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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, 1998
COMMISSION FILE NUMBER: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
Common stock (no par) (voting) Not listed
8 1/2% Preferred Stock Series A
(Par Value $1.00 per share) (non-voting)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes XX No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Based on the closing price on March 1, 1999, the aggregate market value of
common stock held by non-affiliates of the registrant was $360,961.
The number of outstanding common shares of the registrant as of March 1,
1999 was 2,578,295.
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") is an insurance holding
company which, until October 1, 1997, was a leading provider, through its
subsidiaries, of credit life and credit disability insurance in the Middle
Atlantic region of the United States. The insurance subsidiaries are licensed in
26 states and the District of Columbia and conducted the majority of their
business in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and
Virginia, marketing credit insurance products primarily through automobile
dealers. In connection with its credit insurance operations, the Company also
marketed, as an agent, an automobile extended service warranty product.
Effective October 1, 1997, the Company transferred all of its credit insurance
and fee income accounts to Life of the South Corporation ( LOTS ), a Georgia-
based financial services holding corporation. On January 1, 1998, LOTS hired
substantially all of the sales and marketing personnel of the Company and
assumed the administration of the Company s credit insurance business. In
addition, effective January 1, 1998, the Company also reinsured to American
Republic Insurance Company ( American Republic ), a financial partner of LOTS in
this transaction, 100% of its credit insurance business which was inforce on
September 30, 1997 (the Sale of Assets ) and reinsured 100% of the credit
insurance business written on the policy or certificate forms of the Company s
subsidiaries in the fourth quarter of 1997. In connection with these
transactions, the Company and LOTS also agreed that, with respect to one of the
subsidiaries, the new credit insurance business produced by that subsidiary s
former customer accounts, which were transferred to LOTS, would continue to be
written on the policy or certificate forms of the subsidiary until September 30,
1999, or an earlier date which may be agreed to by the parties. This premium and
the related insurance risk have also been reinsured 100% to American Republic.
Settlement on the Sale of Assets transaction, which received the approval
of state insurance regulators and the approval of the Company s preferred and
common shareholders at a special meeting held on March 24, 1998 (the Special
Meeting ), took place in May 1998. At the Special Meeting, the Company s
shareholders also approved a Plan of Liquidation and Dissolution pursuant to
which the Company intends to liquidate its remaining assets, provide for all
liabilities, redeem its preferred stock and distribute any remaining cash to its
common shareholders.
In 1992, the Company sold all of its traditional whole-life, term and
annuity business. In 1994, the Company reinsured substantially all of its
universal life insurance business to a third party insurer and, effective
January 1, 1997, it sold its remaining block of universal life business back to
the direct writer of the business. Additional information regarding the sale of
the Individual Life Insurance Division s in-force business appears below under
"Operations."
The Company, through its wholly-owned subsidiary, IAAC, Inc., formerly
Interstate Auto Auction, Inc. ("Interstate"), also conducted wholesale and
retail automobile auctions of used vehicles for automobile dealers, banks and
leasing companies. The Company sold the business and the related operating
assets of Interstate in November 1996 for cash in the amount of $4.85 million.
Additional information regarding the termination of the auto auction operations
appears below under Operations.
The term "Company" when used herein refers to Consumers Financial
Corporation and its subsidiaries unless the context requires otherwise. The
Company's executive offices are located at 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania 17011. Its telephone number is (717) 730-6320.
The Company was formed in 1966 as 20th Century Corporation (a Pennsylvania
business corporation) and adopted its present name on May 30, 1980. The Company
operated through various wholly-owned subsidiaries since it was formed; however,
all of these subsidiaries have been either sold or liquidated except for
Consumers Life Insurance Company, a Delaware life insurance company ( Consumers
Life ), Investors Fidelity Life Assurance Corp., an Ohio life insurance company
which is a subsidiary of Consumers Life, and Consumers II Ltd., a reinsurance
company domiciled on the Island of Nevis.
Prior to the discontinuation of its business operations, as discussed
above, the Company operated in three industry segments: the Automotive Resource
Division, which marketed credit insurance and other products and services to its
automobile dealer customers, the Individual Life Insurance Division and the Auto
Auction Division. These segments did not include the corporate activities of
Consumers Financial Corporation which previously were insignificant in relation
to the three segments. All three segments are now presented as discontinued
operations in the Company s consolidated financial statements for all periods
presented. See Note 4 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
At the Special Meeting referred to above, the Company s shareholders also
approved a Plan of Liquidation and Dissolution (the Plan of Liquidation )
whereby, following the Sale of Assets, the Company would be liquidated by (i)
the sale of its remaining assets, (ii) the payment of all claims, liabilities
and expenses, (iii) the redemption and cancellation of all outstanding shares of
Preferred Stock, and (iv) the pro rata distribution of any remaining cash to the
holders of Common Stock. The liquidation process is expected to be concluded in
approximately five years. During that period, the Company will consider and
evaluate any other viable proposals for the sale of the Company or its assets
which would provide greater value to shareholders.
The assets and liabilities of the Company may be transferred to a
liquidating trust if the Board of Directors determines that the use of a
liquidating trust provides the best alternative for liquidating the Company. If
the Company s assets and liabilities are transferred to such a trust, all
distributions to shareholders would then be made directly from the liquidating
trust after the satisfaction of all liabilities.
OPERATIONS
The Company's principal subsidiaries, which, until October 1, 1997, were
engaged in the marketing of credit insurance business, are Consumers Life and
Investors Fidelity Life Assurance Corp. Together these companies are licensed in
26 states and the District of Columbia. In August 1997, the Company sold another
wholly-owned subsidiary, Consumers Life Insurance Company of North Carolina,
which had also been engaged in the sale of credit insurance.
As noted previously in this Item 1, the Company sold its credit insurance
customer accounts to LOTS as of October 1, 1997 and, effective January 1, 1998,
the Company transferred to American Republic, through reinsurance, its September
30, 1997 inforce block of credit insurance business and 100% of the credit
insurance business written in the fourth quarter of 1997. Although one of the
Company s insurance subsidiaries has agreed to allow all new credit insurance
premiums produced by the customer accounts which were sold to LOTS to be written
on the policy or certificate forms of the subsidiary until September 30, 1999,
all of this business will be reinsured 100% to American Republic. As a result of
these transactions with LOTS and American Republic, the Company has no remaining
business segments, since it sold the remainder of its individual life insurance
business as of January 1, 1997 and sold its auto auction business in November
1996. The information appearing below briefly describes the three business
segments in which the Company previously operated. The activities of the Company
are now restricted primarily to the collection of investment income on the
Company s remaining invested assets, the collection of fee revenues from LOTS
relating to the sale of the Company s credit insurance accounts and the payment
of certain corporate costs and other fixed overhead expenses.
Since the reinsurance treaty between Consumers Life and American Republic
is an indemnity agreement, Consumers Life would become liable for the insurance
risks transferred in the event American Republic is unable to meet its
obligations under the reinsurance agreement.
AUTOMOTIVE RESOURCE DIVISION
Prior to the sale of its credit insurance and fee income accounts to LOTS
as of October 1, 1997, the Company marketed and retained the risk on credit
insurance in connection with consumer loan transactions, substantially all of
which were automobile purchases. Credit life insurance provides funds in the
event of the insured's death for payment of a specified loan or loans owed by
the insured. Similarly, credit disability insurance provides for the periodic
paydown of such loans during the term of the insured's disability. In most
cases, the entire premium is paid at the time the insurance is issued. The
primary beneficiary under credit insurance is the lender, with any proceeds in
excess of the unpaid portion of the loan payable to a named second beneficiary
or the insured's estate.
The credit insurance business was the major source of the Company's
revenues and, until 1991, provided the majority of its profits as well.
Automobile sales accounted for substantially all of the credit insurance sold by
the Company. The credit insurance industry and the Company s credit business
were both adversely affected in the early 1990's by the increase in the number
of automobiles which were being leased instead of purchased, not only because
there was a general lack of availability of approved credit insurance products
applicable to leases but also due to a reluctance on the part of automobile
dealers to emphasize the sale of credit insurance products on lease
transactions.
The Company also marketed, in an agency capacity, extended service
automobile warranty products through its wholly-owned subsidiary, Consumers Car
Care Corporation. These products were underwritten by unaffiliated insurance
companies, administered by unaffiliated third party administrators and sold
primarily through automobile dealers who also sold the Company's credit
insurance. Other related products and services were also offered to the
Company's automobile dealer customers.
