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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
< X >Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
Common stock (no par) (voting) Not listed
8 1/2% Preferred Stock Series A
(Par Value $1.00 per share) (non-voting)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes XX No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Based on the closing price on March 1, 1998, the aggregate market value of
common stock held by non-affiliates of the registrant was $1,622,597.
The number of outstanding common shares of the registrant as of March 1,
1998 was 2,596,155
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") is an insurance holding
company which, until October 1, 1997, was a leading provider, through its
subsidiaries, of credit life and credit disability insurance in the Middle
Atlantic region of the United States. The insurance subsidiaries are licensed
in 26 states and the District of Columbia and conducted the majority of their
business in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and
Virginia, marketing credit insurance products primarily through automobile
dealers. In connection with its credit insurance operations, the Company also
marketed, as an agent, an automobile extended service warranty product.
Effective October 1, 1997, the Company transferred all of its credit insurance
and fee income accounts to Life of the South Corporation ( LOTS ), a Georgia-
based financial services holding corporation. On January 1, 1998, LOTS hired
substantially all of the sales and marketing personnel of the Company and
assumed the administration of the Company s credit insurance business. In
addition, effective January 1, 1998, the Company also reinsured to American
Republic Insurance Company ( American Republic ), a financial partner of LOTS
in this transaction, 100% of its credit insurance business which was inforce on
September 30, 1997 (the Sale of Assets ) and reinsured 100% of the credit
insurance business written on the policy or certificate forms of the Company s
s u bsidiaries in the fourth quarter of 1997. In connection with these
transactions, the Company and LOTS have further agreed that, with respect to
one of the subsidiaries, the new credit insurance business produced by that
subsidiary s former customer accounts, which have now been transferred to LOTS,
will continue to be written on the policy or certificate forms of the
subsidiary until September 30, 1999, or an earlier date which may be agreed to
by the parties. This premium and the related insurance risk will also be
reinsured 100% to American Republic.
The Sale of Assets transaction, which has received the approval of state
insurance regulators and the approval of the Company s preferred and common
shareholders at a special meeting held on March 24, 1998 (the Special
Meeting ), is expected to close in April 1998. The reinsurance transaction
involving the fourth quarter credit insurance business as well as certain
related transactions are also expected to close at that time. At the Special
Meeting, the Company s shareholders also approved a Plan of Liquidation and
Dissolution pursuant to which the Company intends to liquidate its remaining
assets, provide for all liabilities, redeem its preferred stock at $10 per
share and then distribute all remaining cash to its common shareholders.
The Company has not written any new individual life insurance business
since 1992. In 1992, the Company sold all of its traditional whole-life, term
and annuity business. In 1994, the Company reinsured substantially all of its
universal life insurance business to a third party insurer and, effective
January 1, 1997, it sold its remaining block of universal life business back to
the direct writer of the business. Additional information regarding the
termination of marketing activities and the operations of the Individual Life
Insurance Division and the sale of the division s in-force business appears
below under "Operations."
The Company, through its wholly-owned subsidiary, IAAC, Inc., formerly
Interstate Auto Auction, Inc. ("Interstate"), also conducted wholesale and
retail automobile auctions of used vehicles for automobile dealers, banks and
leasing companies. The Company sold the business and the related operating
assets of Interstate in November 1996 for cash in the amount of $4.85 million.
Additional information regarding the termination of the auto auction operations
appears below under Operations.
The term "Company" when used herein refers to Consumers Financial
Corporation and its subsidiaries unless the context requires otherwise. The
Company's executive offices are located at 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania 17011. Its telephone number is (717) 730-6320.
The Company was formed in 1966 as 20th Century Corporation (a Pennsylvania
business corporation) and adopted its present name on May 30, 1980. The Company
operated through its wholly-owned subsidiaries, principally Consumers Life
Insurance Company (a Delaware life insurance company) ( Consumers Life ),
Consumers Car Care Corporation (a Pennsylvania business corporation) and, until
late 1996, Interstate (a Pennsylvania business corporation). Investors Fidelity
Life Assurance Corp. (an Ohio life insurance company) is a subsidiary of
Consumers Life. Until its sale in August 1997, Consumers Life Insurance Company
of North Carolina (a Texas life insurance company) was also a subsidiary of
Consumers Life.
Prior to the discontinuation of its business operations, as discussed
above, the Company operated in three industry segments: the Automotive Resource
Division, which marketed credit insurance and other products and services to
its automobile dealer customers, the Individual Life Insurance Division and
the Auto Auction Division. These segments did not include the corporate
activities of Consumers Financial Corporation which previously were
insignificant in relation to the three segments. Both the individual life
insurance and the auto auction segments were presented as discontinued
operations in the Company s consolidated financial statements beginning in 1996.
As a result of the sale of the credit insurance and related operations to LOTS
and the transfer of all of the inforce credit insurance business to American
Republic, which is acting as LOTS financial partner, the Automotive Resource
Division has now also been presented as a discontinued operation in the
Consolidated Financial Statements. See Note 5 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
As a result of the operating losses incurred by the Company since 1993, in
March 1996, the Company announced its plans to explore various alternatives for
selling or merging its remaining business units. Direct contacts were made with
over 45 potential buyers to solicit their interest in participating in an
auction process to acquire the Company or its assets and business operations.
This auction process was intended to achieve maximum value and a timely sale
through simultaneous exposure to a wide range of potential purchasers. Separate
groups of potential bidders were solicited for the Company s auto auction
business and for its credit insurance business. After evaluating numerous
offers for the sale of the auto auction business, in late 1996, the Company
sold that business and the related operating assets for $4.85 million.
The Company received 11 letters of intent for either the sale of its
credit insurance operations or the sale of the entire Company (excluding the
auto auction business). Four bidders were selected to perform due diligence
reviews and submit final offers. After detailed discussions and negotiations
were conducted with the four bidders concerning the final offers which they
submitted, the Company signed a letter of intent with one of those bidders,
LaSalle Group, Inc. ( LaSalle ) on September 29, 1996 involving a proposed
merger of the Company with LaSalle. On October 30, 1996, the Company entered
into a merger agreement (the Merger Agreement ) with LaSalle pursuant to which
the Company would have become a wholly-owned subsidiary of LaSalle and the
holders of the Company s common stock would have received cash of approximately
$3.78 per share. The transaction was approved by the common shareholders on
March 25, 1997 subject to the approval of certain state insurance regulators.
However, on May 15, 1997, LaSalle disclosed to the Company that it was unlikely
that its original source of funding for the merger would be available by
June 15 and that it was in the process of securing alternate funding. At that
time, the Company exercised its right to renew its search for another acquiror
to protect the Company in the event LaSalle s funding would not be available.
The Company then requested that certain previous bidders for the Company s
credit insurance business resubmit their bids for consideration.
On July 25, 1997, the Merger Agreement with LaSalle was terminated
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the merger transaction. Following
the receipt and evaluation by the Company of four new offers for the credit
insurance business, the Company signed a letter of intent on July 28, 1997 to
sell its credit insurance operations to LOTS, subject to a due diligence review
by LOTS. On September 19, 1997, an amended letter of intent was signed by the
parties and an Asset Purchase Agreement was subsequently signed on December 30,
1997. As indicated above, certain transactions contemplated by the Asset
Purchase Agreement required the approval of certain state insurance regulators
and the Company s preferred and common shareholders before being settled.
At the Special Meeting referred to above, the Company s shareholders also
approved a Plan of Liquidation and Dissolution (the Plan of Liquidation )
whereby, following the Sale of Assets, the Company would be liquidated by (i)
the sale of its remaining assets, (ii) the payment of all claims, liabilities
and expenses, (iii) the redemption and cancellation of all outstanding shares
of Preferred Stock at par value, and (iv) the pro rata distribution of all
remaining cash to the holders of Common Stock. The liquidation process is
expected to be concluded in approximately five years by a final liquidating
distribution to the shareholders of the Company. During that period, the
Company will consider and evaluate any other viable proposals for the sale of
the Company or its assets which would provide greater value to shareholders.
The assets and liabilities of the Company may be transferred to a
liquidating trust if the Board of Directors determines that the use of a
liquidating trust provides the best alternative for liquidating the Company. If
the Company s assets and liabilities are transferred to such a trust, all
distributions to shareholders would then be made directly from the liquidating
trust after the satisfaction of all liabilities.
OPERATIONS
The Company's principal subsidiaries, which, until October 1, 1997, were
engaged in the marketing of credit insurance business, are Consumers Life
Insurance Company and Investors Fidelity Life Assurance Corp. Together these
companies are licensed in 26 states and the District of Columbia. In August
1997, the Company sold another wholly-owned subsidiary, Consumers Life
Insurance Company of North Carolina, which had also been engaged in the sale
of credit insurance.
