-----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, A8FWprt8jw+N/n7xaL3qL/LP/4BYrgFFTIE5eqNn3e+Puyfd11Z4t1sCuR1scdBW w7E+I0oyo+wPidmUq/cS4A== 0000100320-99-000002.txt : 19990403 0000100320-99-000002.hdr.sgml : 19990403 ACCESSION NUMBER: 0000100320-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSUMERS FINANCIAL CORP CENTRAL INDEX KEY: 0000100320 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 231666392 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12455 FILM NUMBER: 99585176 BUSINESS ADDRESS: STREET 1: 1200 CAMP HILL BY PASS STREET 2: P O BOX26 CITY: CAMP HILL STATE: PA ZIP: 17001-0026 BUSINESS PHONE: 7177614230 MAIL ADDRESS: STREET 1: 1200 CAMP HILL BYPASS STREET 2: PO BOX 26 CITY: CAMP HILL STATE: PA ZIP: 17001-0026 FORMER COMPANY: FORMER CONFORMED NAME: TWENTIETH CENTURY CORP DATE OF NAME CHANGE: 19800620 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K < X >Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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, 1999, the aggregate market value of common stock held by non-affiliates of the registrant was $360,961. The number of outstanding common shares of the registrant as of March 1, 1999 was 2,578,295. PART I ITEM 1. BUSINESS GENERAL Consumers Financial Corporation (the "Company") is an insurance holding company which, until October 1, 1997, was a leading provider, through its subsidiaries, of credit life and credit disability insurance in the Middle Atlantic region of the United States. The insurance subsidiaries are licensed in 26 states and the District of Columbia and conducted the majority of their business in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and Virginia, marketing credit insurance products primarily through automobile dealers. In connection with its credit insurance operations, the Company also marketed, as an agent, an automobile extended service warranty product. Effective October 1, 1997, the Company transferred all of its credit insurance and fee income accounts to Life of the South Corporation ( LOTS ), a Georgia- based financial services holding corporation. On January 1, 1998, LOTS hired substantially all of the sales and marketing personnel of the Company and assumed the administration of the Company s credit insurance business. In addition, effective January 1, 1998, the Company also reinsured to American Republic Insurance Company ( American Republic ), a financial partner of LOTS in this transaction, 100% of its credit insurance business which was inforce on September 30, 1997 (the Sale of Assets ) and reinsured 100% of the credit insurance business written on the policy or certificate forms of the Company s subsidiaries in the fourth quarter of 1997. In connection with these transactions, the Company and LOTS also agreed that, with respect to one of the subsidiaries, the new credit insurance business produced by that subsidiary s former customer accounts, which were transferred to LOTS, would continue to be written on the policy or certificate forms of the subsidiary until September 30, 1999, or an earlier date which may be agreed to by the parties. This premium and the related insurance risk have also been reinsured 100% to American Republic. Settlement on the Sale of Assets transaction, which received the approval of state insurance regulators and the approval of the Company s preferred and common shareholders at a special meeting held on March 24, 1998 (the Special Meeting ), took place in May 1998. At the Special Meeting, the Company s shareholders also approved a Plan of Liquidation and Dissolution pursuant to which the Company intends to liquidate its remaining assets, provide for all liabilities, redeem its preferred stock and distribute any remaining cash to its common shareholders. In 1992, the Company sold all of its traditional whole-life, term and annuity business. In 1994, the Company reinsured substantially all of its universal life insurance business to a third party insurer and, effective January 1, 1997, it sold its remaining block of universal life business back to the direct writer of the business. Additional information regarding the sale of the Individual Life Insurance Division s in-force business appears below under "Operations." The Company, through its wholly-owned subsidiary, IAAC, Inc., formerly Interstate Auto Auction, Inc. ("Interstate"), also conducted wholesale and retail automobile auctions of used vehicles for automobile dealers, banks and leasing companies. The Company sold the business and the related operating assets of Interstate in November 1996 for cash in the amount of $4.85 million. Additional information regarding the termination of the auto auction operations appears below under Operations. The term "Company" when used herein refers to Consumers Financial Corporation and its subsidiaries unless the context requires otherwise. The Company's executive offices are located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania 17011. Its telephone number is (717) 730-6320. The Company was formed in 1966 as 20th Century Corporation (a Pennsylvania business corporation) and adopted its present name on May 30, 1980. The Company operated through various wholly-owned subsidiaries since it was formed; however, all of these subsidiaries have been either sold or liquidated except for Consumers Life Insurance Company, a Delaware life insurance company ( Consumers Life ), Investors Fidelity Life Assurance Corp., an Ohio life insurance company which is a subsidiary of Consumers Life, and Consumers II Ltd., a reinsurance company domiciled on the Island of Nevis. Prior to the discontinuation of its business operations, as discussed above, the Company operated in three industry segments: the Automotive Resource Division, which marketed credit insurance and other products and services to its automobile dealer customers, the Individual Life Insurance Division and the Auto Auction Division. These segments did not include the corporate activities of Consumers Financial Corporation which previously were insignificant in relation to the three segments. All three segments are now presented as discontinued operations in the Company s consolidated financial statements for all periods presented. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. At the Special Meeting referred to above, the Company s shareholders also approved a Plan of Liquidation and Dissolution (the Plan of Liquidation ) whereby, following the Sale of Assets, the Company would be liquidated by (i) the sale of its remaining assets, (ii) the payment of all claims, liabilities and expenses, (iii) the redemption and cancellation of all outstanding shares of Preferred Stock, and (iv) the pro rata distribution of any remaining cash to the holders of Common Stock. The liquidation process is expected to be concluded in approximately five years. During that period, the Company will consider and evaluate any other viable proposals for the sale of the Company or its assets which would provide greater value to shareholders. The assets and liabilities of the Company may be transferred to a liquidating trust if the Board of Directors determines that the use of a liquidating trust provides the best alternative for liquidating the Company. If the Company s assets and liabilities are transferred to such a trust, all distributions to shareholders would then be made directly from the liquidating trust after the satisfaction of all liabilities. OPERATIONS The Company's principal subsidiaries, which, until October 1, 1997, were engaged in the marketing of credit insurance business, are Consumers Life and Investors Fidelity Life Assurance Corp. Together these companies are licensed in 26 states and the District of Columbia. In August 1997, the Company sold another wholly-owned subsidiary, Consumers Life Insurance Company of North Carolina, which had also been engaged in the sale of credit insurance. As noted previously in this Item 1, the Company sold its credit insurance customer accounts to LOTS as of October 1, 1997 and, effective January 1, 1998, the Company transferred to American Republic, through reinsurance, its September 30, 1997 inforce block of credit insurance business and 100% of the credit insurance business written in the fourth quarter of 1997. Although one of the Company s insurance subsidiaries has agreed to allow all new credit insurance premiums produced by the customer accounts which were sold to LOTS to be written on the policy or certificate forms of the subsidiary until September 30, 1999, all of this business will be reinsured 100% to American Republic. As a result of these transactions with LOTS and American Republic, the Company has no remaining business segments, since it sold the remainder of its individual life insurance business as of January 1, 1997 and sold its auto auction business in November 1996. The information appearing below briefly describes the three business segments in which the Company previously operated. The activities of the Company are now restricted primarily to the collection of investment income on the Company s remaining invested assets, the collection of fee revenues from LOTS relating to the sale of the Company s credit insurance accounts and the payment of certain corporate costs and other fixed overhead expenses. Since the reinsurance treaty between Consumers Life and American Republic is an indemnity agreement, Consumers Life would become liable for the insurance risks transferred in the event American Republic is unable to meet its obligations under the reinsurance agreement. AUTOMOTIVE RESOURCE DIVISION Prior to the sale of its credit insurance and fee income accounts to LOTS as of October 1, 1997, the Company marketed and retained the risk on credit insurance in connection with consumer loan transactions, substantially all of which were automobile purchases. Credit life insurance provides funds in the event of the insured's death for payment of a specified loan or loans owed by the insured. Similarly, credit disability insurance provides for the periodic paydown of such loans during the term of the insured's disability. In most cases, the entire premium is paid at the time the insurance is issued. The primary beneficiary under credit insurance is the lender, with any proceeds in excess of the unpaid portion of the loan payable to a named second beneficiary or the insured's estate. The credit insurance business was the major source of the Company's revenues and, until 1991, provided the majority of its profits as well. Automobile sales accounted for substantially all of the credit insurance sold by the Company. The credit insurance industry and the Company s credit business were both adversely affected in the early 1990's by the increase in the number of automobiles which were being leased instead of purchased, not only because there was a general lack of availability of approved credit insurance products applicable to leases but also due to a reluctance on the part of automobile dealers to emphasize the sale of credit insurance products on lease transactions. The Company also marketed, in an agency capacity, extended service automobile warranty products through its wholly-owned subsidiary, Consumers Car Care Corporation. These products were underwritten by unaffiliated insurance companies, administered by unaffiliated third party administrators and sold primarily through automobile dealers who also sold the Company's credit insurance. Other related products and services were also offered to the Company's automobile dealer customers. INDIVIDUAL LIFE INSURANCE DIVISION In March of 1992, the Company announced the termination of this Division's marketing activities and announced its intent to sell its existing blocks of whole-life, term, annuity and universal life business. Effective October 1, 1992, the traditional whole-life, term and annuity business was sold for $5.6 million to the Londen Insurance Group located in Phoenix, Arizona. Effective December 31, 1994, the Company coinsured its direct universal life business and irrevocably assigned all its right, title and interest in a block of assumed universal life business (coinsured from AMEX Life Assurance Company on a 90% quota share basis) to American Merchants Life Insurance Company, located in Jacksonville, Florida, for $5.5 million. Effective January 1, 1997, the Company sold its remaining block of individual life insurance business back to the direct writer of the business. The direct writer paid the Company a recapture consideration of $1.05 million in March 1997 when the transaction closed. AUTO AUCTION DIVISION As indicated previously, the business and the related operating assets of Interstate were sold in November 1996 for cash of $4.85 million. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for further information concerning the sale and its impact on the Company s operating results. Prior to the sale, Interstate conducted wholesale automobile auctions of used vehicles at its facility in Mercer, Pennsylvania (about 50 miles north of Pittsburgh). Interstate s customers included automobile dealers and leasing companies. In connection with its weekly auctions, Interstate provided a body shop repair and conditioning service and an arbitration service through which disputes between buyers and sellers were resolved. INVESTMENTS The Company's insurance subsidiaries have historically invested primarily in fixed maturity securities (bonds) and, to a lesser extent, in mortgages with intermediate terms (generally not more than seven years). Investments in mortgages allowed the Company to obtain higher yields while maintaining maturities in the five to seven year range. Prior to the sale of the Company s direct universal life business, the Company's investment policy also included investing in certain mortgage-backed securities which provided competitive yields on assets supporting these interest sensitive products. In connection with the Sale of Assets transaction with American Republic and LOTS, the Company sold substantially all of its bonds in late 1997 and early 1998. The Company s only remaining fixed maturity securities are bonds which the insurance subsidiaries are required to maintain on deposit with various state insurance departments. The Company s mortgage loan portfolio, which relates primarily to commercial real estate, has declined significantly during the past four years, from $9.9 million at the end of 1994 to $1.6 million at December 31, 1998. The reduction is primarily attributable to the sale of certain mortgages, refinancings and early payoffs. Approximately $1.1 million of the mortgage balance at the end of 1998 relates to a loan issued to the co-owner of the Company s home office building. The mortgage portfolio has generally been concentrated in the Central Pennsylvania area. The Company considered this strategy to be conservative because this region has historically not been particularly susceptible to wide economic swings in recessionary times, due to the diversity of industries throughout the area and the presence of government operations and military installations. Following the approval of the Plan of Liquidation, the Company has maintained all of its remaining investable funds in short-term securities in order to provide the liquidity necessary to pay current expenses and to eliminate the market risk associated with bond investments. The Company also intends to invest the funds which arise from the eventual liquidation of its mortgage loan and real estate investments in short-term securities. The following table sets forth the Company's investment results for the periods indicated: Years ended December 31, 1998 1997 1996 Net Net Net Investment Yield Investment Yield Investment Yield Income % Income % Income % Interest: Fixed maturities $175 5.0 $1,934 6.7 $2,364 6.2 Mortgage loans 139 7.8 189 8.7 421 9.0 Policy loans 33 6.6 Short term 733 4.3 486 4.4 265 4.5 investments Real estate 157 (1 ) Other 82 9.7 17 1.0 1,047 5.5 2,691 6.3 3,257 6.5 Investment expenses (85) (0.4) (675) (1.6) (680) (0.9) Total net investment income 962 5.1 2,016 4.7 2,577 5.6 Less investment income for period subsequent to adoption of liquidation basis of accounting 487 Net investment income for period prior to adoption of liquidation basis of accounting 475 2,016 2,577 Less net investment income attributable to discontinued operations 415 1,953 2,518 Net investment income attributable to continuing operations $60 $63 $59
(1) Represents rental income related to three properties classified as non- investment real estate. COMPETITION Inasmuch as the Company no longer conducts any insurance or other operations, it no longer competes with other organizations. 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 r e s t r ictions 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 of their respective states of d o m i c ile. Although the insurance subsidiaries no longer have direct policyholders, these state regulators continue to monitor the companies statutory capital and surplus and other aspects of their financial compliance with state insurance laws and regulations. The dividends which a life insurance company may distribute are subject to regulatory requirements based upon minimum statutory capital and surplus and/or statutory earnings. In addition to regulatory considerations, the overall financial strength of each operating entity is considered before dividends are paid. Additionally, the amount of dividends a life insurance company can pay is subject to certain tax considerations. See Notes 3 and 15 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K. The Company is also subject to regulation under the insurance holding company laws of 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 March 31, 1999, the Company had only 4 full-time employees and 2 part-time employees. On January 1, 1998, all of the Company s sales personnel resigned and became employees of LOTS in connection with the transactions discussed earlier in this Item 1, and certain other administrative employees were terminated. The Company has adequate insurance coverage against employee dishonesty, theft, forgery and alteration of checks and similar items. There can be no assurance that the Company will be able to continue to obtain such coverage in the future or that it will not experience uninsured losses. ITEM 2. PROPERTIES Since September 1989, the Company has maintained its executive and business offices in a leased building located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania. The office building contains approximately 44,000 square feet of office space (approximately 39,000 square feet of leasable space). Prior to 1993, the Company leased the entire facility at an annual rental of $421,000, plus insurance, taxes and utilities. In March of 1994, the Company exercised its option to acquire a 50% interest in its home office building, which reduced the Company s annual rent to $204,000. The option price was approximately $1.75 million. As a result of the termination in 1992 of all new business functions in the Individual Life Insurance Division and the transaction with LOTS discussed in Item 1, the Company now occupies approximately 14% of the leasable office space. The Company has leased about 45% of the leasable space to third party tenants pursuant to various short-term leases. As of March 1, 1999, the a n nualized rental income to the Company under these sub-leases totals approximately $210,000. All of the remaining business activities of the Company and its subsidiaries are conducted at the above address in Camp Hill, Pennsylvania. In connection with its credit insurance operations, the Company maintained branch offices in leased facilities in Philadelphia, Pennsylvania and Columbus, Ohio until December 31, 1997. The branch offices primarily provided supervision, sales and service for credit insurance agents doing business in the eastern Pennsylvania, Delaware, New Jersey and Ohio areas. ITEM 3. LEGAL PROCEEDINGS The Company is a party to various lawsuits which are ordinary and routine litigation incidental to its business. None of these lawsuits is expected to have a materially adverse effect on the Company's financial condition or operations. See Note 12 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information concerning litigation matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1998 to the shareholders of the Company for their consideration through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Consumers Financial Corporation common stock was traded on the NASDAQ National Market System with a ticker symbol of CFIN until June 1, 1998 when it was delisted by NASDAQ for non-compliance with NASDAQ s new market value of public float requirements. The Company s Convertible Preferred Stock, Series A was also traded on the NASDAQ National Market System until March 16, 1998, when it was also delisted by NASDAQ for non-compliance with the new public float requirement of a minimum of 750,000 shares. Since the shareholders of the Company approved the Plan of Liquidation and Dissolution on March 24, 1998, the Company did not appeal the delisting decision for either the common or preferred stock, nor did it take any steps to come into compliance with the new rules or attempt to seek inclusion on the NASDAQ Small Cap Market. Quarterly price ranges for the Company s common and preferred stock, based on information provided by The National Association of Securities Dealers through the NASD OTC Bulletin Board, are presented below.