INDIVIDUAL LIFE INSURANCE DIVISION
In March of 1992, the Company announced the termination of this Division's
marketing activities and announced its intent to sell its existing blocks of
whole-life, term, annuity and universal life business. Effective October 1,
1992, the traditional whole-life, term and annuity business was sold for $5.6
million to the Londen Insurance Group located in Phoenix, Arizona. Effective
December 31, 1994, the Company coinsured its direct universal life business and
irrevocably assigned all its right, title and interest in a block of assumed
universal life business (coinsured from AMEX Life Assurance Company on a 90%
quota share basis) to American Merchants Life Insurance Company, located in
Jacksonville, Florida, for $5.5 million. Effective January 1, 1997, the Company
sold its remaining block of individual life insurance business back to the
direct writer of the business. The direct writer paid the Company a recapture
consideration of $1.05 million in March 1997 when the transaction closed.
AUTO AUCTION DIVISION
As indicated previously, the business and the related operating assets of
Interstate were sold in November 1996 for cash of $4.85 million. See Note 4 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K for further information concerning the sale and its impact on the Company s
operating results. Prior to the sale, Interstate conducted wholesale
automobile auctions of used vehicles at its facility in Mercer, Pennsylvania
(about 50 miles north of Pittsburgh). Interstate s customers included automobile
dealers and leasing companies. In connection with its weekly auctions,
Interstate provided a body shop repair and conditioning service and an
arbitration service through which disputes between buyers and sellers were
resolved.
INVESTMENTS
The Company's insurance subsidiaries have historically invested
primarily in fixed maturity securities (bonds) and, to a lesser extent, in
mortgages with intermediate terms (generally not more than seven years).
Investments in mortgages allowed the Company to obtain higher yields while
maintaining maturities in the five to seven year range. Prior to the sale of the
Company s direct universal life business, the Company's investment policy also
included investing in certain mortgage-backed securities which provided
competitive yields on assets supporting these interest sensitive products. In
connection with the Sale of Assets transaction with American Republic and LOTS,
the Company sold substantially all of its bonds in late 1997 and early 1998. The
Company s only remaining fixed maturity securities are bonds which the insurance
subsidiaries are required to maintain on deposit with various state insurance
departments.
The Company s mortgage loan portfolio, which relates primarily to
commercial real estate, has declined significantly during the past four years,
from $9.9 million at the end of 1994 to $1.6 million at December 31, 1998. The
reduction is primarily attributable to the sale of certain mortgages,
refinancings and early payoffs. Approximately $1.1 million of the mortgage
balance at the end of 1998 relates to a loan issued to the co-owner of the
Company s home office building. The mortgage portfolio has generally been
concentrated in the Central Pennsylvania area. The Company considered this
strategy to be conservative because this region has historically not been
particularly susceptible to wide economic swings in recessionary times, due to
the diversity of industries throughout the area and the presence of government
operations and military installations.
Following the approval of the Plan of Liquidation, the Company has
maintained all of its remaining investable funds in short-term securities in
order to provide the liquidity necessary to pay current expenses and to
eliminate the market risk associated with bond investments. The Company also
intends to invest the funds which arise from the eventual liquidation of its
mortgage loan and real estate investments in short-term securities.
The following table sets forth the Company's investment results for the
periods indicated:
Years ended December 31,
1998 1997 1996
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
Interest:
Fixed maturities $175 5.0 $1,934 6.7 $2,364 6.2
Mortgage loans 139 7.8 189 8.7 421 9.0
Policy loans 33 6.6
Short term 733 4.3 486 4.4 265 4.5
investments
Real estate 157 (1
)
Other 82 9.7 17 1.0
1,047 5.5 2,691 6.3 3,257 6.5
Investment expenses (85) (0.4) (675) (1.6) (680) (0.9)
Total net investment
income 962 5.1 2,016 4.7 2,577 5.6
Less investment income
for period subsequent
to adoption of
liquidation basis of
accounting 487
Net investment income
for period prior to
adoption of liquidation
basis of accounting 475 2,016 2,577
Less net investment
income attributable to
discontinued operations 415 1,953 2,518
Net investment income
attributable to
continuing operations $60 $63 $59
(1) Represents rental income related to three properties classified as non-
investment real estate.
COMPETITION
Inasmuch as the Company no longer conducts any insurance or other
operations, it no longer competes with other organizations.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the states in which they are licensed. The extent of such
regulation varies from state to state, but, in general, each state has statutory
r e s t r ictions and a supervisory agency which has broad discretionary
administrative powers. Such regulation is designed primarily to protect
policyholders and relates to the licensing of insurers and their agents, the
approval of policy forms, the methods of computing financial statement reserves,
the form and content of financial reports and the type and concentration of
permitted investments. The Company's insurance subsidiaries are subject to
periodic examination by the insurance departments of their respective states of
d o m i c ile. Although the insurance subsidiaries no longer have direct
policyholders, these state regulators continue to monitor the companies
statutory capital and surplus and other aspects of their financial compliance
with state insurance laws and regulations.
The dividends which a life insurance company may distribute are subject to
regulatory requirements based upon minimum statutory capital and surplus and/or
statutory earnings. In addition to regulatory considerations, the overall
financial strength of each operating entity is considered before dividends are
paid. Additionally, the amount of dividends a life insurance company can pay is
subject to certain tax considerations. See Notes 3 and 15 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
The Company is also subject to regulation under the insurance holding
company laws of various states in which it does business. These laws vary from
state to state, but generally require insurance holding companies and insurers
that are subsidiaries of holding companies to register and file certain reports,
including information concerning their capital structures, ownership, financial
condition and general business operations, and require prior regulatory agency
approval of changes in control of an insurer, most dividends and intercorporate
transfers of assets within the holding company structure. The purchase of
more than 10% of the outstanding shares of the Company's common stock by one or
more affiliated parties would require the prior approval of certain state
insurance departments which regulate the Company.
EMPLOYEES AND AGENTS
As of March 31, 1999, the Company had only 4 full-time employees and 2
part-time employees. On January 1, 1998, all of the Company s sales personnel
resigned and became employees of LOTS in connection with the transactions
discussed earlier in this Item 1, and certain other administrative employees
were terminated.
The Company has adequate insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. There can be no
assurance that the Company will be able to continue to obtain such coverage in
the future or that it will not experience uninsured losses.
ITEM 2. PROPERTIES
Since September 1989, the Company has maintained its executive and
business offices in a leased building located at 1200 Camp Hill By-Pass, Camp
Hill, Pennsylvania. The office building contains approximately 44,000 square
feet of office space (approximately 39,000 square feet of leasable space). Prior
to 1993, the Company leased the entire facility at an annual rental of $421,000,
plus insurance, taxes and utilities. In March of 1994, the Company exercised its
option to acquire a 50% interest in its home office building, which reduced the
Company s annual rent to $204,000. The option price was approximately $1.75
million. As a result of the termination in 1992 of all new business functions in
the Individual Life Insurance Division and the transaction with LOTS discussed
in Item 1, the Company now occupies approximately 14% of the leasable office
space. The Company has leased about 45% of the leasable space to third party
tenants pursuant to various short-term leases. As of March 1, 1999, the
a n nualized rental income to the Company under these sub-leases totals
approximately $210,000. All of the remaining business activities of the Company
and its subsidiaries are conducted at the above address in Camp Hill,
Pennsylvania.
In connection with its credit insurance operations, the Company maintained
branch offices in leased facilities in Philadelphia, Pennsylvania and Columbus,
Ohio until December 31, 1997. The branch offices primarily provided supervision,
sales and service for credit insurance agents doing business in the eastern
Pennsylvania, Delaware, New Jersey and Ohio areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits which are ordinary and routine
litigation incidental to its business. None of these lawsuits is expected to
have a materially adverse effect on the Company's financial condition or
operations. See Note 12 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K for additional information concerning
litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Consumers Financial Corporation common stock was traded on the NASDAQ
National Market System with a ticker symbol of CFIN until June 1, 1998 when it
was delisted by NASDAQ for non-compliance with NASDAQ s new market value of
public float requirements. The Company s Convertible Preferred Stock, Series A
was also traded on the NASDAQ National Market System until March 16, 1998, when
it was also delisted by NASDAQ for non-compliance with the new public float
requirement of a minimum of 750,000 shares. Since the shareholders of the
Company approved the Plan of Liquidation and Dissolution on March 24, 1998, the
Company did not appeal the delisting decision for either the common or preferred
stock, nor did it take any steps to come into compliance with the new rules or
attempt to seek inclusion on the NASDAQ Small Cap Market.