As noted in Item 1 - General, the Company sold its credit insurance
customer accounts to LOTS as of October 1, 1997 and, effective January 1, 1998,
the Company transferred to American Republic, through reinsurance, its
September 30, 1997 inforce block of credit insurance business and 100% of the
credit insurance business written in the fourth quarter of 1997. Although one
of the Company s insurance subsidiaries has agreed to allow all new credit
insurance premiums produced by the customer accounts which were sold to LOTS
to be written on the policy or certificate forms of the subsidiary until
September 30, 1999, all of this business will be reinsured 100% to American
Republic. As a result of these transactions with LOTS and American Republic,
the Company has no remaining business segments, since it sold the remainder
of its individual life insurance business as of January 1, 1997 and sold its
auto auction business in November 1996. The information appearing below
briefly describes the three business segments in which the Company previously
operated. The activities of the Company are now restricted primarily to the
collection of investment income on the Company s remaining invested assets,
the collection of fee revenues from LOTS relating to the sale of the Company
s credit insurance accounts and the payment of certain corporate costs and
other fixed overhead expenses.
AUTOMOTIVE RESOURCE DIVISION
Prior to the sale of its credit insurance and fee income accounts to LOTS
as of October 1, 1997, the Company marketed and retained the risk on credit
insurance in connection with consumer credit transactions, substantially all of
which were automobile purchases. Credit life insurance provides funds in the
event of the insured's death for payment of a specified loan or loans owed by
the insured. Similarly, credit disability insurance provides for the periodic
paydown of such loans during the term of the insured's disability. In most
cases, the entire premium is paid at the time the insurance is issued. Premiums
collected are remitted to the Company net of commissions. Credit insurance
generally is written on a decreasing term basis with the policy benefit
initially being the full amount of the loan and thereafter decreasing in
amounts corresponding to the repayment schedule. The primary beneficiary under
credit insurance is the lender, with any proceeds in excess of the unpaid
portion of the loan payable to a named second beneficiary or the insured's
estate.
The credit insurance business was the major source of the Company's
revenues and, until 1991, provided the majority of its profits as well.
Automobile sales accounted for substantially all of the credit insurance sold
by the Company. The credit insurance industry and the Company s credit business
were both adversely affected in recent years by the increase in the number of
automobiles which are leased instead of purchased. This is principally due to
the lack of availability of approved credit insurance products applicable to
leases and to a reluctance on the part of automobile dealers to emphasize the
sale of credit insurance products on lease transactions. (The Company had
credit insurance products available for lease transactions in most of the
states in which it actively marketed.)
The Company also marketed, in an agency capacity, extended service
automobile warranty products through its wholly-owned subsidiary, Consumers Car
Care Corporation. These products were underwritten by unaffiliated insurance
companies, administered by unaffiliated third party administrators and sold
primarily through automobile dealers who also sold the Company's credit
insurance. Other related products and services were also offered to the
Company's automobile dealer customers.
INDIVIDUAL LIFE INSURANCE DIVISION
In March of 1992, the Company announced the termination of this Division's
marketing activities and announced its intent to sell its existing blocks of
whole-life, term, annuity and universal life business. Effective October 1,
1992, the traditional whole-life, term and annuity business was sold for $5.6
million to the Londen Insurance Group located in Phoenix, Arizona. Effective
December 31, 1994, the Company coinsured its direct universal life business and
irrevocably assigned all its right, title and interest in a block of assumed
universal life business (coinsured from AMEX Life Assurance Company on a 90%
quota share basis) to American Merchants Life Insurance Company, located in
Jacksonville, Florida, for $5.5 million. The Company continued to provide all
policyholder administrative functions for this business pursuant to a service
agreement until May 1, 1995.
Effective January 1, 1997, the Company sold its remaining block of
individual life insurance business back to the direct writer of the business.
The direct writer paid the Company a recapture consideration of $1.05 million
in March 1997 when the transaction closed.
As a result of the disposal of the remaining insurance business of the
individual life insurance division, the operating results of this segment are
included with discontinued operations for all periods presented in the
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
AUTO AUCTION DIVISION
As indicated previously, the business and the related operating assets of
Interstate were sold in November 1996 for cash of $4.85 million. See Note 5 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K for further information concerning the sale and its impact on the
Company s operating results. Prior to the sale, Interstate conducted wholesale
automobile auctions of used vehicles at its facility in Mercer, Pennsylvania
(about 50 miles north of Pittsburgh). Interstate s customers included
automobile dealers and leasing companies. In connection with its weekly
auctions, Interstate provided a body shop repair and conditioning service and
an arbitration service through which disputes between buyers and sellers were
resolved.
In 1996, prior to the sale of the business, approximately 28,000 cars were
registered for sale at Interstate through the regular weekly consignment
auction, and approximately 57% of all vehicles registered were sold. In 1995,
approximately 35,000 cars were registered for sale at Interstate through the
regular weekly consignment auction, and approximately 56% of those vehicles
were sold. Auction fees were generally paid by the seller for each vehicle
sold and an additional fee was paid by the purchaser. The purchaser s fees
varied according to the price paid for the automobile.
INVESTMENTS
The Company's general investment policy with respect to assets of its
insurance subsidiaries has historically been to invest primarily in fixed
maturity securities and, to a lesser extent, in mortgages with intermediate
terms (generally not more than seven years). Investments in mortgages allowed
the Company to obtain higher yields while maintaining maturities in the five to
seven year range. Prior to the sale of the Company s direct universal life
business, the Company's investment policy also included investing in certain
m o r tgage-backed securities which provided competitive yields on assets
supporting these interest sensitive products. In order to provide the liquidity
necessary to consummate the Sale of Assets transaction with American Republic
and LOTS and to eliminate the market risk on the bond portfolio, the Company
sold substantially all of its bonds in late 1997 and early 1998.
The Company s mortgage loan portfolio, which relates primarily to
commercial real estate, has declined significantly during the past three years,
from $9.9 million at the end of 1994 to $2 million at December 31, 1997. The
r e duction is primarily attributable to the sale of certain mortgages,
refinancings and early payoffs. The mortgage portfolio has generally been
concentrated in the Central Pennsylvania area. The Company considers this
strategy to be conservative because this region has historically not been
particularly susceptible to wide economic swings in recessionary times, due to
the diversity of industries throughout the area and the presence of government
operations and military installations.
Investments in government and corporate bonds have historically been
limited to those with a Moody s or Standard & Poors rating of A or better. The
Company bought U.S. Treasury Notes for their yield and superior liquidity
features. The Company also purchased U.S. Government agency bonds and corporate
bonds provided such bonds were part of large liquid issues (over $100 million)
and, in the case of corporate bonds, represented economic balance and
diversification. The Company also bought foreign bonds denominated in U.S.
dollars (Yankee Bonds), thereby avoiding exposure to foreign currency risk.
Short-term investments are maintained primarily to meet anticipated cash
requirements arising from operations. As of December 31, 1997, the fixed
maturities portfolio did not contain any non-investment grade securities. The
Company defines a non-investment grade security as any security rated below
Baa3 by Moody s Investors Service and below BBB by Standard and Poor s Rating
Service. The assets of the Company's non-insurance subsidiaries generally have
been invested in short-term instruments.
The following table sets forth the Company's investment results for the
periods indicated:
Years Ended December 31,
1997 1996 1995
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
(Restated) (Restated)
Interest:
Fixed maturities $1,934 6.7 $2,364 6.2 $2,175 6.8
Mortgage loans 189 8.7 421 9.0 692 8.1
Policy loans 33 6.6 58 13.9 (2)
Short-term
investments 486 4.4 265 4.5 221 4.7
Real estate 157 (1) 332 30.7 (3)
Other 82 9.7 17 1.0 3 0.2
2,691 6.3 3,257 6.5 3,481 7.2
Investment expenses (675) (1.6) (680) (0.9) (702) (0.1)
Total net investment
income $2,016 4.7 $2,577 5.6 $2,779 6.3
Less net investment
income attributable
to discontinued
operations 1,953 2,518 2,739
Net investment income
attributable to
continuing operations $63 $59 $40
(1) Represents rental income related to three properties classified as non-
investment real estate.
(2) Includes $27,000 in interest which should have been included in 1994
income. If this income had been included in 1994, the yield in 1995 would
have been 7.4% and the 1994 yield would have been 7.3%.
(3) Includes $170,000 in rental income related to a property classified as
non-investment real estate. Excluding this income, the real estate yield
is 6.8%.
COMPETITION
Prior to the sale of its customer accounts to LOTS as of October 1, 1997,
the Company competed with numerous other credit insurance companies, many of
which were larger than the Company and had greater financial and marketing
resources. The principal competitive factors in the automobile credit insurance
industry are commission levels, the quality of training for dealers, the
variety of related products, the availability of dealer incentive programs and
the level of administrative support and efficiency of claims handling
procedures.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the states in which they are licensed. The extent of such
regulation varies from state to state, but, in general, each state has
statutory restrictions and a supervisory agency which has broad discretionary
administrative powers. Such regulation is designed primarily to protect
policyholders and relates to the licensing of insurers and their agents, the
approval of policy forms, the methods of computing financial statement
reserves, the form and content of financial reports and the type and
concentration of permitted investments. The Company's insurance subsidiaries
are subject to periodic examination by the insurance departments in the states
of their formation and are also subject to joint regulatory agency examination
and market conduct examinations in the other states in which they are
authorized to do business.
Certain states in which the Company is licensed have regulations limiting
the credit insurance premium rates or the commissions payable to agents or, in
some cases, limiting both rates and commissions payable. In addition, some
states have regulations that require credit insurance claims ratios to be a
specified percentage of earned premiums. If an insurer's claims ratio is below
the prescribed benchmark, it is required to reduce premium rates and,
conversely, if the claims ratio is higher than the benchmark, the insurer may
request an increase in premium rates.