1998 QUARTERLY STOCK PRICES 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Common Stock High 1.06 0.63 0.40 0.36 Low 0.50 0.25 0.34 0.13 Convertible Preferred Stock Series A High 8.75 9.00 9.00 9.00 Low 7.00 8.00 9.00 8.81
As of December 31, 1998, there were 6,622 shareholders of record who collectively held 2,578,488 common shares and 105 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 1998, 1997 or 1996.The Convertible Preferred Stock, Series A dividends are paid quarterly on the first day of January, April, July and October at an annual rate of $.85 per share. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain information contained in or derived from the Consolidated Financial Statements and the Notes thereto. (NOT COVERED BY INDEPENDENT AUDITOR S REPORT) For the period from January 1, 1998 to Years Ended December 31, March 24, 1998 dollar amounts in thousands, except per 1997 1996 1995 1994 share Total revenues (excluding change in unearned premiums) $261 $40 $378 $664 $201 Premiums written (4) (37) 353 685 622 Net investment income 60 63 59 40 54 Net return on average investments 4.8% 4.9% 5.4% 6.0% 6.7% Loss from continuing operations (88) (1,441) (1,737) (1,429) (2,062) Discontinued operations 112 (4,919) 503 (172) 850 Income (loss) before cumulative effect of change 24 (6,360) (1,234) (1,601) (1,212) in accounting principles Cumulative effect of change in 299 accounting principles Net income (loss) 24 (6,360) (1,234) (1,601) (913) Basic and diluted income (loss) per common share: Loss from continuing operations (0.08) (0.73) (0.83) (0.71) (0.94) Discontinued operations 0.04 (1.89) 0.19 (0.07) 0.32 Loss before cumulative effect of change (0.04) (2.62) (0.64) (0.78) (0.62) in accounting principles Cumulative effect of change in accounting principles 0.11 Net loss (0.04) (2.62) (0.64) (0.78) (0.51) December 31, 1998 1997 1996 1995 1994 Total assets $62,68 $85,035 $114,619 $123,322 $125,276 8 Total debt 0 0 0 2,537 3,389 Shareholders equity and redeemable 6,724 13,343 15,671 15,226 preferred stock Shareholders equity per common share 0.78 3.31 4.20 3.96 Net assets in liquidation and redeemable 5,198 preferred stock Cash dividends declared per common NONE NONE NONE NONE 0.05 share
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A review of the significant factors which affected the Company s net assets in liquidation at December 31, 1998, its operating results for the period from January 1, 1998 to March 24, 1998 and the changes in its net assets in liquidation for the period from March 25, 1998 to December 31, 1998 is presented below. Information relating to 1997 and 1996 is also presented for comparative purposes. This analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes appearing elsewhere in this Form 10- K. OVERVIEW At the Special Meeting of Shareholders held on March 24, 1998, the Company s preferred and common shareholders approved the sale of the Company s core credit insurance and related products business, which was the Company s only remaining business operation, following various sales over the past six years of its traditional and universal life insurance business and its auto auction business. In connection with the sale of its inforce credit insurance business, the Company also sold its credit insurance customer accounts and one of its life insurance subsidiaries. At the Special Meeting, the shareholders also approved a Plan of Liquidation and Dissolution, pursuant to which the Company intends to liquidate its remaining assets, provide for all of its liabilities, redeem its preferred stock and distribute any remaining cash to its common shareholders. The agreement with Life of the South Corporation (LOTS), the purchaser of the credit insurance operations, provides that the proceeds from the sale of the customer accounts are to be received over a five-year period ending September 2002, based on the amount of credit insurance premiums produced by those customer accounts during that period. The Company may also receive a payment from a contingency fund established by the Company and LOTS based on the claims experience on the inforce credit insurance business from October 1, 1997 to September 30, 2002. Because of these future payments and potential future payments, the distribution, if any, to the Company s common shareholders will not be made until late in 2002, when all amounts due from LOTS have been received. The Company has made substantial reductions in its number of employees during the past several years as a result of the discontinuation of its various businesses. As of March 31, 1999, four people are employed on a full-time basis by the Company. During the liquidation period, the Company intends to out source most of the functions which will continue to be required. As a result of the approval of the Plan of Liquidation, the Company adopted a liquidation basis of accounting in its financial statements for periods subsequent to March 24, 1998. Under liquidation accounting rules, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. Prior to March 25, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entities. RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS As a result of the sale of its remaining business and the adoption of the Plan of Liquidation, as discussed above, the Company s income and expenses now consist principally of (i) fee income from LOTS from the sale of the Company s customer accounts, (ii) investment income on existing assets and (iii) corporate expenses, primarily salaries, professional fees and home office rent and related real estate costs. A discussion of the material factors which affected the Company s results of operations (for periods prior to March 25, 1998) and the changes in its net assets in liquidation (for the period from March 25, 1998 to December 31, 1998) is presented below. For the year ended December 31, 1998, the Company reported (i) net income of $24,000 from January 1, 1998 to March 24, 1998 and (ii) an excess of expenses (including income taxes) over income of $202,000 for the period from March 25, 1998 to December 31, 1998, resulting in a total loss of $178,000. In 1997 and 1996, the Company s net losses totaled $6.4 million and $1.2 million, respectively. The improvement in 1998 is principally the result of significant expense reductions, as discussed below, and the elimination of the substantial losses which were being incurred in the Company s credit insurance business, which was sold to LOTS as of January 1, 1998. A $3.9 million loss on the disposal of that segment and an additional $825,000 operating loss from that line of business were reflected in the 1997 results of operations. As indicated above, for the period following the adoption of the liquidation basis of accounting (March 25, 1998 to December 31, 1998), the Company s expenses exceeded its revenues by $202,000. The excess expenses include $527,000 in income tax expense which resulted principally from the elimination of $472,000 in deferred tax assets. On a pre-tax basis, revenues exceeded expenses by $325,000. The Company s revenues consist primarily of investment income from its existing invested assets and fee income received from LOTS from the sale of its credit insurance customer accounts. Investment income totaled $962,000 in 1998 and $487,000 from March 25 to December 31, 1998. Investment income declined substantially compared to 1997 and 1996 because of the transfer of more than $35 million in assets to LOTS and its financial partner, American Republic Insurance Company, in May 1998 in connection with the sale of the Company s credit insurance business. That transaction also resulted in the transfer of all of the Company s credit insurance policy liabilities. For the full year of 1998, the Company s fee income from LOTS totaled $405,000, after deducting $109,000 in fees which are payable to a former joint venture partner. For the period following the adoption of the liquidation basis of accounting, fee income from LOTS, net of the partner s share, was $305,000. In addition to investment income and fee income, the Company also reported a significant increase in profits earned on a now terminated joint venture. Profits from the venture totaled $243,000 from March 25, 1998 to the end of the year. Since these profits are based on the claims experience of several blocks of insurance business, the level of profits earned in 1998 is not indicative of amounts which may be earned over the next several years. Operating expenses for the period from March 25 to December 31 were $1.6 million, which included $366,000 in salaries and related benefits, $355,000 in accounting, legal and other professional fees and $243,000 in rent and related costs associated with the Company s home office building. In addition, the Company reported a $250,000 charge in 1998 to reflect a reduction in the estimated net realizable value of the office building. During 1998, 36 of the 42 people employed by the Company as of December 31, 1997 were terminated, and during the first quarter of 1999, two of the remaining six people became part- time employees. The reduction in expenses and the elimination of the underwriting losses the Company had been experiencing on its credit insurance business prior to its sale are the major reasons for the improved results in 1998 compared to the previous two years. In addition to the reduction in net assets in liquidation caused by the $202,000 excess of expenses over revenues, net assets for the period from March 25, 1998 to December 31, 1998 declined by an additional $1.1 million as a result of other factors which are discussed below under Capital Resources. ESTIMATED NET EXPENSES DURING LIQUIDATION PERIOD As indicated above, the liquidation of the Company is expected to continue for approximately four more years until all fee payments and other potential distributions are received from LOTS. During this period, certain corporate expenses will continue to be incurred and investment income will continue to earn on existing invested funds. The Board of Directors may determine during this period that the amount of funds available for ultimate distribution to shareholders may be increased by transferring all of the Company s remaining net assets into a liquidating trust, in which case the trustees of such trust would be responsible for liquidating all remaining assets, paying all liabilities and making any distributions to the preferred and common shareholders. Based on current estimates, which exclude the potential savings, if any, from the use of a liquidating trust, the Company believes that its future operating expenses and other costs, including preferred stock dividends, will exceed fee income and other revenues during the liquidation period by approximately $100,000 to $200,000. Actual income and expenses could vary significantly from the present estimates due to uncertainties as to when certain assets will be liquidated, when the preferred stock will be redeemed, the level of actual expenses which will be incurred and the ultimate resolution of various contingencies which may arise. FINANCIAL CONDITION A discussion of the important elements affecting the Company s net assets in liquidation at December 31, 1998 and its financial position at December 31, 1997 is presented below. INVESTED ASSETS The Company s investments decreased from $41 million at the end of 1997 to $4.5 million at December 31, 1998. The transfer of more than $35 million to LOTS and its financial partner in connection with the sale of the Company s credit insurance business accounted for virtually all of the decline in invested assets. Invested assets at December 31, 1998 consist of (i) U.S. Treasury Notes (owned by the Company s insurance subsidiaries) which are on deposit with numerous state insurance departments in connection with licensing requirements, (ii) three mortgage loans secured by commercial real estate, including one loan granted to the co-owner of the Company s home office building and secured by the co-owner s one-half interest in the building, (iii) short-term investments, principally money market funds and (iv) other invested assets, most of which were liquidated in early 1999 at amounts equal to their carrying value. The Company is attempting to sell its home office building, which has a carrying value at the end of 1998 of approximately $1 million and is classified with Property and Equipment. The Company s only other real estate, a warehouse with a carrying value of $187,000, is classified with Other Real Estate since this property is also for sale. LIQUIDITY The Company s subsidiaries have historically met most of their cash requirements from funds generated from operations, while the Company has generally relied on its principal operating subsidiaries to provide it with sufficient cash funds to maintain an adequate liquidity position. As a result of the Company s decision to sell its remaining operations, liquidate all of its net assets and distribute cash to its shareholders, the Company s principal sources of cash funds are the fee income from LOTS, investment income on existing assets and proceeds from the sale of non-liquid assets. These funds must be used to settle all remaining liabilities as they become due, to pay operating expenses until the Company is dissolved and to pay dividends to preferred shareholders until the Company s preferred stock is redeemed. The adequacy of the Company s liquidity position in the future will be principally dependent on its ability to sell its real estate investments and other non- liquid assets and the timing of such sales, as well as on the level of operating expenses the Company must incur during the liquidation period. CAPITAL RESOURCES Given its plans to liquidate and eventually dissolve, the Company has made no commitments for capital expenditures and does not intend to make any such commitments