Quarterly price ranges for the Company s common and preferred stock, based
on information provided by The National Association of Securities Dealers
through the NASD OTC Bulletin Board, are presented below.
1998 QUARTERLY STOCK PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Common Stock
High 1.06 0.63 0.40 0.36
Low 0.50 0.25 0.34 0.13
Convertible Preferred Stock
Series A
High 8.75 9.00 9.00 9.00
Low 7.00 8.00 9.00 8.81
As of December 31, 1998, there were 6,622 shareholders of record who
collectively held 2,578,488 common shares and 105 shareholders of record of the
Convertible Preferred Stock, Series A, who held 481,461 shares.
Dividends on both the Company s common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. No common stock
dividends were declared in either 1998, 1997 or 1996.The Convertible Preferred
Stock, Series A dividends are paid quarterly on the first day of January, April,
July and October at an annual rate of $.85 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the Consolidated Financial Statements and the Notes thereto.
(NOT COVERED BY INDEPENDENT AUDITOR S REPORT)
For the period
from January 1,
1998 to Years Ended December 31,
March 24, 1998
dollar amounts in thousands, except per 1997 1996 1995 1994
share
Total revenues (excluding change
in unearned premiums) $261 $40 $378 $664 $201
Premiums written (4) (37) 353 685 622
Net investment income 60 63 59 40 54
Net return on average investments 4.8% 4.9% 5.4% 6.0% 6.7%
Loss from continuing operations (88) (1,441) (1,737) (1,429) (2,062)
Discontinued operations 112 (4,919) 503 (172) 850
Income (loss) before cumulative effect
of change 24 (6,360) (1,234) (1,601) (1,212)
in accounting principles
Cumulative effect of change in 299
accounting
principles
Net income (loss) 24 (6,360) (1,234) (1,601) (913)
Basic and diluted income (loss) per
common share:
Loss from continuing operations (0.08) (0.73) (0.83) (0.71) (0.94)
Discontinued operations 0.04 (1.89) 0.19 (0.07) 0.32
Loss before cumulative effect of
change (0.04) (2.62) (0.64) (0.78) (0.62)
in accounting principles
Cumulative effect of change in
accounting principles 0.11
Net loss (0.04) (2.62) (0.64) (0.78) (0.51)
December 31,
1998 1997 1996 1995 1994
Total assets $62,68 $85,035 $114,619 $123,322 $125,276
8
Total debt 0 0 0 2,537 3,389
Shareholders equity and redeemable 6,724 13,343 15,671 15,226
preferred stock
Shareholders equity per common share 0.78 3.31 4.20 3.96
Net assets in liquidation and
redeemable 5,198
preferred stock
Cash dividends declared per common NONE NONE NONE NONE 0.05
share
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company s net
assets in liquidation at December 31, 1998, its operating results for the period
from January 1, 1998 to March 24, 1998 and the changes in its net assets in
liquidation for the period from March 25, 1998 to December 31, 1998 is presented
below. Information relating to 1997 and 1996 is also presented for comparative
purposes. This analysis should be read in conjunction with the Consolidated
Financial Statements and the related Notes appearing elsewhere in this Form 10-
K.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company s preferred and common shareholders approved the sale of the Company s
core credit insurance and related products business, which was the Company s
only remaining business operation, following various sales over the past six
years of its traditional and universal life insurance business and its auto
auction business. In connection with the sale of its inforce credit insurance
business, the Company also sold its credit insurance customer accounts and one
of its life insurance subsidiaries. At the Special Meeting, the shareholders
also approved a Plan of Liquidation and Dissolution, pursuant to which the
Company intends to liquidate its remaining assets, provide for all of its
liabilities, redeem its preferred stock and distribute any remaining cash to its
common shareholders.
The agreement with Life of the South Corporation (LOTS), the purchaser of
the credit insurance operations, provides that the proceeds from the sale of the
customer accounts are to be received over a five-year period ending September
2002, based on the amount of credit insurance premiums produced by those
customer accounts during that period. The Company may also receive a payment
from a contingency fund established by the Company and LOTS based on the claims
experience on the inforce credit insurance business from October 1, 1997 to
September 30, 2002. Because of these future payments and potential future
payments, the distribution, if any, to the Company s common shareholders will
not be made until late in 2002, when all amounts due from LOTS have been
received. The Company has made substantial reductions in its number of employees
during the past several years as a result of the discontinuation of its various
businesses. As of March 31, 1999, four people are employed on a full-time basis
by the Company. During the liquidation period, the Company intends to out source
most of the functions which will continue to be required.
As a result of the approval of the Plan of Liquidation, the Company
adopted a liquidation basis of accounting in its financial statements for
periods subsequent to March 24, 1998. Under liquidation accounting rules, assets
are stated at their estimated net realizable values and liabilities are stated
at their anticipated settlement amounts. Prior to March 25, the Company reported
the results of its operations and its asset and liability amounts using
accounting principles applicable to going concern entities.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
As a result of the sale of its remaining business and the adoption of the
Plan of Liquidation, as discussed above, the Company s income and expenses now
consist principally of (i) fee income from LOTS from the sale of the Company s
customer accounts, (ii) investment income on existing assets and (iii) corporate
expenses, primarily salaries, professional fees and home office rent and related
real estate costs. A discussion of the material factors which affected the
Company s results of operations (for periods prior to March 25, 1998) and the
changes in its net assets in liquidation (for the period from March 25, 1998 to
December 31, 1998) is presented below.
For the year ended December 31, 1998, the Company reported (i) net income
of $24,000 from January 1, 1998 to March 24, 1998 and (ii) an excess of expenses
(including income taxes) over income of $202,000 for the period from March 25,
1998 to December 31, 1998, resulting in a total loss of $178,000. In 1997 and
1996, the Company s net losses totaled $6.4 million and $1.2 million,
respectively. The improvement in 1998 is principally the result of significant
expense reductions, as discussed below, and the elimination of the substantial
losses which were being incurred in the Company s credit insurance business,
which was sold to LOTS as of January 1, 1998. A $3.9 million loss on the
disposal of that segment and an additional $825,000 operating loss from that
line of business were reflected in the 1997 results of operations.
As indicated above, for the period following the adoption of the
liquidation basis of accounting (March 25, 1998 to December 31, 1998), the
Company s expenses exceeded its revenues by $202,000. The excess expenses
include $527,000 in income tax expense which resulted principally from the
elimination of $472,000 in deferred tax assets. On a pre-tax basis, revenues
exceeded expenses by $325,000. The Company s revenues consist primarily of
investment income from its existing invested assets and fee income received from
LOTS from the sale of its credit insurance customer accounts. Investment income
totaled $962,000 in 1998 and $487,000 from March 25 to December 31, 1998.
Investment income declined substantially compared to 1997 and 1996 because of
the transfer of more than $35 million in assets to LOTS and its financial
partner, American Republic Insurance Company, in May 1998 in connection with the
sale of the Company s credit insurance business. That transaction also resulted
in the transfer of all of the Company s credit insurance policy liabilities. For
the full year of 1998, the Company s fee income from LOTS totaled $405,000,
after deducting $109,000 in fees which are payable to a former joint venture
partner. For the period following the adoption of the liquidation basis of
accounting, fee income from LOTS, net of the partner s share, was $305,000. In
addition to investment income and fee income, the Company also reported a
significant increase in profits earned on a now terminated joint venture.
Profits from the venture totaled $243,000 from March 25, 1998 to the end of the
year. Since these profits are based on the claims experience of several blocks
of insurance business, the level of profits earned in 1998 is not indicative of
amounts which may be earned over the next several years.
Operating expenses for the period from March 25 to December 31 were $1.6
million, which included $366,000 in salaries and related benefits, $355,000 in
accounting, legal and other professional fees and $243,000 in rent and related
costs associated with the Company s home office building. In addition, the
Company reported a $250,000 charge in 1998 to reflect a reduction in the
estimated net realizable value of the office building. During 1998, 36 of the 42
people employed by the Company as of December 31, 1997 were terminated, and
during the first quarter of 1999, two of the remaining six people became part-
time employees. The reduction in expenses and the elimination of the
underwriting losses the Company had been experiencing on its credit insurance
business prior to its sale are the major reasons for the improved results in
1998 compared to the previous two years.