The dividends which a life insurance company may distribute are subject to
regulatory requirements based upon minimum statutory capital and surplus and/or
statutory earnings. In addition to regulatory considerations, the overall
financial strength of each operating entity is considered before dividends are
paid. Additionally, the amount of dividends a life insurance company can pay is
subject to certain tax considerations. See Notes 3 and 17 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
The Company is also subject to regulation under the insurance holding
company laws of various states in which it does business. These laws vary from
state to state, but generally require insurance holding companies and insurers
that are subsidiaries of holding companies to register and file certain
reports, including information concerning their capital structures, ownership,
financial condition and general business operations, and require prior
regulatory agency approval of changes in control of an insurer, most dividends
and intercorporate transfers of assets within the holding company structure.
The purchase of more than 10% of the outstanding shares of the Company's
common stock by one or more affiliated parties would require the prior
approval of certain state insurance departments which regulate the Company.
EMPLOYEES AND AGENTS
As of December 31, 1997, the Company had approximately 42 full-time
employees, including its management and sales personnel. In addition, as of
that date there were approximately 900 licensed agents selling credit
insurance and vehicle extended service contracts, most of whom were full-
time employees of automobile dealers, banks and other financial institutions.
On January 1, 1998, all of the Company s remaining sales personnel resigned
and became employees of LOTS in connection with the transactions discussed
earlier in this Item 1, and certain other administrative employees were
terminated. As of March 31, 1998, the Company had eight full-time employees.
The Company has adequate insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. The Company does not
have similar coverage for its agents. There can be no assurance that the
Company will be able to continue to obtain such coverage in the future or
that it will not experience uninsured losses.
ITEM 2. PROPERTIES
Since September 1989, the Company has maintained its executive and
business offices in a leased building located at 1200 Camp Hill By-Pass, Camp
Hill, Pennsylvania. The office building contains approximately 44,500 square
feet of office space. Prior to 1993, the Company leased the entire facility at
an annual rental of $421,000, plus insurance, taxes and utilities. As a result
of the termination in 1992 of all new business functions in the Individual Life
Insurance Division and the transaction with LOTS discussed earlier in this Item
1, the Company now occupies approximately 48% of the available office space.
The Company has leased about 33% of the remaining space to third party tenants.
Annual rental income to the Company under these sub-leases totals $84,000. In
March of 1994, the Company exercised its option to acquire a 50% interest in
its home office building, which reduced the Company s annual rent to $204,000.
The option price was approximately $1.75 million. Except as otherwise noted,
the remaining business operations of the Company and all of the subsidiaries
are conducted at the above address in Camp Hill, Pennsylvania.
In connection with its credit insurance operations, Consumers Life
maintained a branch office in leased facilities in Philadelphia, Pennsylvania
until December 31, 1997. The branch office primarily provided supervision,
sales and service for credit insurance agents doing business in the eastern
Pennsylvania, Delaware and New Jersey areas. Annual rental for this office was
approximately $27,000.
Investors Fidelity Life Assurance Corp. maintained an office in leased
facilities in Columbus, Ohio until December 31, 1997. This office primarily
provided sales support and supervision for credit insurance agents in the State
of Ohio. Annual rental for this office was approximately $13,000 plus
insurance, taxes and utilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits which are ordinary and routine
litigation incidental to its business. None of these lawsuits is expected to
have a materially adverse effect on the Company's financial condition or
operations. See Note 14 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K for additional information concerning
litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise. However, at the Special Meeting held on March 24, 1998,
the holders of Preferred Stock and Common Stock, each voting separately as a
class, approved (i) the Sale of Assets transaction, in which the Company sold
its inforce block of credit insurance business to American Republic, financial
partner of LOTS and (ii) the Plan of Liquidation whereby the Company will wind
up its affairs and ultimately be liquidated and dissolved.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Consumers Financial Corporation common stock is currently traded on the
NASDAQ National Market System with its ticker symbol being CFIN. The Company s
Convertible Preferred Stock, Series A was also traded on the NASDAQ National
Market System until March 16, 1998, when it was delisted by NASDAQ for non-
compliance with the new public float requirement of a minimum of 750,000 shares
under Maintenance Standard 1, pursuant to NASD Marketplace Rule 4450(a)(3)
which became effective on February 23, 1998. The Company has also received
notice from NASDAQ that its common stock was not in compliance with the new
market value of public float requirement, and if the Company does not come
into compliance with the new Marketplace Rule on or before May 28, 1998, the
common stock will be subject to delisting. Since the shareholders of the
Company approved the Plan of Liquidation and Dissolution on March 24, 1998,
the Company does not intend to appeal the delisting decision for either the
preferred or common stock, take any steps to come into compliance with the
Marketplace Rules or attempt to seek inclusion on the NASDAQ Small Cap Market.
1997 QUARTERLY STOCK PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Common Stock
High 3 3/4 3 3/4 2 1/4 1 3/16
Low 3 11/16 2 1/2 1 1/8 1
Convertible Preferred
Stock, Series A
High 8 1/4 8 1/2 8 1/2 8 1/4
Low 8 1/4 8 1/4 8 7
Directors, officers and employees of the Company have a sizeable ownership
position in the Company, which has been derived from the Company s longstanding
belief that this ownership position would provide a strong incentive for all
parties involved to enhance shareholder value. At December 31, 1997, the
Company s Employee Stock Ownership Plan held 8% of the total common stock
outstanding.
As of December 31, 1997, there were 6,699 shareholders of record who
collectively held 2,596,155 common shares and 113 shareholders of record of the
Convertible Preferred Stock, Series A, who held 481,461 shares.
Dividends on both the Company s common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. No common stock
dividends were declared in either 1997, 1996 or 1995; however, common stock
dividends had been paid for 14 consecutive years through 1994. The Convertible
Preferred Stock, Series A, dividends are paid quarterly on the first day of
January, April, July and October. The annual Convertible Preferred Stock,
Series A, cash dividend is $.85 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the Consolidated Financial Statements and the Notes thereto.
(NOT COVERED BY INDEPENDENT AUDITOR S REPORT)
Years Ended December 31,
dollar amounts in thousands,
except per share 1997 1996 1995 1994 1993
(Restated) (Restated) (Restated) (Restated)
Total revenues (excluding change
in unearned premiums) $40 $378 $664 $201 $1,936
Premiums written (37) 353 685 622 987
Net investment income 63 59 40 54 111
Net return on average investments 4.9% 5.4% 6.0% 6.7% 7.2%
Loss from continuing operations (1,441) (1,737) (1,429) (2,062) (781)
Discontinued operations (4,919) 503 (172) 850 (34)
Loss before cumulative
effect of change in
accounting principles (6,360) (1,234) (1,601) (1,212) (815)
Cumulative effect of change
in accounting principles 299 (710)
Net loss (6,360) (1,234) (1,601) (913) (1,525)
Basic and diluted income
(loss) per common share:
Loss from continuing
operations (0.73) (0.83) (0.71) (0.94) (0.45)
Discontinued operations (1.89) 0.19 (0.07) 0.32 (0.01)
Loss before cumulative effect
of change in accounting
principles (2.62) (0.64) (0.78) (0.62) (0.46)
Cumulative effect of change
in accounting principles 0.11 (0.26)
Net loss (2.62) (0.64) (0.78) (0.51) (0.72)
December 31,
1997 1996 1995 1994 1993
Total assets $85,035 $114,619 $123,322 $125,276 $144,393
Total debt 0 0 2,537 3,389 4,683
Shareholders equity and
redeemable preferred stock 6,724 13,343 15,671 15,226 19,502
Shareholders equity per
common share 0.78 3.31 4.20 3.96 5.41
Cash dividends declared per
common share NONE NONE NONE 0.05 0.05
NOTE 1: The financial data for the years ended December 31, 1993 through
1996 has been restated to reflect the operating results of the
Company s Automotive Resource Division as a discontinued operation.
NOTE 2: The earnings per share amounts presented above have been computed in
accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128). Adoption of SFAS 128 did not result
in the restatement of any per share amounts for years prior to 1997.
For further discussion of the calculation of per share amounts under
SFAS 128, see Note 18 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's 1997
operating performance as well as its financial position at December 31, 1997 is
presented below. Information relating to 1996 and 1995 is also presented for
comparative purposes. This analysis should be read in conjunction with the
Consolidated Financial Statements and the related Notes appearing elsewhere in
this Form 10-K.
OVERVIEW
The most significant event affecting the Company in 1997 was the
termination of the planned merger with LaSalle Group, Inc. (the "Merger"). As
discussed below, the Company entered into an Agreement and Plan of Merger with
LaSalle in October of 1996 in order to preserve shareholder value in light of
the Company's recurring operating losses which had significantly reduced its
total capital and its liquidity position. The Merger would have resulted in the
cash payment of $3.78 per share to the Company's common shareholders. The
Company was forced to terminate the Merger because, despite repeated assurances
to the contrary, LaSalle was unable to provide the cash funds necessary to
complete the Merger.
