UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
< X > Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes XX No
Indicate the number of shares outstanding of each of the issuer s classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1996
$.01 Stated Value 2,613,123 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information Number
Item 1. Financial Statements:
Consolidated Balance Sheets - 3
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations - 4 - 5
Three Months ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows - 6
Three Months Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management s Discussion and Analysis of Results of 10 - 13
Operations and Financial Condition
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> March 31,1996 December 31,
(in thousands) (Unaudited) 1995
<S> <C> <C>
Assets
Investments:
Fixed maturities $34,566 $35,048
Mortgage loans on real estate 5,543 7,041
Investment real estate 997 1,020
Policy loans 494 482
Other invested assets 2,462 2,512
Short-term investments 2,609 2,892
Total investments 46,671 48,995
Cash 491 451
Accrued investment income 701 653
Receivables 23,407 23,820
Prepaid reinsurance premiums 18,372 18,604
Deferred policy acquisition costs 21,678 21,926
Property and equipment 4,039 4,118
Other real estate 2,485 2,645
Other assets 2,199 2,110
$120,043 $123,322
Liabilities, Redeemable Preferred Stock and
Shareholders Equity
Liabilities:
Future policy benefits $36,190 $36,582
Unearned premiums 57,460 57,943
Other policy claims and benefits payable 2,530 2,851
Other liablities 5,965 6,259
Income taxes:
Current 275 299
Deferred 741 1,180
Notes payable 2,372 2,537
105,533 107,651
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible,
net of treasury stock 4,666 4,657
Shareholders equity:
Common Stock 30 30
Capital in excess of stated value 8,016 8,016
Net unrealized appreciation
of debt and equity securities 115 705
Retained earnings 3,153 3,688
Treasury stock (1,470) (1,425)
9,844 11,014
$120,043 $123,322
</TABLE> CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
March 31,
(in thousands, except per share data) 1996 1995
<S> <C> <C)
Revenues:
Premiums written and policy charges $8,618 $9,362
Decrease (increase) in unearned premiums 482 (8)
Gross premium income and policy charges 9,100 9,354
Less reinsurance ceded (4,064) (4,044)
Net premium income and policy charges 5,036 5,310
Net investment income 659 753
Net realized investment losses (1) (25)
Fees and other income 1,243 1,025
6,937 7,063
Benefits and expenses:
Death and other benefits 2,056 2,039
Increase in future policy benefits 768 739
Amortization of deferred policy
acquisition costs 2,612 2,629
Operating expenses 2,039 2,070
7,475 7,477
Loss before income taxes (538) (414)
Income tax benefit (114) (19)
Net loss ($424) ($395)
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
March 31,
(in thousands, except per share data) 1996 1995
<S> <C> <C>
Per share data:
Net Loss ($0.20) ($0.19)
Weighted average number of shares outstanding 2,617 2,676
Loss per common share - assuming full dilution * *
* Anti-dilutive
Cash dividends declared per common share None None
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>(in thousands) 1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss ($424) ($395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred policy acquisition costs incurred (2,363) (2,561)
Amortization of deferred policy acquisition costs 2,611 2,628
Other amortization and depreciation 121 134
Change in future policy benefits 255 233
Change in unearned premiums (483) 8
Change in amounts due reinsurers (11) (158)
Income taxes (198) (56)
Change in accounts receivable 598 136
Change in other liabilities (152) (245)
Other (528) (455)
Total adjustments (150) (336)
Net cash used in operating activities (574) (731)
Cash flows from investing activities:
Purchase of investments (1,131) (4,103)
Maturity of investments 1,812 5,112
Sale of investments 897 729
Purchase of property and equipment (5) (68)
Net cash provided by investing activities 1,573 1,670
Cash flows from financing activities:
Principal payments on debt (165) (165)
Receipts from universal life and investment products 1,422 1,472
Withdrawals on universal life and investment products (2,068) (2,188)
Purchase of treasury stock (45) (157)
Cash dividends to shareholders (103) (102)
Net cash used in financing activities (959) (1,140)
Net increase (decrease) in cash 40 (201)
Cash at beginning of period 451 1,254
Cash at end of period $491 $1,053
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1. General:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's consolidated
financial position as of March 31, 1996, the consolidated results of its
operations for the three months ended March 31, 1996 and 1995 and the
consolidated changes in its cash flows for the three months ended March 31,
1996 and 1995. Certain prior year amounts have been reclassified to conform
with classifications used for 1996. Such reclassifications had no impact on