In addition to the reduction in net assets in liquidation caused by the
$202,000 excess of expenses over revenues, net assets for the period from March
25, 1998 to December 31, 1998 declined by an additional $1.1 million as a result
of other factors which are discussed below under Capital Resources.
ESTIMATED NET EXPENSES DURING LIQUIDATION PERIOD
As indicated above, the liquidation of the Company is expected to continue
for approximately four more years until all fee payments and other potential
distributions are received from LOTS. During this period, certain corporate
expenses will continue to be incurred and investment income will continue to
earn on existing invested funds. The Board of Directors may determine during
this period that the amount of funds available for ultimate distribution to
shareholders may be increased by transferring all of the Company s remaining net
assets into a liquidating trust, in which case the trustees of such trust would
be responsible for liquidating all remaining assets, paying all liabilities and
making any distributions to the preferred and common shareholders. Based on
current estimates, which exclude the potential savings, if any, from the use of
a liquidating trust, the Company believes that its future operating expenses and
other costs, including preferred stock dividends, will exceed fee income and
other revenues during the liquidation period by approximately $100,000 to
$200,000. Actual income and expenses could vary significantly from the present
estimates due to uncertainties as to when certain assets will be liquidated,
when the preferred stock will be redeemed, the level of actual expenses which
will be incurred and the ultimate resolution of various contingencies which may
arise.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company s net assets
in liquidation at December 31, 1998 and its financial position at December 31,
1997 is presented below.
INVESTED ASSETS
The Company s investments decreased from $41 million at the end of 1997 to
$4.5 million at December 31, 1998. The transfer of more than $35 million to LOTS
and its financial partner in connection with the sale of the Company s credit
insurance business accounted for virtually all of the decline in invested
assets. Invested assets at December 31, 1998 consist of (i) U.S. Treasury Notes
(owned by the Company s insurance subsidiaries) which are on deposit with
numerous state insurance departments in connection with licensing requirements,
(ii) three mortgage loans secured by commercial real estate, including one loan
granted to the co-owner of the Company s home office building and secured by the
co-owner s one-half interest in the building, (iii) short-term investments,
principally money market funds and (iv) other invested assets, most of which
were liquidated in early 1999 at amounts equal to their carrying value. The
Company is attempting to sell its home office building, which has a carrying
value at the end of 1998 of approximately $1 million and is classified with
Property and Equipment. The Company s only other real estate, a warehouse with a
carrying value of $187,000, is classified with Other Real Estate since this
property is also for sale.
LIQUIDITY
The Company s subsidiaries have historically met most of their cash
requirements from funds generated from operations, while the Company has
generally relied on its principal operating subsidiaries to provide it with
sufficient cash funds to maintain an adequate liquidity position. As a result of
the Company s decision to sell its remaining operations, liquidate all of its
net assets and distribute cash to its shareholders, the Company s principal
sources of cash funds are the fee income from LOTS, investment income on
existing assets and proceeds from the sale of non-liquid assets. These funds
must be used to settle all remaining liabilities as they become due, to pay
operating expenses until the Company is dissolved and to pay dividends to
preferred shareholders until the Company s preferred stock is redeemed. The
adequacy of the Company s liquidity position in the future will be principally
dependent on its ability to sell its real estate investments and other non-
liquid assets and the timing of such sales, as well as on the level of operating
expenses the Company must incur during the liquidation period.
CAPITAL RESOURCES
Given its plans to liquidate and eventually dissolve, the Company has made
no commitments for capital expenditures and does not intend to make any such
commitments in the future. The Company s net assets in liquidation declined by
$1.3 million from March 25, 1998 to December 31, 1998. The reduction is
attributable to (i) the establishment of a $664,000 liability relating to the
Company s under funded pension plan, (ii) the write-off of $472,000 in deferred
tax assets, (iii) preferred stock dividends of $307,000 and (iv) a $175,000
charge to increase the carrying value of the preferred stock to redemption value
(prior to adoption of the liquidation basis of accounting, the difference
between the fair value and the redemption value of the stock was being reduced
by periodic accretions which were charged to retained earnings). These decreases
were partially offset by the excess of income over expenses (on a pre-tax
basis). The reductions listed in (ii) and (iv) above are non-recurring, while
the preferred stock dividends in (iii) are expected to continue until the
preferred shares are redeemed. The amount of the ultimate pension liability, and
consequently the need for any further increase or decrease in the liability, is
dependent on a number of factors, the most important of which is the prescribed
interest rate which is in effect at the time the plan is terminated.
INFLATION
Because of the Company s current plans to liquidate its assets, pay all of
its liabilities, distribute any remaining cash to its shareholders and
ultimately dissolve within the next four years, the effects of inflation on the
Company are minimal.
YEAR 2000 COMPLIANCE
Because the Company is no longer conducting any business operations and is
in the process of liquidating its remaining assets, it is therefore relying,
both directly and indirectly, on fewer computer systems than in the past to
maintain all of its financial and other records and to file all required
financial reports with state insurance departments and other regulators. In
fulfilling its continuing, although limited, responsibilities, the Company
directly utilizes only two computer systems, one for its general ledger
accounting and one for maintenance of its shareholder records (since the Company
continues to perform its own stock transfer agent functions). The Company has
received written assurances from both software vendors that their respective
systems have been tested and will operate problem free during and after the year
2000. The Company also receives certain computer generated information from
LOTS, and has obtained a year 2000 certification from LOTS stating that all of
its hardware and software systems have been tested and are year 2000 compliant.
Based on the above, management does not believe that its very limited operations
will be adversely impacted by year 2000 computer problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at December 31, 1998, the Company qualifies as a small
business issuer under Regulation S-B of the Federal Securities Laws. A small
business issuer is defined as any United States or Canadian issuer with revenues
or public float of less than $25 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation,
integrity and objectivity of the financial information contained in this Form
10-K. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. Such statements
include informed estimates and judgements of management for those transactions
that are not yet complete or for which the ultimate effects cannot be precisely
determined. Financial information presented in this annual report is consistent
with that in the financial statements.
Accounting procedures and related systems of internal control have been
established to provide reasonable assurance that the books and records reflect
the transactions of the Company and that established policies and procedures are
properly implemented by qualified personnel. Such systems are evaluated
regularly to determine their effectiveness.
The consolidated financial statements for the years ended December 31,
1998, 1997 and 1996 have been audited by Arthur Andersen LLP, independent
auditors. Such audits were conducted in accordance with generally accepted
auditing standards, and include a review and evaluation of our internal
accounting control structure, tests of the accounting records and other auditing
procedures they consider necessary to express their informed professional
opinion on the consolidated financial statements.
The Board of Directors, with the assistance of its Audit Committee,
monitors the financial and accounting operations of the Company. The Committee,
composed of non-employee members of the Board of Directors, meets periodically
with representatives of its independent auditing firm to discuss the scope of
its audit and related reports. The Company s independent auditors have at all
times full and free access to the Audit Committee, without management present,
to discuss any matter that they believe should be brought to the attention of
the Committee.
