The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intends", "intend", "intended", "goal", "estimate", "estimates", "expects", "expect", "expected", "project", "projected", "projections", "plans", "anticipates", "anticipated", "should", "designed to", "foreseeable future", "believe", "believes" and "scheduled" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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 credit insurance and related products business, which was the Company's only remaining business operation. In connection with the sale of its in force 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 (the Plan of Liquidation), pursuant to which the Company is now liquidating its remaining assets so that it can pay or provide for all of its liabilities and distribute its remaining cash to its preferred shareholders. It is unlikely that any cash will be available for distribution to the common shareholders.
As discussed below, during 1999, the Company s net assets in liquidation, which represent the amount available for distribution to common shareholders, were reduced to zero, and the estimated liquidation value of the Company s preferred stock was reduced by $303,000 from its full redemption price. For the year ended December 31, 2000, the estimated liquidation value of the preferred stock decreased by an additional $938,000, primarily as a result of (i) a $432,000 increase in the amount necessary to fully fund the Company s pension plan so the plan could be terminated and (ii) $391,000 in preferred dividends. An excess of benefits and expenses (excluding pension expense) over revenues of $269,000 also contributed to the decline in the liquidation value of the preferred stock, but this reduction was partially offset by miscellaneous increases in net assets during the year. All subsequent decreases in the Company s net assets during the remainder of the liquidation period will continue to reduce the estimated liquidation value of the preferred stock.
During 1999, the Company s net assets in liquidation decreased from $383,000 to zero and, as stated above, the estimated liquidation value of the preferred stock also declined by $303,000. These reductions were principally due to a $252,000 excess of benefits and expenses over revenues for the year, a $388,000 increase in the liability for the Company's under funded pension plan and $406,000 in preferred dividends. These reductions were partially offset by a $210,000 adjustment of certain liabilities to their estimated settlement amounts and other miscellaneous increases in net assets.
In 1998, for the period following the adoption of the liquidation basis of accounting, the Company's net assets in liquidation declined by $1.3 million, from $1.7 million to $383,000. As was the case in 1999, this decrease was also largely due to an excess of benefits and expenses over revenues for the period of $132,000, an increase in the pension plan liability of $374,000 and preferred shareholder dividends totaling $307,000. For the period from January 1, 1998 to March 24, 1998, the Company reported net income of $24,000 (a loss of $.04 per share after giving consideration to preferred dividends), which included a $112,000 gain related to the 1997 disposal of the discontinued credit insurance business.
As indicated above, since the Company has no net assets available for common shareholders, all decreases in net assets must be deducted from the estimated liquidation value of the Company s preferred stock. During 2000, the estimated liquidation value of the preferred stock decreased by $938,000. As a result, at December 31, 2000, the 456,061 shares of preferred stock outstanding have an estimated liquidation value of $3,320,000, or $7.28 per share.
The decrease in the liquidation value of the preferred stock in 2000 was primarily the result of a $432,000 increase in the Company s liability for its under funded pension plan and $391,000 in dividends to the preferred shareholders. An excess of expenses over revenues (excluding pension expense) also contributed to the decline in the liquidation value. Effective in March 2000, the Company terminated the pension plan as part of the Plan of Liquidation. Following the receipt of all regulatory approvals and each participant s election as to his or her form of benefit payment (lump sum or annuity), the plan s final liability was determined using a government- mandated interest rate to compute the lump sum benefits. Because the prescribed interest rate had declined from the rate used by the Company to estimate its December 31, 1999 liability to the plan, the total liability to participants, and the Company s corresponding liability to the plan, increased compared to the estimate at the end of 1999. Consequently, the Company had to contribute $966,000 to the plan, or $432,000 more than the $534,000 which had been established at December 31, 1999 as the unfunded liability.
The liquidation value of the preferred stock also declined as a result of the $391,000 in dividends paid to the preferred shareholders in 2000. Since the Company is in liquidation and cannot generate future value from its business operations, each dividend payment to the preferred shareholders reduces the amount ultimately distributable to those shareholders as a liquidation payment. The Company is currently unable to make any liquidating distributions to these shareholders because virtually all of the Company s liquid funds are held by the Company s insurance subsidiary and cannot be utilized until that subsidiary is sold.
