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.
Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128.
(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.
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.
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.
In 1989, the Company entered into an agreement for the lease of office space. The facility contains approximately 44,500 square feet of office space. The term of the lease is ten years with an option to renew for one additional term of five years. Until March 1994, monthly lease payments were $35,000. In March 1994, the Company exercised its option to acquire a 50% interest in this property at a price of $1.75 million. The Company continues to lease the portion of the building it does not own, but at monthly rent of $17,000 through July 1999, although the Company has subleased a portion of the office space which it does not otherwise occupy. Income from these sub-leases totaled $87,000 in 1998, $57,000 in 1997 and $98,000 in 1996.
In connection with the proposed sale of the Company s September 30, 1997 inforce block of credit insurance to LOTS (pursuant to reinsurance agreements which Consumers Life and IFLAC entered into with American Republic), the two insurance subsidiaries filed the reinsurance agreements with the insurance regulators in their respective domiciliary states and obtained the required regulatory approval during the first quarter of 1998. In connection with the sale of the Company s Arizona-domiciled insurance company to LOTS, LOTS filed a Form A with the Arizona Insurance Department and received the Department s approval in September 1998.