James C. Robertson R. Fredric Zullinger
Chairman, Chief Executive Officer Senior Vice President and
and President Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying balance sheet of Consumers Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1997, the related statements of operations, shareholders equity and cash flows
for each of the two years in the period then ended and the statements of
operations, shareholders equity and cash flows for the period from January 1,
1998 to March 24, 1998. In addition, we have audited the statement of net
assets in liquidation as of December 31, 1998, and the related statement of
changes in net assets in liquidation for the period from March 25, 1998 to
December 31, 1998. These financial statements and the schedules referred to
below are the responsibility of the Company s management. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 4 to the financial statements, the shareholders of
Consumers Financial Corporation approved a plan of liquidation on March 24,
1998, and the Company commenced liquidation shortly thereafter. As a result, the
Company has changed its basis of accounting for periods subsequent to March 24,
1998 from the going-concern basis to the liquidation basis. Accordingly, the
carrying value of the remaining assets as of December 31, 1998, are presented at
estimated realizable values and all liabilities are presented at estimated
settlement amounts.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Financial
Corporation as of December 31, 1997, the results of its operations and its cash
flows for each of the two years in the period then ended and for the period from
January 1, 1998 to March 24, 1998, its net assets in liquidation as of December
31, 1998, and the changes in its net assets in liquidation for the period from
March 25, 1998 to December 31, 1998, in conformity with generally accepted
accounting principles applied on the bases described in the preceding paragraph.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 14(a) are presented for purposes
of complying with the Securities and Exchange Commission s rules and are not
part of the basic financial statements. The amounts included in these schedules
have been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 16, 1999
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 1998
(dollar amount in thousands)
Assets
Investments:
Fixed maturities $1,043
Mortgage loans on real estate 1,600
Other invested assets 75
Short-term investments 1,732
Total investments 4,450
Cash 172
Accrued investment income 36
Receivables 21,590
Prepaid reinsurance premiums 34,840
Deferred policy acquisition costs 50
Property and equipment 1,018
Other real estate 187
Other assets 345
Total assets 62,688
Liabilities
Future policy benefits 17,645
Unearned premiums 35,163
Other policy claims and benefits payable 2,882
Other liabilities 1,800
57,490
Redeemable preferred stock: Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 481,461 shares 4,815
Total liabilities and redeemable preferred stock 62,305
Net assets in liquidation $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
For the period from March 25, 1998 to December 31, 1998
(in thousands)
Revenues:
Earned premiums $521
Net investment income 487
Fees from sale of customer accounts 305
Joint venture fees 243
Net realized investment gains 160
Gain on disposal of discontinued business 84
Miscellaneous 270
2,070
Benefits and expenses:
Policyholder benefits 177
Rent and related costs 243
Salaries, wages and employee benefits 366
Professional fees 355
Taxes, licenses and fees 142
Loss on sale of other assets 286
Miscellaneous 176
1,745
Income before income tax expense 325
Income tax expense (527)
Liability for underfunded pension plan (664)
Decrease in unrealized appreciation of debt securities (32)
Preferred stock dividends (307)
Adjustment of preferred stock to redemption value (175)
Retirement of treasury shares-preferred 57
Purchase of treasury shares-common (9)
Decrease in net assets for the period (1,332)
Net assets at beginning of period 1,715
Net assets at December 31, 1998 $383
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED BALANCE SHEET
For the period
front March 24,
1998 through
December 31, 1998
(dollar amounts in thousands) (Unaudited) 1997
ASSETS
Investments:
Fixed maturities $4,076 $5,857
Mortgage loans on real estate 1,887 2,086
Other invested assets 261 295
Short-term investments 31,964 32,763
Total investments 38,188 41,001
Cash 289 641
Accrued investment income 188 268
Receivables 23,880 16,639
Prepaid reinsurance premiums 37,981 9,572
Deferred policy acquisition costs 25 13,570
Property and equipment 1,320 1,350
Other real estate 780 783
Other assets 731 1,211
$103,382 $85,035
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
Liabilities:
Future policy benefits $17,649 $21,467
Unearned premiums 38,918 49,994
Other policy claims and benefits
payable 4,047 2,539
Due to reinsurer on sale of
credit insurance business 34,719
Other liabilities 1,664 4,556
Income taxes:
Current 415 430
Deferred (442) (445)
Total liabilities 96,970 78,541
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible,
authorized 632,500 issued 514,261
shares; outstanding 481,461 shares;
redemption amount $4,815;
net of treasury stock of $271 4,697 4,688
Shareholders equity:
Common stock, $.01 stated value,
authorized 10,000,000 shares;
issued 3,019,110 shares;
outstanding 1998, 2,595,617 shares;
1997, 2,596,155 shares 30 30
Capital in excess of stated value 7,989 7,989
Net unrealized appreciation
of debt securities, net of income 58 54
Deficit (4,891) (4,796)
Treasury stock (1,471) (1,471)
Total shareholders equity 1,715 1,806
$103,382 $85,035
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period
January 1, 1998 Years ended December 31,
(in thousands, except per share amounts) March 24, 1998 1997 1996
Revenues:
Premiums written ($4) ($37) $353
Decrease in unearned premiums 87 393 64
Premium income 83 356 417
Net investment income 60 63 59
Realized investment gains (losses) 24 (176) (69)
Fees and other income 181 190 35
Total revenues 348 433 442
Benefits and expenses:
Death and other benefits 83 460 581
Amortization of deferred policy 10 12
Operating expenses 368 1,639 2,118
Total benefits and expenses 451 2,109 2,711
Loss from continuing operations before
tax benefit (103) (1,676) (2,269)
Income tax benefit (15) (235) (532)
Loss from continuing operations (88) (1,441) (1,737)
Discontinued operations:
Loss from operations of discontinued
businesses (net of income taxes) (825) (382)
Gain (loss) on disposal of discontinued
businesses (net of income taxes) 112 (4,094) 885
112 (4,919)
Net income (loss) $24 ($6,360) ($1,234)
Basic and diluted income (loss) per common
Loss from continuing operations ($0.08) ($0.73) ($0.83)
Discontinued operations 0.04 (1.89) 0.19
Net loss ($0.04) ($2.62) ($0.64)
Weighted average number of shares 2,596 2,601 2,614
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Capital Accumulated other
excess comprehensive income Retained
Common stock stated Fixed Equity earnings
(dollar amounts in thousands) Shares Amount value maturities securities (deficit)
BALANCE, JANUARY 1, 1996 3,031 $30 $8,016 $674 $31 $3,688
Net loss for the year (1,234)
Change in net unrealized appreciation for the (609) (26)
Total comprehensive income (loss)
(409)
Preferred stock dividends
Accretion of difference between fair value and (36)
mandatory redemption value of preferred stock
Purchase of treasury shares
Retirement of treasury shares (10) (50)
2,009
BALANCE, DECEMBER 31, 1996 3,021 30 7,966 65 5
Net loss for the year (6,360)
Change in net unrealized appreciation for the (11) (5)
Total comprehensive income (loss)
(409)
Preferred stock dividends
Accretion of difference between fair value and (36)
mandatory redemption value of preferred stock
Purchase of treasury shares Retirement of treasury shares-common (2) (10)
Retirement of treasury shares-preferred 33
BALANCE, DECEMBER 31, 1997 3,019 30 7,989 54 0 (4,796)
Net income for the period 24
Change in net unrealized appreciation for the 4
Total comprehensive income
Preferred stock dividends (109)
Accretion of difference between fair value and (10)
mandatory redemption value of preferred stock
($4,891
BALANCE, MARCH 24, 1998 3,019 $30 $798 $58 $0
See notes to consolidated financial statements.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Treasury stock Total
(dollar amounts in thousands) Shares Amount amount
BALANCE, JANUARY 1, 1996 410 ($1,425 $11,01
Net loss for the year (1,234
Change in net unrealized (635)
Total comprehensive income (loss) (1,869
Preferred stock dividends (409)
Accretion of difference between
fair value and
mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (10) (50) (50)
Retirement of treasury shares 10 50
BALANCE, DECEMBER 31, 1996 (410 (1,425) 8,650
Net loss for the year (6,360
Change in net unrealized (16)
Total comprehensive income (loss) (6,376
Preferred stock dividends (409)
Accretion of difference between
fair value and
mandatory redemption value of
preferred stock (36)
Purchase of treasury shares (15) (56) (56)
Retirement of treasury shares- 2 10
Retirement of treasury shares- 33
(423)
BALANCE, DECEMBER 31, 1997 (1,471) 1,806
Net income for the period 24
Change in net unrealized 4
Total comprehensive income 28
Preferred stock dividends (109)
Accretion of difference between
fair value and (10)
mandatory redemption value of
preferred stock
BALANCE, MARCH 24, 1998 (423 ($1,471 $1,715
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
January 1, 1998 Years ended December 31,
(in thousands) March 24, 1998 1997
Cash flows from operating activities:
Net income (loss) $24 ($6,360) ($1,234)
Adjustments to reconcile net loss to cash
provided by (used in) operating
Provision for permanent decline in
investments 158 50
Deferred policy acquisition costs (9,771) (8,987)
Amortization of deferred policy 12,615 11,964
Provision for permanent decline in
Other amortization and depreciation 24 483 433
Change in future policy benefits (2,696) 454
Change in unearned premiums (6,183) (1,765)
Change in amounts due reinsurers (142) (1,226) 2
Income taxes (15) (1,601) (22)
Change in prepaid reinsurance premiums 7,765 1,266
Change in receivables 1,497 4,618 3,455
Change in other liabilities (376) 415 (695)
Other (434) 186 (88)
Total adjustments 554 5,705 6,067
Net cash provided by (used in) operating 578 (655) 4,833
Cash flows from investing activities:
Purchase of investments (3) (39,231) (13,140)
Maturity of investments 1,000 2,195 6,484
Sale of investments 1,829 46,424 6,598
Net assets transferred in sale of insurance (3,647) (8,175)
Purchase of property and equipment (24)
Net cash provided by (used in) investing (821) 1,213 (82)
Cash flows from financing activities:
Principal payments on debt (2,537)
Receipts from universal life and investment 4,775
Withdrawals on universal life and investment (6,425)
Purchase of treasury stock, including 8 1/2%
redeemable preferred stock (64) (50)
Cash dividends to shareholders (109) (409) (409)
Net cash used in financing activities (109) (473) (4,646)
Net increase (decrease) in cash (352) 85 105
Cash at beginning of year 641 556 451
Cash at end of period $289 $641 $556
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $255
Income taxes $111 $90 $154
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. COMPANY OVERVIEW
The operating losses incurred by the Company over the past five years have
significantly reduced its net worth and its liquidity position. As a result, in
late 1997, the Company signed an agreement to sell its core credit insurance and
related products business, which had been its only remaining business operation,
following the sales in 1994 and 1997 of all of its universal life insurance
business and the 1996 sale of its auto auction business. Settlement on the sale
of the credit insurance business took place in May 1998. The Company s income or
loss from operations now consists principally of (i) earned premium and related
costs associated with a small, closed block of extended service contract
business, (ii) fee revenues received from Life of the South Corporation, a
Georgia-based financial services holding company which acquired the Company s
credit insurance business and its credit insurance accounts (LOTS), (iii)
investment income on remaining assets and (iv) corporate expenses.
