department as long as the subsidiary's statutory capital and surplus exceeds $3 million. The reported statutory capital and surplus of the life insurance subsidiaries was $5.9 million at December 31, 1996 and $7.1 million at December 31, 1995. After reflecting the impact of both the disallowed reinsurance treaty and the excess subsidiary investments discussed in Note 20, the statutory capital and surplus of the life insurance subsidiaries at December 31, 1995 would have been $4.6 million. The insurance companies combined statutory net income was $29,000 in 1996. In 1995, the companies reported a combined net loss of $3,589,000, and in 1994 they reported net income of $477,000. Insurance laws require that certain amounts be deposited with various state insurance departments for the benefit and protection of policyholders. The approximate carrying amount of such deposits at both December 31, 1996 and 1995 was $5.3 million. After receiving consent from the Delaware Insurance Department, the Company adopted, for statutory reporting purposes, an accelerated method of reserving disability unearned premiums. The change allows the Company to recognize revenue in a manner which more appropriately matches its incidence of claims. In addition to the use of this unearned premium method, the insurance subsidiaries have also requested and received approval from their respective domiciliary states to carry as an admitted asset a receivable for credit insurance premiums, net of commissions, which have been collected by the companies agents but have not yet been remitted to the companies. At December 31, 1996 and 1995, the premiums in process of collection receivable totaled $1.8 million and $2 million, respectively. 3. Accounting Changes As of January 1, 1994, the Company changed its method of earning credit disability premiums for a substantial portion of its credit disability business. The method used prior to 1994 was computed based on the average of the Rule of 78's and the Pro Rata methods, while the new method utilizes a weighted average of those two methods, based on 65% of the Rule of 78's method and 35% of the Pro Rata method. The new weighted average method accelerates the premium earning pattern and provides a better matching of earned premiums with the incidence of incurred disability claims based on the Company s actual experience. The Company s method of amortizing deferred policy acquisition costs for credit disability business was also revised in proportion to the change in earned premiums. The cumulative effect of this change on years prior to 1994 has been included in results of operations for 1994. This change reduced the 1994 net loss by $299,000 ($.11 per share). 4. Pending Merger Because of the recurring losses in the Company s core credit insurance business, in early 1996, the Company began evaluating alternatives to best serve the interests of its shareholders. The Company considered several alternatives, including the following: (1) the sale of its insurance operations, (2) the sale of its credit insurance marketing organization (with retention and ongoing administration of inforce business), (3) the sale of its auto auction business, (4) the sale of the Company, (5) the reorganization of the Company or (6) the combination of the Company with another organization in the same or other lines of business. In January 1996, the Company engaged a financial advisor to assist in evaluating the many alternatives to maximize shareholder value. In February 1996, the Company began soliciting bids for both its credit and universal life insurance operations and its auto auction business. From March until May 1996, 12 offers were received to buy the Company or segments of the Company, including one from LaSalle Group, Inc. (LaSalle), an investment management firm, which was structured as a cash merger. Following the completion of due diligence reviews and the submission of revised offers by the four highest bidders, the Company and its financial advisor reviewed and analyzed each offer. In October 1996, management recommended and advised the Company s Board of Directors to accept the revised offer from LaSalle. On October 30, 1996, the Company entered into an Agreement and Plan of Merger with LaSalle and Consumers Acquisition Corp. ("CAC"), whereby CAC will be merged with and into the Company (the "Merger"). As the surviving corporation in the Merger, the Company will become a wholly-owned subsidiary of LaSalle. The Merger is subject to, among other things, the approval of insurance regulators in the four states in which the Company's insurance subsidiaries are domiciled. The Company s common shareholders approved the Merger at a Special Meeting held on March 25, 1997. The Agreement and Plan of Merger provides that the holders of the Company's outstanding common stock will receive cash in the amount of $3.92 per share, subject to certain adjustments. The Company's Preferred Stock will remain outstanding following the Merger, and the holders thereof will retain all of the rights and preferences which currently exist for such stock. 5. Discontinued Operations In late September 1996, the Company finalized a plan to dispose of the business and the related operating assets of Interstate as part of an overall plan to merge or otherwise combine its core insurance operations with those of another insurance company. On November 6, 1996, the Company sold Interstate s auto auction business and all of its property, plant and equipment and inventories to ADESA Pennsylvania, Inc., an unrelated third party, for cash of $4.85 million. The sale resulted in a fourth quarter after-tax gain of approximately $1.8 million. The gain on disposal includes a loss from operations of $84,000 from September 30, 1996 (the measurement date) to December 31, 1996, less an income tax benefit of $28,000. Accordingly, in the accompanying financial statements, Interstate s operating results have been reported as discontinued operations for all periods presented. Interstate s non-operating net assets, principally cash, receivables, investments and trade payables, were retained by the Company. In March 1997, the Company signed a Recapture Agreement to reinsure its remaining block of individual life insurance business back to the direct writer of the business (see Note 21). The Recapture Agreement provides that the direct writer will pay the Company a recapture consideration equal to $1.05 million in exchange for the transfer by the Company of assets in an amount equal to the net statutory policy reserves for this business. Based upon the recapture consideration to be received, the transaction will result in an after-tax loss of approximately $900,000. This loss has been reflected in the Company s 1996 financial statements. The Company had previously sold a substantial portion of its direct and assumed universal life business to an unaffiliated company. The business written on a direct basis was coinsured to the acquiring company. The assumed business was transferred to the purchaser with approval of the direct writing company and with no recourse to the Company in the event the purchaser is unable to fulfill its obligations under the reinsurance agreement. These transactions, which took place on December 30, 1994, resulted in the transfer of $32.7 million in policy liabilities and $24.1 million in cash, mortgage loans and policy loans to the purchaser. In addition, $7.7 million in deferred policy acquisition costs were written off. The sale produced a pre-tax gain of $895,000, which was partially offset by a $492,000 loss on the sale of investments necessary to close on the transaction. Accordingly, in the accompanying financial statements, the operating results of the Company s individual life insurance business have been reported as discontinued operations for all periods presented. A summary of the results of operations of the discontinued segments is presented below: 1996 Individual Life Auto (in thousands) Insurance Auction Total Revenues $4,349 $2,688 $7,037 Income from operations before income tax expense $393 $554 $947 Income tax expense 134 226 360 Income from operations 259 328 587 Gain (loss) on disposal before income tax expense (benefit) (1,385) 3,031 1,646 Income tax expense (benefit) (471) 1,232 761 Gain (loss) on disposal (914) 1,799 885 Income (loss) from discontinued operations ($655) $2,127 $1,472
1995
Individual Life Auto (in thousands) Insurance Auction Total Revenues $5,781 $3,221 $9,002 Income from operations before income tax expense $83 $732 $815 Income tax expense 28 316 344 Income from discontinued operations $55 $416 $471
1994
Individual Life Auto (in thousands) Insurance Auction Total Revenues $8,517 $3,304 $11,821 Income from operations before income tax expense $1,135 $478 $1,613 Income tax expense 386 192 578 Income from discontinued operations 749 286 1,035 Gain on disposal before income tax expense 403 403 Income tax expense 137 137 Gain on disposal 266 266 Income from discontinued operations $1,015 $286 $1,301
At December 31, 1996 and 1995, the remaining net assets of the discontinued individual life insurance segment consisted of the following:
December 31 (in thousands) 1996 1995 Invested assets $8,576 $7,787 Accrued investment income and receivables 135 218 Deferred policy acquisition costs 2,535 4,284 Future policy benefits and other policy (11,246) (10,743) liabilities Net assets $0 $1,546
At December 31, 1995, the net assets of the discontinued auto auction business consisted of $1.8 million in property and equipment and $84,000 in inventories. 6. Investments and Investment Income Investments, which are valued for financial statement purposes as described in Note 1, consist of the following at December 31, 1996:
Quoted or Balance Amortized estimated sheet (in thousands) cost fair value amount Fixed maturities: Bonds: United States government and government $25,650 $25,889 $25,889 agencies and authorities Foreign governments 287 298 298 Public utilities 3,979 3,868 3,868 All other 12,399 12,358 12,358 42,315 42,413 42,413 Certificates of deposit 205 205 205 Total fixed maturities 42,520 42,618 42,618 Mortgage loans on real estate 2,286 2,425 2,286 Policy loans 518 518 518 Other invested assets 1,861 1,931 1,866 Short-term investments 3,901 3,901 3,901 Total investments $51,086 $51,393 $51,189