Since the Company had received no other viable offers to acquire the
entire organization, the Board of Directors and management determined that
selling the Company's remaining business operations, liquidating all of its
assets and distributing cash to the Company's shareholders was necessary in
order to fully provide for the Company's obligations to its preferred
shareholders and to preserve some value for the common shareholders. Therefore,
following the termination the Merger and the review and evaluation of new bids
for the Company's credit insurance operations, the Company signed an Asset
Purchase Agreement (the "Agreement") on December 30, 1997 to sell its credit
insurance and fee income business as well as the stock of one of its insurance
subsidiaries to Life of the South Corporation, a Georgia-based financial
services holding company ("LOTS"). The Board of Directors also adopted a plan
of liquidation and dissolution (the "Plan of Liquidation and Dissolution")
pursuant to which the Company will be liquidated and dissolved in accordance
with provisions of the Pennsylvania Business Corporation Law. The Plan of
Liquidation and Dissolution was approved by the Company s shareholders on
March 24, 1998.
RESULTS OF OPERATIONS
As stated above, in December 1997, the Company entered into an Agreement
to sell its remaining business operations, following the sale of its auto
auction business in 1996 and the sale in early 1997 of the rest of its
individual life insurance business. Consequently all of these businesses have
been presented in the Consolidated Financial Statements appearing elsewhere in
this Form 10-K as discontinued operations. The Company's continuing operations
now consist principally of (i) earned premiums and related acquisition and
claims costs associated with a very small closed block of extended service
contract business, (ii) investment income on existing assets, (iii) fee income
from LOTS from the sale of the Company's customer accounts and (iv) overhead
expenses. A discussion of the material factors which affected the Company's
results from continuing operations and, where applicable, the results from its
discontinued operations is presented below. Information for 1996 and 1995 is
also presented for comparative purposes.
CONTINUING OPERATIONS
The Company's pre-tax loss from continuing operations decreased from a
restated level of $2.3 million in 1996 to a loss of $1.7 million in 1997. In
1995, the restated loss was $1.9 million. As indicated above, continuing
operations are now limited primarily to fee revenues from LOTS, investment
income and corporate expenses. The block of extended service business produces
a relatively insignificant amount of operating income or loss. A decrease in
corporate expenses in 1997 is the major reason for the reduced loss from
continuing operations compared to 1996. The 1997 results were adversely
affected by a $744,000 write-down of the Company's real estate holdings,
including its home office building which is classified with property
and equipment.
DISCONTINUED OPERATIONS - AUTOMOTIVE RESOURCE DIVISION
Premium revenues from credit insurance, the Division's principal product,
declined 13.1% in 1997 following a 9.5% decrease in 1996 compared to 1995.
Credit insurance premiums in 1997 totaled $26.1 million in 1997 compared to
premiums of $30 million and $33.1 million in 1996 and 1995, respectively. The
decline in premium revenues in all periods is the result of the cancellation by
the Company of unprofitable accounts in several states over the past few years,
but it also reflects the loss of accounts and the Company's inability to
attract new accounts because of its financial condition.
As shown in Note 5 of the Notes to Consolidated Financial Statements, the
pre-tax operating results of this discontinued division, including the
estimated pre-tax loss on disposal of the business, declined significantly in
1997 to a loss of $5.5 million compared to a restated loss of $1.3 million in
1996 and a restated loss of $875,000 in 1995. A $3.1 million estimated loss on
the sale of the credit insurance business in 1998, which has been reflected
in the 1997 financial statements as a write-down of deferred policy
acquisition costs, and a $381,000 charge for employee severance payments are
the major reasons for the decline in operating results of this discontinued
segment. Increased life and disability claims on business retained by the
Company (i.e., business not reinsured to producer-owned captives) also
contributed to the poorer operating results in 1997.
Effective January 1, 1998, the Company will reinsure its September 30,
1997 inforce block of credit insurance business and 100% of the credit
insurance premiums written and processed in the fourth quarter of 1997 to
American Republic Insurance Company ("American Republic"), which is acting as
LOTS' financial partner in this transaction. LOTS and the Company have also
agreed that, with respect to the Company's principal insurance subsidiary, new
credit insurance business produced by that subsidiary's former customer
accounts, which have now been transferred to LOTS, will continue to be written
on the policy or certificate forms of the subsidiary until September 30, 1999,
or an earlier date which may be agreed to by the parties. This premium and
the related insurance risk will also be reinsured 100% to American Republic.
DISCONTINUED OPERATIONS - INDIVIDUAL LIFE INSURANCE DIVISION
Operations in the Individual Life Insurance Division in 1996 and 1995 were
limited to one closed block of assumed universal life business, following the
sale of the Division's direct universal life business in 1994 and the sale of
its traditional whole life and term business in 1992. In March 1997, the
Company completed a reinsurance transaction with World Insurance Company
("World"), which was effective January 1, 1998, pursuant to which World
recaptured the universal life insurance business previously assumed by the
Company from World through a joint venture agreement which began in 1987. World
initially paid a recapture consideration to the Company in the amount of $1.
05 million. In exchange, the Company transferred to World assets supporting
the net statutory basis policy reserves for this business. Based on the
recapture consideration received, the Company wrote off $1.4 million in
deferred policy acquisition costs which were not recoverable. This write-off,
which totaled $914,000 on an after-tax basis, was presented as a loss on
disposal of the discontinued segment in the Company's 1996 financial
statements.
During 1997, the parties agreed to make certain adjustments to the
recapture consideration which, together with a $123,000 loss on bonds sold in
1997 in order to close the transaction, resulted in an additional loss on
disposal of $167,000, net of income tax benefits, which has been reported in
1997. In 1996, excluding the $914,000 write-off, the Division reported pre-tax
income of $393,000 compared to restated pre-tax income of $83,000 in 1995. The
Division's operating results for 1996 and 1995 reflect the elimination of any
continuing overhead and indirect costs which had previously been allocated to
this Division.
DISCONTINUED OPERATIONS - AUTO AUCTION DIVISION
In November 1996, the Company sold the auto auction business and related
operating assets (property and equipment and inventories) of Interstate Auto
Auction to ADESA Pennsylvania, Inc. for cash of $4.85 million. The Division's
pre-tax income for the first nine months of 1996, which excluded any continuing
overhead, was $554,000 compared to income of $732,000, as restated to eliminate
any continuing overhead, in 1995. The operating results of the auto auction
after September 30, 1996, when the Company finalized its plan to dispose of the
business, were included with the gain realized on the disposal of the auction
business. The auction generated an $84,000 pre-tax loss ($57,000 after taxes)
during this period. Approximately $1.7 million of the proceeds from the sale of
the auto auction business was used to repay the remaining amount due on the
Company's bank loans.
During 1997, the Company incurred $22,000 of final expenses relating to
the auction business which have been presented as an additional loss on
disposal of the discontinued business.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's financial
position at December 31, 1997 and 1996 is presented below.
INVESTED ASSETS
Invested assets at December 31, 1997 were $41 million compared to $51.2
million at the end of 1996. A substantial portion of the decline is the result
of the settlement on the reinsurance transaction with World, in which the
Company transferred approximately $8.8 million in cash and investments to
World. In addition, the asset base at December 31, 1996 included approximately
$500,000 which was required in the first quarter of 1997 to pay the Federal
and state income taxes on the gain from the sale of the Company's auto auction
business in 1996.
During the fourth quarter of 1997, the Company sold a substantial portion
of its bond portfolio in connection with the planned sale of its credit
insurance business to LOTS. At the closing of the transaction, which is
expected to occur in April 1998, the Company will deliver cash to cover the
statutory reserve liabilities reinsured to American Republic, as LOTS'
financial partner.
The bonds were sold in 1997 not only to provide the liquidity necessary
to close the transaction but also to eliminate the market risk on the
portfolio during the period prior to closing. The proceeds from the sale of
the securities were reinvested in money market funds. As a result, 80% of the
Company's total invested assets at the end of 1997 were short-term investments.
The Company sold most of its remaining bonds in early 1998.
Prior to the sale of its various insurance operations, the Company s
general investment policy emphasized fixed maturity securities (primarily
bonds) with Moody's or Standard and Poor's ratings of A or better and mortgage
loans with terms generally not more than seven years. The Company did not
invest in non-investment grade securities because the greater returns on such
investments did not justify the potentially greater risks.
During 1997, the Company increased its loan loss reserves for mortgage
loans and investment and non-investment real estate by $229,000. Loan loss
reserves were increased by $35,000 and $93,000 in 1996 and 1995, respectively.
Management believes that its reserves at December 31, 1997 are adequate to
cover any possible losses which may develop in its mortgage loan and real
estate portfolios. The carrying value of these investments at December 31,
1997 was $2.9 million compared to $3.4 million at the end of 1996.
LIQUIDITY
Liquidity refers to a company s ability to meet its financial obligations
and commitments as they come due. The Company s operating subsidiaries have
historically met most of their cash requirements from funds generated from
operations. However, the recurring operating losses incurred by the subsidiar-
ies have significantly reduced the subsidiaries and, in turn, the Company s
liquidity positions, resulting in the decision to sell the Company s remaining
business, liquidate all assets, distribute cash to the shareholders and
ultimately dissolve.