The agreement with the purchaser of the Company s credit insurance operations provided that the proceeds from the sale of the customer accounts were to be received as fee revenues until September 2002, based on the amount of credit insurance premiums produced by those accounts. However, as discussed in Note 12 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K, a dispute arose during 1999 between the Company and the purchaser regarding the payment of investment income on the assets which were transferred to the purchaser in connection with the sale of the in force credit insurance business. Because of the dispute, the purchaser began withholding the fee revenues from the Company to offset the investment income it believed it was due. At September 30, 2000, net fee revenues of $421,000 had been withheld by the purchaser. In October 2000, the parties settled this dispute. Pursuant to the terms of the settlement agreement, the purchaser paid the Company $250,000 in settlement of all prior amounts withheld and in lieu of any future fee revenue payments.
The Company incurred approximately $169,000 in legal fees during 2000, principally in connection with the above-referenced dispute and other litigation matters. Although the settlement of the fee revenue dispute has eliminated future legal costs related to that issue, the Company will continue to incur legal expenses related to several other lawsuits in which it is a defendant and in connection with the completion of the Plan of Liquidation.
The Company s net assets in liquidation at December 31, 1999 were zero. The $383,000 decline in net assets during 1999 was the result of an excess of benefits and expenses over revenues of $252,000, a $388,000 increase in the liability for the Company s under funded pension plan and $406,000 in preferred stock dividends. These reductions were partially offset by a $210,000 adjustment of certain liabilities to their estimated settlement amounts. The 1999 excess of expenses over revenues is principally due to (i) higher than expected audit, actuarial and legal fees and salary expenses (in part due to the Company s inability to sell its life insurance subsidiary), (ii) delays in selling the Company s home office building, which resulted in higher than anticipated rent and maintenance costs for the year and (iii) a loss from a terminated joint venture which was expected to generate income.
The Company's unfunded pension liability increased by $388,000 in 1999 principally because of the Company's decision in early 2000 to terminate the plan. This decision resulted in the use of an interest rate in computing the December 31, 1999 plan liabilities which was intended to approximate the rate which would be in effect when the plan actually terminated. For continuing plans, different assumptions regarding interest rates are generally utilized. At December 31, 1999, the plan's estimated unfunded liability was $534,000.
For the period from March 25, 1998 to December 31, 1998, net assets in liquidation decreased by $1.3 million. The reduction was primarily due to (i) a $132,000 net loss, (ii) a $734,000 increase in the liability for the under funded pension plan and (iii) preferred shareholder dividends of $307,000. The net loss for the period was attributable to the write-off of $472,000 of deferred tax assets. Excluding the tax write-off, revenues for the period exceeded expenses by $395,000 due to significant income from a now terminated joint venture and because of $160,000 in realized investment gains. Profits from the joint venture totaled $243,000 from March 25, 1998 to the end of the year. The unfunded liability in the Company's pension plan increased significantly because of a drop in long-term interest rates in 1998.
As a result of the foregoing, a final distribution cannot be made to the preferred shareholders until (i) the life subsidiary is sold and the time period of any required indemnifications given to the purchaser has expired, (ii) the Company has resolved all remaining litigation matters and (iii) a determination is made regarding the amount of any contingency fund distribution which might be payable to the Company.
The Board of Directors may determine during this period of time that the amount of funds available for ultimate distribution to the preferred shareholders would 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 any remaining liabilities and making distributions to the preferred shareholders.
Historically, the Company's subsidiaries met most of their cash requirements from funds generated from operations, while the Company generally relied on those 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 investment income and proceeds from the sales of non liquid assets. These funds must be used to settle all remaining liabilities as they become due, to pay expenses until the Company is dissolved and to pay dividends on the preferred stock until a final distribution is made to the preferred shareholders. The adequacy of the Company's liquidity position during the remainder of the liquidation period will be principally dependent on its ability to sell its remaining non liquid assets and the timing of such sales, as well as on the level of expenses the Company must incur during the liquidation period. The Company s liquidity is particularly dependent on its ability to sell its life insurance subsidiary, since all dividends and other distributions to the Company from that subsidiary must be approved by the Delaware Insurance Department. Sinking Fund for Redeemable Preferred Stock
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 several years, the effects of inflation on the Company are not material.
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 judgments 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.
The Board of Directors monitors the financial and accounting operations of the Company. The Board meets periodically with representatives of its independent auditing firm to discuss the scope of the audit and related reports. The Company s independent auditors have at all times full and free access to the Board of Directors, without management present, to discuss any matter that they believe should be brought to the attention of the Board.
James C. Robertson R. Fredric Zullinger Chairman, Chief Executive Officer Senior Vice President and President and Chief Financial Officer
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 changed its basis of accounting for periods subsequent to March 24, 1998 from the going-concern basis to the liquidation basis. Accordingly, the carrying values of the remaining assets as of December 31, 2000 and 1999 are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts.