A portion of the Company's invested funds is restricted as to use. Deposits are required with various state insurance departments for the benefit and protection of policyholders (see Note 2). At December 31, 1996 and 1995, no mortgage loans or other loans were considered to be non-performing loans. At December 31, 1996, approximately 81% of the Company's investments in mortgage loans were secured by commercial real estate and the remaining mortgage loans were secured by residential real estate. Approximately 73% of the loans involved properties located in Central Pennsylvania. Such investments consist principally of first mortgage liens on completed income-producing properties, primarily office buildings . One mortgage loan exceeded 10% of shareholders equity at December 31, 1996, and two mortgage loans exceeded 10% of shareholders equity at December 31, 1995. The Company s mortgage loan valuation reserve at December 31, 1996 and 1995 was $100,000. Accumulated depreciation on investment real estate amounted to $51,000 at December 31, 1995. At December 31, 1996, all the Company s real estate is classified as non-investment real estate, since the Company intends to sell these properties. Accumulated depreciation on the properties at the time they were reclassified totaled $22,663. Net investment income is applicable to the following investments:
Years (in thousands) 1996 1995 1994 Interest: Fixed maturities $2,364 $2,175 $2,773 Mortgage loans 421 692 2,138 Policy loans 33 58 250 Other invested assets 59 38 117 Short-term investments 223 186 168 Real estate income 157 332 177 3,257 3,481 5,623 Less investment expenses (680) (702) (649) Total net investment income 2,577 2,779 4,974 Less net investment income attributable to 490 543 2,096 discontinued operations Net investment income attributable to $2,087 $2,236 $2,878 continuing operations
The amortized cost and estimated fair values of investments in debt securities at December 31, 1996 and 1995 are as follows:
1996 Gross Gross Estimated Available for sale Amortized unrealized unrealized fair (In thousands) cost gains losses value U.S. Treasury securities and obligations of U.S. government corporations and agencies $24,749 $409 $139 $25,019 Corporate securities 16,665 121 262 16,524 Mortgage-backed securities 901 2 33 870 Totals $42,315 $532 $434 $42,413
1995 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 $17,492 $794 $12 $18,274 Corporate securities 15,354 303 68 15,589 Mortgage-backed securities 972 6 2 976 Totals $33,818 $1,103 $82 $34,839
The amortized cost and estimated fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated (in thousands) cost fair value Due in 1997 $4,896 $4,910 Due in 1987 - 2002 26,466 26,673 Due in 2003 - 2007 8,459 8,395 Due after 2007 1,593 1,565 41,414 41,543 Mortgage-backed securities 901 870 Totals $42,315 $42,413
Proceeds from sales of investments in debt securities and assets held for sale during 1996 were $4.1 million. Gross gains of $6,000 and gross losses of $20,000 were realized on those sales. Proceeds from such sales in 1995 were $4.1 million. Gross gains of $3,000 and gross losses of $29,000 were realized on those sales. Proceeds from sales in 1994 were $9.6 million. Gross gains of $41,000 and gross losses of $38,000 were realized on those sales. A summary of the consolidated net realized gains (losses) and the change in the difference between cost and quoted or estimated fair value for fixed maturity investments is as follows:
Change in the Net difference between realized amortzied cost and investment quoted or gains estimated (in thousands) (losses) fair value Total 1996 Fixed maturities ($14) ($923) ($937) Tax effect 314 314 Totals ($14) ($609) ($623) 1995 Fixed maturities ($26) $2,995 $2,969 Tax effect (347) (347) Totals ($26) $2,648 $2,622 1994 Fixed maturities $3 ($2,833) ($2,830) Tax effect 292 292 Totals $3 ($2,541) ($2,538)
Realized gains and losses in the years ended December 31, 1996, 1995 and 1994 also arose from the sale of other investments. 7. Receivables
December 31 (in thousands) 1996 1995 Amounts due from agents $2,981 $3,399 Reinsurance receivable 17,543 20,022 Other 805 1,492 21,329 24,913 Less allowance for uncollectible accounts (1,039) (1,093) Balance $20,290 $23,820
8. Deferred Policy Acquisition Costs
Individual (in thousands) Credit Life Total Balance, January 1, 1994 $17,130 $13,899 $31,029 Cumulative effect of change in accounting (359) (359) principle (Note 3) Costs deferred 10,495 152 10,647 Amortization (10,388) (1,533) (11,921) Write-off attributable to sale of universal (7,741) (7,741) life insurance Balance, December 31, 1994 16,878 4,777 21,655 Costs deferred 10,917 88 11,005 Amortization (10,153) (581) (10,734) Balance, December 31, 1995 17,642 4,284 21,926 Costs deferred 8,905 82 8,987 Amortization (10,133) (446) (10,579) Write-off attributable to pending sale (1,385) (1,385) of universal life insurance Balance, December 31, 1996 $16,414 $2,535 $18,949
9. Property and Equipment
December 31 (in thousands) 1996 1995 Data processing equipment and software $2,062 $2,176 Furniture and equipment 1,087 1,660 Buildings and land 1,978 3,563 Improvements to property 523 1,634 5,650 9,033 Less accumulated depreciation (3,482) (4,915) Balance $2,168 $4,118
10. Policy Liabilities The composition of future policy benefits and unearned premiums at December 31, 1996 and the assumptions pertinent thereto are as follows:
Life Future Investment insurance policy Unearned yields: years (in thousands) in force benefits premiums of issue Individual life $596,690 $23,966 4 1/2% - 11 1/2% 1961 - 1992 Credit life 1,418,853 $21,689 (a) 1987 - 1996 Credit disability 11,420 34,489 (a) 1987-1996 Balance $2,015,543 $35,386 $56,178
(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 $3.0 million at December 31, 1996. Future policy benefits and unearned premiums do not include any deduction for reinsurance ceded to other companies. At December 31, 1996 and 1995, future policy benefits relating to such reinsurance totaled $16.1 and $18.5 million, respectively. These amounts have been classified with Receivables. Unearned premiums with respect to reinsured business totaled $17.3 and $18.6 million at December 31, 1996 and 1995, respectively. These unearned premiums are separately stated on the Consolidated Balance Sheets as Prepaid Reinsurance Premiums. Insurance in force net of reinsurance ceded was $1.1 billion at December 31, 1996. Transactions affecting the Company s credit disability claim liabilities and reserves, net of reinsurance, are summarized as follows:
(in thousands) 1996 1995 Balance as of January 1 $11,250 $11,262 Less reinsurance recoverable 3,267 3,296 Net balance as of January 1 7,983 7,966 Incurred claims related to: Current year 7,344 6,669 Prior year (425) (849) Total incurred claims 6,919 5,820 Paid claims related to: Current year 2,161 2,033 Prior years 4,068 3,770 Total paid claims 6,229 5,803 Net balance as of December 31 8,673 7,983 Plus reinsurance recoverable 3,667 3,267 Balance as of December 31 $12,340 $11,250
11. Reinsurance The life insurance companies routinely cede and, in certain instances, assume reinsurance. Ceded insurance is treated as a risk and liability of the assuming companies. Net premium income, benefits, and expenses are presented net of non-financing reinsurance ceded and include non-financing reinsurance assumed. The life insurance companies have entered into various financing-type reinsurance agreements with unaffiliated insurance companies. Such agreements are primarily designed to minimize the reduction of statutory capital and surplus arising at the time premiums are written. In connection with these agreements, the insurance subsidiaries have received and reported, in the aggregate, approximately $20.5 million at December 31, 1996 as an advance of future statutory profits on the blocks of business reinsured under these agreements. The life insurance subsidiaries are obligated to repay the advances from future statutory profits. The effects of these agreements have been removed from the financial statements except for the cost of this financing, which amounted to $608,000, $603,000 and $616,000 in 1996, 1995 and 1994, respectively. Individual life insurance coverage in excess of $50,000 written by any of the life insurance companies is reinsured. The retention limit for some substandard risks is less than $50,000. Credit insurance premiums ceded to other companies were $10.4 million, $12 million and $16.3 million in 1996, 1995 and 1994, respectively. Incurred benefits and losses reinsured in 1996 were $6.2 million compared to $6.7 million in 1995. These amounts have been deducted in arriving at death and other benefits and the increase in future policy benefits in the Consolidated Statements of Operations. At December 31, 1996 and 1995, reinsurance recoverable for paid and unpaid benefits was $17.5 million and $20 million, respectively. Reinsurance recoverable is classified with Receivables. 12. Notes Payable In 1990, the Company obtained financing in the form of a $10 million term loan. In 1993, the terms of this loan were restructured, resulting in the elimination or modification of several financial covenants, a reduction in the Company s required debt service payments and the transfer of a portion of the remaining balance to Interstate pursuant to a separate loan agreement. In 1995, the Company further restructured the new loans. These restructuring changes included an extension of the maturity date to January 1997, the removal of several additional financial covenants and the transfer of an additional $685,000 of the remaining loan balance directly to Interstate. A balloon payment was due at the end of the term. The interest rate on these loans was one percentage point above the bank s prime rate. The Company assigned all of the outstanding common stock of Consumers Life, Interstate and Consumers Car Care Corporation as security for its loan, while Interstate s property and equipment and its inventories were separately pledged for Interstate s loan. The security for each loan was cross-collateralized to the other loan. Both of these loans were repaid in full in 1996 in connection with the sale of the Company s auto auction business, resulting in a release of the liens on Interstate s property and equipment and the release of the stock of the subsidiaries (see Note 5). Interest costs incurred on long-term debt during each of the last three years are as follows: 1996, $230,000; 1995, $286,000; 1994, $305,000. 13. Pension and Other Retirement Plans The Company has a defined benefit pension plan and two profit sharing plans which cover substantially all full-time employees. Contributions under the pension plan are based upon length of service and annual compensation of each employee. The assets of the pension plan include principally debt securities and mortgages. Effective July 31, 1996, the Company froze the benefits payable to participants under the pension plan. As a result, contributions to the plan, which have approximated $210,000 per year, will be reduced in the future. The profit sharing plans, which include an employee stock ownership plan, provide for annual contributions in amounts to be determined by the Board of Directors. Such contributions are based upon the annual compensation of each employee. No contributions were made in either 1996, 1995 or 1994. The funded status of the plan is as follows:
December 31, (in thousands) 1996 1995 Actuarial present value of: Vested benefit obligation $3,000 $2,783 Accumulated benefit obligation $3,016 $2,814 Actuarial present value of projected $3,016 $2,947 benefit obligation Plan assets at fair value 2,727 2,558 Projected benefit obligation in excess of plan (289) (389) assets Unrecognized net losses 472 401 Unrecognized net liability at transition 74 86 Unrecognized reduction in projected benefit (136) obligation Unamortized prior year loss (410) (354) Prepaid (accrued) pension cost ($289) ($256) (in thousands) 1996 1995 1994 Net periodic pension cost included the following components: Service cost during the period $139 $172 $178 Interest cost on projected benefit 213 196 173 obligation Actual return on plan assets (175) (161) (153) Net amortization and deferral 2 2 9 Net periodic pension cost $179 $209 $207
Rates used in determining pension expense and related obligations were:
1996 1995 1994 Discount rate for expense computation, 7.50% 7.50% 7.50% beginning of year Assumed annual rate of return on plan assets 7.50% 7.50% 7.50% Discount rate for projected benefit obligation, 7.50% 7.50% 7.50% end of year Assumed annual rate of increase in compensation 3.00% 3.00% 3.00%
14. Commitments and Contingencies Rental expense in 1996, 1995 and 1994 was approximately $351,000, $355,000 and $450,000, respectively. In 1989, the Company entered into an agreement for the lease of office space. The facility contains approximately 44,500 square feet of office space. The term of the lease is ten years with an option to renew for one additional term of five years. Until March 1994, monthly lease payments were $35,000. In March 1994, the Company exercised its option to acquire a 50% interest in this property at a price of $1.75 million. The Company continues to lease the entire building, which is classified as an operating lease, but at monthly rent of $17,000 through July 1999, although the Company has subleased a significant portion of the office space which it does not otherwise occupy. The Company has no other significant leases. In connection with the cancellation of a joint venture agreement in 1996, the Company has agreed to pay $500,000 in cash to its former joint venture partner at the time the pending Merger with LaSalle (see Note 4) is consummated. In the event the Merger with LaSalle is not completed, any payment to the joint venture partner will be determined under a separate calculation as follows: (a) if the Company enters into a transaction similar to the LaSalle transaction in which it is acquired by or merged with another entity, the parties have agreed to negotiate a mutually acceptable termination price; (b) if the Company enters into a transaction whereby, as part of a plan to terminate its insurance operations and sell all of its assets, it sells its credit insurance marketing organization to an unrelated third party, the Company has agreed to pay its former partner a pro rata share of the proceeds, if any, it receives from the sale of the marketing organization. The Company agreed to make such payments to the joint venture partner as consideration for terminating the venture, which will allow the Company to retain the profits or losses on credit insurance premiums previously reinsured to the partner. Reinsurance risks would give rise to liability to the insurance companies only in the event that the reinsuring company might be unable to meet its obligations under the reinsurance agreements in force. In March 1997, the Company received a demand for arbitration and statement of claim from 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 had been a defendant in a lawsuit in an Alabama state court originally filed as a class action lawsuit in 1994. The plaintiff subsequently voluntarily dismissed the count to his complaint seeking class certification and no longer seeks to assert claims on behalf of the class. During 1996, the Company settled this litigation for a nominal amount. In connection with the sale of Interstate s business, as discussed in Note 5, the Company provided the buyer with limited indemnifications with respect to certain potential environmental liabilities asserted within two years from the closing date. The Company does not believe that these limited indemnifications will have a materially adverse effect on the Company's financial position or results of operations. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company or its 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. 15. Redeemable Preferred Stock The Redeemable Convertible Preferred Stock (the Preferred Stock ) will remain outstanding following the pending merger described in Note 4, and the holders thereof will retain all of the rights and preferences which currently exist for such stock, as discussed below. The Preferred Stock has a liquidation preference of $10.00 per share and is convertible at any time, unless previously redeemed, into shares of common stock at the rate of 1.482 shares of common stock for each share of Preferred Stock (equivalent to a conversion price of $6.75 per share). The Preferred Stock is redeemable at the option of the Company initially at a redemption price of $10.85 per share and thereafter at prices declining to $10.00 per share on and after July 2, 1996. Annual dividends at the rate of $.85 per share are cumulative from the date of original issue and are payable quarterly on the first day of January, April, July and October. Except in certain limited instances, the holders of the Preferred Stock have no voting rights. A sinking fund will be established requiring mandatory and annual payments sufficient to redeem 10% of the number of shares of Preferred Stock initially issued, commencing July 1, 1998, calculated to redeem all of the Preferred Stock by July 1, 2007. If, at any time, the Company is in arrears as to preferred dividends or sinking fund appropriations for the Preferred Stock, dividends to holders of the Company's common stock as well as purchases, redemptions or acquisitions by the Company of shares of the Company's common stock are restricted. If the Company is in default in an aggregate amount equal to four quarterly preferred dividends, the holders of the Preferred Stock shall be entitled, only while such arrearage exists, to elect two additional members to the then existing Board of Directors. The difference between the fair value of the Preferred Stock at the date of issue and the mandatory redemption value is being recorded through periodic accretions, using the interest method, with the related charge to retained earnings ($36,000 in 1996, 1995 and 1994). At December 31, 1996 and 1995, 713,275 shares of common stock were reserved for the conversion of the Preferred Stock. 16. Stock Options In May 1982, the shareholders of the Company approved a Stock Option Plan which permitted the granting of incentive stock options (as defined in the Internal Revenue Code). The Plan provided for the granting of Stock Options to purchase shares of the Company's common stock at at price not less than its fair market value on the date of grant. Options granted under the Plan expire not later than six years from date of grant. The Plan authorized 300,000 shares for purchase upon the exercise of such options, which were made available from either authorized but unissued shares or shares issued and reacquired by the Company. In May 1989, the shareholders of the Company approved the Stock Incentive Plan which permits the granting of any or all of the following types of awards: (1) stock options, including incentive stock options and non-qualified stock options and (2) stock appreciation rights (SAR) either in tandem with stock options or free standing. This Plan is intended as an enhancement of the 1982 Stock Option Plan. All officers and salaried key employees of the Company and its subsidiaries and affiliates are eligible to be participants. Persons who serve only as directors are not eligible. The Plan provides for the issuance of up to 250,000 shares of Common Stock (the Stock). The shares of Stock deliverable under the Plan will consist in whole or in part of authorized and unissued shares or Treasury shares. The purchase price per share of Stock under any stock option will be determined by the Personnel Committee, but will not be less than 100% of the fair market value of the Stock on the date of the grant of such option. The term of each option will be fixed by the Personnel Committee. Options will be exercisable at such time or times as determined by the Committee, but no option will be exercisable after the expiration of six years from the date the option is granted. The grant price with respect to a freestanding SAR or an SAR granted in tandem with an option will be the fair market value of the Stock on the date of the grant. Upon exercise of an SAR, the participant will be entitled to receive up to, but no more than, an amount in cash or Stock equal to the excess of the fair market value of the shares with respect to which the SAR is exercised (calculated as of the exercise date) over the grant price of the SAR. Payment by the Company upon a participant's exercise could be in cash or Stock, as the Committee may determine. With respect to SARs granted together with options, any related option will no longer be exercisable to the extent the SAR had been exercised and the exercise of any option will cancel the related SAR to the extent of such exercise. The changes in option shares outstanding during the past three years are as follows: TABLE Option Price shares per share Balance, January 1, 1994 257,588 2.25 - 5.25 Options terminated (26,794) 2.25 - 5.00 Balance, December 31, 1994 230,794 2.25 - 5.25 Options terminated (67,794) 5.00 - 5.25 Options granted 16,000 2.25 - 5.00 Balance, December 31, 1995 179,000 2.25 Options terminated upon exercise of SAR s (30,000) 2.25 Balance, December 31, 1996 149,000 2.25 During 1996, 30,000 SAR s were exercised, resulting in a cash payment of $41,250 based on a market price of $3.625 on the date of exercise. At December 31, 1996, 133,117 shares were reserved for options which are available to be granted and all of the 149,000 outstanding options were exercisable. Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123 - Accounting for Stock-Based Compensation. As permitted by the statement, the Company has elected to continue to account for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized for stock options. The Company believes the computation of compensation expense based on the fair value method of accounting, as defined in SFAS No. 123, would have no material effect on the results of operations. 17. Income Taxes Under tax laws in effect prior to 1984, a portion of the life insurance companies' gain from operations was not currently taxed but was accumulated in a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the balance in the Policyholders' Surplus Account for each company was frozen as of December 31, 1983 and additional amounts are no longer accumulated in this account. However, distributions from the account continue to be taxed, as under previous laws, if any of the following conditions occur: (a) The Policyholders' Surplus exceeds a prescribed maximum, or (b) Distributions, other than stock dividends, are made to shareholders in excess of Shareholders' Surplus as defined by prior law, or (c) A company ceases to qualify for taxation as a life insurance company. At December 31, 1996 Policyholders' Surplus for the life insurance companies combined aggregated approximately $1.6 million. The companies have no present plans for distributing the amounts in Policyholders' Surplus. 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, 1996 and 1995 are as follows:
(in thousands) 1996 1995 Deferred tax liabilities: Fixed maturities $33 $347 Deferred policy acquisition costs 6,366 7,426 Other 359 437 6,758 8,210 Deferred tax assets: Future policy benefits and financial 5,796 5,827 reinsurance Net operating loss carryforwards 1,589 2,143 Other 301 284 7,686 8,254 Valuation allowance for deferred tax assets (1,224) (1,224) 6,462 7,030 Net deferred tax liability $296 $1,180
Significant components of income tax expense (benefit) are as follows:
(in thousands) 1996 1995 1994 Current: Federal ($835) ($149) $109 State 10 65 131 Total current (825) (84) 240 Deferred (3) (663) (786) Income tax benefit related to continuing (828) (747) (546) operations Income tax expense (benefit) included with discontinued operations: Current 1,688 220 680 Deferred (567) 124 35 1,121 344 715 Deferred income taxes included with cumulative 154 effect of change in accounting principle Total income tax expense (benefit) $293 ($403) $323
The provision for federal income taxes is not proportional to pre-tax financial statement income or loss due to the exclusions and special deductions afforded life insurance companies under the Internal Revenue Code, as amended, and the exclusion of non-taxable and non-deductible items. A reconciliation between income tax expense or benefit and the expected Federal income tax expense at the applicable statutory rates is as follows:
(in thousands) 1996 1995 1994 Loss from continuing operations before income ($3,534) ($2,819) ($3,059) tax benefit Income tax benefit at 34% statutory rate on (1,202) (958) (1,040) pre-tax loss Effect of rate difference on net operating 288 loss carryback Adjustment of prior year s income tax expense (8) 50 291 Dividends received deduction (11) (10) State income taxes 17 35 87 Items not includable for tax purposes 20 12 94 Other, net 68 124 22 Actual income tax benefit ($828) ($747) ($546)
At December 31, 1996 the life insurance companies have available approximately $4.7 millon of Federal net operating losses. These losses will be carried forward to future years, and may only be used to offset the taxable income of the life insurance companies. Approximately $3.6 million of these net operating losses are subject to limitations on their use under Internal Revenue Code Section 382 and the consolidated return regulations. This operating loss will expire in 2004. The remaining $1.1 million of net operating losses will expire in 2009. 18. Per Share Information Per share information has been computed based upon the weighted average number of common and dilutive common equivalent shares and dilutive convertible securities outstanding. All options are common stock equivalents and have been included in computing the weighted average number of common and dilutive common equivalent shares outstanding for the applicable periods in which these options are not anti-dilutive. The Preferred Stock, which is not considered a common stock equivalent, was not dilutive in 1996, 1995 or 1994. 19. Segment Information As a result of the disposal of the auto auction business in 1996 and the planned disposal of the remaining block of individual life insurance business in early 1997, the Company now operates in one industry segment: credit insurance and related products and services (the Automotive Resource Division). Revenues (net of non-financing reinsurance) and pre-tax loss for the Automotive Resource Division are presented below for the years ended December 31, 1996, 1995 and 1994. Certain corporate activities, which are insignificant in relation to the Automotive Resource Division, are presented separately.
(in thousands) 1996 1995 1994 Revenues (net of reinsurance): Automotive Resource Division $23,820 $23,509 $23,388 Corporate 18 21 10 23,838 23,530 23,398 Realized investment losses not allocated (160) (120) (476) $23,678 $23,410 $22,922 Pre-tax loss from continuing operations: Automotive Resource Division ($2,500) ($2,392) ($2,182) Corporate (874) (307) (401) (3,374) (2,699) (2,583) Realized investment losses (160) (120) (476) ($3,534) ($2,819) ($3,059)
Operating expenses include amortization of deferred policy acquisition costs and other amortization and depreciation for the years ended December 31, 1996, 1995 and 1994 as follows:
(in thousands) 1996 1995 1994 Automotive Resource Division $10,315 $10,379 $10,854 Corporate 40 47 47 $10,355 $10,426 $10,901
20. Regulatory Matters In connection with the proposed Merger with LaSalle discussed in Note 4 and as required by state insurance laws, LaSalle has filed documents with the insurance regulators in each of the states in which the Company's four insurance subsidiaries are domiciled in order to obtain their approval of the Merger. These Form A filings are currently under review by each of the respective insurance departments. In June 1996, the North Carolina Department of Insurance issued its December 31, 1993 Report on Examination on one of the Company's subsidiaries. As a result of its examination, the Department concluded that two of the subsidiary's surplus relief reinsurance agreements did not comply with the state's reinsurance statutes and that the financial impact of these agreements should be reversed. Only one of the agreements was still in effect in June 1996, while the other agreement had been terminated prior to the end of 1994. As of June 30, 1996, the remaining agreement was terminated, and this business was subsequently coinsured to a third party reinsurer in connection with the planned sale of the subsidiary (see Note 21). If the financial impact of the remaining treaty had been reversed as of December 31, 1995, the statutory capital and surplus of both the subsidiary and its parent, Consumers Life (which carries its investment in the subsidiary based on the capital and surplus of the subsidiary), would have been reduced by approximately $930,000. The subsidiary included this adjustment in its 1996 statutory financial statements as a direct charge to its surplus. As discussed in Note 21, the Company has signed a Consent Order issued by the North Carolina Insurance Department requiring the Company s North Carolina subsidiary to either relocate its office and records to North Carolina or redomesticate to another state by September 11, 1997 to avoid having its Certificate of Authority revoked. In September 1996, the Delaware Department of Insurance notified Consumers Life that its level of investments in subsidiaries exceeded the amount permitted under Delaware Insurance laws and that the company's capital and surplus should be reduced by the amount of such excess. The Company later determined that Consumers Life's investments in subsidiaries had exceeded the permitted level as of December 31, 1995 by approximately $1.6 million. If the adjustment for the North Carolina subsidiary's reinsurance treaty and the adjustment for the excess investment in subsidiaries had been reflected in the December 31, 1995 statutory financial statements of Consumers Life, its capital and surplus would have been reduced from $7.3 million to $4.7 million. Consumers Life included both of these adjustments in its 1996 statutory financial statements as a direct charge to its surplus. Its reported capital and surplus at December 31, 1996 was $5.9 million. As disclosed in Note 21, the Company has entered into a definitive agreement to sell the North Carolina insurance subsidiary to a third party. The sale of this subsidiary, which is expected to occur promptly after receipt of regulatory approvals, will eliminate the excess investment in subsidiaries and the related $1.5 million surplus reduction Consumers Life recorded at December 31, 1996. At the Company s request, the Delaware Insurance Department reviewed one of Consumers Life s surplus relief reinsurance treaties for compliance with a new state regulation regarding reinsurance agreements. While the Department determined that the treaty was in compliance at December 31, 1996, the Department has indicated that one modification to the agreement must be made in order for the treaty to remain in compliance in the future. The Company plans to make this modification, which is not expected to result in any significant additional costs to the Company or have a material effect on the Company s financial statements. 