On March 24, 1998, the Company s shareholders approved a plan of
liquidation and dissolution (the Plan of Liquidation and Dissolution) pursuant
to which the Company intends to liquidate its remaining assets, provide for all
of its liabilities, redeem its preferred stock and distribute any remaining cash
to its common shareholders. (see Note 4.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Consumers
Financial Corporation (the Company) and its wholly-owned subsidiaries, the most
significant of which is Consumers Life Insurance Company (Consumers Life).
Investors Fidelity Life Assurance Corp. (IFLAC) is a subsidiary of Consumers
Life. All material intercompany accounts and transactions have been eliminated.
Liquidation basis of accounting
The financial statements have been prepared on the basis of generally
accepted accounting principles (GAAP) which, as to the life insurance company
subsidiaries, vary from reporting practices prescribed or permitted by
regulatory authorities. As a result of the approval of the Plan of Liquidation
and Dissolution referred to above and discussed in Note 4, the Company adopted a
liquidation basis of accounting for the period subsequent to March 24, 1998.
Under the liquidation basis of accounting, assets are stated at their estimated
net realizable values and liabilites are stated at their anticipated settlement
amounts. Amounts determined in accordance with the liquidation basis of
accounting do not significantly differ from the accounting policies discussed
below. Prior to March 25, the Company reported the results of its operations and
its asset and liability amounts using accounting principles applicable to going
concern entitites, as discussed below. Certain prior year amounts have been
reclassified to conform with classifications used for 1998.
Investments
Fixed maturities includes bonds, notes and certificates of deposit
maturing after one year. Management determines the appropriate classification of
bonds and notes at the time of purchase and reevaluates such designation as of
each balance sheet date. These securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. All other
bonds and notes are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of income taxes, reported as a separate component of shareholders equity. The
amortized cost of fixed maturity securities is adjusted for amortization of
premiums and accretion of discounts to maturity. All certificates of deposits
maturing after one year are deemed to be held to maturity.
Mortgage loans on real estate are carried at the unpaid principal balance.
Other invested assets, excluding real estate partnerships, and short-term
investments are carried at cost. Investments in real estate partnerships are
reported at equity.
Interest on fixed maturities and short-term investments is credited to
income as it accrues on the principal amounts outstanding, adjusted for
amortization of premiums and discounts computed by the interest method.
Dividends are recorded as income on the ex-dividend dates. Loan origination and
commitment fees are amortized, using the interest method, over the life of the
mortgage loan. The accrual of interest on mortgage loans is generally
discontinued when the full collection of principal is in doubt, or when the
payment of principal or interest has become contractually 90 days past due.
Realized gains and losses and provisions for permanent losses on
investments are included in the determination of operating income. Net
unrealized appreciation or depreciation of debt securities and preferred and
common stocks, which represents the difference between fair value and aggregate
cost, is included in a separate shareholders' equity account. The "specific
identification" method is used in determining the cost of investments sold.
Fair values of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the investments.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings.
Deferred policy acquisition costs
Prior to the discontinuation of its insurance operations, the Company
deferred the costs of acquiring new insurance business. The costs deferred
consisted principally of commissions, certain sales salaries and other expenses
that varied with and were primarily related to the production of new business.
Acquisition costs relating to single premium credit insurance were amortized so
as to charge each year's operations in direct proportion to premiums earned.
Deferred policy acquisition costs were expensed when such costs were deemed not
to be recoverable from future earned premiums and investment income or, when
applicable, from the estimated proceeds to be received from the sale of the
related insurance business.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation is being provided
on the straight-line method over the estimated useful lives of the assets.
Other real estate
Real estate is carried at the lower of cost or fair value, less estimated
selling costs.
Future policy benefits
The liability for future policy benefits for individual life insurance has
been provided on a net level premium method based on estimated investment
yields, withdrawals, mortality and other assumptions which were appropriate at
the time the policies were issued. Such estimates were based upon industry data
and the Companies' past experience, as adjusted to provide for possible adverse
deviation from the estimates. Benefit reserves for universal life products
represent policy account balances before applicable surrender charges plus
certain deferred policy initiation fees that are recognized in income over the
term of the policies.
Unearned premiums
Unearned premiums for credit life and disability insurance contracts have
been computed based upon the original and remaining term of the related policies
as follows: decreasing term credit life on the Rule of 78's method, level term
credit life using the Pro Rata method and credit disability using a 65% - 35%
weighted average of the Rule of 78's and Pro Rata methods.
Income taxes
The Company and its subsidiaries provide income taxes, for financial
reporting purposes, on the basis of the liability method as required by
Statement of Financial Accounting Standards No. 109.
Earnings per share
Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
New accounting standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS 130 is to report a measure of all changes in equity of an enterprise
that result from transactions and other economic events of the period other than
transactions with owners. Comprehensive income (loss) is the total of net income
(loss) and all other nonowner changes in equity. Accordingly, the Company has
reported comprehensive income (loss) in the Consolidated Statements of
Shareholders Equity.
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 132, Employers Disclosures about Pensions and Other postretirement
Benefits (SFAS 132). As required by SFAS 132, the Company has provided certain
additional disclosures relating to the benefit obligation and the assets of its
pension plan. Similar disclosures were also provided for 1997.
3. BASIS OF FINANCIAL STATEMENTS
The more significant GAAP applied in the preparation of the financial
statements that differ from life insurance statutory accounting practices
prescribed or permitted by regulatory authorities (which are primarily designed
to demonstrate solvency) are as follows:
(a) In accordance with NAIC requirements, all bonds eligible for
amortization are reported at amortized value, whereas in the
accompanying financial statements, only bonds which are classified
as held-to-maturity securities are stated at amortized cost, and
available-for-sale securities are carried at fair value. Other
securities are carried at values prescribed by or deemed acceptable
to the NAIC.
(b) Costs of acquiring new business are deferred and amortized rather
than being charged to operations as incurred.
(c) The liability for future policy benefits and expenses on individual
life insurance is based on conservative estimates of expected
mortality, morbidity, interest, withdrawals, and future maintenance
and settlement expenses, rather than on statutory rates for
mortality and interest. For credit life insurance, the liability is
based upon the unearned premium reserve, computed as described in
Note 2, rather than on statutory rates for mortality and interest.
The credit disability policy liability, principally the unearned
premium reserve, is calculated as described in Note 2, while the
statutory liability is computed using predominantly the average of
the Rule of 78's and Pro Rata methods.
(d) Deferred income taxes, if applicable, are provided as described in
Note 15.
