In connection with its insurance operations, Consumers Life Insurance Company maintains a branch office in leased facilities in Philadelphia, Pennsylvania. The branch office primarily provides supervision, sales and service for credit insurance agents doing business in the eastern Pennsylvania, Delaware and New Jersey areas. Annual rental for this office is approximately $27,000.
Investors Fidelity Life Assurance Corp. maintains an office in leased facilities in Columbus, Ohio. This office primarily provides sales support and supervision for credit insurance agents in the State of Ohio. Annual rental for this office is approximately $13,000 plus insurance, taxes and utilities.
A review of the significant factors which affected the Company's 1996 operating performance as well as its financial position at December 31, 1996 is presented below. Information relating to 1995 and 1994 is also presented for comparative purposes. This analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes.
Because of the recurring losses in the Company s core credit insurance business, in early 1996, the Company began evaluating alternatives to best serve the interests of its shareholders. The Company considered several alternatives, including the following: (1) the sale of its insurance operations, (2) the sale of its credit insurance marketing organization (with retention and ongoing administration of inforce business), (3) the sale of its auto auction business, (4) the sale of the Company, (5) the reorganization of the Company or (6) the combination of the Company with another organization in the same or other line of business. In January 1996, the Company engaged a financial advisor to assist in evaluating the many alternatives to maximize shareholder value. The Company subsequently solicited bids for both its credit and universal life insurance operations and its auto auction business. In October 1996, the Company entered into an Agreement and Plan of Merger with LaSalle Group, Inc. ( LaSalle ) whereby the Company will become a wholly-owned subsidiary of LaSalle. The merger transaction, which is subject to insurance regulatory approval, was approved by the Company s common shareholders on March 25, 1997. See Note 4 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K for additional information with respect to the pending merger.
LaSalle's strategic plan following the merger includes focusing on and rebuilding the Company's core credit insurance operation by combining it with other credit insurance businesses LaSalle plans to acquire. Accordingly, in November 1996, the Company sold the business and related operating assets of Interstate Auto Auction, Inc. to an unrelated third party for cash in the amount of $4.85 million. In addition, in March 1997, the Company signed an agreement to sell its remaining block of individual life insurance business, following the sale of other blocks of individual life business in both 1992 and 1994. As a result of these sale transactions, in the Company's consolidated financial statements appearing elsewhere in this Form 10-K, the operating results and the net gain from disposal of both the individual life insurance and the auto auction segments have been reported as discontinued businesses for all periods presented. Further information regarding these transactions is presented later in this analysis and in Note 5 of the Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K.
The Company reported a net loss for 1996 of $1.2 million ($.64 per share) compared to a loss of $1.6 million ($.78 per share) in 1995 and a loss of $913,000 ($.51 per share) in 1994. However, the loss from continuing operations was $2.7 million in 1996 compared to losses of $2.1 million and $2.5 million, on a restated basis, in 1995 and 1994, respectively. The higher 1996 loss from continuing operations is due primarily to the costs incurred by the Company in connection with valuing and offering for sale the Company's various businesses. Discontinued operations for 1996 include not only the operating results of each of the discontinued segments but also a $1.8 million gain on the disposal of the auto auction business and related assets and a loss of $914,000 arising from the write-off of deferred policy acquisition costs based on the consideration to be received in 1997 from the sale of the individual life insurance business.
The following table compares revenues and operating results for each of the past three years. Amounts for 1995 and 1994 have been restated to reflect the operating results of the individual life insurance and auto auction businesses as discontinued operations.
Excluding the write-off, the Division reported pre-tax income of $393,000 in 1996 compared to restated pre-tax income of $83,000 in 1995. The Division's operating results for 1996 reflect the elimination of any continuing overhead and indirect costs which had previously been allocated to this Division. The results for prior periods have been restated to also eliminate these costs. These reallocated costs totaled $292,000 in 1996 and $330,000 in 1995. Higher than normal claims costs in the first half of 1995 adversely affected the results for that year and are the principal reason for the lower earnings in 1995.
A discussion of the important elements affecting the Company's financial position at December 31, 1996 and 1995 is presented below.