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, 1996, each of the Company's insurance subsidiaries have more than sufficient capital to meet the NAIC's RBC requirements. However, if the effects of the surplus relief reinsurance treaties are excluded from the statutory financial statements, certain of the insurance subsidiaries would not meet minimum required RBC levels. As discussed above, the Company has received correspondence from and conducted discussions with various state insurance departments concerning the reinsurance agreements, capital levels and unprofitable operations of certain of the Company s insurance subsidiaries. These insurance departments have indicated their expectation that the insurance subsidiaries would be sold or merged or otherwise raise additional capital. Failure to complete the Merger with LaSalle or otherwise raise additional capital and satisfactorily resolve the regulatory matters discussed above could subject the Company's insurance subsidiaries to possible sanctions which may include, among other things, restrictions on marketing and other operations, mandatory asset dispositions and other forms of regulatory intervention. The financial statement impact, if any, of such regulatory actions cannot presently be determined. 21. Subsequent Events On March 6, 1997, the Company signed a stock purchase agreement to sell its North Carolina domiciled insurance subsidiary to Safeguard Health Enterprises, Inc., a specialized health care marketing company based in California, for cash equal to the subsidiary's regulatory capital and surplus on the closing date plus $416,000 for the subsidiary's state licenses. The Company is no longer marketing any insurance products through this insurance subsidiary. The Company has reinsured the in-force credit insurance business of the subsidiary to a third-party insurer which will then retrocede the business back to the subsidiary's current insurance company parent on an earned basis. The transaction is conditioned upon the approval of the North Carolina and Texas insurance departments. The North Carolina Insurance Department has conditioned its approval, in part, upon the concurrent redomestication of the Company to another state, consistent with its policy which no longer permits North Carolina domestic companies to have their principal administrative offices located outside the state. At the buyer s request, the Company plans to change its state of domicile to Texas. The Company has filed the required petition for redomestication with the North Carolina Insurance Department. A redomestication petition is expected to be filed with the Texas Insurance Department, together with the buyer s Form A filing relating to the change in control, in early April 1997. The sale will result in a pre-tax gain to the Company of approximately $281,000. On March 10, 1997, the Company signed a Consent Order issued by the North Carolina Insurance Department relating to the Company s North Carolina insurance subsidiary. Pursuant to the Order, the Company has agreed to either relocate the subsidiary s principal operations office and corporate records to North Carolina or redomesticate it to another state. If the subsidiary has not completed either the relocation of its office or the redomestication by September 11, 1997, its Certificate of Authority in North Carolina will be revoked. The planned redomestication and concurrent sale of the subsidiary, as discussed above, is expected to be completed prior to September 11. On March 27, 1997, the Company completed a reinsurance transaction with World Insurance Company ( World ), in which World recaptured the individual life insurance business previously assumed by the Company from World through a joint venture agreement. World paid the Company a recapture consideration equal to $1.05 million in exchange for the transfer to World of assets supporting the net statutory basis policy reserves for this business. Based on the recapture consideration received, the Company has written off approximately $1.4 million in deferred policy acquisition costs which are not recoverable. This write-off resulted in an after-tax charge to the Company s fourth quarter 1996 operating results of approximately $900,000 (see Note 5). In late 1996, the Company, along with the other 50% owner, granted an option to purchase the home office building to an unrelated third party. The option expired in March 1997 and was not renewed. QUARTERLY FINANCIAL DATA (Unaudited)
1996 (in thousands, except per share amounts) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter (Restated) (Restated) (Restated) Total revenues - continuing operations $8,498 $9,781 $8,538 $6,785 (before reinsurance ceded) Loss from continuing operations before ($909) ($213) ($644) ($1,768) income tax (benefit) Income tax expense (benefit) (253) 176 (363) (388) Loss from continuing operations (656) (389) (281) (1,380) Discontinued operations 232 146 56 1,038 Net loss ($424) ($243) ($225) ($342) Per share data: Loss from continuing operations ($0.29) ($0.20) ($0.15) ($0.57) Discontinued operations 0.09 0.06 0.02 0.40 Net loss ($0.20) ($0.14) ($0.13) ($0.17) 1995 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter (Restated) (Restated) (Restated) (Restated) Total revenues - continuing operations ($8,918) $10,286 $10,482 $7,743 (before reinsurance ceded) Loss from continuing operations before income tax (benefit) ($577) ($371) ($630) ($1,241) Income tax benefit (85) (77) (170) (415) Loss from continuing operations (492) (294) (460) (826) Discontinued operations 97 203 247 (76) Net income (loss) ($395) ($91) ($213) ($902) Per share data: Loss from continuing operations ($0.23) ($0.16) ($0.21) ($0.36) Discontinued operations 0.04 0.08 0.09 (0.03) Net loss ($0.19) ($0.08) ($0.12) ($0.39)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The firm of Ernst & Young LLP ("E&Y") served as the Company's Independent Auditors from October 23, 1990 to November 26, 1996. On that date, E&Y advised the Company that it could no longer continue as the Company's independent public accountants, and that it could not perform the audit of the Company's 1996 financial statements. E&Y made this determination because it had provided certain financial advisory services to the Company in connection with the Company's efforts to sell or merge its business operations. These services, in E&Y's judgment, impaired the firm's independence as it relates to the Company's 1996 financial statements. E&Y further advised the Company that its independence with respect to the Company's 1995 financial statements was not impaired; however, E&Y recommended that the Company retain new auditors to re-audit the 1995 financial statements to avoid any delays that might otherwise arise in the filing and review of a proxy statement covering the proposed merger of the Company with a subsidiary of LaSalle, or periodic reports to be filed thereafter. None of E&Y's reports on the Company's financial statements for 1994 or 1995 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 26, 1996, there were no disagreements between the Company and E&Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure and no reportable events have occurred. E&Y 's decision that it could not perform the audit of the Company's 1996 financial statements was acknowledged by the Audit Committee of the Company's Board of Directors on November 26, 1996. On the same date, the Audit Committee acted to retain Arthur Andersen LLP to perform the audit of the Company's 1996 financial statements and the re-audit of the 1995 financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Board of Directors of the Company is divided into three (3) groups, with the directors in each group serving terms of three (3) years and until their successors are duly elected and qualified. Rev. Sterling P. Martz, a director with the Company since 1968, reached the mandatory age for retirement established by the Board of Directors on July 31, 1996. However, at its July 1996 meeting, the Board of Directors requested that Rev. Martz continue to serve as a Director until the merger with LaSalle is completed or the Company otherwise disposes of its business operations. The table below sets forth the period for which the following individuals have served as directors of the Company, the principal occupation or employment of each for the last five(5) years, other major affiliations and age as of March 1, 1997.
Principal Occupation for the Past Name Five Years, Office (if any) Held in Director Term the Company and Other Information Since Expires (Age) Leon A. Guida Retired, Former Co-Owner and General 1986 1996** (72) Manager, S & H Pontiac, Harrisburg, PA *James C. Robertson Chairman of the Board, President and 1967 1996** (65) Chief Executive Officer of the Company *Sterling P. Martz Retired Clergyman, Winfield, PA 1968 1996** (76) *Edward J. Kremer President, Hanna, Kremer & Tilghman 1983 1997 (66) Insurance, Inc., Salisbury, MD; Director and Chairman of the Board, Delmar Bancorp, Delmar, MD John E. Groninger President, John E. Groninger, Inc., 1968 1998 (70) Juniata Concrete, Inc., Republic Development Corp., and Juniata Lumber & Supply Co., Mexico, PA; Director, Juniata Valley Financial Corp., Mifflintown, PA *Robert G. Little, Jr., D.V.M. Partner, Little's Veterinary 1966 1998 (67) Hospital, Williamsport, PA; Director, Bucktail Bank and Trust Co., Williamsport, PA
* Denotes Member of Executive Committee ** Due to the pending merger with LaSalle, there was no election of Directors held in 1996, and the existing Directors agreed to continue to serve beyond their terms until the merger is completed, or the Company otherwise disposes of its business operations. The following information is provided as of March 1, 1997 for each executive officer of the Company and the principal executives of its subsidiaries. All of the executive officers listed also serve as executive officers of the life insurance subsidiaries. The executive officers are appointed annually by the Board of Directors and serve at the discretion of the Board.