The principal sources of cash funds of the life insurance subsidiaries
have historically been premiums and investment income, as well as proceeds from
sales and maturities of investments. These companies used cash primarily to pay
commissions, claims and operating expenses. Credit insurance was the Company s
principal product line and credit insurance premiums were therefore the
Company s principal source of premium revenues. Credit insurance premium levels
during the past five years are substantially lower than the premium levels
prior to the economic recession in the early 1990's. This continued reduction
in cash funds has depleted most of the Company s short-term cash reserves and
has caused a decline in its long-term investment base. The assessment by the
Company s management and its Board of Directors that this decrease in revenues
and the related decline in operating results could not be reversed within a
reasonable period of time led to the decision in early 1996 to evaluate other
alternatives to best serve the interests of its shareholders, which, in turn,
led to the plan referred to above and discussed elsewhere in this Management
s Discussion.
CAPITAL RESOURCES
The Company s total equity decreased significantly in 1997 due primarily
to the $6.3 million net loss. The decrease is also attributable to $409,000 in
dividends paid to preferred shareholders. Total equity, including redeemable
preferred stock, was $6.5 million at December 31, 1997 compared to $13.3
million at the end of 1996. Shareholders equity per common share also
decreased from $3.31 at December 31, 1996 to $.78 at the end of 1997.
INFLATION
Because of the Company s current plans to liquidate its assets, distribute
cash to its shareholders and ultimately dissolve, the effects of inflation on
the Company are minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation,
integrity and objectivity of the financial information contained in this Form
10-K. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Such statements
include informed estimates and judgements of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Financial information presented in this annual report is consistent
with that in the financial statements.
Accounting procedures and related systems of internal control have been
established to provide reasonable assurance that the books and records
reflect the transactions of the Company and that established policies and
procedures are properly implemented by qualified personnel. Such systems are
evaluated regularly to determine their effectiveness.
The consolidated financial statements for the years ended December 31,
1997, 1996 and 1995 have been audited by Arthur Andersen LLP, independent
auditors. Such audits were conducted in accordance with generally accepted
auditing standards, and include a review and evaluation of our internal
accounting control structure, tests of the accounting records and other audi-
ting procedures they consider necessary to express their informed professional
opinion on the consolidated financial statements.
The Board of Directors, with the assistance of its Audit Committee,
monitors the financial and accounting operations of the Company. The Committee,
composed of non-employee members of the Board of Directors, meets periodically
with representatives of its independent auditing firm to discuss the scope of
its audit and related reports. The Company s independent auditors have at all
times full and free access to the Audit Committee, without management present,
to discuss any matter that they believe should be brought to the attention of
the Committee.
James C. Robertson R. Fredric Zullinger
Chairman, Chief Executive Officer Senior Vice President and
and President Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance sheets of Consumers
Financial Corporation (a Pennsylvania corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements and the sche-
dules referred to below are the responsibility of the Company s management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to ob-
tain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted account-
ing principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 5 of the Notes
to Consolidated Financial Statements, the Company has discontinued the opera-
tions of its credit insurance, individual life insurance and auto auction
segments and has adopted a plan of liquidation and dissolution. As further
discussed in Note 5, the Company has suffered recurring losses from operations
that have significantly reduced its net capital and liquidity position and
it has significantly reduced its number of employees, all of which raise
substantial doubt about the Company s ability to continue as a going concern.
Management s plans in regard to these matters are also described in Note 5.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 14(a) are presented for purposes
of complying with the Securities and Exchange Commission s rules and are not
part of the basic financial statements. The amounts included in these schedules
have been subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 31, 1998
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(dollar amounts in thousands) 1997 1996
ASSETS
Investments:
Fixed maturities $5,857 $42,618
Mortgage loans on real estate 2,086 2,286
Policy loans 518
Other invested assets 295 984
Short-term investments 32,763 4,783
Total investments 41,001 51,189
Cash 641 556
Accrued investment income 268 731
Receivables 16,639 20,290
Prepaid reinsurance premiums 9,572 17,338
Deferred policy acquisition costs 13,570 18,949
Property and equipment 1,350 2,168
Other real estate 783 1,115
Other assets 1,211 2,283
$85,035 $114,619
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
Liabilities:
Future policy benefits $21,467 $35,386
Unearned premiums 49,994 56,178
Other policy claims and benefits payable 2,539 2,736
Other liabilities 4,556 5,495
Income taxes:
Current 430 1,185
Deferred (445) 296
Total liabilities 78,541 101,276
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible,
authorized 632,500 shares; issued 1997,
514,261 shares; 1996, 536,500 shares;
outstanding 1997 and 1996, 481,461
shares; redemption amount 1997 and 1996,
$4,815; net of treasury stock of $271
in 1997 and $453 in 1996 4,688 4,693
Shareholders equity:
Common stock, $.01 stated value,
authorized 10,000,000
shares; issued 1997, 3,019,110 shares,
1996, 3,021,496 shares; outstanding
1997, 2,596,155 shares, 1996,
2,611,532 shares 30 30
Capital in excess of stated value 7,989 7,966
Net unrealized appreciation of debt
and equity securities,
net of income taxes 54 70
Retained earnings (deficit) (4,796) 2,009
Treasury stock (1,471) (1,425)
Total shareholders equity 1,806 8,650
$85,035 $114,619
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except
per share amounts) 1997 1996 1995 (Restated) (Restated)
Revenues:
Premiums written ($37) $353 $685
Decrease (increase) in
unearned premiums 393 64 (291)
Premium income 356 417 394
Net investment income 63 59 40
Realized investment losses (176) (69) (120)
Fees and other income 190 35 59
Total revenues 433 442 373
Benefits and expenses:
Death and other benefits 460 581 512
Amortization of deferred policy
acquisition costs 10 12 7
Operating expenses 1,639 2,118 1,798
Total benefits and expenses 2,109 2,711 2,317
Loss from continuing operations
before income tax benefit (1,676) (2,269) (1,944)
Income tax benefit (235) (532) (515)
Loss from continuing operations (1,441) (1,737) (1,429)
Discontinued operations:
Loss from operations of
discontinued business (net
of income taxes) (825) (382) (172)
Gain (loss) on disposal of
discontinued business
(net of income taxes) (4,094) 885
(4,919) 503 (172)
Net loss ($6,360) ($1,234) ($1,601)
Basic and diluted income (loss)
per common share:
Loss from continuing operations ($0.73) ($0.83) ($0.71)
Discontinued operations (1.89) 0.19 (0.07)
Net loss ($2.62) ($0.64) ($0.78)
Weighted average number of
shares outstanding 2,601 2,614 2,634
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Capital Net unrealized
excess appreciation Retained
Common stock stated Fixed Equity earnings
(dollar amounts in thousands) Shaares Amount value maturities securities (deficit)
BALANCE, JANUARY 1, 1995 3,061 $31 $8,129 $197 $22 $5,734
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year 2,648 9
Preferred stock dividends (409)
Accretion of difference between fair
value and mandatory redemption value
of preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (30) (1) (113)
Net loss for the year (1,601)
BALANCE, DECEMBER 31, 1995 3,031 30 8,016 674 31 3,688
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (609) (26)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (10) (50)
Net loss for the year (1,234)
BALANCE, DECEMBER 31, 1996 3,021 30 7,966 65 5 2,009
Change in net unrealized appreciation
(depreciation) of fixed maturities and
equity securities for the year (11) (5)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares-common (2) (10)
Retirement of treasury shares-preferred 33
Net loss for the year (6,360)
BALANCE, DECEMBER 31, 1997 3,019 $30 $7,989 $54 $0 ($4,796)
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Treasury stock Total
(dollar amounts in thousands) Shares Amount amount
BALANCE, JANUARY 1, 1995 (382) ($1,337) $10,605
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year 2,657
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (58) (202) (202)
Retirement of treasury shares 30 114
Net loss for the year (1,601)
BALANCE, DECEMBER 31, 1995 (410) (1,425) 11,014
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (635)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (10) (50) (50)
Retirement of treasury shares 10 50
Net loss for the year (1,234)
BALANCE, DECEMBER 31, 1996 (410) (1,425) 8,650
Change in net unrealized appreciation
(depreciation) of fixed maturities
and equity securities for the year (16)
Preferred stock dividends (409)
Accretion of difference between fair value
and mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (15) (56) (56)
Retirement of treasury shares-common 2 10
Retirement of treasury shares-preferred 33
Net loss for the year (6,360)
BALANCE, DECEMBER 31, 1997 (423) ($1,471) $1,806
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands) 1997 1996 1995
Cash flows from operating activities:
Net loss ($6,360) ($1,234) ($1,601)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Provision for permanent decline in
value of investments 158 50
Deferred policy acquisition costs
incurred (9,771) (8,987) (11,005)
Amortization of deferred policy
acquisition costs 12,615 11,964 10,734
Provision for permanent decline in
value of property and equipment
and other real estate 942
Other amortization and depreciation 483 433 613
Change in future policy benefits (2,696) 454 2,063
Change in unearned premiums (6,183) (1,765) 1,392
Amounts due reinsurers (1,226) 2 (86)
Income taxes (1,601) (22) (318)
Change in prepaid reinsurance premiums 7,765 1,266 580
Change in receivables 4,618 3,455 3,225
Change in other liabilities 415 (695) (117)
Other 186 (88) 81
Total adjustments 5,705 6,067 7,162
Net cash provided by (used in) operating
activities (655) 4,833 5,561
Cash flows from investing activities:
Purchase of investments (39,231) (13,140) (9,657)
Maturity of investments 2,195 6,484 7,027
Sale of investments 46,424 6,598 2,190
Purchase of property and equipment (24) (371)
Transfer of assets in sale of universal
life business (8,175)
Net cash provided by (used in) investing
activities 1,213 (82) (811)
Cash flows from financing activities:
Principal payments on debt (2,537) (852)
Receipts from universal life and investment
products 4,775 4,938
Withdrawals on universal life and
investment products (6,425) (9,029)
Purchase of treasury stock, including
8 1/2% redeemable preferred stock (64) (50) (201)
Cash dividends to shareholders (409) (409) (409)
Net cash used in financing activities (473) (4,646) (5,553)
Net increase (decrease) in cash 85 105 (803)
Cash at beginning of year 556 451 1,254
Cash at end of year $641 $556 $451
Supplemental disclosures of cash flow
information:
Cash paid (received) during the year for:
Interest $255 $305
Income taxes $90 $154 $75
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. COMPANY OVERVIEW
The Company has incurred operating losses over the past five years which
have significantly reduced its net worth and its liquidity position. In late
1997, the Company signed an agreement to sell its core credit insurance and
related products business, which had been its only remaining business opera-
tion, following the sales in 1994 and 1997 of all of its universal life
insurance business and the 1996 sale of its auto auction business. After the
sale of the credit insurance business, the Company s income or loss from
continuing operations will consist principally of (i) earned premium and
related costs associated with a small, closed block of extended service
contract business, (ii) fee revenues which will be received from LOTS, (iii)
investment income on remaining assets and (iv) corporate expenses.