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 2000 and 1999 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.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Consumers Financial Corporation and subsidiaries for the period from January 1, 1998 to March 24, 1998 and the changes in their net assets in liquidation for the period from March 25, 1998 to December 31, 1998, in conformity with accounting principles generally accepted in the United States applied on the bases described in the preceding paragraph.
Our audit was 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 1998 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.
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). At December 31, 2000, Consumers Life is the Company s only remaining subsidiary. All material intercompany accounts and transactions have been eliminated.
Prior to March 25, 1998, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entities, as discussed below. Certain prior year amounts have been reclassified to conform with classifications used for 2000.
Realized gains and losses and provisions for permanent losses on investments are included in the determination of the excess of benefits and expenses over revenues. The "specific identification" method is used in determining the cost of investments sold.
Mortgage loans: The fair values for mortgage loans are estimated using discounted cash flow analyses, using interest rates which would currently be offered for similar loans to borrowers with similar credit ratings.
Property and equipment are stated at estimated net realizable value. Depreciation has been provided on the straight-line method over the estimated useful lives of the assets.
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. The Company s unearned premium liability has been permanently reinsured to other insurance companies.
(e) Commission allowances pertaining to financing-type reinsurance agreements are not included in results of operations or changes in net assets in liquidation
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 $8.6 million. At December 31, 2000, Consumers Life does not meet the minimum capital and surplus requirements in eleven of the states in which it is licensed, and it has agreed to a temporary suspension of its insurance license in one of those states. No actions have been taken with respect to this matter by the insurance departments of the other states. Since the Company does not intend to write any new insurance business through Consumers Life and is currently attempting to sell the subsidiary, a temporary suspension of any of its licenses will have no material effect on the Company. However, if any of the licenses are revoked rather than suspended, the total consideration the Company would receive when Consumers Life is sold will be reduced.
The reported statutory capital and surplus of Consumers Life was $3.0 million at December 31, 2000 and $4.3 million at December 31, 1999. Consumers Life reported statutory net losses of $316,000 in 2000 and $1.5 million in 1999.
Insurance laws require Consumers Life to deposit certain amounts with various state insurance departments in order to maintain its licenses. The approximate carrying amounts of such deposits at December 31, 2000 and 1999 were $1.4 million and $1.0 million, respectively.
On December 30, 1997, the Company entered into agreements with LOTS and American Republic Insurance Company (American Republic), 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 in force block of credit insurance business to 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 new credit insurance business produced by Consumers Life s former customer accounts, which were transferred to LOTS, such business would continue to be written on the policy or certificate forms of Consumers Life until September 30, 1999. The parties subsequently modified their agreement to extend the September 30 date to November 15, 1999 with respect to Pennsylvania premiums only. This premium and the related insurance risk were also reinsured 100% to American Republic.
The sale of the in force block of business referred to in (ii) above was completed in May 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 in September 1998.
A summary of the results of operations of the discontinued segments for the period prior to adoption of the liquidation basis of accounting is presented below:
(a) Includes renewal premiums which are 100% ceded under an indemnity reinsurance agreement with a third party reinsurer.
Investments, which are valued for financial statement purposes as described in Note 1, consist of the following at December 31, 2000:
At December 31, 1999, the Company held three mortgage loans, all of which exceeded 10% of its net assets in liquidation. The largest loan had a balance of $1,175,760 and was granted to the co-owner of the Company s former home office building. This loan, which was secured by the co-owner s one-half interest in the building, was paid in full in August 2000 when the office building was sold. At December 31, 1999, another mortgage with a balance of $295,360 was non-performing, in part, because the mortgagor filed a voluntary petition under Chapter 11 of the Bankruptcy Code in late 1997. Interest totaling $39,965 and $13,383 was excluded from investment income in 1999 and 1998, respectively, due to the non-performing status of this loan. As a result of an agreement reached with the bankruptcy trustee, from November 1999 to May 2000, the Company received approximately $32,000 in lease payments from a tenant at the mortgaged property. Such payments were applied first to legal costs incurred by the Company and then to accrued late fees and unpaid interest. The trustee sold this property in June 2000, at which time the principal balance on this loan was paid in full along with $47,000 in unpaid interest.
In August 2000, the Company sold its home office building at a price which exceeded the carrying value of the property by approximately $9,000.
Mortality and withdrawal assumptions generally are based on industry data. 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).
Life insurance in force net of reinsurance ceded was $58,000 at December 31, 2000 and 1999.