Name Age Office James C. Robertson 65 President and Chief Executive Officer William J. Walsh, Jr. 54 Executive Vice President and Chief Operating Officer Ralph R. Byrnes 54 Senior Vice President-Automotive Resource Division R. Fredric Zullinger 48 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. Walsh joined the Company in 1976 as Vice President-Finance. He was appointed Executive Vice President and Chief Operating Officer of the Company in 1985 and currently serves in that capacity. Mr. Byrnes joined the Company in 1971 and was appointed Vice President- Credit Sales of the Company's life insurance subsidiary in 1974. Mr. Byrnes was appointed Senior Vice President of the Company's life insurance subsidiaries in 1986 and currently serves in that capacity. Mr. Zullinger joined the Company in 1977 as Vice President-Accounting of the Company's life insurance subsidiaries. He was appointed Treasurer of the Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr. Zullinger currently serves as Senior Vice President, Chief Financial Officer and Treasurer of the Company. ITEM 11. EXECUTIVE COMPENSATION 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, 1996, 1995 and 1994 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 TABLE Annual Compensation Other All Annual Other Name and Principal Position Year Salary Bonus Compensation Compensation James C. Robertson, 1996 $88,998 (1) - 0 - $7,950 (2) $73,016 (3) Chairman, President and 1995 $145,000 - 0 - $6,300 (2) - 0 - Chief Executive Officer 1994 $145,000 - 0 - $6,300 (2) - 0 - William J. Walsh, Jr., 1996 $114,000 - 0 - - 0 - $18,605 (3) Executive Vice President and 1995 $114,000 - 0 - - 0 - - 0 - Chief Operating Officer 1994 $114,000 - 0 - - 0 - - 0 - Ralph R. Byrnes, 1996 $109,500 $30,000 - 0 - $20,362 (3) Senior Vice President- 1995 $109,500 - 0 - - 0 - - 0 - Automotive Resource Division 1994 $109,500 - 0 - - 0 - - 0 - (1) Mr. Robertson s status as a salaried employee of the Company terminated effective July 19, 1997. Since that time, Mr. Robertson has been compensated at a daily rate of $150 for any work performed in his capacity as President and CEO of the Company. Mr. Robertson earned $83,654 as a salaried employee and $5,344 as a non-salaried officer of the Company. (2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman of the Board of the Company, including fees which were deferred. (3) Represents distribution from the Company s Excess Benefit Plan which was terminated in July 1997 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 1996. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR TABLE Shown below is information with respect to the stock options and stock appreciation rights ("SARS") awarded under the Company's 1989 Stock Incentive Plan ("1989 Plan") to the named executive officers and held by them at December 31, 1996. The 1989 Plan was approved by the shareholders, and provides for the grant of both options that qualify as incentive stock options under the Internal Revenue Code and non-qualified (non-statutory) stock options. The option price is 100% of the fair market value on the date of grant ($2.25) and the maximum term to exercise the grant is six (6) years. The options have accompanying SARS which permit the holder to receive common stock or cash equal to the excess of the fair market value covered by the option over the option price. To the extent that accompanying SARS are exercised, the corresponding stock options are canceled and the shares subject to the option are charged against the maximum number of shares authorized under the 1989 Plan. When a stock option is exercised, the related SAR is likewise surrendered. All of the options listed in the table were granted in 1993 in place of an equal number of options that were awarded in May 1989 and subsequently canceled.
Number of Securities Value of Underlying Unexercised Unexercised In-The-Money Options/SARS Options/SARS Shares at Fiscal at Fiscal Acquired Value Year-End (#) Year-End ($)(2) on Exercise Realized Exercisable (E) Exercisable (#) Name (#) ($) Unexercisable (U) Unexercisable (U) James C. Robertson 30,000 41,250 (1) - 0 - - 0 - William J. Walsh, Jr. - 0 - - 0 - 25,000 35,938 Ralph R. Byrnes - 0 - - 0 - 25,000 35,938
(1) In December 1996, Mr. Robertson exercised all of the 30,000 SAR s issued to him in tandem with stock options. As a result, the payment received by Mr. Robertson represents the difference between $3.625, the high bid price of the Common Stock on December 13, 1996, and $2.25, the exercise price of the options, multiplied by the 30,000 SAR s. (2) The values in this column are based on the difference between the market value of the Company s common stock on December 31, 1996 and the exercise price of the options. PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Personnel Committee of the Board of Directors (the "Committee") administers and approves all forms of compensation for the Chief Executive Officer ("CEO"), Executive Officers and other officers of the Company. The members of the Committee are independent, non-employee directors and review with the full Board all aspects of compensation. In addition to reviewing and evaluating the performance and compensation levels of the CEO and the other Executive Officers, the Committee considers management succession and the implementation and administration of the Company's various incentive plans, including the stock option and bonus plans. Compensation Philosophy The compensation policy of the Company is based upon a belief 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. The Company relies 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. In March of each year the Committee, along with the CEO, review an annual salary plan for the Company's officers. The salary plan is developed with the assistance of the Company's Human Resources Department and is based on industry, peer group and national surveys along with performance judgments as to the past and expected future contributions of the individual officers. In addition, the Committee periodically is provided independent compensation reports from various consulting groups concerning salary competitiveness in its industry. The compensation for the CEO and the other Executive Officers consists of a base salary, potential annual bonuses and long-term stock option incentives. The Committee considers the total compensation for the CEO and each of the Executive Officers in establishing each element of compensation. Base salaries are fixed at levels competitive in the market compared to other comparably sized companies with officers having equal responsibilities engaged in similar businesses as the Company. With the exception of the senior marketing Executive Officer, the CEO and the remaining Executive Officers of the Company do not have employment contracts with the Company. As a condition of closing the Merger required by LaSalle, Ralph R. Byrnes, a Senior Vice President and top marketing executive of the insurance subsidiaries, entered into a three year employment contract with the Company which became effective at the time the Merger Agreement with the LaSalle was signed. Under the terms of the employment agreement, Mr. Byrnes receives an annual salary of $120,000 and received a $30,000 bonus at the time the Merger Agreement was signed and is entitled to receive a $20,000 bonus at the effective time of the Merger, as well as additional bonuses based upon his performance during the term of the three year contract. Annual bonuses and long term stock option incentives have been used by the Company as a form of compensation and are tied to the Company's success at achieving significant financial performance goals, as well as increasing shareholder value. Under the Company's bonus program, the CEO and the other Executive Officers are paid a percentage of their annual base salary as determined by pre-established increases to the Company's pre-tax earnings. Since the criteria established by the Company for awarding bonuses has not been met, no bonuses have been earned by the CEO and the other Executive Officers since 1989 under this bonus program. Grants of stock options with accompanying stock appreciation rights ("SARS") have been used by the Company to retain and motivate the CEO and the other Executive Officers to improve the long-term stock market performance of the Company's common stock. In its decision to grant incentive stock options the Committee looks to the expected value of the Company's common stock during the period of time available to exercise the options. No stock options or SARS were granted by the Company to the CEO or the other Executive Officers during fiscal year 1996. CEO Compensation In evaluating the performance and setting the incentive compensation of the CEO, James C. Robertson, the Committee has taken into consideration the Company's plan to merge or otherwise sell the Company during 1996 while continuing the manage the Company as if independent. During 1996, the Company was able to enter into the Merger Agreement with the LaSalle Group, Inc. and reduced its general expenses by over $1.8 million. The base salary for Mr. Robertson has remained the same since 1991 and no bonuses were earned by Mr. Robertson during this time period as well. In 1996, Mr. Robertson stated his intention to retire from the Board of Directors and resign as President and CEO upon the closing of the merger or the sale of the Company. While Mr. Robertson continues to serve in these capacities, his status as a salaried employee of the Company was terminated effective July 19, 1996. Since that time, Mr. Robertson has 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, and the standard retainer and board meeting fees in his role as Chairman of the Board. The Committee believes that the total compensation for Mr. Robertson during 1996 is reasonable based upon Mr. Robertson's experience, leadership and contributions made to the Company during this transition period. This report is submitted by the Personnel Committee of the Company's Board of Directors. Leon A. Guida, Chairman John E. Groninger Rev. Sterling P. Martz STOCK PRICE PERFORMANCE COMPARISON
CUMULATIVE TOTAL RETURN 12/91 12/92 12/93 12/94 12/95 12/96 Consumers Financial Group (CFIN) 100 78 96 90 110 12 PEER GROUP (PPEER1) 100 116 128 120 175 215 NASDAQ STOCK MARKET-US (INAS) 100 116 134 131 185 227
*Assumes $100 invested on December 31, 1991 in the Company s common stock, NASDAQ Stock Index and Peer Group common stock. Total shareholder returns assume reinvestment of dividends. [FN](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 Employees Retirement Plan (the Plan). The Plan was established effective January 1, 1984. Under the Plan the retirement benefit is determined by a formula which reflects compensation and years of service. Benefits are fully vested after seven (7) years of service. The Plan was amended effective January 1, 1989 to reflect changes mandated by ERISA and, as of the same date, a supplemental non-qualified Excess Benefit Plan was adopted covering certain employees, primarily those with higher compensation levels. Compensation includes base salary, bonuses and other forms of compensation and generally corresponds to the amounts shown in the Summary Compensation Table. During 1996, the Company froze the benefits payable to participants under the Plan. The Company also terminated the Excess Benefit Plan in 1996 and distributed the plan assets to the participants. The formula 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 of 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 after January 1, 1989, 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 (Employee Retirement Plan), plus (c) .75% of monthly compensation in excess of the social security wage base (Excess Benefit Plan). At December 31, 1996, the estimated monthly defined benefit payable upon retirement at age 65 for each of the named executive officers is as follows: William J. Walsh, Jr., $2,429 and Ralph R. Byrnes, $2,794. Amounts shown are straight-life annuity amounts and are not reduced by a joint and survivorship provision which is available to the named executive officers. In addition, following his retirement as a salaried employee in July 1996, James C. Robertson began receiving a monthly annuity benefit in the amount of $3,667. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 1, 1997, the number of shares of voting stock owned by any person who is known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, the only class of voting securities outstanding.