in the future. The Company s net assets in liquidation declined by $1.3 million from March 25, 1998 to December 31, 1998. The reduction is attributable to (i) the establishment of a $664,000 liability relating to the Company s under funded pension plan, (ii) the write-off of $472,000 in deferred tax assets, (iii) preferred stock dividends of $307,000 and (iv) a $175,000 charge to increase the carrying value of the preferred stock to redemption value (prior to adoption of the liquidation basis of accounting, the difference between the fair value and the redemption value of the stock was being reduced by periodic accretions which were charged to retained earnings). These decreases were partially offset by the excess of income over expenses (on a pre-tax basis). The reductions listed in (ii) and (iv) above are non-recurring, while the preferred stock dividends in (iii) are expected to continue until the preferred shares are redeemed. The amount of the ultimate pension liability, and consequently the need for any further increase or decrease in the liability, is dependent on a number of factors, the most important of which is the prescribed interest rate which is in effect at the time the plan is terminated. INFLATION Because of the Company s current plans to liquidate its assets, pay all of its liabilities, distribute any remaining cash to its shareholders and ultimately dissolve within the next four years, the effects of inflation on the Company are minimal. YEAR 2000 COMPLIANCE Because the Company is no longer conducting any business operations and is in the process of liquidating its remaining assets, it is therefore relying, both directly and indirectly, on fewer computer systems than in the past to maintain all of its financial and other records and to file all required financial reports with state insurance departments and other regulators. In fulfilling its continuing, although limited, responsibilities, the Company directly utilizes only two computer systems, one for its general ledger accounting and one for maintenance of its shareholder records (since the Company continues to perform its own stock transfer agent functions). The Company has received written assurances from both software vendors that their respective systems have been tested and will operate problem free during and after the year 2000. The Company also receives certain computer generated information from LOTS, and has obtained a year 2000 certification from LOTS stating that all of its hardware and software systems have been tested and are year 2000 compliant. Based on the above, management does not believe that its very limited operations will be adversely impacted by year 2000 computer problems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The requirements for certain market risk disclosures are not applicable to the Company because, at December 31, 1998, the Company qualifies as a small business issuer under Regulation S-B of the Federal Securities Laws. A small business issuer is defined as any United States or Canadian issuer with revenues or public float of less than $25 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Company is responsible for the preparation, integrity and objectivity of the financial information contained in this Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Such statements include informed estimates and judgements of management for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Financial information presented in this annual report is consistent with that in the financial statements. Accounting procedures and related systems of internal control have been established to provide reasonable assurance that the books and records reflect the transactions of the Company and that established policies and procedures are properly implemented by qualified personnel. Such systems are evaluated regularly to determine their effectiveness. The consolidated financial statements for the years ended December 31, 1998, 1997 and 1996 have been audited by Arthur Andersen LLP, independent auditors. Such audits were conducted in accordance with generally accepted auditing standards, and include a review and evaluation of our internal accounting control structure, tests of the accounting records and other 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 Senior Vice President and and President Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Consumers Financial Corporation We have audited the accompanying balance sheet of Consumers Financial Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 1997, the related statements of operations, shareholders equity and cash flows for each of the two years in the period then ended and the statements of operations, shareholders equity and cash flows for the period from January 1, 1998 to March 24, 1998. In addition, we have audited the statement of net assets in liquidation as of December 31, 1998, and the related statement of changes in net assets in liquidation for the period from March 25, 1998 to December 31, 1998. These financial statements and the schedules referred to below are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 4 to the financial statements, the shareholders of Consumers Financial Corporation approved a plan of liquidation on March 24, 1998, and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for periods subsequent to March 24, 1998 from the going-concern basis to the liquidation basis. Accordingly, the carrying value of the remaining assets as of December 31, 1998, are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Financial Corporation as of December 31, 1997, the results of its operations and its cash flows for each of the two years in the period then ended and for the period from January 1, 1998 to March 24, 1998, its net assets in liquidation as of December 31, 1998, and the changes in its net assets in liquidation for the period from March 25, 1998 to December 31, 1998, in conformity with generally accepted accounting principles applied on the bases described in the preceding paragraph. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statement schedules at Item 14(a) are presented for purposes of complying with the Securities and Exchange Commission s rules and are not part of the basic financial statements. The amounts included in these schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 16, 1999 CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION DECEMBER 31, 1998
(dollar amount in thousands) Assets Investments: Fixed maturities $1,043 Mortgage loans on real estate 1,600 Other invested assets 75 Short-term investments 1,732 Total investments 4,450 Cash 172 Accrued investment income 36 Receivables 21,590 Prepaid reinsurance premiums 34,840 Deferred policy acquisition costs 50 Property and equipment 1,018 Other real estate 187 Other assets 345 Total assets 62,688 Liabilities Future policy benefits 17,645 Unearned premiums 35,163 Other policy claims and benefits payable 2,882 Other liabilities 1,800 57,490 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued and outstanding 481,461 shares 4,815 Total liabilities and redeemable preferred stock 62,305 Net assets in liquidation $383
See notes to consolidated financial statements. CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION For the period from March 25, 1998 to December 31, 1998 (in thousands) Revenues: Earned premiums $521 Net investment income 487 Fees from sale of customer accounts 305 Joint venture fees 243 Net realized investment gains 160 Gain on disposal of discontinued business 84 Miscellaneous 270 2,070 Benefits and expenses: Policyholder benefits 177 Rent and related costs 243 Salaries, wages and employee benefits 366 Professional fees 355 Taxes, licenses and fees 142 Loss on sale of other assets 286 Miscellaneous 176 1,745 Income before income tax expense 325 Income tax expense (527) Liability for underfunded pension plan (664) Decrease in unrealized appreciation of debt securities (32) Preferred stock dividends (307) Adjustment of preferred stock to redemption value (175) Retirement of treasury shares-preferred 57 Purchase of treasury shares-common (9) Decrease in net assets for the period (1,332) Net assets at beginning of period 1,715 Net assets at December 31, 1998 $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED BALANCE SHEET For the period front March 24, 1998 through December 31, 1998 (dollar amounts in thousands) (Unaudited) 1997 ASSETS Investments: Fixed maturities $4,076 $5,857 Mortgage loans on real estate 1,887 2,086 Other invested assets 261 295 Short-term investments 31,964 32,763 Total investments 38,188 41,001 Cash 289 641 Accrued investment income 188 268 Receivables 23,880 16,639 Prepaid reinsurance premiums 37,981 9,572 Deferred policy acquisition costs 25 13,570 Property and equipment 1,320 1,350 Other real estate 780 783 Other assets 731 1,211 $103,382 $85,035 LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY Liabilities: Future policy benefits $17,649 $21,467 Unearned premiums 38,918 49,994 Other policy claims and benefits payable 4,047 2,539 Due to reinsurer on sale of credit insurance business 34,719 Other liabilities 1,664 4,556 Income taxes: Current 415 430 Deferred (442) (445) Total liabilities 96,970 78,541 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 issued 514,261 shares; outstanding 481,461 shares; redemption amount $4,815; net of treasury stock of $271 4,697 4,688 Shareholders equity: Common stock, $.01 stated value, authorized 10,000,000 shares; issued 3,019,110 shares; outstanding 1998, 2,595,617 shares; 1997, 2,596,155 shares 30 30 Capital in excess of stated value 7,989 7,989 Net unrealized appreciation of debt securities, net of income 58 54 Deficit (4,891) (4,796) Treasury stock (1,471) (1,471) Total shareholders equity 1,715 1,806 $103,382 $85,035
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF OPERATIONS For the period January 1, 1998 Years ended December 31, (in thousands, except per share amounts) March 24, 1998 1997 1996 Revenues: Premiums written ($4) ($37) $353 Decrease in unearned premiums 87 393 64 Premium income 83 356 417 Net investment income 60 63 59 Realized investment gains (losses) 24 (176) (69) Fees and other income 181 190 35 Total revenues 348 433 442 Benefits and expenses: Death and other benefits 83 460 581 Amortization of deferred policy 10 12 Operating expenses 368 1,639 2,118 Total benefits and expenses 451 2,109 2,711 Loss from continuing operations before tax benefit (103) (1,676) (2,269) Income tax benefit (15) (235) (532) Loss from continuing operations (88) (1,441) (1,737) Discontinued operations: Loss from operations of discontinued businesses (net of income taxes) (825) (382) Gain (loss) on disposal of discontinued businesses (net of income taxes) 112 (4,094) 885 112 (4,919) Net income (loss) $24 ($6,360) ($1,234) Basic and diluted income (loss) per common Loss from continuing operations ($0.08) ($0.73) ($0.83) Discontinued operations 0.04 (1.89) 0.19 Net loss ($0.04) ($2.62) ($0.64) Weighted average number of shares 2,596 2,601 2,614
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Capital Accumulated other excess comprehensive income Retained Common stock stated Fixed Equity earnings (dollar amounts in thousands) Shares Amount value maturities securities (deficit) BALANCE, JANUARY 1, 1996 3,031 $30 $8,016 $674 $31 $3,688 Net loss for the year (1,234) Change in net unrealized appreciation for the (609) (26) Total comprehensive income (loss) (409) Preferred stock dividends Accretion of difference between fair value and (36) mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares (10) (50) 2,009 BALANCE, DECEMBER 31, 1996 3,021 30 7,966 65 5 Net loss for the year (6,360) Change in net unrealized appreciation for the (11) (5) Total comprehensive income (loss) (409) Preferred stock dividends Accretion of difference between fair value and (36) mandatory redemption value of preferred stock Purchase of treasury shares Retirement of treasury shares-common (2) (10) Retirement of treasury shares-preferred 33 BALANCE, DECEMBER 31, 1997 3,019 30 7,989 54 0 (4,796) Net income for the period 24 Change in net unrealized appreciation for the 4 Total comprehensive income Preferred stock dividends (109) Accretion of difference between fair value and (10) mandatory redemption value of preferred stock ($4,891 BALANCE, MARCH 24, 1998 3,019 $30 $798 $58 $0