In 2000, refunds (negative premiums) ceded to other companies totaled approximately $1.8 million. Premiums ceded in 1999 were approximately $11.9 million, while premiums ceded in 1998 were approximately $17.7 million. The negative premiums in 2000 are the result of the termination in late 1999 of the fronting arrangement whereby, following the sale of the credit insurance operations to LOTS in early 1998, credit insurance business continued to be written on Consumers Life s certificate forms in 1998 and most of 1999 and ceded 100% to American Republic. Once all new business ceased, the refund of unearned premiums was the only premium activity which remained.
At December 31, 1999, the Company had a defined benefit pension plan and two defined contribution plans in effect. As of March 22, 2000, the pension plan was terminated, and, following approval from the Pension Benefit Guaranty Corporation and receipt of a favorable determination letter from the Internal Revenue Service, all benefits due under the plan were distributed to the plan participants in November and December 2000. Benefits under this plan had been frozen as of July 31, 1996. The Company contributed approximately $966,000 to the plan during 2000 so that the plan could pay the required benefits to the participants.
Effective October 1, 1999, the Company also terminated its employee stock owner ship plan. In October 2000, after receiving a favorable determination letter from the Internal Revenue Service, the plan assets, consisting principally of common stock of the Company, were distributed to the participants.
Rates used in determining pension expense for the years ended December 31, 2000, 1999 and 1998 and the related pension obligations at December 31, 1999 and 1998 were as follows:
From March 1994 until August 2000, the Company owned a 50% interest in its home office building, which it sold in August 2000. The Company leased the portion of the building it did not own at a rate of $17,000 per month until July 1999 when its lease expired. The building lease was classified as an operating lease. The Company also subleased a portion of the unused space in the building to third party tenants until April 2000. Income from these subleases totaled $14,000 in 2000, $175,000 in 1999 and $87,000 in 1998. The Company has no other significant leases.
The terms of the Preferred Stock require the Company to make annual payments to a sinking fund. The first such payment was due in July 1998. The Preferred Stock terms also provide that any purchase of preferred shares by the Company will reduce the sinking fund requirements by the redemption value of the shares purchased. As a result of the Company s purchases of Preferred Stock prior to 1998, no sinking fund payment was due in 1998, and the required payment for 1999 was reduced from $550,000 to $414,610. The purchase of 18,000 preferred shares in 1999 and 7,400 shares in 2000 has further reduced the 1999 sinking fund deficiency to $160,610. On July 1, 2000, an additional $550,000 sinking fund payment became due but was not paid.
Prior to March 25, 1998, the difference between the fair value of the Preferred Stock at the date of issue and the mandatory redemption value was recorded through periodic accretions, using the interest method, resulting in a charge to retained earnings ($9,000 in 1998). Upon the adoption of the liquidation basis of accounting in March 1998, the remaining difference of $175,000 was recorded as a reduction in the Company s net assets. At December 31, 2000 and 1999, the redemption value of the Preferred Stock exceeded the net assets available to redeem these shares by $1,241,000 and $303,000, respectively. Accordingly, the carrying amount for the Preferred Stock has been reduced to reflect the net assets available.
At December 31, 2000 and 1999, 675,646 and 686,608 shares of common stock, respectively, were reserved for the conversion of the Preferred Stock.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 2000 and 1999 are as follows:
The following table sets forth the computation of basic and diluted per share data for continuing operations for the period prior to the adoption of the liquidation basis of accounting.
As a result of the disposal of its auto auction business in 1996, the disposal of its remaining block of individual life insurance business in early 1997 and the disposal of its credit insurance business in 1998, the Company has no remaining business segments.
In August 2000, Consumers Life signed a Consent Order issued by the Delaware Insurance Department in which the Department claimed that Consumers Life had violated certain provisions of the Delaware Holding Company statutes in that it had not obtained prior approval from the Department for certain intercompany transactions. The Department did not impose any fines or other sanctions but did require that Consumers Life obtain prior approval from the Department for all transactions with the Company and for any disbursements in excess of $10,000.
In July 1999, Investors Fidelity Life Assurance Corp. (IFLAC), a subsidiary of Consumers Life, filed an application with the Ohio Department of Insurance to formally discontinue its business as a life insurance company. In September 1999, the Ohio Department issued an order accepting the surrender of IFLAC s certificate of authority.
The NAIC has established certain minimum capitalization requirements based on risk-based capital (RBC) formulas. The formulas are designed to identify companies which are undercapitalized and require specific regulatory action based on requirements relating to insurance, business, asset and interest rate risks. At December 31, 2000, Consumers Life has more than sufficient capital to meet the NAIC's RBC requirements.