operating results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 1995 Form 10-K.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. Income Taxes:
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
are as follows (in 000's):
<TABLE>
<CAPTION> March 31, December
1996 31,
1995
<S> <C> <C>
Deferred tax liabilities:
Fixed maturities $57 $347
Deferred policy acquisition costs 7,330 7,426
Other 409 437
7,796 8,210
Deferred tax assets:
Future policy ben and financial reinsurance 5,812 5,827
Net operating loss carryforwards 2,199 2,143
Other 268 284
8,279 8,254
Valuation allowance for deferred tax assets (1,224) (1,224)
7,055 7,030
Net deferred tax liability $741 $1,180
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
2. Income Taxes (continued):
Significant components of the provision for income taxes are as follows (in
000's):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current:
Federal ($3) $1
State 38 41
Total current 35 42
Deferred (149) (61)
Income tax benefit ($114) ($19)
</TABLE>
The reconciliation of the provision for income taxes and the amount which
would have been provided at statutory rates is as follows (in 000's):
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Loss before income taxes ($538) ($414)
Income tax benefit at 34% statutory rate on
pre-tax loss (183) (141)
Dividends received deduction (7) (3)
State income taxes 25 27
Items not includable for tax purposes 17 29
Other, net 34 69
Actual income tax benefit ($114) ($19)
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
3. Contingencies:
Reinsured risks would give rise to liability to the insurance subsidiaries
only in the event that the reinsuring company might be unable to meet its
obligations under the reinsurance agreements in force.
The lawsuit filed in an Alabama state court in 1994 against the Company
alleging breach of contract and fraud in the sale of credit life insurance
has been settled by the parties for a nominal amount.
4. Reinsurance:
The effect of reinsurance on premiums written and earned for the periods
ended March 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION> 1996 1995
(in 000's) Written Earned Written Earned
<S> <C> <C> <C> <C>
Direct $8,000 $8,508 $8,521 $8,501
Assumed 617 592 841 853
Ceded (3,832) (4,064) (3,891) (4,044)
Net $4,785 $5,036 $5,471 $5,310
</TABLE>
Ceded benefits incurred through March 31, 1996 and 1995 are $2,936,647 and
$2,800,526, respectively. These losses were deducted in arriving at death
and other benefits and the increase in future policy benefits in the
Consolidated Statements of Operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company s first quarter net loss totaled $424,000 ($.20 per share) compared
to a loss of $395,000 ($.19 per share) reported in the same period of 1995.
Increased credit insurance losses in the Automotive Resource Division more than
offset improved profitability in both the Individual Life Insurance Division and
in the Auto Auction Division. Credit insurance results declined primarily
because of a higher claims ratio on credit disability business.
Because of the recurring losses in its core credit insurance business, the
Company announced in March 1996 that it had retained a financial advisor to
assist management in evaluating various alternatives for preserving shareholder
value. The alternatives being considered include the sale of the insurance
operations (either the existing business and the marketing organization or only
the marketing organization), the sale of the auto auction business, the sale of
the entire Company or a combination of the Company with another organization.
Management is currently reviewing proposals it has received as a result of its
recent solicitation of bids, and it is anticipated that a number of additional
bids will be received in the near future. While there can be no assurance that
any of these transactions can be completed in 1996, the Company believes it is
reasonably possible that one of the alternatives outlined above will be
consummated in 1996.
The table below compares revenues and operating results in 1996 with those in
1995.
<TABLE>
<CAPTION> First Quarter
(in thousands, except per share amounts) 1996 1995
<S> <C> <C>
Total revenues by source:
Premiums written and policy charges $8,618 $9,362
Net investment income 659 753
Realized investment losses (1) (25)
Fees and other income 1,243 1,025
$10,519 $11,115
Pre-tax income (loss):
Automotive Resource Division ($715) ($346)
Individual Life Insurance Division 84 (103)
Auto Auction Division 209 136
Other (115) (76)
(537) (389)
Realized investment losses (1) (25)
Pre-tax loss (538) (414)
Income tax benefit (114) (19)
Net loss ($424) ($395)
Net loss per share ($0.20) ($0.19)
</TABLE>
RESULTS OF OPERATIONS
A discussion of the most significant factors which affected first quarter
operating results in each of the Company's three Divisions is presented below.
Information relating to 1995 is also presented for comparative purposes.