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Treasury stock Total (dollar amounts in thousands) Shares Amount amount BALANCE, JANUARY 1, 1996 410 ($1,425 $11,01 Net loss for the year (1,234 Change in net unrealized (635) Total comprehensive income (loss) (1,869 Preferred stock dividends (409) Accretion of difference between fair value and mandatory redemption value of preferred stock (36) Purchase of treasury shares (10) (50) (50) Retirement of treasury shares 10 50 BALANCE, DECEMBER 31, 1996 (410 (1,425) 8,650 Net loss for the year (6,360 Change in net unrealized (16) Total comprehensive income (loss) (6,376 Preferred stock dividends (409) Accretion of difference between fair value and mandatory redemption value of preferred stock (36) Purchase of treasury shares (15) (56) (56) Retirement of treasury shares- 2 10 Retirement of treasury shares- 33 (423) BALANCE, DECEMBER 31, 1997 (1,471) 1,806 Net income for the period 24 Change in net unrealized 4 Total comprehensive income 28 Preferred stock dividends (109) Accretion of difference between fair value and (10) mandatory redemption value of preferred stock BALANCE, MARCH 24, 1998 (423 ($1,471 $1,715 CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES (IN PROCESS OF LIQUIDATION) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period January 1, 1998 Years ended December 31, (in thousands) March 24, 1998 1997 Cash flows from operating activities: Net income (loss) $24 ($6,360) ($1,234) Adjustments to reconcile net loss to cash provided by (used in) operating Provision for permanent decline in investments 158 50 Deferred policy acquisition costs (9,771) (8,987) Amortization of deferred policy 12,615 11,964 Provision for permanent decline in Other amortization and depreciation 24 483 433 Change in future policy benefits (2,696) 454 Change in unearned premiums (6,183) (1,765) Change in amounts due reinsurers (142) (1,226) 2 Income taxes (15) (1,601) (22) Change in prepaid reinsurance premiums 7,765 1,266 Change in receivables 1,497 4,618 3,455 Change in other liabilities (376) 415 (695) Other (434) 186 (88) Total adjustments 554 5,705 6,067 Net cash provided by (used in) operating 578 (655) 4,833 Cash flows from investing activities: Purchase of investments (3) (39,231) (13,140) Maturity of investments 1,000 2,195 6,484 Sale of investments 1,829 46,424 6,598 Net assets transferred in sale of insurance (3,647) (8,175) Purchase of property and equipment (24) Net cash provided by (used in) investing (821) 1,213 (82) Cash flows from financing activities: Principal payments on debt (2,537) Receipts from universal life and investment 4,775 Withdrawals on universal life and investment (6,425) Purchase of treasury stock, including 8 1/2% redeemable preferred stock (64) (50) Cash dividends to shareholders (109) (409) (409) Net cash used in financing activities (109) (473) (4,646) Net increase (decrease) in cash (352) 85 105 Cash at beginning of year 641 556 451 Cash at end of period $289 $641 $556 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $255 Income taxes $111 $90 $154
See notes to consolidated financial statements CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. COMPANY OVERVIEW The operating losses incurred by the Company over the past five years have significantly reduced its net worth and its liquidity position. As a result, in late 1997, the Company signed an agreement to sell its core credit insurance and related products business, which had been its only remaining business operation, following the sales in 1994 and 1997 of all of its universal life insurance business and the 1996 sale of its auto auction business. Settlement on the sale of the credit insurance business took place in May 1998. The Company s income or loss from operations now consists principally of (i) earned premium and related costs associated with a small, closed block of extended service contract business, (ii) fee revenues received from Life of the South Corporation, a Georgia-based financial services holding company which acquired the Company s credit insurance business and its credit insurance accounts (LOTS), (iii) investment income on remaining assets and (iv) corporate expenses. On March 24, 1998, the Company s shareholders approved a plan of liquidation and dissolution (the Plan of Liquidation and Dissolution) pursuant to which the Company intends to liquidate its remaining assets, provide for all of its liabilities, redeem its preferred stock and distribute any remaining cash to its common shareholders. (see Note 4.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of Consumers Financial Corporation (the Company) and its wholly-owned subsidiaries, the most significant of which is Consumers Life Insurance Company (Consumers Life). Investors Fidelity Life Assurance Corp. (IFLAC) is a subsidiary of Consumers Life. All material intercompany accounts and transactions have been eliminated. Liquidation basis of accounting The financial statements have been prepared on the basis of generally accepted accounting principles (GAAP) which, as to the life insurance company subsidiaries, vary from reporting practices prescribed or permitted by regulatory authorities. As a result of the approval of the Plan of Liquidation and Dissolution referred to above and discussed in Note 4, the Company adopted a liquidation basis of accounting for the period subsequent to March 24, 1998. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilites are stated at their anticipated settlement amounts. Amounts determined in accordance with the liquidation basis of accounting do not significantly differ from the accounting policies discussed below. Prior to March 25, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entitites, as discussed below. Certain prior year amounts have been reclassified to conform with classifications used for 1998. Investments Fixed maturities includes bonds, notes and certificates of deposit maturing after one year. Management determines the appropriate classification of bonds and notes at the time of purchase and reevaluates such designation as of each balance sheet date. These securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. All other bonds and notes are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of shareholders equity. The amortized cost of fixed maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. All certificates of deposits maturing after one year are deemed to be held to maturity. Mortgage loans on real estate are carried at the unpaid principal balance. 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. Mortgage loans: The fair values for mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Deferred policy acquisition costs Prior to the discontinuation of its insurance operations, the Company deferred the costs of acquiring new insurance business. The costs deferred consisted principally of commissions, certain sales salaries and other expenses that varied with and were primarily related to the production of new business. Acquisition costs relating to single premium credit insurance were amortized so as to charge each year's operations in direct proportion to premiums earned. Deferred policy acquisition costs were expensed when such costs were deemed not to be recoverable from future earned premiums and investment income or, when applicable, from the estimated proceeds to be received from the sale of the related insurance business. Property and equipment and depreciation Property and equipment are stated at cost. Depreciation is being provided on the straight-line method over the estimated useful lives of the assets. Other real estate Real estate is carried at the lower of cost or fair value, less estimated selling costs. Future policy benefits The liability for future policy benefits for individual life insurance has been provided on a net level premium method based on estimated investment yields, withdrawals, mortality and other assumptions which were appropriate at the time the policies were issued. Such estimates were based upon industry data and the Companies' past experience, as adjusted to provide for possible adverse deviation from the estimates. Benefit reserves for universal life products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Unearned premiums Unearned premiums for credit life and disability insurance contracts have been computed based upon the original and remaining term of the related policies as follows: decreasing term credit life on the Rule of 78's method, level term credit life using the Pro Rata method and credit disability using a 65% - 35% weighted average of the Rule of 78's and Pro Rata methods. Income taxes The Company and its subsidiaries provide income taxes, for financial reporting purposes, on the basis of the liability method as required by Statement of Financial Accounting Standards No. 109. Earnings per share Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. New accounting standards Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS 130 is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income (loss) is the total of net income (loss) and all other nonowner changes in equity. Accordingly, the Company has reported comprehensive income (loss) in the Consolidated Statements of Shareholders Equity. In 1998, the Company adopted Statement of Financial Accounting Standards No. 132, Employers Disclosures about Pensions and Other postretirement Benefits (SFAS 132). As required by SFAS 132, the Company has provided certain additional disclosures relating to the benefit obligation and the assets of its pension plan. Similar disclosures were also provided for 1997. 3. BASIS OF FINANCIAL STATEMENTS The more significant GAAP applied in the preparation of the financial statements that differ from life insurance statutory accounting practices prescribed or permitted by regulatory authorities (which are primarily designed to demonstrate solvency) are as follows: (a) In accordance with NAIC requirements, all bonds eligible for amortization are reported at amortized value, whereas in the accompanying financial statements, only bonds which are classified as held-to-maturity securities are stated at amortized cost, and available-for-sale securities are carried at fair value. Other securities are carried at values prescribed by or deemed acceptable to the NAIC. (b) Costs of acquiring new business are deferred and amortized rather than being charged to operations as incurred. (c) The liability for future policy benefits and expenses on individual life insurance is based on conservative estimates of expected mortality, morbidity, interest, withdrawals, and future maintenance and settlement expenses, rather than on statutory rates for mortality and interest. For credit life insurance, the liability is based upon the unearned premium reserve, computed as described in Note 2, rather than on statutory rates for mortality and interest. The credit disability policy liability, principally the unearned premium reserve, is calculated as described in Note 2, while the statutory liability is computed using predominantly the average of the Rule of 78's and Pro Rata methods. (d) Deferred income taxes, if applicable, are provided as described in Note 15. (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. 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. Under Delaware insurance laws, distributions are subject to further restrictions relating to capital and surplus and operating earnings. Accordingly, under normal circumstances, at December 31, 1998, approximately $2 million of Consumers Life's net assets cannot generally be transferred to the parent company and $682,000 is available for transfer during 1999. However, because of its prior operating losses and its current capital and surplus position, the Company is not permitted to pay any dividends without prior approval from the Delaware Insurance Department. Also, any loans or advances to the 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 only if the subsidiary's statutory capital and surplus exceeds $3 million. The reported statutory capital and surplus of Consumers Life was $5.0 million at December 31, 1998 and $5.7 million at December 31, 1997. Consumers Life and IFLAC reported combined statutory net income of $281,000 in 1998 and a $2.7 million combined statutory net loss in 1997. Insurance laws require Consumers Life and IFLAC to deposit certain amounts with various state insurance departments for the benefit and protection of policyholders. The approximate carrying amounts of such deposits at December 31, 1998 and 1997 were $1.1 million and $1.9 million, respectively. 4. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION On December 30, 1997, the Company entered into an agreement with LOTS, pursuant to which the Company (i) sold its credit insurance and fee income accounts to LOTS effective October 1, 1997, (ii) sold its September 30, 1997 inforce block of credit insurance business to American Republic Insurance Company (American Republic), LOTS financial partner in the transaction, effective January 1, 1998 and (iii) sold one of its wholly-owned reinsurance subsidiaries to LOTS as of August 31, 1998. LOTS and the Company also agreed that, with respect to Consumers Life, new credit insurance business produced by that subsidiary s former customer accounts, which were transferred to LOTS, would continue to be written on the policy or certificate forms of the subsidiary until September 30, 1999, or an earlier date which may be agreed to by the parties. This premium and the related insurance risk are also being reinsured 100% to American Republic. The sale of the inforce block of business referred to in (ii) above was completed on May 13, 1998 after the required approvals of the Company s preferred and common shareholders and state insurance regulators in the states of Delaware and Ohio were received. Settlement on the sale of the reinsurance subsidiary referred to in (iii) above occurred on September 28, 1998, following the approval in late August of the insurance regulators in the state of Arizona. The sale of the inforce block of business resulted in an after-tax loss of approximately $3,705,000, of which $3,919,000 was reflected in the Company s fourth quarter 1997 financial statements through a write-down of deferred policy acquisition costs. The 1997 loss included an $819,000 loss from operations from September 30, 1997 (the measurement date) to December 31, 1997. An offsetting gain on disposal of $214,000, which results from adjustments to certain estimates made in 1997, has been included in the Company s 1998 financial statements. As a result of the sale of the Company s credit insurance and related operations to LOTS, in the accompanying financial statements, the operating results of the credit insurance and related fee income business have been reported as discontinued operations for all periods presented. In addition to approving the sale of the inforce credit insurance business, at the Special Meeting of Shareholders held on March 24, 1998, the Company s shareholders also approved a Plan of Liquidation and Dissolution, pursuant to which the Company intends to liquidate its remaining assets, provide for all of its liabilities, redeem its preferred stock and distribute any remaining cash to its common shareholders. Pursuant to the terms of its agreement with LOTS, the Company is receiving payments from LOTS