(e) The statutory liabilities for the interest maintenance reserve and
asset valuation reserve, designed to lessen the impact on surplus of
market fluctuations of securities and mortgage loans, have not been
provided in the financial statements.
(f) Certain assets are reported as assets rather than being charged
directly to surplus and excluded from the balance sheets.
(g) Commission allowances pertaining to financing-type reinsurance
agreements are not included in results of operations.
Dividends and other distributions to the Company from Consumers Life are
limited in that Consumers Life is required to maintain minimum capital and
surplus in each of the states in which it is licensed, determined in accordance
with regulatory accounting practices. The amount of minimum capital and surplus
required is $5.5 million. Under Delaware insurance laws, distributions are
subject to further restrictions relating to capital and surplus and operating
earnings. Accordingly, under normal circumstances, at December 31, 1998,
approximately $2 million of Consumers Life's net assets cannot generally be
transferred to the parent company and $682,000 is available for transfer during
1999. However, because of its prior operating losses and its current capital and
surplus position, the Company is not permitted to pay any dividends without
prior approval from the Delaware Insurance Department. Also, any loans or
advances to the parent company of a material amount must be reported to the
insurance department. The Company may have limited cash funds available to pay
dividends in excess of amounts transferred from subsidiaries. In addition,
separate restrictions apply to the surplus note owed to the Company by a
subsidiary of Consumers Life. Payment of interest and repayment of principal on
the note are permitted by the applicable state insurance department only if the
subsidiary's statutory capital and surplus exceeds $3 million.
The reported statutory capital and surplus of Consumers Life was $5.0
million at December 31, 1998 and $5.7 million at December 31, 1997. Consumers
Life and IFLAC reported combined statutory net income of $281,000 in 1998 and a
$2.7 million combined statutory net loss in 1997.
Insurance laws require Consumers Life and IFLAC to deposit certain amounts
with various state insurance departments for the benefit and protection of
policyholders. The approximate carrying amounts of such deposits at December 31,
1998 and 1997 were $1.1 million and $1.9 million, respectively.
4. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION
On December 30, 1997, the Company entered into an agreement with LOTS,
pursuant to which the Company (i) sold its credit insurance and fee income
accounts to LOTS effective October 1, 1997, (ii) sold its September 30, 1997
inforce block of credit insurance business to American Republic Insurance
Company (American Republic), LOTS financial partner in the transaction,
effective January 1, 1998 and (iii) sold one of its wholly-owned reinsurance
subsidiaries to LOTS as of August 31, 1998. LOTS and the Company also agreed
that, with respect to Consumers Life, new credit insurance business produced by
that subsidiary s former customer accounts, which were transferred to LOTS,
would continue to be written on the policy or certificate forms of the
subsidiary until September 30, 1999, or an earlier date which may be agreed to
by the parties. This premium and the related insurance risk are also being
reinsured 100% to American Republic.
The sale of the inforce block of business referred to in (ii) above was
completed on May 13, 1998 after the required approvals of the Company s
preferred and common shareholders and state insurance regulators in the states
of Delaware and Ohio were received. Settlement on the sale of the reinsurance
subsidiary referred to in (iii) above occurred on September 28, 1998, following
the approval in late August of the insurance regulators in the state of Arizona.
The sale of the inforce block of business resulted in an after-tax loss of
approximately $3,705,000, of which $3,919,000 was reflected in the Company s
fourth quarter 1997 financial statements through a write-down of deferred policy
acquisition costs. The 1997 loss included an $819,000 loss from operations from
September 30, 1997 (the measurement date) to December 31, 1997. An offsetting
gain on disposal of $214,000, which results from adjustments to certain
estimates made in 1997, has been included in the Company s 1998 financial
statements. As a result of the sale of the Company s credit insurance and
related operations to LOTS, in the accompanying financial statements, the
operating results of the credit insurance and related fee income business have
been reported as discontinued operations for all periods presented.
In addition to approving the sale of the inforce credit insurance
business, at the Special Meeting of Shareholders held on March 24, 1998, the
Company s shareholders also approved a Plan of Liquidation and Dissolution,
pursuant to which the Company intends to liquidate its remaining assets, provide
for all of its liabilities, redeem its preferred stock and distribute any
remaining cash to its common shareholders. Pursuant to the terms of its
agreement with LOTS, the Company is receiving payments from LOTS over a five-
year period based on the amount of credit insurance premiums produced by the
customer accounts sold by the Company to LOTS. The Company may also receive a
payment from a contingency fund established by the parties based on the claims
experience on the inforce credit insurance business from October 1, 1997 to
September 30, 2002. Because of these future payments and potential future
payments, the distribution, if any, to the Company s common shareholders will
not be made until late in 2002, when all amounts due from LOTS have been
received. The Company has made substantial reductions in its number of employees
during the past several years as a result of the discontinuation of its various
businesses. As of March 31, 1999, four people will be employed on a full-time
basis by the Company. During the liquidation period, the Company intends to
outsource most of the functions which will continue to be required.
A summary of the results of operations of the discontinued segments is
presented below:
For the period from January 1, 1998 to March 24, 1998
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $4,127 $158 $4,285
Gain from operations before income taxes
Income taxes
Gain from operations
Gain on disposal before income taxes $112 $112
Income taxes
Gain on disposal 112 112
Gain from discontinued operations $112 $112
Year ended December 31, 1997
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $29,712 $1,892 (a) $6 $31,610
Loss from operations before income tax ($1,457) ($1,457)
Income tax benefit (632) (632)
Loss from operations (825) (825)
Loss on disposal before income tax benefit (4,061) ($253) ($22) (4,336)
Income tax benefit (142) (86) (14) (242)
Loss on disposal (3,919) (167) (8) (4,094)
Loss from discontinued operations ($4,744) ($167) ($8) ($4,919)
Year ended December 31, 1996
Individual
Credit Life Auto
(in thousands) Insurance Insurance Auction Total
Revenues (before reinsurance ceded) $33,315 $4,349 (a) $2,688 $40,352
Income (loss) from operations before
income tax expense (benefit) ($1,266) $393 $554 ($319)
Income tax expense (benefit) (297) 134 226 63
Income (loss) from operations (969) 259 328 (382)
Gain (loss) on disposal before income
tax expense (benefit) (1,385) 3,031 1,646
Income tax expense (benefit) (471) 1,232 761
Gain (loss) on disposal (914) 1,799 885
Income (loss) from discontinued operations ($969) ($655) $2,127 $503
(a) Includes renewal premiums which are 100% ceded under indemnity reinsurance
agreement with third party reinsurer.
5. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement purposes as
described in Note 1, consist of the following at December 31, 1998:
Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
Fixed maturities:
Bonds-United States government and
government $967 $993 $993
agencies and authorities
Certificates of deposit 50 50 50
Total fixed maturities 1,017 1,043 1,043
Mortgage loans on real estate 1,600 1,600 1,600
Other invested assets 75 75 75
Short-term investments 1,732 1,732 1,732
Total investments $4,424 $4,450 $4,450
A portion of the Company's invested funds is restricted as to use in that
deposits are required with various state insurance departments for the benefit
and protection of policyholders (see Note 3).
At December 31, 1998, one mortgage loan with a balance of $295,360 was
non-performing. Interest on this loan of $13,383 was excluded from investment
income in 1998 due to its non-accrual status. At December 31, 1997, no
mortgage loans or other loans were considered to be non-performing loans.
At December 31, 1998, all three of the Company's investments in mortgage
loans were secured by commercial real estate located in Central Pennsylvania.
Such investments consist of first mortgage liens on completed income-producing
properties. Each of the loans exceeded 10% of the Company s net assets in
liquidation at December 31, 1998, while two mortgage loans exceeded 10% of
shareholders equity at December 31, 1997. The Company s mortgage loan
valuation reserve at December 31, 1997 was $50,000.
At December 31, 1998 and 1997, all the Company s real estate is classified
as non-investment real estate, since the Company intends to sell these
properties. Accumulated depreciation on the properties at the end of 1998 and
1997 totaled $27,000 and $56,000, respectively.