On March 24, 1998, the Company s shareholders approved a plan of
liquidation and dissolution (the Plan of Liquidation and Dissolution) pursuant
to which the Company intends to liquidate its remaining assets, provide for all
of its liabilities, redeem its preferred stock at par value and distribute all
remaining cash to its common shareholders. Inasmuch as certain payments from
LOTS will be received over a five-year period, the final distribution to the
common shareholders will not be made until late in 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Consumers Financial Corporation is an insurance holding company which,
until October 1, 1997, was a leading provider, through its subsidiaries, of
credit life and credit disability insurance in the Middle Atlantic region of
the United States. See Note 5 with respect to the sale of the Company s inforce
credit insurance business and its credit insurance and fee income accounts.
Basis of financial statements
The financial statements have been prepared on the basis of generally
accepted accounting principles (GAAP) which, as to the life insurance company
s u bsidiaries, vary from reporting practices prescribed or permitted by
regulatory authorities. Certain prior year amounts have been reclassified to
conform with classifications used for 1997.
Principles of consolidation
The consolidated financial statements include the accounts of Consumers
Financial Corporation (the Company) and its wholly-owned subsidiaries, the most
significant of which are Consumers Life Insurance Company (Consumers Life) and
Consumers Car Care Corporation. Investors Fidelity Life Assurance Corp.
(Investors Fidelity) and Consumers Reinsurance Company are subsidiaries of
Consumers Life. All material intercompany accounts and transactions have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Investments
Fixed maturities includes bonds, notes and certificates of deposit
maturing after one year. Management determines the appropriate classification of
bonds and notes at the time of purchase and reevaluates such designation as of
each balance sheet date. These securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. All other
bonds and notes are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of income taxes, reported as a separate component of shareholders equity. The
amortized cost of fixed maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. All certificates of deposits
maturing after one year are deemed to be held to maturity. Equity securities
(common and non-redeemable preferred stocks) held by the insurance subsidiaries
are stated at fair value.
Mortgage loans on real estate are carried at the unpaid principal balance.
Policy loans are carried at their unpaid balance. Other invested assets,
excluding real estate partnerships, and short-term investments are carried at
cost. Investments in real estate partnerships are reported at equity.
Interest on fixed maturities and short-term investments is credited to
income as it accrues on the principal amounts outstanding, adjusted for
amortization of premiums and discounts computed by the interest method.
Dividends are recorded as income on the ex-dividend dates. Loan origination and
commitment fees are amortized, using the interest method, over the life of the
mortgage loan. The accrual of interest on mortgage loans is generally
discontinued when the full collection of principal is in doubt, or when the
payment of principal or interest has become contractually 90 days past due.
Realized gains and losses and provisions for permanent losses on
investments are included in the determination of operating income. Net
unrealized appreciation or depreciation of debt securities and preferred and
common stocks, which represents the difference between fair value and aggregate
cost, is included in a separate shareholders' equity account. The "specific
identification" method is used in determining the cost of investments sold.
Fair values of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments. The
fair values for equity securities are based on quoted market prices and are
recognized in the balance sheet (see Note 6).
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for similar loans to borrowers with similar credit ratings. The
carrying amounts for policy loans approximate their fair values.
Long-term debt: The carrying amount for long-term debt approximates its
fair value.
Deferred policy acquisition costs
The costs of acquiring new business, including costs incurred subsequent
to the year of issue in excess of the ultimate level costs, principally
commissions, certain sales salaries and those home office expenses that vary
with and are primarily related to the production of new business, have been
deferred. Deferred policy acquisition costs related to universal life-type
policies and investment products were amortized in relation to the present
value of expected gross profits on the policies. Acquisition costs relating
to single premium credit insurance have been amortized so as to charge
each year's operations in direct proportion to premiums earned. Deferred policy
acquisition costs are expensed when such costs are deemed not to be recoverable
from future earned premiums and investment income or, when applicable, from the
estimated proceeds to be received from the sale of the related insurance
business.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation is being provided
on the straight-line method over the estimated useful lives of the assets.
Other real estate
Real estate is carried at the lower of cost or fair value, less estimated
selling costs.
Future policy benefits
The liability for future policy benefits for individual life insurance has
been provided on a net level premium method based on estimated investment
yields, withdrawals, mortality and other assumptions which were appropriate at
the time the policies were issued. Such estimates were based upon industry data
and the Companies' past experience, as adjusted to provide for possible adverse
deviation from the estimates. Benefit reserves for universal life products
represent policy account balances before applicable surrender charges plus
certain deferred policy initiation fees that are recognized in income over the
term of the policies.
Unearned premiums
Unearned premiums for credit life and disability insurance contracts have
been computed based upon the original and remaining term of the related
policies as follows: decreasing term credit life on the Rule of 78's method,
level term credit life using the Pro Rata method and credit disability using a
65% - 35% weighted average of the Rule of 78's and Pro Rata methods.
Recognition of premium revenue and related costs
Revenues for universal life-type policies and investment products consist
of policy charges for the cost of insurance, policy administration, and
surrenders assessed during the period, and expenses include interest credited
to policy account balances and benefit claims incurred in excess of policy
account balances. For credit insurance, premiums are earned over the terms of
the policies, as discussed above. Policy and contract claims include provisions
for claims reported and claims incurred but not reported. The Company believes
that the liabilities for claims and related expenses are adequate. Anticipated
investment income is considered in determining whether future earned premiums
on existing credit insurance will be sufficient to cover the present value of
future benefits and maintenance expenses and to recover the unamortized portion
of deferred policy acquisition costs.
Income taxes
The Company and its subsidiaries provide income taxes, for financial
reporting purposes, on the basis of the liability method as required by
Statement of Financial Accounting Standards No. 109.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). Under SFAS 128, the calculation of
primary and fully diluted earnings per share has been replaced with basic and
diluted earnings per share. The basic earnings per share calculation differs
from primary earnings per share in that it excludes the dilutive effects of
options, warrants and convertible securities, while the calculation of diluted
earnings per share is about the same as the previous fully diluted earnings per
share calculation. Adoption of SFAS 128 had no effect on the per share amounts
previously reported for 1996 and 1995 because the Company s stock options and
convertible securities are anti-dilutive for those periods.
3. BASIS OF FINANCIAL STATEMENTS
The more significant GAAP applied in the preparation of the financial
statements that differ from life insurance statutory accounting practices
prescribed or permitted by regulatory authorities (which are primarily designed
to demonstrate solvency) are as follows:
(a) Investments in securities of unaffiliated companies are reported as
described in Note 2, rather than in accordance with valuations
established by the National Association of Insurance Commissioners
(NAIC). Pursuant to NAIC valuations, bonds eligible for amortization
are reported at amortized value; other securities are carried at
values prescribed by or deemed acceptable to the NAIC, including
common stocks, other than stocks of affiliates, at market value.
(b) Costs of acquiring new business are deferred and amortized rather
than being charged to operations as incurred.
(c) The liability for future policy benefits and expenses on individual
life insurance is based on conservative estimates of expected
mortality, morbidity, interest, withdrawals, and future maintenance
and settlement expenses, rather than on statutory rates for
mortality and interest. For credit life insurance, the liability is
based upon the unearned premium reserve, computed as described in
Note 2, rather than on statutory rates for mortality and interest.
The credit disability policy liability, principally the unearned
premium reserve, is calculated as described in Note 2, while the
statutory liability is computed using predominantly the average of
the Rule of 78's and Pro Rata methods.