over a five- year period based on the amount of credit insurance premiums produced by the customer accounts sold by the Company to LOTS. The Company may also receive a payment from a contingency fund established by the parties based on the claims experience on the inforce credit insurance business from October 1, 1997 to September 30, 2002. Because of these future payments and potential future payments, the distribution, if any, to the Company s common shareholders will not be made until late in 2002, when all amounts due from LOTS have been received. The Company has made substantial reductions in its number of employees during the past several years as a result of the discontinuation of its various businesses. As of March 31, 1999, four people will be employed on a full-time basis by the Company. During the liquidation period, the Company intends to outsource most of the functions which will continue to be required. A summary of the results of operations of the discontinued segments is presented below: For the period from January 1, 1998 to March 24, 1998 Individual Credit Life Auto (in thousands) Insurance Insurance Auction Total Revenues (before reinsurance ceded) $4,127 $158 $4,285 Gain from operations before income taxes Income taxes Gain from operations Gain on disposal before income taxes $112 $112 Income taxes Gain on disposal 112 112 Gain from discontinued operations $112 $112 Year ended December 31, 1997 Individual Credit Life Auto (in thousands) Insurance Insurance Auction Total Revenues (before reinsurance ceded) $29,712 $1,892 (a) $6 $31,610 Loss from operations before income tax ($1,457) ($1,457) Income tax benefit (632) (632) Loss from operations (825) (825) Loss on disposal before income tax benefit (4,061) ($253) ($22) (4,336) Income tax benefit (142) (86) (14) (242) Loss on disposal (3,919) (167) (8) (4,094) Loss from discontinued operations ($4,744) ($167) ($8) ($4,919) Year ended December 31, 1996 Individual Credit Life Auto (in thousands) Insurance Insurance Auction Total Revenues (before reinsurance ceded) $33,315 $4,349 (a) $2,688 $40,352 Income (loss) from operations before income tax expense (benefit) ($1,266) $393 $554 ($319) Income tax expense (benefit) (297) 134 226 63 Income (loss) from operations (969) 259 328 (382) Gain (loss) on disposal before income 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 ($969) ($655) $2,127 $503
(a) Includes renewal premiums which are 100% ceded under indemnity reinsurance agreement with third party reinsurer. 5. INVESTMENTS AND INVESTMENT INCOME Investments, which are valued for financial statement purposes as described in Note 1, consist of the following at December 31, 1998: Quoted or Balance Amortized estimated sheet (in thousands) cost fair value amount Fixed maturities: Bonds-United States government and government $967 $993 $993 agencies and authorities Certificates of deposit 50 50 50 Total fixed maturities 1,017 1,043 1,043 Mortgage loans on real estate 1,600 1,600 1,600 Other invested assets 75 75 75 Short-term investments 1,732 1,732 1,732 Total investments $4,424 $4,450 $4,450
A portion of the Company's invested funds is restricted as to use in that deposits are required with various state insurance departments for the benefit and protection of policyholders (see Note 3). At December 31, 1998, one mortgage loan with a balance of $295,360 was non-performing. Interest on this loan of $13,383 was excluded from investment income in 1998 due to its non-accrual status. At December 31, 1997, no mortgage loans or other loans were considered to be non-performing loans. At December 31, 1998, all three of the Company's investments in mortgage loans were secured by commercial real estate located in Central Pennsylvania. Such investments consist of first mortgage liens on completed income-producing properties. Each of the loans exceeded 10% of the Company s net assets in liquidation at December 31, 1998, while two mortgage loans exceeded 10% of shareholders equity at December 31, 1997. The Company s mortgage loan valuation reserve at December 31, 1997 was $50,000. At December 31, 1998 and 1997, 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 end of 1998 and 1997 totaled $27,000 and $56,000, respectively. Net investment income is applicable to the following investments: Years ended December 31, (in thousands) 1998 1997 1996 Interest: Fixed maturities $175 $1,934 $2,364 Mortgage loans 139 189 421 Policy loans 33 Short-term investments 733 486 265 Real estate 157 Other 82 17 1,047 2,691 3,257 Investment expenses (85) (675) (680) Total net investment income 962 2,016 2,577 Less investment income for period subsequent to adoption of liquidation basis of accounting 487 Net investment income for period prior to adoption of liquidation basis of accounting 475 2,016 2,577 Less net investment income attributable to discontinued operations 415 1,953 2,518 Net investment income attributable to continuing operations $60 $63 $59
The amortized cost and estimated fair values of investments in debt securities at December 31, 1998 and 1997 are as follows: 1998 Gross Gross Estimated Available for sale Amortized unrealized unrealized fair (In thousands) cost gains losses value U.S. Treasury securities and obligations of U.S. government corporations and agencies $967 $26 $993 Totals $967 $26 $993 1997 Gross Gross Estimate Available for sale Amortized unrealized unrealized fair (In thousands) cost gains losses value U.S. Treasury securities and obligations of U.S. government corporations and agencies $4,365 $81 $2 $4,444 Corporate securities 373 1 374 Mortgage-backed securities 887 7 5 889 Totals $5,625 $89 $7 $5,707
The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated (in thousands) cost fair value Due in 1999 $652 $661 Due in 2000-2004 315 332 Totals $967 $993
Proceeds from the sales of investments in debt securities during 1998 were $3.7 million. Gross gains of $58,000 and gross losses of $6,000 were realized on those sales. Proceeds from such sales in 1997 were $48 million. Gross gains of $446,000 and gross losses of $247,000 were realized on those sales. Proceeds from sales in 1996 were $4.1 million. Gross gains of $6,000 and gross losses of $20,000 were realized on those sales. Realized investment gains (losses) are applicable to the following investments: Years ended December 31, (in thousands) 1998 1997 1996 Fixed maturities $146 $249 ($14) Other invested assets 38 (219) (55) 184 30 (69) Less realized investment gains for period subsequent to adoption of liquidation basis of accounting 160 Realized investment gains (losses) for period prior to adoption 24 30 (69) of liquidation basis of accounting Less realized investment gains attributable to discontinued operations 206 Realized investment gains (losses) attributable to continuing operations $24 ($176) ($69)
6. RECEIVABLES December 31, (in thousands) 1998 1997 Amounts due from agents $1,902 Reinsurance recoverable $20,488 13,271 Federal income tax refund 520 524 Other 582 1,378 21,590 17,075 Less allowance for uncollectible accounts (436) Balance $21,590 $16,639
7. DEFERRED POLICY ACQUISITION COSTS Individual (in thousands) Credit Life Total Balance, January 1, 1996 17,642 4,284 21,926 Costs deferred 8,905 82 8,987 Amortization (10,133) (446) (10,579) Write-off attributable to 1997 sale of inforce universal life insurance business (1,385) (1,385) Balance, December 31, 1996 16,414 2,535 18,949 Costs deferred 9,771 9,771 Amortization (9,515) (9,515) Write-off attributable to sale of inforce universal life insurance business (2,535) (2,535) Write-off attributable to 1998 sale of inforce credit insurance business (3,100) (3,100) Balance, December 31, 1997 13,570 0 13,570 Costs deferred 133 133 Amortization (25) (83) (108) Write-off attributable to sale of inforce credit insurance business (13,545) (13,545) Balance, December 31, 1998 $0 $50 $50
8. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE
December 31, (in thousands) 1998 1997 Property and equipment: Data processing equipment and software $122 $2,062 Furniture and equipment 198 1,071 Home office building, including 1,563 1,788 1,883 4,921 Less accumulated depreciation (865) (3,571) Balance $1,018 $1,350
December 31, (in thousands) 1998 1997 Other real estate: Commercial office building $625 Warehouse $214 214 839 Less accumulated depreciation (27) (56) Balance $187 $783
All of the Company s real estate is classified as non-investment real estate since these properties are listed for sale. 9. POLICY LIABILITIES The composition of future policy benefits and unearned premiums at December 31, 1998 and the assumptions pertinent thereto are as follows: Life Future Interest insurance policy Unearned rates: years (in thousands) in force benefits premiums of issue Individual life $145,635 $9,354 4 1/2% - 11 1961 - 1992 Credit life 922,555 $13,874 (a) 1987 - 1998 Credit disability 8,291 21,289 (a) 1987-1998 Balance $1,068,190 $17,645 $35,163
(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 $684,000 at December 31, 1998. Future policy benefits and unearned premiums do not include any deduction for reinsurance ceded to other companies. At December 31, 1998, all but $39,000 of the Company s future policy benefits liability and all but $323,000 of its unearned premiums liability were reinsured to other insurers in connection with the discontinuation of the Company s insurance operations. At December 31, 1997, significant portions of the Company s policy liabilities were also reinsured to other insurers. Future policy benefits and unearned premiums related to such reinsurance are classified with Receivables and Prepaid Reinsurance Premiums, respectively, as shown in the following table.
December 31, (in thousands) 1998 1997 Future Policy Benefits and Other Policy Claims and Benefits $ 20,527 $ 24,006 Payable Reinsurance Recoverable 20,488 13,271 Net liability $ 39 $ 10,735 Unearned Premiums $ 35,163 $ 49,994 Prepaid Reinsurance Premiums 34,840 9,572 Net liability $ 323 $ 40,422
Life insurance in force net of reinsurance ceded was $58,000 at December 31, 1998. 10. REINSURANCE Prior to the 1998 sale of its credit insurance business, as discussed in Note 4, and the sales of its individual life insurance business in 1992 through 1997, the Company routinely ceded and, in some instances, assumed reinsurance. The sale of the credit insurance business of Consumers Life was completed pursuant to an indemnity reinsurance agreement with American Republic, while IFLAC s credit insurance was ceded utilizing an assumption reinsurance agreement. Similarly, the reinsurance transactions through which the Company sold its individual life insurance business included the use of both indemnity and assumption agreements. The insurance companies remain contingently liable for insurance risks ceded under indemnity agreements, while such risks are legally transferred to the reinsurer when assumption agreements are utilized. Historically, the insurance companies also entered into various financing- type reinsurance agreements with unaffiliated reinsurers. Such agreements, which primarily involved credit insurance, were designed to minimize the reduction of statutory capital and surplus arising at the time premiums were written. These financing-type agreements were terminated as of January 1, 1998 when the American Republic agreements became effective. During 1998, Consumers Life entered into another financing-type reinsurance agreement in which it assumed approximately $2 million in individual life insurance premiums and an equal amount of policy liabilities. The effects of all financing-type agreements have been removed from the financial statements except for the cost of the financing, which amounted to $25,000, $660,000 and $608,000 in 1998, 1997 and 1996, respectively. These costs are included with Operating Expenses on the Consolidated Statements of Operations and are presented with Miscellaneous Expenses on the Consolidated Statement of Changes in Net Assets in Liquidation. Excluding premiums reinsured under financing-type agreements, premiums ceded to other companies were $17.7 million, $4.9 million and $12.4 million in 1998, 1997 and 1996, respectively. Incurred benefits and losses reinsured in 1998 were $16.4 million compared to $6.8 million in 1997 and $10 million in 1996. These amounts have been deducted in arriving at Death and Other Benefits in the Consolidated Statements of Operations and in computing Policyholder Benefits in the Statement of Changes in Net Assets in Liquidation. However, Future Policy Benefits and Unearned Premiums at December 31, 1998 and 1997 do not include any deduction for reinsurance ceded. Instead, the amounts related to such reinsurance are classified with Receivables and Prepaid Reinsurance Premiums (see Note 9). 11. 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. The profit sharing plans, which include an employee stock ownership plan, provide for annual contributions in amounts to be determined by the Board of Directors. Such contributions are based upon the annual compensation of each employee; however, no Company contributions were made in either 1998, 1997 or 1996. The funded status of the plan is as follows:
December 31, (in thousands) 1998 1997 Actuarial present value of: Vested benefit obligation $3,121 $2,891 Accumulated benefit obligation $3,121 $2,891 Actuarial present value of projected benefit obligation $3,121 $2,891 Plan assets at fair value 2,457 2,694 Projected benefit obligation in excess of plan (664) (197) assets Unrecognized net loss arising from difference between 831 472 actual experience and assumed experience Unrecognized net liability at transition 49 61 Unrecognized prior service cost (117) (126) Unamortized prior year loss (763) (407) Accrued pension cost ($664) ($197)
Reconciliations of beginning and ending balances of the Plan's projected benefit obligation and its assets are presented below.
