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 1994, 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 for $1.75 million, which reduced the Company s annual rent on the portion of the building it does not own to $204,000.
As a result of the sale of all of its insurance operations and the adoption of the Plan of Liquidation, the Company has occupied only about 14% of the leasable office space during the past several years. Since 1998, the Company has leased about 45% of the leasable space to third party tenants pursuant to various short-term leases, and received $175,000, $87,000 and $57,000 in 1999, 1998 and 1997, respectively, from these subleases. The Company s lease terminated in July 1999, and since that time, the Company and its co-owner have shared in the sublease income and the operating costs of the office building.
The agreement with the purchaser of the credit insurance operations provides that the proceeds from the sale of the customer accounts are to be received as fee income on a quarterly basis 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 inforce credit insurance business. Until the dispute is resolved, the purchaser is withholding the above-referenced fee income from the Company to offset the investment income it believes it is due. At December 31, 1999, $137,000 of the $373,000 in net fee income reported for the year was being held by the purchaser. As required by the agreements between the parties, this matter will be settled through arbitration.
The Company may also receive a payment from a contingency fund established by the Company and the purchaser based on the claims experience of the inforce credit insurance business from October 1, 1997 to September 30, 2002. However, based on the claims experience to date, as provided by the purchaser, the Company would not be entitled to any portion of the contingency fund. Because of the fee income payments and the potential payment from the contingency fund, the distribution, if any, to the Company's common shareholders will not be made until late in 2002, when all amounts due from the purchaser have been received.
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, 1998, the Company reported the results of its operations and its asset and liability amounts using accounting principles applicable to going concern entities.
At December 31, 1998, the Company's net assets in liquidation totaled $383,000. During 1999, the net assets in liquidation were reduced to zero, primarily as a result of a $252,000 net loss 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 a $303,000 reduction in the estimated liquidation value of the Company's preferred stock. 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. This decrease was also the result of a net loss for the period ($132,000), an increase in the pension plan liability ($374,000) and preferred shareholder dividends ($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 from the 1997 disposal of its discontinued credit insurance business. In 1997, the Company reported a loss from continuing operations of $1.4 million ($.73 per share) and a loss from discontinued operations of $4.9 million ($1.89 per share).
As a result of the sale of its remaining business and the adoption of the Plan of Liquidation, the Company's income and expenses now consist principally of (i) fee income 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 costs. A discussion of the material factors which affected the Company's results of operations (for the year ended December 31, 1997 and 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 and for the year ended December 31, 1999) is presented below.
The Company s net assets in liquidation at December 31, 1999 were zero. The $383,000 decline in 1999 was the result of the $252,000 net loss mentioned earlier, 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 and a $303,000 reduction in the estimated liquidation value of the Company s preferred stock. The 1999 net loss is principally attributable 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.
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. On a pre-tax basis, revenues exceeded expenses by $395,000 due to a significant increase in 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 compared to a $20,000 loss in 1999. The unfunded liability in the Company's pension plan increased significantly because of the drop in long-term interest rates in 1998. A decrease in rates generally increases a plan's liabilities, while higher rates reduced the liabilities.
As explained earlier, the liquidation of the Company is expected to continue until late in 2002 when all fee payments and the potential distribution from the contingency fund are received. Until that time, 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 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 all liabilities and making any distributions to the preferred and common shareholders.
Based on management's 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 changes in net assets, including preferred stock dividends, will exceed fee income and other revenues during the liquidation period by approximately $500,000 to $700,000. Actual income and expenses and other net asset changes could vary significantly from the present estimates due to the uncertainties regarding (i) when certain assets will be liquidated, (ii) when the distribution to the preferred shareholders occurs, (iii) the outcome of the investment income dispute discussed earlier, (iv) the level of actual expenses which will be incurred and (v) the ultimate resolution of any future contingencies which may arise.
For the year ended December 31, 1999, the Company's investments decreased by $900,000, from $4.5 million at the beginning of the year to $3.6 million at December 31, 1999. The decline is primarily attributable to the payment of $406,000 in preferred dividends and the payment of $625,000 to the Company's pension plan. In 1998, invested assets decreased from $41 million at the end of 1997 to $4.5 million at December 31, 1998 as a result of the transfer of more than $35 million to the purchaser of the Company's credit insurance business in connection with the sale of that business. Total investments at both December 31, 1999 and 1998 consisted principally of (i) U.S. Treasury Notes, owned by the Company's insurance subsidiary, 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 and (iii) short-term investments, principally money market funds.