(d) Deferred income taxes, if applicable, are provided as described in
Note 17.
(e) The statutory liabilities for the interest maintenance reserve and
asset valuation reserve, designed to lessen the impact on surplus of
market fluctuations of securities and mortgage loans, have not been
provided in the financial statements.
(f) Certain assets are reported as assets rather than being charged
directly to surplus and excluded from the balance sheets.
(g) Commission allowances pertaining to financing-type reinsurance
agreements are not included in results of operations.
(h) Loan origination fees are deferred and recognized over the life of
the applicable mortgage as an adjustment of yield rather than being
reported in income as received.
(i) Revenues for universal life-type policies and investment products
consist of policy charges primarily for the cost of insurance rather
than premiums due and/or collected on such policies. Expenses
include interest credited to policy account balances and benefit
claims incurred in excess of policy account balances rather than the
increase in benefit reserves and gross benefit claims incurred for
these types of policies.
Dividends and other distributions to the Company from Consumers Life are
limited in that Consumers Life is required to maintain minimum capital and
surplus in each of the states in which it is licensed, determined in accordance
with regulatory accounting practices. The amount of minimum capital and surplus
required is $5.5 million. All distributions are further limited by Delaware
state insurance laws to the greater of previous year earnings, computed in
accordance with statutory accounting principles, or 10% of statutory capital
and surplus as of the end of the previous year. In some instances such payments
may require the prior approval of the insurance department. Accordingly, based
on amounts reported to regulatory authorities, at December 31, 1997,
approximately $1.7 million of Consumers Life's net assets cannot generally be
transferred to the parent company and $619,000 is available for transfer during
1998 as long as the minimum capital and surplus requirements mentioned above
are maintained. Also, any loans or advances to the parent company of a material
amount must be reported to the insurance department. The Company may have
limited cash funds available to pay dividends in excess of amounts transferred
from subsidiaries. In addition, separate restrictions apply to the surplus note
owed to the Company by a subsidiary of Consumers Life. Payment of interest and
repayment of principal on the note are permitted by the applicable state
insurance department as long as the subsidiary's statutory capital and surplus
exceeds $3 million.
The reported statutory capital and surplus of the life insurance
subsidiaries was $6.4 million at December 31, 1997 and $5.9 million at December
31, 1996. The insurance companies combined statutory net loss was $1.4 million
in 1997. In 1996, the companies reported combined net income of $29,000 and in
1995 they reported a net loss of $3.6 million.
Insurance laws require that certain amounts be deposited with various
state insurance departments for the benefit and protection of policyholders. The
approximate carrying amounts of such deposits at December 31, 1997 and 1996
were $1.9 million and $5.3 million, respectively.
For statutory reporting purposes, the Company utilizes an accelerated
method of reserving disability unearned premiums which allows the Company to
recognize revenue in a manner which more appropriately matches its incidence of
claims. In addition to the use of this unearned premium method, which was
approved by the Delaware Insurance Department, the insurance subsidiaries have
also received approval from their respective domiciliary states to carry as an
admitted asset a receivable for certain credit insurance premiums,
net of commissions, which have been collected by the companies agents but have
not yet been remitted to the companies. At December 31, 1997 and 1996, the
premiums in process of collection receivable totaled $1.5 million and $1.8
million, respectively.
4. TERMINATION OF PENDING MERGER
On October 30, 1996, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement) with LaSalle Group, Inc. (LaSalle) and an
affiliate of LaSalle whereby the Company would have become a wholly-owned
subsidiary of LaSalle (the Merger). The Merger was subject to, among other
things, the approval of insurance regulators in the four states in which the
Company s insurance subsidiaries were domiciled and the approval of the
Company s common shareholders. Although the shareholders voted to approve the
Merger at a meeting held on March 25, 1997, LaSalle disclosed to the Company on
May 15, 1997 that its original source of funding for the Merger was not likely
to be available within a reasonable period of time and that it was in the
process of securing alternate funding. At that time, the Company exercised its
right to renew its search for another acquiror to protect the Company in the
event LaSalle s funding would not be available.
On July 28, 1997, the Merger Agreement with LaSalle was terminated
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the Merger transaction. On
July 28, 1997, the Company entered into a letter of intent to sell its credit
insurance operations to Life of the South Corporation, a Georgia-based
financial services holding company (LOTS), as described more fully in Note 5.
5. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION
The operating losses incurred by the Company over the past five years have
significantly reduced the Company s net worth and its liquidity position.
Consequently, in March 1996, the Company announced its plans to explore various
alternatives for selling or merging its remaining business operations, which
included credit insurance and related products, the auto auction business
conducted through Interstate and a closed block of assumed universal life
business. The Company had previously sold its traditional whole life, term and
annuity business in 1992 and the majority of its universal life business in
1994, both of which were part of the individual life insurance division.
Direct contacts were made with numerous potential buyers to solicit their
interest in participating in an auction process to acquire either the Company
or its various business operations and assets. Separate groups of potential
bidders were solicited for the Company s credit insurance business and auto
auction business. Because the direct writer of the assumed individual life
business, World Insurance Company (World), had an option to recapture that
business, the Company conducted negotiations with World to sell the remaining
inforce business back to World.
After evaluating numerous offers for the sale of the auto auction
business, in November 1996, the Company sold Interstate s auto auction
business, all of its property, plant and equipment and inventories and the
Interstate name to ADESA Pennsylvania, Inc., an unrelated third party, for
cash of $4.85 million. The sale resulted in an after-tax gain of approximately
$1.8 million in the fourth quarter of 1996. The gain on disposal includes a
loss from operations of $84,000 from September 30, 1996 (the measurement date)
to December 31, 1996, less an income tax benefit of $28,000. Accordingly,
in the accompanying financial statements, Interstate s operating results have
been reported as discontinued operations for all periods presented.
Interstate s non-operating net assets, principally cash, receivables,
investments and trade payables, were retained by the Company.
In March 1997, the Company completed a reinsurance transaction with World,
in which World recaptured the individual life insurance business previously
assumed by the Company from World through a joint venture agreement. World
initially paid the Company a recapture consideration equal to $1.05 million in
exchange for the transfer to World of assets supporting the net statutory basis
policy reserves for this business. The recapture transaction resulted in an
after-tax loss of approximately $900,000 which was reported by the Company in
the fourth quarter of 1996. During 1997, the parties agreed to make certain
adjustments to the recapture consideration which, together with a $123,000 loss
on bonds sold in 1997 in order to close the transaction, resulted in an
additional loss on disposal of $167,000, net of income tax benefits. As
indicated above, the Company had previously sold all of its other individual
life insurance business. Accordingly, in the accompanying financial statements,
the operating results of the Company s individual life insurance division have
been reported as discontinued operations for all periods presented.
As indicated in Note 4, the Company renewed its search for either another
acquiror or a purchaser of its credit insurance business in May 1997, following
notification from LaSalle that its original source of funding for the pending
Merger would probably not be available within a reasonable period of time. The
Company requested that certain previous bidders for its credit insurance
business (the Company s only remaining business segment at that time) resubmit
their bids for consideration. Following the receipt and evaluation by the
Company of four new offers for its credit insurance business, the Company
signed a letter of intent on July 28, 1997 to sell the credit insurance and
related operations to LOTS, subject to a due diligence review by LOTS. In
September 1997, an amended letter of intent was signed by the parties and an
Asset Purchase Agreement was subsequently signed on December 30, 1997.
The Asset Purchase Agreement provides for the sale of the Company s credit
insurance and fee income accounts to LOTS effective October 1, 1997 and the
transfer of the Company s marketing personnel and credit insurance
administrative functions to LOTS effective January 1, 1998. With respect to the
sale of the customer accounts, the Company will receive fees from LOTS over a
five-year period based on the amount of credit insurance premiums produced by
the customer accounts which were sold. Unlike the transactions described below,
the above transactions were not subject to any further conditions and have
therefore been completed. Accordingly, the Company has included approximately
$132,000, before income taxes, in its 1997 financial statements, representing
the fees earned by the Company in the fourth quarter.
In addition to the above transactions, the Asset Purchase Agreement also
provides for (i) the sale, effective January 1, 1998, of the Company s
September 30, 1997 inforce block of credit insurance business to American
Republic Insurance Company, an Iowa-domiciled insurance company (American
Republic), which is acting as LOTS financial partner in this transaction and
(ii) the sale of one of the Company s wholly-owned reinsurance subsidiaries to
LOTS as of January 1, 1998. The sale of the inforce business referred to
in (i) above required the approval of the Company s preferred and common
shareholders and the approval of insurance regulators in Delaware and Ohio,
the domiciliary states of the two insurance subsidiaries which produced the
credit insurance business. The Company s shareholders approved the transaction
at a special meeting held on March 24, 1998 (the Special Meeting). The
Delaware and Ohio insurance departments approved the reinsurance agreements
which provide for the transfer of the insurance business on February 17, 1998
and March 30, 1998, respectively. The sale of the subsidiary referred to in (
ii) above requires the approval of the insurance regulators in the state of
Arizona, the subsidiary s state of domicile, which approval has not yet
been received.
