The agreement with Life of the South Corporation (LOTS), the purchaser of the credit insurance operations, provides that the proceeds from the sale of the customer accounts are to be received over a five-year period ending September 2002, based on the amount of credit insurance premiums produced by those customer accounts during that period. The Company may also receive a payment from a contingency fund established by the Company and LOTS 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 are employed on a full-time basis by the Company. During the liquidation period, the Company intends to out source most of the functions which will continue to be required.
The consolidated financial statements for the years ended December 31, 1998, 1997 and 1996 have been audited by Arthur Andersen 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.
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 has changed its basis of accounting for periods subsequent to March 24, 1998 from the going-concern basis to the liquidation basis. Accordingly, the carrying value of the remaining assets as of December 31, 1998, are presented at estimated realizable values and all liabilities are presented at estimated settlement amounts.
On December 30, 1997, the Company entered into an agreement with LOTS, 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 Insurance Company (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, or an earlier date which may be agreed to by the parties. This premium and the related insurance risk are also being reinsured 100% to American Republic.
The provision for federal income taxes is not proportional to pre-tax financial statement income or loss due to the exclusions and special deductions afforded life insurance companies under the Internal Revenue Code, as amended, and the exclusion of non-taxable and non-deductible items. A reconciliation between income tax expense or benefit and the expected Federal income tax expense at the applicable statutory rates is as follows:
The preferred stock is convertible into 713,275 shares of common stock (see Note 13). Options to purchase 132,000 common shares were outstanding at December 31, 1998 (see Note 14). None of the common shares contingently issuable upon the conversion of the preferred stock or upon the exercise of the stock options have been included in the computation of diluted per share information because the effect would be antidilutive.