Automotive Resource Division
Credit insurance premium revenues decreased by 6.1% in the first quarter of 1996
to $7.3 million. Approximately half of the decline is attributable to the
cancellation in mid-1995 of all accounts in one unprofitable state. The
Division s credit insurance premium production remains significantly below pre-
1990 levels due to the declines which occurred during the economic recession of
the early 1990's. A consequence of the reduction in written premiums has been a
decline in earned premiums, which in turn has resulted in a substantial increase
in operating expense ratios since 1989. Higher expense ratios have been a key
reason for the unprofitable operating results the Division has experienced in
recent years.
The Division s pre-tax operating loss for the first three months of 1996
increased to $715,000 from $346,000 in the same period last year. A higher
disability claims ratio and, to a lesser extent, higher expenses are responsible
for the increased loss.
Individual Life Insurance Division
Since the end of 1994, the operations of this Division have been limited to one
closed block of assumed universal life business. A significant reduction in
death claims in the first quarter of 1996 resulted in a $186,000 improvement in
pre-tax operating results compared to the first three months of 1995. The
Division s pre-tax profit for 1996 totaled $84,000 while a $103,000 loss was
reported in the first quarter of 1995. Continued improvement in operating
results compared to 1995 is expected since death claims in the second quarter
(through May 10) are also well below the unusually high level of claims
experienced in the second quarter of last year.
Auto Auction Division
Fee revenues from the Auto Auction Division increased 6.2% in the first quarter
from $664,000 to $750,000 despite a small reduction in the volume of vehicles
sold through the auction. Fee rate changes offset the volume decline and
produced the additional revenues for the period. Pre-tax profits also increased
from $136,000 in the first quarter of 1995 to $209,000 in the current year. Most
of the increase, however, was attributable to the receipt of insurance proceeds
which were $63,000 higher than the estimated amount included in the 1995
financial statements. The insurance funds relate to a fire which occurred at the
auction in February 1995.
FINANCIAL CONDITION
<TABLE>
<CAPTION>(in thousands, except per share March 31, December 31,
amounts) 1996 1995
<S> <C> <C>
Invested assets $46,671 $48,995
Total assets $120,043 $123,322
Total debt $2,372 $2,537
Total shareholders' equity and redeemable
preferred stock $14,510 $15,671
Debt as a percent of total capital 14.1% 13.9%
Shareholders' equity per common share $3.77 $4.20
</TABLE>
Invested Assets
The Company's invested assets at March 31, 1996 totaled $47 million compared to
$49 million at the end of 1995. The decline in the asset base is in part the
result of an $854,000 decrease in the carrying value of the Company's bond
portfolio due to rising interest rates since the end of 1995. At March 31, 1996,
the market value of the portfolio exceeded its amortized cost by $167,000. The
remainder of the decline resulted from reduced cash flows which typically occur
in the first quarter because of lower premium levels and higher claims costs.
Liquidity
The Company's operating subsidiaries have historically met most of their cash
requirements from funds generated from operations, although reduced credit
insurance revenues over the past several years have had an adverse impact on the
insurance companies' operating cash flows. The Company has generally relied on
its operating subsidiaries to provide it with sufficient cash funds to maintain
an adequate liquidity position. 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. Interstate
Auto Auction and Consumers Car Care Corporation provide the Company with sources
of cash which are not subject to insurance regulations that restrict their
ability to transfer cash. The net cash provided by or used in operating
activities for the three months ended March 31, 1996 and 1995 is presented in
the Consolidated Statements of Cash Flows.
Capital Resources
The Company's total equity, which includes redeemable preferred stock, decreased
by $1.2 million during the first quarter of 1996 to $14.5 million. The decrease
is principally attributable to the decline in the carrying value of the bond
portfolio ($564,000 net of applicable income taxes), the current year operating
loss of $424,000 and $102,000 in dividends to preferred shareholders.
The Company reduced its bank loans by $165,000 during the first quarter,
although its ratio of debt to total capital remains at about 14%. The loans
mature in January 1997.
The Company's insurance subsidiaries utilize reinsurance agreements to finance
their credit insurance operations and maintain adequate levels of statutory
capital and surplus. These agreements minimize reductions of statutory surplus
which result from new premium production.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except for the matters discussed in Note 3 to the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-Q, neither the
registrant nor its subsidiaries are involved in any pending legal
proceedings other than routine litigation incidental to the normal
conduct of its business during the three months ended March 31, 1996.
Item 2. Changes in Securities
During the three months ended March 31, 1996, there have been no
limitations or qualifications, through charter documents, loan
agreements or otherwise, placed upon the holders of the registrant's
common or preferred stock to receive dividends.