Because the Company is no longer conducting any business operations and is in the process of liquidating its remaining assets, it is relying, both directly and indirectly, on fewer computer systems than in the past to maintain all of its financial and other records and file all required financial reports with state insurance departments and other regulators. In fulfilling its continuing, although limited, responsibilities, the Company directly utilizes on three computer systems, one for its general ledger accounting, one for the preparation of prescribed regulatory reports to state insurance departments and one for maintenance of its shareholder records (since the Company continues to perform its own stock transfer agent functions).
Prior to December 31, 1999, the Company received written assurances from each of its software vendors that their respective systems were tested and would operate problem free during and after the year 2000. The Company also obtained a year 2000 certification from the purchaser of its credit insurance business (since it continues to receive certain financial reports from that company) stating that all of its hardware and software systems were tested and were year 2000 compliant.
As of March 1, 2000, the Company has had no significant year 2000 computer software problems. Based upon the information outlined above, management does not believe that the Company s very limited operations will be adversely impacted by any year 2000 computer problems during the remainder of 2000.
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.
We have audited the accompanying consolidated statement of net assets in liquidation of Consumers Financial Corporation and subsidiaries as of December 31, 1999 and the related consolidated statement of changes in net assets in liquidation for the year then ended. 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 audit.
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 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.
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 year ended December 31, 1997 and for the period from January 1, 1998 to March 24, 1998, their net assets in liquidation as of December 31, 1998 and the changes in their 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 1998 and 1997 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.
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, make cash distributions to its preferred shareholders and distribute the remaining cash, if any, to its common shareholders. (see Note 4.)
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). All material intercompany accounts and transactions have been eliminated.
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 periods 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.
Mortgage loans on real estate are carried at the unpaid principal balance. Short-term investments are carried at cost. Other invested assets, comprised of real estate partnerships, are reported at estimated net realizable value.
Realized gains and losses and provisions for permanent losses on investments are included in the determination of pre-tax income or loss. 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.
For periods prior to the adoption of the liquidation basis of accounting, basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128.
The more significant accounting principles 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 for statutory accounting purposes.
The reported statutory capital and surplus of Consumers Life was $4.3 million at December 31, 1999 and $5.0 million at December 31, 1998. Consumers Life reported a statutory net loss of $1.5 million in 1999, while Consumers Life and its former insurance subsidiary, Investors Fidelity Life Assurance Corp., reported combined statutory net income of $281,000 in 1998.
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 inforce 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 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. 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.
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 is now liquidating its remaining assets and providing for all of its liabilities. The Company eventually intends to make a cash distribution to its preferred shareholders and ultimately distribute its remaining cash, if any, to its common shareholders. Pursuant to the terms of its agreement with LOTS, the Company will continue receiving payments from LOTS until September 30, 2002 from the sale of the Company s customer accounts. In 2002, 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 sold to LOTS. As a result, 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 personnel reductions during the past several years as a result of the discontinuation of its various businesses. As of March 1, 2000, three people were employed on a full-time basis by the Company.
Investments, which are valued for financial statement purposes as described in Note 1, consist of the following at December 31, 1999:
A portion of the Company's invested funds is restricted as to use in that deposits are required with various state insurance departments in order to maintain licenses in those states (see Note 3).
At December 31, 1999 and 1998, one mortgage loan with a balance of $295,360 was non-performing. The mortgagor on this loan filed a voluntary petition under Chapter 11 of the Bankruptcy Code in late 1997. Interest on this loan of $39,965 and $13,383 was excluded from investment income in 1999 and 1998, respectively, due to its non-performing status. As a result of an agreement reached with the bankruptcy trustee, the Company is now receiving approximately $4,800 per month in lease payments from a tenant at the mortgaged property. In accordance with that agreement, such payments are being applied first to legal costs incurred by the Company and then to accrued late fees, interest and principal. The trustee is actively seeking alternate sources of financing for the property and is also attempting to sell the property.
The amortized cost and estimated fair values of investments in debt securities at December 31, 1999 and 1998 are as follows:
All debt securities held by the Company at December 31, 1999 have contractual maturities between 2001 and 2005. 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.
Future policy benefits reported to regulatory authorities were less than the above total by approximately $80,000 at December 31, 1999.
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 in both 1999 and 1998 and $660,000 in 1997. These costs are included with Operating Expenses on the Consolidated Statements of Operations and are presented with Miscellaneous Expenses on the Consolidated Statements of Changes in Net Assets in Liquidation.
Excluding premiums reinsured under financing-type agreements, premiums ceded to other companies were $11.9 million, $17.7 million and $4.9 million in 1999, 1998, and 1997, respectively.
The Company has a defined benefit pension plan and two defined contribution plans which cover substantially all full-time employees. Contributions under the pension plan are based upon length of service and annual compensation of each employee. The assets of the pension plan include principally debt securities and mortgages. Effective July 31, 1996, the Company froze the benefits payable to participants under the pension plan. In January 2000, the Company notified the participants of the pension plan of its intent to terminate the plan, subject to the approval of the Pension Benefit Guaranty Corporation (PBGC). Accordingly, in April 2000, the Company intends to file an application for such approval with the PBGC and will also request a determination letter confirming the qualified status of the plan from the Internal Revenue Service.