Net investment income is applicable to the following investments:
Years ended December 31,
(in thousands) 1998 1997 1996
Interest:
Fixed maturities $175 $1,934 $2,364
Mortgage loans 139 189 421
Policy loans 33
Short-term investments 733 486 265
Real estate 157
Other 82 17
1,047 2,691 3,257
Investment expenses (85) (675) (680)
Total net investment income 962 2,016 2,577
Less investment income for period subsequent
to adoption of liquidation basis of accounting 487
Net investment income for period prior to adoption
of liquidation basis of accounting 475 2,016 2,577
Less net investment income attributable to
discontinued operations 415 1,953 2,518
Net investment income attributable to
continuing operations $60 $63 $59
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1998 and 1997 are as follows:
1998 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $967 $26 $993
Totals $967 $26 $993
1997 Gross Gross Estimate
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $4,365 $81 $2 $4,444
Corporate securities 373 1 374
Mortgage-backed securities 887 7 5 889
Totals $5,625 $89 $7 $5,707
The amortized cost and estimated fair value of debt securities at December
31, 1998, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(in thousands) cost fair value
Due in 1999 $652 $661
Due in 2000-2004 315 332
Totals $967 $993
Proceeds from the sales of investments in debt securities during 1998 were
$3.7 million. Gross gains of $58,000 and gross losses of $6,000 were realized on
those sales. Proceeds from such sales in 1997 were $48 million. Gross gains of
$446,000 and gross losses of $247,000 were realized on those sales. Proceeds
from sales in 1996 were $4.1 million. Gross gains of $6,000 and gross losses of
$20,000 were realized on those sales.
Realized investment gains (losses) are applicable to the following
investments:
Years ended December 31,
(in thousands) 1998 1997 1996
Fixed maturities $146 $249 ($14)
Other invested assets 38 (219) (55)
184 30 (69)
Less realized investment gains for period subsequent
to adoption of liquidation basis of accounting 160
Realized investment gains (losses) for period prior
to adoption 24 30 (69)
of liquidation basis of accounting
Less realized investment gains attributable
to discontinued operations 206
Realized investment gains (losses)
attributable to continuing operations $24 ($176) ($69)
6. RECEIVABLES
December 31,
(in thousands) 1998 1997
Amounts due from agents $1,902
Reinsurance recoverable $20,488 13,271
Federal income tax refund 520 524
Other 582 1,378
21,590 17,075
Less allowance for uncollectible accounts (436)
Balance $21,590 $16,639
7. DEFERRED POLICY ACQUISITION COSTS
Individual
(in thousands) Credit Life Total
Balance, January 1, 1996 17,642 4,284 21,926
Costs deferred 8,905 82 8,987
Amortization (10,133) (446) (10,579)
Write-off attributable to 1997
sale of inforce universal
life insurance business (1,385) (1,385)
Balance, December 31, 1996 16,414 2,535 18,949
Costs deferred 9,771 9,771
Amortization (9,515) (9,515)
Write-off attributable to
sale of inforce universal
life insurance business (2,535) (2,535)
Write-off attributable to
1998 sale of inforce
credit insurance business (3,100) (3,100)
Balance, December 31, 1997 13,570 0 13,570
Costs deferred 133 133
Amortization (25) (83) (108)
Write-off attributable to
sale of inforce credit
insurance business (13,545) (13,545)
Balance, December 31, 1998 $0 $50 $50
8. PROPERTY AND EQUIPMENT AND OTHER REAL ESTATE
December 31,
(in thousands) 1998 1997
Property and equipment:
Data processing equipment and software $122 $2,062
Furniture and equipment 198 1,071
Home office building, including 1,563 1,788
1,883 4,921
Less accumulated depreciation (865) (3,571)
Balance $1,018 $1,350
December 31,
(in thousands) 1998 1997
Other real estate:
Commercial office building $625
Warehouse $214 214
839
Less accumulated depreciation (27) (56)
Balance $187 $783
All of the Company s real estate is classified as non-investment real
estate since these properties are listed for sale.
9. POLICY LIABILITIES
The composition of future policy benefits and unearned premiums at
December 31, 1998 and the assumptions pertinent thereto are as follows:
Life Future Interest
insurance policy Unearned rates: years
(in thousands) in force benefits premiums of issue
Individual life $145,635 $9,354 4 1/2% - 11
1961 - 1992
Credit life 922,555 $13,874 (a)
1987 - 1998
Credit disability 8,291 21,289 (a)
1987-1998
Balance $1,068,190 $17,645 $35,163
(a) There are no interest rate assumptions in the credit reserve
factors.
Mortality and withdrawal assumptions generally are based on industry data
and the life insurance companies' prior experience. The mortality tables
predominantly used in calculating benefit reserves are the 1955 - 1960 Basic
Select and Ultimate for males (special graduation) and the 1965 - 1970 Basic
Select and Ultimate for males (special graduation).
The withdrawal assumptions for individual life insurance are predominantly
Linton B and Linton C.
Future policy benefits reported to regulatory authorities were less than
the above total by approximately $684,000 at December 31, 1998.
Future policy benefits and unearned premiums do not include any deduction
for reinsurance ceded to other companies. At December 31, 1998, all but $39,000
of the Company s future policy benefits liability and all but $323,000 of its
unearned premiums liability were reinsured to other insurers in connection with
the discontinuation of the Company s insurance operations. At December 31, 1997,
significant portions of the Company s policy liabilities were also reinsured to
other insurers. Future policy benefits and unearned premiums related to such
reinsurance are classified with Receivables and Prepaid Reinsurance Premiums,
respectively, as shown in the following table.
December 31,
(in thousands) 1998 1997
Future Policy Benefits and Other Policy Claims and Benefits $ 20,527 $ 24,006
Payable
Reinsurance Recoverable 20,488 13,271
Net liability $ 39 $ 10,735
Unearned Premiums $ 35,163 $ 49,994
Prepaid Reinsurance Premiums 34,840 9,572
Net liability $ 323 $ 40,422
Life insurance in force net of reinsurance ceded was $58,000 at December
31, 1998.
10. REINSURANCE
Prior to the 1998 sale of its credit insurance business, as discussed in
Note 4, and the sales of its individual life insurance business in 1992 through
1997, the Company routinely ceded and, in some instances, assumed reinsurance.
The sale of the credit insurance business of Consumers Life was completed
pursuant to an indemnity reinsurance agreement with American Republic, while
IFLAC s credit insurance was ceded utilizing an assumption reinsurance
agreement. Similarly, the reinsurance transactions through which the Company
sold its individual life insurance business included the use of both indemnity
and assumption agreements. The insurance companies remain contingently liable
for insurance risks ceded under indemnity agreements, while such risks are
legally transferred to the reinsurer when assumption agreements are utilized.
Historically, the insurance companies also entered into various financing-
type reinsurance agreements with unaffiliated reinsurers. Such agreements,
which primarily involved credit insurance, were designed to minimize the
reduction of statutory capital and surplus arising at the time premiums were
written. These financing-type agreements were terminated as of January 1, 1998
when the American Republic agreements became effective. During 1998, Consumers
Life entered into another financing-type reinsurance agreement in which it
assumed approximately $2 million in individual life insurance premiums and an
equal amount of policy liabilities. The effects of all financing-type agreements
have been removed from the financial statements except for the cost of the
financing, which amounted to $25,000, $660,000 and $608,000 in 1998, 1997 and
1996, respectively. These costs are included with Operating Expenses on the
Consolidated Statements of Operations and are presented with Miscellaneous
Expenses on the Consolidated Statement of Changes in Net Assets in Liquidation.
Excluding premiums reinsured under financing-type agreements, premiums
ceded to other companies were $17.7 million, $4.9 million and $12.4 million in
1998, 1997 and 1996, respectively.
Incurred benefits and losses reinsured in 1998 were $16.4 million compared
to $6.8 million in 1997 and $10 million in 1996. These amounts have been
deducted in arriving at Death and Other Benefits in the Consolidated Statements
of Operations and in computing Policyholder Benefits in the Statement of Changes
in Net Assets in Liquidation. However, Future Policy Benefits and Unearned
Premiums at December 31, 1998 and 1997 do not include any deduction for
reinsurance ceded. Instead, the amounts related to such reinsurance are
classified with Receivables and Prepaid Reinsurance Premiums (see Note 9).
11. PENSION AND OTHER RETIREMENT PLANS
The Company has a defined benefit pension plan and two profit sharing
plans which cover substantially all full-time employees. Contributions under the
pension plan are based upon length of service and annual compensation of each
employee. The assets of the pension plan include principally debt securities and
mortgages. Effective July 31, 1996, the Company froze the benefits payable to
participants un