Item 3. Defaults upon Senior Securities
The registrant has not defaulted in the payment of principal, interest
or in any other manner on any indebtedness and is current with all its
accounts; however, the registrant was in violation of two provisions of
its loan agreements at March 31, 1996. These violations have been
waived by the lender. There is no arrearage in the payment of dividends
on the registrant's preferred stock.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the
registrant during the three months ended March 31, 1996.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
(11) Computation of Earnings per Common Share.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
Registrant
Date May 15, 1996 By /S/ James C. Robertson
James C. Robertson, President
(Chief Executive Officer)
Date May 15, 1996 By /S/ R. Fredric Zullinger
R. Fredric Zullinger
Senior Vice President, Chief Financial
Officer and Treasurer
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION> Three Months Ended March 31,
(in thousands, except per share amounts) 1996 1995
<S> <C> <C>
Primary Earnings Per Share
Reconciliation of net income (loss) per Statements
of Operations to amoount used in primary earnings
per share computation:
Net loss ($424) ($395)
Preferred dividend requirement (102) (102)
Accretion in carrying value of preferred stock (9) (9)
Net loss, as adjusted ($535) ($506)
Reconciliation of weighted average number of shares
outstanding to amount used in primary earnings per
share computation:
Weighted average number of common shares
outstanding 2,617 2,676
Add weighted average number of shares issuable
from assumed exercise of stock options
Weighted average number of shares of common
Stock and equivalents outstanding 2,617 2,676
Net loss per common and common equivalent share ($0.20) ($0.19)
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION> Three Months Ended March 31,
(in thousands, except per share amounts) 1996 1995<PAGE>
<S> <C> <C>
Fully Diluted Earnings Per Share
Reconciliation of net income (loss) per Statements
of Operations to amount used in fully diluted
Earnings per share computation:
Net loss ($424) ($395)
Reconciliation of weighted average number of shares
outstanding, as adjusted, per primary computation
on preceding page, to amount used in fully diluted
earnings per share computation:
Weighted average number of shares outstanding,
as adjusted per primary computation on
Preceding page 2,617 2,676
Add shares issuable from assumed conversion of
8 1/2 % cumulative convertible preferred 713 713
Weighted average number of shares of common
Stock and equivalents outstanding 3,330 3,389
Fully Diluted Earnings Per Share * *
* Anti-dilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 MAR-31-1995 DEC-31-1995
<DEBT-HELD-FOR-SALE> 34,565,952 0 35,048,212
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 0 0 0
<MORTGAGE> 5,542,571 0 7,041,033
<REAL-ESTATE> 996,761 0 1,020,158
<TOTAL-INVEST> 46,671,124 0 48,994,969
<CASH> 491,450 0 450,861
<RECOVER-REINSURE> 0 0 0
<DEFERRED-ACQUISITION> 21,677,865 0 21,925,999
<TOTAL-ASSETS> 120,042,718 0 123,321,640
<POLICY-LOSSES> 36,190,133 0 36,581,642
<UNEARNED-PREMIUMS> 57,460,468 0 57,942,946
<POLICY-OTHER> 2,529,505 0 2,850,660
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 2,371,982 0 2,536,982
0 0 0
4,665,634 0 4,656,642
<COMMON> 30,310 0 30,310
<OTHER-SE> 4,665,634 0 4,656,642
<TOTAL-LIABILITY-AND-EQUITY> 120,042,718 0 123,321,640
8,617,888 9,362,179 0
<INVESTMENT-INCOME> 659,262 752,689 0
<INVESTMENT-GAINS> (504) (24,875) 0
<OTHER-INCOME> 1,241,841 1,024,670 0
<BENEFITS> 2,823,567 2,777,768 0
<UNDERWRITING-AMORTIZATION> 2,611,577 2,628,564 0
<UNDERWRITING-OTHER> 2,039,556 2,069,793 0
<INCOME-PRETAX> (538,070) (413,908) 0
<INCOME-TAX> (114,007) (18,637) 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (424,063) (395,271) 0
<EPS-PRIMARY> (0.20) (0.19) 0
<EPS-DILUTED> 0 0 0
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0 0 0
<PROVISION-PRIOR> 0 0 0
<PAYMENTS-CURRENT> 0 0 0
<PAYMENTS-PRIOR> 0 0 0
<RESERVE-CLOSE> 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0
</TABLE>