Invested assets at December 31, 1996 totaled $51.2 million compared to $49 million at the end of 1995. The $3.1 million in proceeds received from the sale of the auto auction business, after repayment of the bank debt, is the primary reason for the increase in investments. Those proceeds were invested principally in bonds. Approximately $750,000 of the proceeds will be required in 1997 for Federal and state income taxes on the gain from this sale. The invested asset base also increased as a result of the sale of $1.2 million in non-investment real estate for cash, the proceeds from which were reinvested in bonds. In addition, during 1996, the Company completed the sale of all but one of the town homes in a real estate development acquired in 1995 through foreclosure. This property, which had a $1.5 million carrying value at December 31, 1995, was classified as non-investment real estate. The proceeds from the sales of the town home units have also been reinvested primarily in bonds.
The Company s general investment policy continues to emphasize fixed maturity securities (primarily bonds) with Moody's or Standard and Poor's ratings of A or better and mortgage loans with terms generally not more than seven years. The Company has not invested in non-investment grade securities because the greater returns on such investments do not justify the potentially greater risks.
Liquidity refers to a company s ability to meet its financial obligations and commitments as they come due. The Company s operating subsidiaries have historically met most of their cash requirements from funds generated from operations, although, as discussed below, reduced credit insurance revenues over the past several years have had a significant impact on the insurance companies operating cash flows. The Company, as a holding company, has generally relied on its operating subsidiaries to provide it with sufficient cash funds to meet its debt service obligations, pay corporate expenses and shareholder dividends. In that regard, the life insurance subsidiaries are also subject to restrictions imposed by law on their ability to transfer cash to the Company in the form of dividends, loans or advances.
Dividends and other distributions to the Company from Consumers Life are limited in that the subsidiary is required to maintain minimum capital and surplus, determined in accordance with regulatory accounting practices. All distributions are further limited by Delaware state insurance laws to the greater of the previous year s earnings, computed in accordance with statutory accounting principles, or 10% of statutory capital and surplus as of the end of the previous year. In some instances such payments may require the prior approval of the insurance department. Also, any loans or advances to the 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 Consumers Life and other subsidiaries. In addition, separate restrictions apply to the surplus note owed to the Company by a subsidiary of Consumers Life. Note 2 of the Notes to Consolidated Financial Statements discusses these restrictions more specifically. The Company s non- life insurance operations, particularly its insurance agency business, provide sources of cash which are not subject to regulatory restrictions. Prior to its sale, the auto auction business was also a source of significant cash flows for the Company.
The Company continued to reduce its outstanding bank debt during 1996. During the first ten (10) months of the year, principal payments of $845,000 were made. On November 6, 1996, in conjunction with the sale of the auto auction business discussed above, the remaining $1.7 million in debt was repaid.
Inflation influences the Company's Automotive Resource Division through its effects on automobile prices and interest rates. An increase in car prices not only affects the amount of credit insurance premiums collected, due to higher loan amounts, but also generally extends the term of car loans. Interest rates affect the consumers' ability to borrow funds which, in turn, affects automobile sales and ultimately the Company's marketing of credit insurance and related products. Because of regulatory standards, the Company's premium rates cannot be readily changed to reflect increased costs arising from inflationary trends.
The consolidated financial statements for the years ended December 31, 1996 and 1995 have been audited by Arthur Andersen LLP, independent auditors. The consolidated financial statements for the year ended December 31, 1994 have been audited by Ernst & Young 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.
We have audited the accompanying consolidated balance sheets of Consumers Financial Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders equity and cash flows for the years 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 audits.
As discussed in Note 4 of the Notes to Consolidated Financial Statements, on October 30, 1996, the Company entered into an Agreement and Plan of Merger with LaSalle Group, Inc. (LaSalle). The merger is subject to the approval of the insurance regulators in the four states in which the Company s insurance subsidiaries are domiciled. In addition, the Company is addressing regulatory matters in various states, and the Company s plans relative to those matters are discussed in Note 20.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
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 1996 and 1995 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 28 , 1997
We have audited the accompanying consolidated statement of operations, shareholders equity and cash flows of Consumers Financial Corporation and subsidiaries for the year ended December 31, 1994. Our audit also included the 1994 amounts in the financial statement schedules listed in the index at item 14(a). These financial statements and schedules are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and the 1994 amounts in the schedules based on our audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of the operations of Consumers Financial Corporation and subsidiaries and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the 1994 amounts in the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
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. Certain prior year amounts have been reclassified to conform with classifications used for 1996.