Based upon the reinsurance consideration to be received for the sale in
1998 of the inforce credit insurance business, the transaction will result in
an after-tax loss of approximately $3.9 million, which has been reflected in
the Company s 1997 financial statements through a write-down of deferred policy
acquisition costs. The estimated loss on disposal includes a loss from
operations of approximately $800,000 from September 30, 1997 (the measurement
date) to December 31, 1997, net of an income tax benefit of $363,000.
As a result of the planned sale of the Company s credit insurance and
related operations to LOTS, in the accompanying financial statements, the
operating results of the credit insurance and related fee income business have
been reported as discontinued operations for all periods presented, and,
accordingly, the operating results for periods prior to 1997 have been
restated.
At the Special Meeting, the Company s preferred and common shareholders
also approved the Plan of Liquidation and Dissolution, pursuant to which the
Company intends to liquidate its remaining assets, provide for all of its
liabilities, redeem its preferred stock at par value ($10 per share) and
distribute all remaining cash to its common shareholders. Pursuant to the terms
of the Asset Purchase Agreement, the Company will receive payments from LOTS
over a five-year period based on the amount of credit insurance premiums
produced by the customer accounts sold by the Company to LOTS. The Company may
also receive a payment from a contingency fund established by the parties based
on the claims experience on the inforce credit insurance business from October
1, 1997 to September 30, 2002. As a result, the final distribution to the
Company s common shareholders will not be made until late in 2002 when the
amounts due from LOTS have been received. The Company has made substantial
reductions in its number of employees during the past several years as a result
of the events described above. As of March 31, 1998, eight people are employed
by the Company. During the liquidation period, the Company intends to outsource
most of the functions which will continue to be required.
A summary of the results of operations of the discontinued segments is
presented below:
1997
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $29,712 $1,892 (a) $6 $31,610
Loss from operations before
income tax benefit ($1,457) ($1,457)
Income tax benefit (632) (632)
Loss from operations (825) (825)
Loss on disposal before
income tax benefit (4,061) ($253) ($22) (4,336)
Income tax benefit (142) (86) (14) (242)
Loss on disposal (3,919) (167) (8) (4,094)
Loss from discontinued operations ($4,744) ($167) ($8) ($4,919)
1996
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $33,315 $4,349 (a) $2,688 $40,352
Income (loss) from operations before
income tax expense (benefit) ($1,266) $393 $554 ($319)
Income tax expense (benefit) (297) 134 226 63
Income (loss) from operations (969) 259 328 (382)
Gain (loss) on disposal before income
rax expense (1,385) 3,031 1,646
Income tax expense (benefit) (471) 1,232 761
Gain (loss) on disposal (914) 1,799 885
Income (loss) from discontinued operations ($969) ($655) $2,127 $503
/TABLE
1995
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $36,766 $5,781 (a) $3,221 $45,768
Income (loss) from operations before
income tax expense (benefit) ($875) $83 $732 ($60)
Income tax expense (benefit) (232) 28 316 112
Income (loss) from operations ($643) $55 $416 ($172)
(a) Includes renewal premiums which are 100% ceded under indemnity reinsurance
agreement with third party reinsurer.
If the Company had reinsured all of its credit insurance business to
American Republic as of December 31, 1997, the Company s remaining assets and
liabilities would consist principally of $5.8 million in cash and invested
assets (primarily bonds, mortgage loans and short-term investments), $1.4
million in receivables, $2.6 million in property and equipment, non-investment
real estate and other assets, $1.2 million in policy liabilities on a closed
block of extended service contract business and $2.1 million in other
liabilities.
6. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement purposes as
described in Note 1, consist of the following at December 31, 1997:
Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
Fixed maturities:
Bonds:
United States government and
government agencies and authorities $5,253 $5,333 $5,333
Public utilities 20 21 21
All other 352 353 353
5,625 5,707 5,707
Certificates of deposit 150 150 150
Total fixed maturities 5,775 5,857 5,857
Mortgage loans on real estate 2,086 2,086 2,086
Other invested assets 295 295 295
Short-term investments 32,763 32,763 32,763
Total investments $40,919 $41,001 $41,001
A portion of the Company's invested funds is restricted as to use.
Deposits are required with various state insurance departments for the benefit
and protection of policyholders (see Note 3).
At December 31, 1997 and 1996, no mortgage loans or other loans were
considered to be non-performing loans.
At December 31, 1997, approximately 86% of the Company's investments in
mortgage loans were secured by commercial real estate and the remaining mort-
gage loans were secured by residential real estate. Approximately 78% of the
loans involved properties located in Central Pennsylvania. Such investments
consist principally of first mortgage liens on completed income-producing
properties, primarily office buildings. Two mortgage loans exceeded 10% of
shareholders equity at December 31, 1997 and one mortgage loan exceeded 10% of
shareholders equity at December 31, 1996. The Company s mortgage loan
valuation reserves at December 31, 1997 and 1996 were $50,000 and $100,000,
respectively.
At December 31, 1997 and 1996, all the Company s real estate is classified
as non-investment real estate, since the Company intends to sell these
properties. Accumulated depreciation on the properties at the time they were
reclassified totaled $22,663.
Net investment income is applicable to the following investments:
Years ended December 31,
(in thousands) 1997 1996 1995
(Restated) (Restated)
Interest:
Fixed maturities $1,934 $2,364 $2,175
Mortgage loans 189 421 692
Policy loans 33 58
Other invested assets 82 17 3
Short-term investments 486 265 221
Real estate income 157 332
2,691 3,257 3,481
Less investment expenses (675) (680) (702)
Total net investment income 2,016 2,577 2,779
Less net investment income
attributable to discontinued
operations 1,953 2,518 2,739
Net investment income
attributable to
continuing operations $63 $59 $40
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1997 and 1996 are as follows:
1997 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(in thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $4,365 $81 $2 $4,444
Corporate securities 373 1 374
Mortgage-backed securities 887 7 5 889
Totals $5,625 $89 $7 $5,707
1996 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $24,749 $409 $139 $25,019
Corporate securities 16,665 121 262 16,524
Mortgage-backed securities 901 2 33 870
Totals $42,315 $532 $434 $42,413
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Actual maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(in thousands) cost fair value
Due in 1998 $210 $210
Due in 1999-2003 2,768 2,819
Due in 2004 - 2008 840 869
Due after 2008 920 920
4,738 4,818
Mortgage-backed securities 887 889
Totals $5,625 $5,707
Proceeds from the sales of investments in debt securities during 1997 were
$48 million. Gross gains of $446,000 and gross losses of $247,000 were
realized on those sales. Proceeds from such sales in 1996 were $4.1 million.
Gross gains of $6,000 and gross losses of $20,000 were realized on those
sales. Proceeds from sales in 1995 were $4.1 million. Gross gains of $3,000
and gross losses of $29,000 were realized on those sales.
Realized investment gains (losses) are applicable to the following
investments:
Years ended December 31,
(in thousands) 1997 1996 1995
(Restated) (Restated)
Fixed maturities $249 ($14) ($27)
Investment real estate (93)
Other invested assets (219) (55)
30 (69) (120)
Less realized investment gains
attributable to discontinued
operations 206
Realized investment losses
attributable to continuing
operations ($176) ($69) ($120)
7. RECEIVABLES
December 31,
(in thousands) 1997 1996
Amounts due from agents $1,902 $2,981
Reinsurance receivable 13,271 17,543
Federal income tax refund 524
Other 1,378 805
17,075 21,329
Less allowance for
uncollectible accounts (436) (1,039)
Balance $16,639 $20,290
8. DEFERRED POLICY ACQUISITION COSTS
Individual
(in thousands) Credit Life Total
Balance, January 1, 1995 $16,878 $4,777 $21,655
Costs deferred 10,917 88 11,005
Amortization (10,153) (581) (10,734)
Balance, December 31, 1995 17,642 4,284 21,926
Costs deferred 8,905 82 8,987
Amortization (10,133) (446) (10,579)
Write-off attributable to
1997 sale of inforce
universal life insurance
business (1,385) (1,385)
Balance, December 31, 1996 16,414 2,535 18,949
Costs deferred 9,771 9,771
Amortization (9,515) (9,515)
Write-off attributable to
sale ofinforce universal
life insurance business (2,535) (2,535)
Write-off attributable to
1998 sale of inforce credit
insurance business (3,100) (3,100)
Balance, December 31, 1997 $13,570 $0 $13,570
9. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE
December 31,
(in thousands) 1997 1996
Property and equipment:
Data processing equipment and software $2,062 $2,062
Furniture and equipment 1,071 1,087
Home office building, including
improvements 1,788 2,501
4,921 5,650
Less accumulated depreciation (3,571) (3,482)
Balance $1,350 $2,168
December 31,
(in thousands) 1997 1996
Other real estate:
Commercial office building $625 $762
Warehouse 214 306
Townhouse development 103
839 1,171
Less accumulated depreciation (56) (56)
Balance $783 $1,115
All of the Company s real estate is classified as non-investment real
estate since these properties are listed for sale.
11. POLICY LIABILITIES
The composition of future policy benefits and unearned premiums at
December 31, 1997 and the assumptions pertinent thereto are as follows:
Life Future Investment
insurance policy Unearned yields: years
i