Rental expense in 1999, 1998 and 1997 was approximately $138,000, $245,000 and $345,000, respectively.
In 1989, the Company entered into an agreement for the lease of office space. The facility contains approximately 44,500 square feet of office space. The term of the lease is ten years with an option to renew for one additional term of five years. Until March 1994, monthly lease payments were $35,000. In March 1994, the Company exercised its option to acquire a 50% interest in this property at a price of $1.75 million. The Company continued to lease the portion of the building it did not own, but at monthly rent of $17,000 through July 1999 when its lease expired. The Company also leases a portion of the unused office space to various third party tenants. Income from these leases totaled $175,000 in 1999, $87,000 in 1998 and $57,000 in 1997. Effective August 1, 1999, the Company and its co-owner share equally in the rent from these tenants and in the operating costs of the building.
In November 1997, the Company and a third party reinsurer were sued by a former general agency with whom the Company had a partnership agreement. The partnership agreement provided that the agency would market universal life insurance business for the Company, pursuant to specific criteria established by the Company, and would also be entitled to a share of the profits, if any, which arose from the business produced. The claimant is seeking monetary damages to compensate it for the Company s alleged failure to share profits and for other alleged losses resulting from the Company s rejection of policy applications involving unacceptable risks. While management believes this claim is completely without merit and intends to vigorously defend itself in this matter, the ultimate outcome of this claim cannot be determined at this time. The Company has filed two counterclaims against this agency seeking damages for losses the Company sustained as a result of the agency s alleged breach of the partnership agreement and to recover an unpaid loan made to the agency.
During 1999, a dispute arose between the Company and the purchaser of its credit insurance business relating to the payment of investment income on the assets which were transferred to the purchaser. Subsequent to the closing of the transaction, the purchaser claimed that the Company owes it approximately $1,400,000 for investment earnings on the amount transferred for the period from October 1, 1997, the effective date of the agreement, to May 13, 1998, the date of settlement on the sale transaction. In October 1999, the purchaser informed the Company that it would begin withholding from the Company the fee income payments which are contractually due to the Company from the sale of the credit insurance accounts. For the year ended December 31, 1999, net fee income totaled $373,000, of which $137,000 has been withheld by the buyer and is included with Receivables on the Consolidated Statements of Net Assets in Liquidation. The Company believes the purchaser s claim for investment income is without merit and intends to take all actions necessary to collect the fee income amounts to which it is contractually entitled. As required by the agreements entered into by the parties, this matter will be settled through arbitration. The ultimate outcome of this dispute cannot be determined at this time.
Annual dividends at the rate of $.85 per share are cumulative from the date of original issue and are payable quarterly on the first day of January, April, July and October. As of December 31, 1999, the Company is not in arrears with respect to payment of dividends on the Preferred Stock. Except in certain limited instances, the holders of the Preferred Stock have no voting rights.
The terms of the Preferred Stock 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 further reduced the sinking fund deficiency to $234,610 at December 31, 1999.
At December 31, 1999 and 1998, 686,608 and 713,275 shares of common stock, respectively, were reserved for the conversion of the Preferred Stock.
Based on its current plans, the Company does not believe it is probable that Consumers Life will incur any additional taxes with regard to its Policyholders Surplus Account.
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, 1999 and 1998 are as follows:
The preferred stock is convertible into 686,608 shares of common stock (see Note 13). None of the common shares contingently issuable upon the conversion of the preferred stock have been included in the computation of diluted per share information because the effect would be antidilutive.
As discussed in Note 4, following the sale of its credit insurance business, the Company intends to liquidate its remaining assets, provide for its liabilities, distribute cash to its preferred shareholders, up to the redemption price, and distribute the remaining cash, if any, to its common shareholders pursuant to a Plan of Liquidation and Dissolution. The Company s income or loss from operations now consists principally of (i) earned premiums and related costs associated with an insignificant block of extended service contract business which was recaptured by the direct writer in 1999, (ii) investment income on remaining assets, (iii) fee income from LOTS from the sale of the Company s customer accounts, and (iv) overhead expenses. Because the fees related to the sale of the Company s customer accounts are being received from LOTS over a five-year period, and because any distribution which may be payable by LOTS to the Company from a contingency fund established by the parties cannot be determined until September 30, 2002, the distribution, if any, to the Company s common shareholders will not be made until late in 2002.
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, 1999, Consumers Life has more than sufficient capital to meet the NAIC's RBC requirements.