December 31, (in thousands) 1998 1997 Projected benefit obligation, beginning of year $2,891 $3,016 Increase due to changes in assumptions 529 Benefits to participants (502) (372) Interest cost 203 213 Other experience gains 34 Projected benefit obligation, end of year $3,121 $2,891
December 31, (in thousands) 1998 1997 Fair value of Plan assets, beginning of year $2,694 $2,781 Employer contributions 100 107 Investment income 175 189 Benefits to participants (502) (372) Administrative expenses (10) (11) Fair value of Plan assets, end of year $2,457 $2,694
Net periodic pension cost is computed below: (in thousands) 1998 1997 1996 Net periodic pension cost included in the following components: Service cost during the period $139 Interest cost on projected benefit $203 $212 213 obligation Actual return on plan assets (161) (175) (175) Net amortization and deferral 171 37 2 Net periodic pension cost $213 $74 $179
Rates used in determining pension expense and related obligations were:
1998 1997 1996 Discount rate (pre-retirement period) 6.50% 7.50% 7.50% Discount rate (post-retirement period) 6.00% 7.50% 7.50% Annual rate of return on plan assets 6.50% 7.50% 7.50% Annual rate of increase in compensation N/A N/A 3.00%
12. COMMITMENTS AND CONTINGENCIES Rental expense in 1998, 1997 and 1996 was approximately $245,000, $345,000 and $351,000, 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 portion of the building it does not own, but at monthly rent of $17,000 through July 1999, although the Company has subleased a portion of the office space which it does not otherwise occupy. Income from these sub-leases totaled $87,000 in 1998, $57,000 in 1997 and $98,000 in 1996. The building lease is classified as an operating lease. The Company has no other significant leases. In connection with the cancellation in 1996 of a joint venture agreement in which the Company reinsured approximately 50% of its Pennsylvania credit insurance business to the joint venture partner, the parties agreed that, in the event the Company sold its credit insurance accounts to an unrelated third party, the Company would pay its former partner approximately 19% of the proceeds it received from such sale. The Company agreed to make these payments to the joint venture partner as consideration for terminating the venture, which allowed a purchaser of the Company s credit insurance business to retain the profits or losses on credit insurance premiums previously reinsured to the partner. As a result, the Company owes to the former partner approximately 19% of the fee revenues it receives from LOTS. In 1998, the partner s share of the fee revenues totaled $109,000. Reinsurance risks would give rise to liability to the insurance companies only in the event that the reinsuring company might be unable to meet its obligations under the reinsurance agreements in force. In November 1997, the Company and a third party reinsurer were sued by a former general agency with whom the Company had a partnership agreement. The partnership agreement provided that the agency would market universal life insurance business for the Company, pursuant to specific criteria established by the Company, and would also be entitled to a share of the profits, if any, which arose from the business produced. The claimant is seeking monetary damages to compensate it for the Company s alleged failure to share profits and for other alleged losses resulting from the Company s rejection of policy applications involving unacceptable risks. While management believes this claim is completely without merit and intends to vigorously defend itself in this matter, the ultimate outcome of this claim cannot be determined at this time. The Company has filed two counterclaims against this agency seeking damages for losses the Company sustained as a result of the agency s alleged breach of the partnership agreement and to recover an unpaid loan made to the agency. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. In the opinion of management, based on opinions of legal counsel, adequate reserves, if deemed necessary, have been established for these matters and their outcome will not result in a significant effect on the financial condition or future operating results of the Company or its subsidiaries. The Company has taken certain income tax positions in previous years that it believes are appropriate. If such positions were to be successfully challenged by the Internal Revenue Service, the Company could incur additional income taxes as well as interest and penalties. Management believes that the ultimate outcome of any such challenges will not have a material effect on the Company s financial statements. 13. REDEEMABLE PREFERRED STOCK The Redeemable Convertible Preferred Stock (the Preferred Stock ) has a liquidation preference of $10.00 per share and is convertible at any time, unless previously redeemed, into shares of common stock at the rate of 1.482 shares of common stock for each share of Preferred Stock (equivalent to a conversion price of $6.75 per share). The Preferred Stock is redeemable at the option of the Company at a redemption price of $10.00 per share. Annual dividends at the rate of $.85 per share are cumulative from the date of original issue and are payable quarterly on the first day of January, April, July and October. As of December 31, 1998, the Company is not in arrears with respect to payment of dividends on the Preferred Stock. Except in certain limited instances, the holders of the Preferred Stock have no voting rights. The terms of the Preferred Stock provide that, beginning July 1, 1998, a sinking fund was to be established. Annual payments are to be made to the sinking fund over a ten-year period in amounts which are sufficient to redeem 10% of the number of shares of Preferred Stock initially issued. In connection with the Plan of Liquidation, the Company presently intends to redeem the Preferred Stock within the next four years and has therefore not established the sinking fund. When the Company is in arrears as to preferred dividends or sinking fund appropriations for the Preferred Stock, dividends to holders of the Company's common stock as well as purchases, redemptions or acquisitions by the Company of shares of the Company's common stock are restricted. If the Company is in default in an aggregate amount equal to four quarterly preferred dividends, the holders of the Preferred Stock shall be entitled, only while such arrearage exists, to elect two additional members to the then existing Board of Directors. Prior to March 25, 1998, the difference between the fair value of the Preferred Stock at the date of issue and the mandatory redemption value was recorded through periodic accretions, using the interest method, resulting in a charge to retained earnings ($9,000 in 1998 and $36,000 in 1997 and 1996). Upon the adoption of the liquidation basis of accounting in March 1998, the unaccreted difference of $175,000 was recorded as a reduction in the Company s net assets. At December 31, 1998 and 1997, 713,275 shares of common stock were reserved for the conversion of the Preferred Stock. 14. 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 up to 300,000 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. In May 1989, the shareholders of the Company approved the Stock Incentive Plan which permits the granting of any or all of the following types of awards: (1) stock options, including incentive stock options and non-qualified stock options and (2) stock appreciation rights (SAR) either in tandem with stock options or free standing. This Plan was intended to enhance the 1982 Stock Option Plan. All officers and salaried key employees of the Company and its subsidiaries and affiliates were eligible to be participants. Persons who served only as directors were not eligible. The Plan provided for the granting of up to 250,000 stock options. As a result of the Company s operating losses over the past five years, the exercise price of the outstanding options is substantially higher than the market price of the Company s common stock, and it is therefore unlikely that any of the options, which expire in May 1999, will ever be exercised. Further, due to its planned liquidation and eventual dissolution, the Company has no intention of granting any additional options. The changes in option shares outstanding during the past three years are as follows:
Option Price shares per share Balance, January 1, 1996 179,000 2.25 Options terminated upon exercise of SAR s (30,000) 2.25 Balance, December 31, 1996 149,000 2.25 Options terminated upon exercise of SAR s (17,000) 2.25 Balance, December 31, 1997 and 1998 132,000 2.25
No options were exercised during 1998. At December 31, 1998, 133,117 shares were reserved for options which are available to be granted (although no such grants are anticipated), and all of the 132,000 outstanding options were exercisable. Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123 - Accounting for Stock-Based Compensation. As permitted by the statement, the Company has elected to continue to account for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized for stock options. The Company believes the computation of compensation expense based on the fair value method of accounting, as defined in SFAS No. 123, would have no material effect on the results of operations. 15. INCOME TAXES Under tax laws in effect prior to 1984, a portion of the life insurance companies' gain from operations was not currently taxed but was accumulated in a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the balance in the Policyholders' Surplus Account for each company was frozen as of December 31, 1983 and additional amounts are no longer accumulated in this account. However, distributions from the account continue to be taxed, as under previous laws, if any of the following conditions occur: (a) The Policyholders' Surplus Account exceeds a prescribed maximum, or (b) Distributions, other than stock dividends, are made to shareholders in excess of Shareholders' Surplus as defined by prior law, or (c) A company ceases to qualify for taxation as a life insurance company. At December 31, 1997, the Policyholders Surplus Account for Consumers Life exceeded the prescribed maximum by approximately $1.1 million, resulting in an additional tax liability of approximately $372,000, which was included in the Company s 1997 financial statements. At December 31, 1998 the Policyholders' Surplus Account for Consumers Life was approximately $439,000. Based on its current plans, the Company does not believe it is probable that Consumers Life will incur any additional taxes with regard to its Policyholders Surplus Account. There are currently no significant amounts of retained earnings in excess of statutory surplus upon which neither current nor deferred income taxes have been provided. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1998 and 1997 are as follows:
(in thousands) 1998 1997 Deferred tax liabilities: Fixed maturities $9 $28 Deferred policy acquisition costs 17 4,614 Other 41 168 67 4,810 Deferred tax assets: Future policy benefits and financial reinsurance 64 5,252 Net operating loss carryforwards 2,175 2,011 Other 259 225 2,498 7,488 Valuation allowance for deferred tax assets (2,431) (2,233) 67 5,255 Net deferred tax asset $0 ($445)
Significant components of income tax expense (benefit) are as follows:
(in thousands) 1998 1997 1996 Current: Federal ($18) ($18) ($539) State 2 56 10 Total current (16) 38 (529) Deferred 1 (273) (3) Income tax benefit related to continuing operations (15) (235) (532) Income tax expense included with discontinued operations: Current (412) 1,392 Deferred (462) (567) (874) 825 Income tax expense (benefit) for periods prior to adoption of liquidation basis of accounting (15) (1,109) 293 Income tax expense for period subsequent to adoption of liquidation basis of accounting: Current 55 Deferred 472 527 Total income tax expense (benefit) $512 ($1,109) $293
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:
For the period from January 1, 1998 to Years ended December 31, March 24, 1998 1997 1996 (in thousands) Loss from continuing operations before ($103) ($1,676) ($2,269) Income tax benefit at 34% statutory rate on pre-tax loss (35) (570) (771) Tax related to decrease in Policyholders 372 Effect of rate difference on net operating 288 Adjustment of prior year s income tax (67) (8) Dividends received deduction (4) (6) (11) State income taxes 2 36 17 Items not includable for tax purposes 34 20 Other, net 22 (34) (67) Actual income tax benefit relating to continuing ($15) ($235) ($532) operations
The Company files a consolidated Federal income tax return. At December 31, 1998, the life insurance companies have available approximately $6.4 millon of Federal net operating losses. These losses will be carried forward to future years, and may only be used to offset the taxable income of the life insurance companies. Approximately $3.6 million of these net operating losses are subject to limitations on their use under Internal Revenue Code Section 382 and the consolidated return regulations. This operating loss will expire in 2004. The remaining $2.8 million of net operating losses will expire in 2009 and 2012. 16. PER SHARE INFORMATION Basic income (loss) per common share has been computed based upon the weighted average number of common shares outstanding. Diluted per share information is equivalent to basic per share information because the Company has no potential common shares which are dilutive for any period presented in the accompanying financial statements. The following table sets forth the computation of basic and diluted per share data. For the period from January 1, 1998 to Year ended December 31, (in thousands, except per share amounts) March 24, 1998 1997 1996 Loss from continuing operations ($88) ($1,441) ($1,737) Preferred stock dividends (109) (409) (409) Accretion of carrying value of preferred stock (9) (36) (36) Numerator for basic loss per share - loss attributable to common shareholders (206) (1,886) (2,182) Effect of dilutive securities 0 0 0 Numerator for diluted loss per share ($206) ($1,886) ($2,182) Denominator for basic loss per share - weighted average shares 2,596 2,601 2,614 Effect of dilutive securities 0 0 0 Denominator for diluted loss per share 2,596 2,601 2,614 Basic and diluted loss per common share ($0.08) (0.73) ($0.83)
The preferred stock is convertible into 713,275 shares of common stock (see Note 13). Options to purchase 132,000 common shares were outstanding at December 31, 1998 (see Note 14). None of the common shares contingently issuable upon the conversion of the preferred stock or upon the exercise of the stock options have been included in the computation of diluted per share information because the effect would be antidilutive. 17. SEGMENT INFORMATION As a result of the disposal of its auto auction business in 1996, the disposal of its remaining block of individual life insurance business in early 1997 and the disposal of its credit insurance business in 1998, the Company has no remaining business segments. As discussed in Note 4, following the sale of its credit insurance business, the Company intends to liquidate its remaining assets, provide for its liabilities, redeem its preferred stock and distribute any remaining cash to its common shareholders pursuant to a Plan of Liquidation and Dissolution. The Company s income or loss from continuing operations now consists principally of (i) earned premiums and related costs associated with an insignificant block of extended service contract business which is in run-off, (ii) investment income on remaining assets, (iii) fee income from LOTS from the sale of the Company s customer accounts, and (iv) overhead expenses. Because the fees related to the sale of the Company s customer accounts are being received from LOTS over a five-year period, and because any distribution which may be payable by LOTS to the Company from a contingency fund established by the parties cannot be determined until September 30, 2002, the Company will be unable to make a final distribution to its common shareholders until late in 2002. 18. REGULATORY MATTERS In connection with the proposed sale of the Company s September 30, 1997 inforce block of credit insurance to LOTS (pursuant to reinsurance agreements which Consumers Life and IFLAC entered into with American Republic), the two insurance subsidiaries filed the reinsurance agreements with the insurance regulators in their respective domiciliary states and obtained the required regulatory approval during the first quarter of 1998. In connection with the sale of the Company s Arizona-domiciled insurance company to LOTS, LOTS filed a Form A with the Arizona Insurance Department and received the Department s approval in September 1998. 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, 1998, each of the Company's two insurance subsidiaries have more than sufficient capital to meet the NAIC's RBC requirements. QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial data is presented for the period prior to the adoption of the liquidation basis of accounting (in thousands, except per share 1997 For the period amounts) from January 1, 1998 1st 2nd 3rd 4th to Quarter Quarter Quarter Quarter March 24, 1998 Total revenues - continuing ($49) $271 ($18) ($164) $348 operations Loss from continuing operations before income tax expense (benefit) ($262) ($86) ($104) ($1,224) ($103) Income tax expense (benefit) (124) 7 (79) (39) (15) Loss from continuing operations (138) (93) (25) (1,185) (88) Discontinued operations (472) (604) 127 (3,970) 112 Net income (loss) ($610) ($697) $102 ($5,155) $24 Per share data: Loss from continuing operations ($0.10) ($0.08) ($0.06) ($0.49) ($0.08) Discontinued operations (0.18) (0.23) 0.05 (1.53) 0.04 Net loss ($0.28) ($0.31) ($0.01) ($2.02) ($0.04)
The following quarterly financial data is presented for the period subsequent to the adoption of the liquidation basis of accounting. (in thousands) 1998 2nd 3rd 4th Income (loss) before income tax expense $223 ($146) $248 Income tax expense (113) (30) (384) Liability for underfunded pension plan (664) Preferred stock dividends (102) (102) (103) Other changes in net assets (141) (21) 3 Decrease in net assets for the period (133) (299) (900) Net assets at beginning of period 1,715 1,582 1,283 Net assets at end of period $1,582 $1,283 $383
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The firm of Arthur Andersen LLP serves as the Company s independent auditors and has served as such since November 26, 1996. No information relating to this item is required to be included in the Company s Form 10-K for the year ended December 31, 1998. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Historically, the Board of Directors of the Company was divided into three (3) groups, with the directors in each group serving terms of three (3) years and until their successors were duly elected and qualified. However, due to the Directors efforts over the past three years to merge, sell or otherwise dispose of the Company or its assets, there has been no election of Directors since 1995, and the existing Directors agreed to continue to serve beyond their terms until such a merger, sale or disposition of the Company or its assets was completed. Following the approval of the Sale of Assets transaction and the Plan of Liquidation and Dissolution by the Company s shareholders on March 24, 1998, three of the Company s Directors, Leon A. Guida, Dr. Robert G. Little, Jr. and Rev. Sterling P. Martz, resigned. The three remaining Directors are expected to continue to serve as Directors for a limited period of time in order to oversee the timely liquidation of the Company in accordance with the Plan of Liquidation. The table below sets forth the period for which the current Directors have served as Directors of the Company, their principal occupation or employment for the last five(5) years, and their other major affiliations and age as of March 1, 1999.
