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.
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.
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.
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.
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.
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.
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.
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.
James C. Robertson R. Fredric Zullinger Chairman, Chief Executive Officer Senior Vice President and and President Chief Financial Officer
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.
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.
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.)
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.
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.
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.
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.
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.
(f) Certain assets are reported as assets rather than being charged directly to surplus and excluded from the balance sheets.
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.
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 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.
The amortized cost and estimated fair values of investments in debt securities at December 31, 1998 and 1997 are as follows:
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.
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.
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.
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).
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 under the pension plan.
The profit sharing plans, which include an employee stock ownership plan, provide for annual contributions in amounts to be determined by the Board of Directors. Such contributions are based upon the annual compensation of each employee; however, no Company contributions were made in either 1998, 1997 or 1996. The funded status of the plan is as follows:
Reconciliations of beginning and ending balances of the Plan's projected benefit obligation and its assets are presented below.
Rental expense in 1998, 1997 and 1996 was approximately $245,000, $345,000 and $351,000, respectively.
In connection with the cancellation in 1996 of a joint venture agreement in which the Company reinsured approximately 50% of its Pennsylvania credit insurance business to the joint venture partner, the parties agreed that, in the event the Company sold its credit insurance accounts to an unrelated third party, the Company would pay its former partner approximately 19% of the proceeds it received from such sale. The Company agreed to make these payments to the joint venture partner as consideration for terminating the venture, which allowed a purchaser of the Company s credit insurance business to retain the profits or losses on credit insurance premiums previously reinsured to the partner. As a result, the Company owes to the former partner approximately 19% of the fee revenues it receives from LOTS. In 1998, the partner s share of the fee revenues totaled $109,000.
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, 1998, 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 provide that, beginning July 1, 1998, a sinking fund was to be established. Annual payments are to be made to the sinking fund over a ten-year period in amounts which are sufficient to redeem 10% of the number of shares of Preferred Stock initially issued. In connection with the Plan of Liquidation, the Company presently intends to redeem the Preferred Stock within the next four years and has therefore not established the sinking fund.
At December 31, 1998 and 1997, 713,275 shares of common stock were reserved for the conversion of the Preferred Stock.
Under tax laws in effect prior to 1984, a portion of the life insurance companies' gain from operations was not currently taxed but was accumulated in a memorandum "Policyholders' Surplus Account." As a result of the Tax Reform Act of 1984, the balance in the Policyholders' Surplus Account for each company was frozen as of December 31, 1983 and additional amounts are no longer accumulated in this account. However, distributions from the account continue to be taxed, as under previous laws, if any of the following conditions occur:
(c) A company ceases to qualify for taxation as a life insurance company.
At December 31, 1997, the Policyholders Surplus Account for Consumers Life exceeded the prescribed maximum by approximately $1.1 million, resulting in an additional tax liability of approximately $372,000, which was included in the Company s 1997 financial statements. At December 31, 1998 the Policyholders' Surplus Account for Consumers Life was approximately $439,000. 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.
The Company files a consolidated Federal income tax return. At December 31, 1998, the life insurance companies have available approximately $6.4 millon of Federal net operating losses. These losses will be carried forward to future years, and may only be used to offset the taxable income of the life insurance companies. Approximately $3.6 million of these net operating losses are subject to limitations on their use under Internal Revenue Code Section 382 and the consolidated return regulations. This operating loss will expire in 2004. The remaining $2.8 million of net operating losses will expire in 2009 and 2012.
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, redeem its preferred stock and distribute any remaining cash to its common shareholders pursuant to a Plan of Liquidation and Dissolution. The Company s income or loss from continuing operations now consists principally of (i) earned premiums and related costs associated with an insignificant block of extended service contract business which is in run-off, (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 Company will be unable to make a final distribution to its common shareholders until late in 2002.
The following quarterly financial data is presented for the period prior to the adoption of the liquidation basis of accounting
The following quarterly financial data is presented for the period subsequent to the adoption of the liquidation basis of accounting.