Mortgage loans on real estate are carried at the unpaid principal balance. Investment real estate is carried at the lower of cost or fair value. Policy loans are carried at their unpaid balance. Other invested assets, excluding real estate partnerships, and short-term investments are carried at cost. Investments in real estate partnerships are reported at equity.
The costs of acquiring new business, including costs incurred subsequent to the year of issue in excess of the ultimate level costs, principally commissions, certain sales salaries and those home office expenses that vary with and are primarily related to the production of new business, have been deferred. Deferred acquisition costs applicable to individual life insurance, excluding universal life-type policies and investment products, were amortized over the premium-paying period of the related policies in the manner which will charge each year's operations in direct proportion to the estimated receipt of premium revenue over the life of the contracts. Premium revenue estimates are made using the same interest, mortality and withdrawal assumptions as are used for computing liabilities for future policy benefits. Deferred policy acquisition costs related to universal life-type policies and investment products are amortized in relation to the present value of expected gross profits on the policies. Acquisition costs relating to single premium credit insurance are being amortized so as to charge each year's operations in direct proportion to premiums earned.
Property and equipment are stated at cost. Depreciation is being provided on the straight-line method over the estimated useful lives of the assets.
Real estate is carried at the lower of cost or fair value.
The reported statutory capital and surplus of the life insurance subsidiaries was $5.9 million at December 31, 1996 and $7.1 million at December 31, 1995. After reflecting the impact of both the disallowed reinsurance treaty and the excess subsidiary investments discussed in Note 20, the statutory capital and surplus of the life insurance subsidiaries at December 31, 1995 would have been $4.6 million. The insurance companies combined statutory net income was $29,000 in 1996. In 1995, the companies reported a combined net loss of $3,589,000, and in they reported net income of $477,000.
Because of the recurring losses in the Company s core credit insurance business, in early 1996, the Company began evaluating alternatives to best serve the interests of its shareholders. The Company considered several alternatives, including the following: (1) the sale of its insurance operations, (2) the sale of its credit insurance marketing organization (with retention and ongoing administration of inforce business), (3) the sale of its auto auction business, (4) the sale of the Company, (5) the reorganization of the Company or (6) the combination of the Company with another organization in the same or other lines of business.
In January 1996, the Company engaged a financial advisor to assist in evaluating the many alternatives to maximize shareholder value. In February 1996, the Company began soliciting bids for both its credit and universal life insurance operations and its auto auction business. From March until May 1996, 12 offers were received to buy the Company or segments of the Company, including one from LaSalle Group, Inc. (LaSalle), an investment management firm, which was structured as a cash merger. Following the completion of due diligence reviews and the submission of revised offers by the four highest bidders, the Company and its financial advisor reviewed and analyzed each offer. In October 1996, management recommended and advised the Company s Board of Directors to accept the revised offer from LaSalle.
On October 30, 1996, the Company entered into an Agreement and Plan of Merger with LaSalle and Consumers Acquisition Corp. ("CAC"), whereby CAC will be merged with and into the Company (the "Merger"). As the surviving corporation in the Merger, the Company will become a wholly-owned subsidiary of LaSalle. The Merger is subject to, among other things, the approval of insurance regulators in the four states in which the Company's insurance subsidiaries are domiciled. The Company s common shareholders approved the Merger at a Special Meeting held on March 25, 1997. The Agreement and Plan of Merger provides that the holders of the Company's outstanding common stock will receive cash in the amount of $3.92 per share, subject to certain adjustments. The Company's Preferred Stock will remain outstanding following the Merger, and the holders thereof will retain all of the rights and preferences which currently exist for such stock.
At December 31, 1995, the net assets of the discontinued auto auction business consisted of $1.8 million in property and equipment and $84,000 in inventories.
Approximately 73% of the loans involved properties located in Central Pennsylvania. Such investments consist principally of first mortgage liens on completed income-producing properties, primarily office buildings . One mortgage loan exceeded 10% of shareholders equity at December 31, 1996, and two mortgage loans exceeded 10% of shareholders equity at December 31, 1995. The Company s mortgage loan valuation reserve at December 31, 1996 and 1995 was $100,000.
The amortized cost and estimated fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.