NAME PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS, OFFICE (IF DIRECTOR (AGE) ANY) SINCE HELD IN THE COMPANY AND OTHER INFORMATION James C. Robertson Chairman of the Board, President and Chief 1967 (67) Executive Officer of the Company Edward J. Kremer President, Hanna, Kremer & Tilghman Insurance, Inc., 1983 (68) Salisbury, MD; Director and Chairman of the Board, Delmar Bancorp, Delmar, MD John E. Groninger President, John E. Groninger, Inc., Juniata Concrete, 1968 (72) Inc., Republic Development Corp., and Juniata Lumber & Supply Co., Mexico, PA; Director, Juniata Valley Financial Corp., Mifflintown, PA
The following information is provided as of March 1, 1999 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 67 President and Chief Executive Officer R. Fredric Zullinger 50 Senior Vice President, Chief Financial Officer and Treasurer
Mr. Robertson joined the Company in 1967 as General Counsel and was elected a director and President of the Company in 1968. Mr. Robertson currently serves as Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Zullinger joined the Company in 1977 as Vice President-Accounting of the Company's life insurance subsidiaries. He was appointed Treasurer of the Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr. Zullinger currently serves as Senior Vice President, Chief Financial Officer and Treasurer of the Company. William J. Walsh, Jr. served as the Company s Executive Vice President and Chief Operating Officer from 1985 to May 1998, at which time Mr. Walsh terminated his employment. 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, 1998, 1997 and 1996 of the Chief Executive Officer and the named executive officers whose annual compensation exceeded $100,000 (hereinafter referred to as "named executive officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL ANNUAL OTHER OTHER Name and Principal Position Year SALARY BONUS COMPENSATION COMPENSATION James C. Robertson, 1998 - 0 - (1) - 0 - $3,975 (2) - 0 - Chairman, President and 1997 - 0 - (1) - 0 - $5,700 (2) - 0 - Chief Executive Officer 1996 $88,998 (1) - 0 - $7,950 (2) $73,016 (3) William J. Walsh, Jr., 1998 $51,860 (4) - 0 - - 0 - $92,735 (4) Executive Vice President and 1997 $114,000 - 0 - - 0 - - 0 - Chief Operating Officer 1996 $114,000 - 0 - - 0 - $18,605 (3)
(1) Mr. Robertson s status as a salaried employee of the Company terminated effective July 19, 1996. For the remainder of 1996, Mr. Robertson was compensated at a daily rate of $150 for any work performed in his capacity as President and CEO of the Company. In 1996 Mr. Robertson earned $83,654 as a salaried employee and $5,344 as a non-salaried officer of the Company. Mr. Robertson was not compensated for any services performed in his capacity as President and CEO of the Company in either 1998 or 1997. (2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman of the Board of the Company, including fees which were deferred. (3) Represents distribution from the Company s Excess Benefit Plan which was terminated in July 1997. (4) Mr. Walsh resigned as an Executive Officer and employee of the Company effective May 1, 1998. At the time of his termination, Mr. Walsh received $16,004 in unused vacation pay. Mr. Walsh was also entitled to receive a severance payment equal to his annual salary. This severance pay is being paid to Mr. Walsh in bi-weekly installments over a one-year period. Such payments totaled $76,731 in 1998. 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 1998. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR TABLE The table below presents information with respect to the stock options and stock appreciation rights ("SARS") awarded under the Company's 1989 Stock Incentive Plan ("1989 Plan") to the named executive officers and held by them at December 31, 1998. The 1989 Plan was approved by the shareholders, and provides for the grant of both options that qualify as incentive stock options under the Internal Revenue Code and non-qualified (non-statutory) stock options. The option price is 100% of the fair market value on the date of grant ($2.25) and the maximum term to exercise the grant is six (6) years. The options have accompanying SARS which permit the holder to receive common stock or cash equal to the excess of the fair market value covered by the option over the option price. To the extent that accompanying SARS are exercised, the corresponding stock options are canceled and the shares subject to the option are charged against the maximum number of shares authorized under the 1989 Plan. When a stock option is exercised, the related SAR is likewise surrendered. All of the options listed in the table were granted in 1993 in place of an equal number of options that were awarded in May 1989 and subsequently canceled.
Number of Securities Underlying Value of Unexercised Unexercised Options/SARS In-The-Money Options/SARS Shares at Fiscal at Fiscal Acquired Value Year-End (#) Year-End ($)(2) on Exercise Realize Exercisable (E) Exercisable (E) Name (#) d Unexercisable (U) Unexercisable (U) ($) William J. Walsh, - 0 - - 0 - 25,000 (E) - 0 - R. Fredric Zullinger - 0 - - 0 - 25,000 (E) - 0 -
(1) Mr. Walsh resigned as an Executive Officer and employee effective May 1, 1998. (2) The values in this column are based on the difference between the market value of the Company s common stock on December 31, 1998 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 Board all aspects of compensation, management succession and the implementation and administration of the Company's various incentive plans. COMPENSATION PHILOSOPHY Historically, the compensation policy of the Company has been based upon the philosophy that an important portion of the annual compensation of each officer should relate to and be contingent upon the performance of the Company, as well as the individual contribution of each officer. In the past, the Company relied to a large degree on the annual and longer term incentive compensation plans to attract and retain corporate officers of outstanding abilities and to motivate them to perform to the full extent of their abilities. Each year the Committee, along with the CEO, reviewed an annual salary plan for the Company's officers which was based on industry, peer group and national surveys along with performance judgments as to the past and expected future contributions of the individual officers. The compensation for the CEO and the other Executive Officers has consisted of a base salary, potential annual bonuses and long-term stock option incentives. The Committee considered the total compensation for the CEO and each of the Executive Officers in establishing each element of compensation. Base salaries were fixed at levels competitive in the market compared to other comparably sized companies with officers having equal responsibilities engaged in similar businesses as the Company. With the adoption of the Plan of Liquidation, the Committee has attempted to implement a compensation policy that will allow an orderly and timely reduction of the officers and employees of the Company. As a result, on May 1, 1998, one (1) executive officer was separated from employment with the Company. As such, there remains one (1) executive officer employed by the Company who is expected to serve in that capacity until mid-year. Thereafter, this individual is expected to continue providing assistance to the Company on a periodic basis during the liquidation of the Company in accordance with the Plan of Liquidation The remaining executive officer s salary has not changed since 1993 and there are no plans to increase the salary or award any bonus or incentive payments. However, upon the separation of the remaining executive officer from the Company, he will be entitled to a severance package equal to his annual salary. No stock options or SARS were granted by the Company to the CEO or the other Executive Officers during 1998. CEO COMPENSATION Mr. Robertson continues to serve as Chairman of the Board, President and CEO of the Company. However, his status as a salaried employee of the Company was terminated effective July 19, 1996. From that time and until December 31, 1996, Mr. Robertson had been compensated at $150 per day for any work performed for the Company in his capacity as a non-salaried employee while serving as President and CEO. Beginning in 1997 and continuing through 1998, Mr. Robertson did not receive any compensation in his capacity as a non-salaried employee while serving as President and CEO, although he continued to receive the standard retainer and board meeting fees in his role as Chairman of the Board. The Committee believes that this arrangement with Mr. Robertson is in the best interests of the Company and is more than reasonable based upon Mr. Robertson's experience and knowledge of the Company while it is attempting to sell its assets and liquidate in accordance with the Plan of Liquidation. This report is submitted by the Personnel Committee of the Company's Board of Directors. John A. Groninger, Chairman Edward J. Kremer STOCK PRICE PERFORMANCE COMPARISON CUMULATIVE TOTAL RETURN 12/31 12/31 12/31 12/31 12/31 12/31/ /93 /94 /95 /96 /97 98 Consumers Financial 123 115 141 154 43 4 Corp. (CFIN) Peer Group 111 104 158 194 330 394 NASDAQ Stock Market 115 112 159 195 240 293 (U.S.) *Assumes $100 invested on December 31, 1993 in the Company s common stock, NASDAQ Stock Index and Peer Group common stock. Total shareholder returns assume reinvestment of dividends. (1) The peer group companies are primarily in the same segment of the insurance industry that market credit life and credit disability products to automotive dealers and other financial institutions. While none of the companies offer all of the products and services of the Company, each can be considered a competitor of the Company. The members of the peer group are as follows: ACCEL International Corporation, CNL Financial Corporation, American Bankers Insurance Group and US Life Corporation. PENSION PLAN BENEFITS The Company has a defined benefit plan, the Consumers Financial Corporation Employees Retirement Plan (the Plan). The Plan was established effective January 1, 1984. Under the Plan the retirement benefit is determined by a formula which reflects compensation and years of service. Benefits are fully vested after seven (7) years of service. The Plan was amended effective January 1, 1989 to reflect changes mandated by ERISA and, as of the same date, a supplemental non-qualified Excess Benefit Plan was adopted covering certain employees, primarily those with higher compensation levels. Compensation includes base salary, bonuses and other forms of compensation and generally corresponds to the amounts shown in the Summary Compensation Table. During 1996, the Company froze the benefits payable to participants under the Plan. The Company also terminated the Excess Benefit Plan in 1996 and distributed the plan assets to the participants. The benefit formula in the Plan provides that for each year of service prior to 1975, the benefit consists of (1) 0.5% of average monthly compensation, plus (b) 1.5% of average monthly compensation in excess of $1,000 where Average Monthly Compensation is average monthly compensation for the five calendar years ending December 31, 1983. For each year of service from January 1, 1984 through December 31, 1988, the benefit consists of (a) 1.5% of monthly compensation times the number of years of service under the Plan, plus (b) 1.4% of monthly compensation in excess of the social security wage base. For each year of service from January 1, 1989 through July 31, 1996, the benefit consists of (a) 1.5% of monthly compensation times the number of years of service under the Plan, plus (b) .65% of monthly compensation in excess of the social security wage base. At December 31, 1998, 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 R. Fredric Zullinger, $1,918. 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, 1999, the number of shares of voting stock owned by any person who is known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock, the only class of voting securities outstanding.
Amount and Nature of Percent Beneficial of Title of Class Name and Address of Beneficial Owner Ownership Class Common Consumers Financial Corporation and 231,344 7.86% Subsidiaries Employee Stock Ownership Plan (ESOP) (1) 1200 Camp Hill By-Pass, Camp Hill, PA 17011 Common Two wholly-owned subsidiaries 365,352 12.41% of Consumers Financial Corporation, 1200 Camp Hill By-Pass,Camp Hill, PA 17011 Common Peter H. Kamin 205,100 6.97% One Financial Center, Suite 1600, Boston, MA 02111
(1)The Company's Employee Stock Ownership Plan is an employee benefit plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Participating employees of the Company have the power to vote the shares allocated to them under the Plan. The Trustees of the Plan have discretionary investment powers including the power to dispose of the shares. The following table sets forth as of March 1, 1999, the number of shares of the Company's Common and Preferred Stock beneficially owned by (a) each director; (b) each executive officer who is not a director; and (c) all directors and executive officers as a group.