Amount and Nature of Percent Beneficial of Title of Class Name and Address of Beneficial Owner Ownership Class Common Consumers Financial Corporation 255,339 8.4% and Subsidiaries Employee Stock Ownership Plan (ESOP)(1) 1200 Camp Hill By-Pass Camp Hill, PA 17011 Common Consumers Life Insurance Company 409,964 12.7% of North Carolina, Consumers Reinsurance Company and Interstate Auto Auction, Inc., affiliates of Consumers Financial Corporation 1200 Camp Hill By-Pass Camp Hill, PA 17011
[FN](1) The Company's Employee Stock Ownership Plan is an employee benefit plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Participating employees of the Company have the power to vote the shares allocated to them under the Plan. The Trustees of the Plan have discretionary investment powers including the power to dispose of the shares. The following table sets forth as of March 1, 1997, the number of shares of the Company's Common and Preferred Stock beneficially owned by (a) each director; (b) each executive officer who is not a director; and (c) all directors and executive officers as a group.
Amount and Nature of Percent Title of Name of Beneficial of Class Beneficial Owner Ownership (1) Class (a) Common Groninger, John E. 57,521 (2) 1.9 Preferred 22,410 (3) 4.2 Common Guida, Leon A. 3,000 * Common Kremer, Edward J. 1,607 * Common Little, Jr., Robert G. 9,143 (4) * Preferred 218 (4) * Common Martz, Sterling P. 4,000 (4) * Preferred 1,400 (4) * Common Robertson, James C. 99,775 3.3 Preferred 5,235 (5) * (b) Common Byrnes, Ralph R. 73,033 (6)(9) 2.4 Common Walsh, Jr., William J. 62,813 (7)(9) 2.1 Common Zullinger, R. Fredric 54,523 (8)(9) 1.8 (c) Common Directors and Executive 365,415 (9) 11.8 Preferred Officers as a Group (9 28,263 5.5 individuals)
[FN] * Denotes less than 1% (1) Except where otherwise indicated, the beneficial owner of the shares exercises sole voting and investment power. (2) Includes 42,542 shares owned by Mr. Groninger's wife. (3) Includes 1,000 shares owned by Mr. Groninger's wife. (4) Shared investment and voting power with their wives for the shares indicated. (5) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's wife. (6) Includes 31,720 shares for which Mr. Byrnes has voting power as to shares held for him in the Employee Stock Ownership Plan, and 25,000 shares he has a right to acquire through the exercise of stock options and stock appreciation rights. (7) Includes 21,284 shares for which Mr. Walsh has voting power as to shares held for him in the Employee Stock Ownership Plan,and 25,000 shares he has a right to acquire through the exercise of stock options and stock appreciation rights. (8) Includes 14,835 shares for which Mr. Zullinger has voting power as to shares held for him in the Employee Stock Ownership Plan, and 25,000 shares he has a right to acquire through the exercise of stock options and stock appreciation rights. (9) Includes shares that are acquirable through the exercise of stock options and SAR s. In accordance with the terms of the proposed merger with LaSalle, the holders of all outstanding stock options and SAR s shall agree to exercise their SAR s in lieu of the exercise of the stock options. As required by Section 16(a) of the Securities Exchange Act of 1934, as amended, the Company notes that Form 5 reports for Messrs. Robertson, Walsh, Zullinger and Byrnes, reporting certain transactions during 1996 not required to be reported on an earlier interim basis, were filed four (4) days late with the Securities and Exchange Commission on February 18, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS W. John Daub III, a Director of the Company until his voluntary resignation from the Board of Directors on April 23, 1996, is affiliated with automobile dealerships that are master group policyholders of a life insurance subsidiary of the Company. Those dealerships receive commissions from the subsidiary in connection with credit insurance they sell. All commissions paid to the dealerships affiliated with Mr. Daub are at rates comparable with commissions paid to other non-affiliated parties. Total commissions on credit insurance business paid by the subsidiary to the dealerships affiliated with Mr. Daub during 1996 were $102,450. In addition, the Daub Trust, a trust controlled by Mr. Daub, purchased in June 1989 a reinsurance company from a life insurance subsidiary of the Company for $155,000, its book value at that time. The Daub Trust paid $55,000 in cash and gave the subsidiary a Note for $100,000, repayable with interest at a rate which varies with the rate of interest earned by the reinsurance company on its certificate of deposit investments. On December 31, 1989, the subsidiary advanced to the Daub Trust an additional $12,000, increasing the total outstanding loan to $112,000. The terms of the Note are substantially the same as those which would have been offered to other non-affiliated parties at that time. The loan is expected to be repaid from profits earned by the reinsurance company and the subsidiary holds all of the outstanding stock of the reinsurance company as collateral for the loan. The loan balance at March 1, 1997 remains at $112,000 as no principal payments have been made. Through December 31, 1996, the reinsurance company has developed profits which are sufficient to repay over half of the current loan balance. However, no payment can be made until the reinsurance company receives approval from the Arizona Insurance Department for a dividend distribution. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) Listing of Documents filed: 1. Financial Statements (included in Part II of this report) Report of Independent Auditors Consolidated Balance Sheets-December 31, 1996 and 1995 Consolidated Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Financial Statement Schedules (included in Part IV of this report): (II) Condensed Financial Information of Registrant (III) Supplementary Insurance Information (IV) Reinsurance (V) Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not required, not applicable or the required information is set forth in the financial statements or notes thereto. 3. Exhibits: (11) Statement regarding Computation of Earnings Per Common Share (18) Letter regarding Change in Accounting Principles (21) Subsidiaries of Consumers Financial Corporation b) Reports on Form 8-K: On November 13, 1996, the Company filed a Form 8-K with respect to (1) the Agreement and Plan of Merger entered into between the Company, LaSalle Group, Inc. and a subsidiary of LaSalle, and (2) the sale of the operating assets and business of Interstate Auto Auction, Inc. On December 4, 1996, the Company filed a Form 8-K regarding the change in the Company's certifying accountants from Ernst & Young LLP to Arthur Andersen LLP. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION BALANCE SHEETS DECEMBER 31, 1996 AND 1995
(in thousands) Liabilities, Redeemable Preferred Assets 1996 1995 Stock and Shareholders Equity 1996 1995 Investments, other than Liabilities: investments in affiliates: Note payable $1,159 Fixed maturities $1,304 Indebtedness to affiliates $544 425 Other invested assets 75 $72 Dividend payable 114 114 1,379 72 Income taxes 1,290 559 Cash 186 228 Miscellaneous 41 88 Investments in affiliates 8,867 12,672 Total liabilities 1,989 2,345 Indebtedness of affiliates 4,765 4,899 Accrued investment income 7 Receivables 7 Redeemable preferred stock: Property and equipment, net of 18 18 Series A, 8 1/2% cumulative 4,693 4,657 accumulated depreciation convertible Other assets 103 110 Shareholders equity: $15,332 $18,016 Common stock 30 30 Capital in excess of stated 7,966 8,016 value Equity in net unrealized 70 705 appreciation of debt and equity securities of subsidiaries Retained earnings 2,009 3,688 Treasury stock (1,425) (1,425) Total shareholders equity 8,650 11,014 $15,332 $18,016
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 TABLE (in thousands) 1996 1995 1994 Revenues: Net investment income $16 $5 $37 Other income 2 16 1 Total revenues 18 21 38 Expenses: Amortization of deferred acquisition costs 825 (including write-off of $746 in 1994) General expenses 765 221 291 Taxes, licenses and fees 9 14 21 Interest 143 145 203 Total expenses 917 380 1,340 Loss before income taxes (899) (359) (1,302) Income taxes 103 210 184 Loss before equity in income (loss) of (1,002) (569) (1,486) unconsolidated subsidiaries Equity in income (loss) of unconsolidated subsidiaries: Continuing operations (1,704) (1,503) (1,027) Discontinued operations 1,472 471 1,301 (232) (1,032) 274 Loss before equity in cumulative effect of change (1,234) (1,601) (1,212) in accounting principle of unconsolidated subsidiaries Equity in cumulative effect of change in accounting 299 principle of unconsolidated subsidiaries Net Loss ($1,234) ($1,601 ($913) ) See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands) 1996 1995 1994 Cash flows from operating activities: Net loss ($1,234) ($1,601) ($913) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of deferred acquisition costs 825 Income taxes 741 (29) 20 Receivables and agents balances 127 31 19 Other liabilities 67 47 59 Equity in loss (income) of unconsolidated 998 1,736 897 subsidiaries Amortization of intangibles 123 217 420 Equity in cumulative effect of change in (299) accounting principles of unconsolidated subsidiaries Other 17 483 (133) Total adjustments 2,073 2,485 1,808 Net cash provided by operating activities 839 884 895 Cash flows from investing activities: Purchase of investments (2,115) (3) (14) Maturity of investments 3 Sale of investments 808 Investments in affiliates 2,044 827 588 Purchase of property and equipment (1) Net cash provided by investing activities 737 827 573 Cash flows from financing activities: Principal payments on debt (1,159) (1,050) (900) Purchase of treasury stock (50) (114) (38) Cash dividends to shareholders (409) (409) (547) Net cash used in financing activities (1,618) (1,573) (1,485) Net increase (decrease) in cash (42) 138 (17) Cash at beginning of year 228 90 107 Cash at end of year $186 $228 $90
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, 1996, 1995 AND 1994 1. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Consumers Financial Corporation and subsidiaries. 2. Cash dividends received from subsidiaries in 1996, 1995 and 1994 amounted to $3,342,844, $827,000 and 600,000, respectively. 3. The Company files a consolidated Federal income tax return with its non- life insurance company subsidiaries and with its consolidated life insurance company subsidiaries, except for Consumers Reinsurance Company, which files a separate return. With respect to the consolidated non-life sub-group, taxes are allocated proportionately to each subsidiary within the consolidated group. Tax expense is allocated to those subsidiaries reporting taxable income, while a tax benefit is allocated to those companies reporting a taxable loss. For the consolidated life insurance sub-group, taxes are allocated only to those companies in the group reporting taxable income. Similarly, tax benefits for the life sub-group are allocated only to those companies reporting a taxable loss. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Deferred Other policy policy Future claims and Premium acquisition policy Unearned benefits and other Segment costs benefits premiums payable revenue Year ended December 31, 1996: Automotive Resource Division $16,414 $11,420 $56,178 $2,511 $21,749 Individual Life Insurance Division (c) 2,535 23,966 225 Other (d) 2 Total $18,949 $35,386 $56,178 $2,736 $21,751 Year ended December 31, 1995 (e): Automotive Resource Division $17,642 $10,411 $57,943 $2,448 $21,278 Individual Life Insurance Division (c) 4,284 26,171 408 Other (d) 16 Total $21,926 $36,582 $57,943 $2,856 $21,294 Year ended December 31, 1994 (e): Automotive Resource Division $16,878 $10,415 $56,551 $2,059 $20,519 Individual Life Insurance Division (c) 4,777 28,194 789 Other (d) 1 Total $21,655 $38,609 $56,551 $2,848 $20,520
(a) Excludes realized investment gains. (b) Allocations of net investment and other operating expenses are based on various assumptions and estimates. The results would change if different assumptions and estimates or a different method were to be used. (c) The assets and liabilities of the discontinued individual life insurance business have not been separately stated on the consolidated balance sheets. (d) Represents operations of Consumers Financial Corporation. (e) Certain amounts for 1995 and 1994 have been restated to reflect the presentation of the individual life insurance and the auto auction businesses as discontinued operations. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Amortization (in thousands) of deferred Net Death policy investment and other acquisition Operating Segment income benefits costs expenses (b) (b) Year ended December 31, 1996: Automotive Resource Division $2,070 $11,698 $10,133 $4,308 Individual Life Insurance Division (c) Other (d) 17 917 Total $2,087 $11,698 $10,133 $5,225 Year ended December 31, 1995 (e): Automotive Resource Division $2,231 $10,267 $10,154 $5,007 Individual Life Insurance Division (c) Other (d) 5 471 Total $2,236 $10,267 $10,154 $5,478 Year ended December 31, 1994 (e): Automotive Resource Division $2,868 $8,877 $10,388 $4,885 Individual Life Insurance Division (c) Other (d) 10 602 Total $2,878 $8,877 $10,388 $5,487
(a) Excludes realized investment gains. (b) Allocations of net investment and other operating expenses are based on various assumptions and estimates. The results would change if different assumptions and estimates or a different method were to be used. (c) The assets and liabilities of the discontinued individual life insurance business have not been separately stated on the consolidated balance sheets. (d) Represents operations of Consumers Financial Corporation. (e) Certain amounts for 1995 and 1994 have been restated to reflect the presentation of the individual life insurance and the auto auction businesses as discontinued operations. SCHEDULE IV REINSURANCE CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Assumed Percentage Ceded to from of amount Gross other other Net assumed to Segment amount companies companies amount net (a) (a) Year ended December 31, 1996: Life insurance in-force (c) $1,733,522 $927,916 $282,021 $1,087,627 25.9% Net premium income: Credit insurance $31,573 $11,689 $124 $20,008 0.6% Warranty 417 417 100.0% $31,573 $11,689 $541 $20,425 2.6% Year ended December 31, 1995 (b): Life insurance in-force (c) $1,820,872 $947,363 $311,201 $1,184,710 26.3% Net premium income: Credit insurance $31,720 $12,628 $327 $19,419 1.7% Warranty 394 394 100.0% $31,720 $12,628 $721 $19,813 3.6% Year ended December 31, 1994 (b): Life insurance in-force (c) $1,911,119 $1,184,134 $354,800 $1,081,785 32.8% Net premium income: Credit insurance $31,120 $13,267 $1,173 $19,026 6.2% Warranty 278 278 100.0% $31,120 $13,267 $1,451 $19,304 7.5%
(a) Includes premiums for credit insurance ceded and assumed on an earned basis. (b) Certain amounts for 1995 and 1994 have been restated to reflect the presentation of the individual life insurance business as a discontinued operation. (c) Life Insurance in-force includes the remaining block of individual life insurance business, which will be sold in 1997. See Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Charged Balance at Charged to to other Balance at Description beginning costs and accounts, Deductions, end of of period expenses describe describe period Year ended December 31, 1996: Provision for permanent decrease in market value of: Equity securities $15 $15 (a) Mortgage loans 100 $100 Real estate 493 $35 400 (a) 128 Other invested assets 75 75 Provision for uncollectible receivables 1,093 233 288 (b) 1,038 $1,701 $343 $703 $1,341 Year ended December 31, 1995: Provision for permanent decrease in market value of: Equity securities $15 $15 Mortgage loans 200 $100 (c) 100 Real estate 300 $193 493 Provision for uncollectible receivables 1,091 79 77 (b) 1,093 $1,606 $272 $177 $1,701 Year ended December 31, 1994: Provision for permanent decrease in market value of: Equity securities $19 $4 (d) $15 Mortgage loans 670 $135 605 (c) 200 Real estate 20 300 20 (a) 300 Provision for uncollectible receivables 1,020 149 78 (b) 1,091 $1,729 $584 $707 $1,606 /TABLE (a) Write-off of reserve for assets sold (b) Write-off of bad debts against reserve (c) Loans transferred to real estate through foreclosure (d) Write-off of worthless securities against reserve 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 25, 1997 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 and March 25, 1997 Chairman of the Board (Chief Executive Officer) /S/William J. Walsh, Jr. Executive Vice President March 25, 1997 (Chief Operating Officer) /S/R. Fredric Zullinger Senior Vice President and March 25, 1997 Treasurer (Chief Financial Officer) /S/John E. Groninger Director March 25, 1997 /S/Leon A. Guida Director March 25, 1997 /S/Edward J. Kremer Director March 25, 1997 /S/Robert G. Little, Jr., D.V.M. Director March 25, 1997 /S/Rev. Sterling P. Martz Director March 25, 1997 -----END PRIVACY-ENHANCED MESSAGE-----