Amount and Nature of Percent TITLE OF Name of Beneficial of CLASS Beneficial Owner Ownership (1) Class (a) Common Groninger, John E. 57,521 (2) 2.0 Preferred 22,410 (3) 4.7 Common Kremer, Edward J. 1,607 * Common Robertson, James C. 99,775 3.4 Preferred 5,235 (4) 1.1 (b) Common Zullinger, R. Fredric 54,523 (5) 1.8 (c) Common Directors and 213,426 (6) 7.2 Preferred Executive Officers as 27,645 5.7 a Group (4 individuals)
* Denotes less than 1% (1) Except where otherwise indicated, the beneficial owner of the shares exercises sole voting and investment power. (2) Includes 42,542 shares owned by Mr. Groninger's wife. (3) Includes 1,000 shares owned by Mr. Groninger's wife. (4) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's wife. (5) Includes 14,835 shares for which Mr. Zullinger has voting power as to shares held for him in the Employee Stock Ownership Plan, and 25,000 shares he has a right to acquire through the exercise of stock options and stock appreciation rights. As a result of the Company s operating losses over the past five years, the exercise price of Mr. Zullinger s options ($2.25) is substantially higher than the market price of the Company s common stock, and it is therefore unlikely that any of these options, which expire in May 1999, will ever be exercised. (6) Includes shares that are acquirable through the exercise of stock options and SAR s. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 1998, the Company did not enter into any transactions in which the amount involved exceeded $60,000, with any of its directors, executive officers, security holders known to the Company to own more than 5% of the Company s common stock or any member of the immediately family of any of the foregoing persons. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) Listing of Documents filed: 1. Financial Statements (included in Part II of this report): Report of Independent Public Accountants Consolidated Statement of Net Assets in Liquidation - December 31, 1998 Consolidated Statement of Changes in Net Assets in Liquidation - For the period from March 25, 1998 to December 31, 1998 Consolidated Balance Sheet-December 31, 1997 Consolidated Statements of Operations - For the period from January 1, 1998 to March 24, 1998 and for the Years Ended December 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997 and 1996 Consolidated Statements of Cash Flows - For the period from January 1, 1998 to March 24, 1998 and for the Years Ended December 31, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules (included in Part IV of this report): (II) Condensed Financial Information of Registrant (III) Supplementary Insurance Information (IV) Reinsurance (V) Valuation and Qualifying Accounts Schedules other than those listed above have been omitted because they are not required, not applicable or the required information is set forth in the financial statements or notes thereto. 3. Exhibits: (11) Statement regarding Computation of Earnings Per Common Share (see Note 16 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K) (21) Subsidiaries of Consumers Financial Corporation (27) Financial Data Schedule b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1998. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENT OF NET ASSETS IN LIQUIDATION DECEMBER 31, 1998
(dollar amounts in thousands) Assets Investments, other than investments in affiliates: Other invested assets $70 Total investments 70 Cash 169 Investments in affiliates 2,672 Indebtedness of affiliates (surplus note) 4,706 Receivables 747 Other assets 48 Total assets 8,412 Liabilities Indebtedness to affiliates 2,132 Dividend payable 102 Underfunded pension plan 664 Other liabilities 316 3,214 Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500 shares; issued and outstanding 481.461 shares 4,815 Total liabilities and redeemable preferred stock 8,029 Net assets in liquidation $383
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION FOR THE PERIOD FROM MARCH 25, 1998 TO DECEMBER 31, 1998 (in thousands) Income: Net investment income $7 Fees from sale of customer accounts 98 Joint venture fees 47 Net realized investment gains 8 Miscellaneous 110 270 Expenses: Printing and postage 11 Salaries, wages and employee benefits 14 Taxes, licenses and fees 26 Depreciation 5 Miscellaneous 56 112 Operating income before income tax benefit 158 Income tax benefit 493 Equity in loss of unconsolidated subsidiaries (853) Liability for underfunded pension plan (664) Decrease in unrealized appreciation of debt securities (32) Preferred stock dividends (307) Adjustment of preferred stock to redemption value (175) Retirement of treasury shares-preferred 57 Purchase of treasury shares-common (9) Decrease in net assets for the period (1,332) Net assets at beginning of period 1,715 Net assets at December 31, 1998 $383
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION BALANCE SHEET DECEMBER 31, 1997
(in thousands) Liabilities, Redeemable Preferred Assets Stock and Shareholders Equity Investments, other than Liabilities: in affiliates: Indebtedness to affiliates $267 Other invested assets $67 Dividend payable 109 67 Miscellaneous 418 Cash 433 Income taxes 296 Investments in affiliates 2,117 Total liabilities 1,090 Indebtedness of affiliates 4,866 Receivables 10 Property and equipment, net of Redeemable preferred stock: accumulated depreciation 15 Series A, 8 1/2 cumulative 4,688 convertible Other assets 76 $7,584 Shareholders equity: Common stock 30 Capital in excess of stated 7,989 value Equity in net unrealized appreciation of debt securities of subsidiaries 54 Deficit (4,796 ) Treasury stock (1,471 ) Total shareholders equity 1,806 $7,584
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF OPERATIONS For the period
Years ended December from January 1,1998 Years ended December 31, to March 24, 1998 (in thousands) 1997 1996 Revenues: Net investment income $9 $19 $16 Net realized investment losses (10) Other income 48 163 2 Total revenues 57 172 18 Expenses: General expenses 98 563 765 Taxes, licenses and fees 7 22 9 Write-off of intangible assets 50 143 Total expenses 105 635 917 Loss before income taxes (48) (463) (899) Income taxes 3 131 103 Loss before equity in income (loss) of unconsolidated subsidiaries (51) (594) (1,002) Equity in income (loss) of unconsolidated Continuing operations (37) (1,174) (735) Discontinued operations 112 (4,592) 503 75 (5,766) (232) Net income (loss) $24 ($6,360) ($1,234
See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSUMERS FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS
For the period 31, from January 1, 1998 Years ended December 31, (in thousands) to March 24, 1998 1997 1996 Cash flows from operating activities: Net income (loss) $24 ($6,360) ($1,234) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Income taxes 12 (1,004) 741 Change in receivables 7 127 Change in other liabilities (11) 377 67 Equity in loss (income) of unconsolidated subsidiaries (793) 6,338 998 Amortization of intangibles 781 50 123 Other (107) 37 17 Total adjustments (118) 5,805 2,073 Net cash provided by (used in) (94) (555) 839 operating activities Cash flows from investing activities: Purchase of investments (1) (3) (2,115) Maturity of investments Sale of investments 1,304 808 Investments in and indebtedness to (1) (26) 2,044 affiliates Net cash provided by (used in) investing (2) 1,275 737 activities Cash flows from financing activities: Principal payments on debt (1,159) Purchase of treasury stock (1) (64) (50) Cash dividends to preferred shareholders (109) (409) (409) Net cash used in financing activities (110) (473) (1,618) Net increase (decrease) in cash (206) 247 (42) Cash at beginning of year 433 186 228 Cash at end of period $227 $433 $186
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, 1998, 1997 AND 1996 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 1998, 1997 and 1996 amounted to $10,000, $425,000 and $3,343,000, respectively. In addition, in 1998, the Company received certain assets and assumed certain liabilities from several of its subsidiaries in connection with the liquidation of those companies. The book value of the net assets received was $679,000. 3. The Company files a consolidated Federal income tax return with its non- life insurance company subsidiaries and with its consolidated life insurance company subsidiaries. With respect to the consolidated non-life sub-group, taxes are allocated proportionately to each subsidiary within the consolidated group. Tax expense is allocated to those subsidiaries reporting taxable income, while a tax benefit is allocated to those companies reporting a taxable loss. For the consolidated life insurance sub-group, tax expense is allocated only to those companies in the group reporting taxable income. Similarly, tax benefits for the life sub-group are allocated only to those companies reporting a taxable loss. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Deferred Other policy Future policy acquisition policy Unearned claims and costs benefits premiums benefits Segment payable Year ended December 31, 1998: Automotive Resource Division: (a) Credit insurance and fee income business $8,291 $34,840 $2,837 Assumed warranty business 323 Individual Life Insurance Division (a) $50 9,354 45 Other (b) Total $50 $17,645 $35,163 $2,882 Year ended December 31, 1997: Automotive Resource Division: (a) Credit insurance and fee income $13,545 $11,785 $49,057 $2,181 Assumed warranty business 25 937 195 Individual Life Insurance Division (a) 9,682 163 Other (b) Total $13,570 $21,467 $49,994 $2,539 Year ended December 31, 1996: Automotive Resource Division: (a) Credit insurance and fee income $16,378 $11,420 $54,848 $2,333 Assumed warranty business 36 1,330 178 Individual Life Insurance Division (a) 2,535 23,966 225 Other (b) Total $18,949 $35,386 $56,178 $2,736
(a) The assets and liabilities of the discontinued credit insurance and individual life insurance businesses have not been separately stated on the consolidated balance sheets. (b) Represents operations of Consumers Financial Corporation. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Premium Amortization income, Death of deferred fees and Net and policy other investment other acquisition Operating Segment income income benefits costs expenses (a) Year ended December 31, 1998 : Amounts attributable to period prior to adoption of liquidation basis of accounting: Automotive Resource Division: (b) Credit insurance and fee income business Assumed warranty business $83 Individual Life Insurance Division (b) Other (c) $60 $368 Total $83 60 368 Amounts attributable to period subsequent to adoption adoption of liquidation basis of accounting: Automotive Resource Division: (b) Credit insurance and fee income business Assumed warranty business $504 46 $260 104 Individual Life Insurance Division (b) Other (c) 281 441 1,178 Total 785 487 260 1,282 Grand total $868 $547 $260 $1,650 Year ended December 31, 1997: Automotive Resource Division: (b) Credit insurance and fee income business Assumed warranty business $375 $44 $460 $10 $1 Individual Life Insurance Division (b) Other (c) 171 19 1,638 Total $546 $63 $460 $10 $1,639 Year ended December 31, 1996: Automotive Resource Division: (b) Credit insurance and fee income business Assumed warranty business $450 $42 $581 $12 $1,110 Individual Life Insurance Division (b) Other (c) 2 17 1,008 Total $452 $59 $581 $12 $2,118
(a) Excludes realized investment gains. (b) The assets and liabilities of the discontinued credit insurance and individual life insurance businesses have not been separately stated on the consolidated balance sheets. (c) Represents operations of Consumers Financial Corporation. SCHEDULE IV REINSURANCE CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(in thousands) Percentage Ceded to Assumed of amount Gross other from Net assumed Segment amount companies companies amount to net Year ended December 31, 1998: Life insurance in-force $0 $0 Premium income: Assumed warranty $604 $604 100.0% $604 $604 100.0% Year ended December 31, 1997: Life insurance in-force $0 $0 Premium income: Assumed warranty $356 $356 100.0% $356 $356 100.0% Year ended December 31, 1996: Life insurance in-force $0 $0 Premium income: Assumed warranty $417 $417 100.0% $417 $417 100.0%
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Additions Charged Balance at Charged to other Balance beginning costs and accounts, Deduction end of Description of period expenses describe describe period Year ended December 31, 1998 Provision for permanent decrease in Mortgage loans $50 $50 (a) Property and equipment 713 $249 $962 Other real estate 357 265 (b) 92 Other invested assets 163 108 (b) 55 Provision for uncollectible receivables 436 436 (a) $1,719 $249 $859 $1,109 Year ended December 31, 1997 Provision for permanent decrease in market Mortgage loans $100 $50 (a) $50 Property and equipment $713 713 Other real estate 128 229 357 Other invested assets 75 158 70 (b) 163 Provision for uncollectible receivables 1,038 110 712 (a) 436 $1,341 $1,210 $832 $1,719 Year ended December 31, 1996 Provision for permanent decrease in market Equity securities $15 $15 (b) Mortgage loans 100 $100 Other real estate 493 $35 400 (b) 128 Other invested assets 75 75 Provision for uncollectible receivables 1,093 233 288 (a) 1,038 $1,701 $343 $703 $1,341
(a) Write-off of bad debts against reserve (b) Write-off of reserve for assets sold 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 16, 1999 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 16, 1999 Chairman of the Board (Chief Executive Officer) /S/ R. Fredric Zullinger Senior Vice President, March 16, 1999 and Treasurer (Chief Financial Officer) /S/ John E. Groninger Director March 16, 1999 /S/ Edward J. Kremer Director March 16, 1999 EXHIBIT 21 SUBSIDIARIES OF CONSUMERS FINANCIAL CORPORATION Consumers Financial Corporation (23-1666392) owns 100% of the outstanding common stock of the following subsidiaries: Consumers Life Insurance Company 21-0706531 CLMC Insurance Agency, Inc. 25-1681245 IAAC, Inc. 25-1211251 Consumers Car Care Corporation 23-1720565 Investors Consolidated Reinsurance, Ltd. 31-1057420 Consumers Limited 25-1493313 Consumers II Limited 25-1718532 Consumers Life Insurance Company owns 100% of the outstanding common stock of Investors Fidelity Life Assurance Corp. (31-0646177). EX-27 2
7 YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1998 DEC-31-1997 0 0 0 0 0 0 0 0 0 0 0 0 4,449,872 41,000,598 171,822 641,234 34,840,247 9,572,236 50,000 13,569,943 62,687,602 85,035,320 0 0 35,152,710 49,994,397 2,882,411 2,538,593 0 0 0 0 0 0 4,814,610 4,687,913 29,438 30,191 353,157 1,775,167 62,687,602 85,035,320 3,003,103 356,188 962,490 62,682 (102,128) (176,124) 1,312,104 189,571 2,630,017 459,708 24,837 9,974 2,400,426 1,639,149 120,189 (1,676,514) 511,794 (235,097) 0 0 213,786 (4,918,937) 0 0 0 0 (177,719) (6,360,354) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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