<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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.)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock (no par) (voting) Not listed
8 1/2% Preferred Stock Series A
(Par Value $1.00 per share) (non-voting)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Based on the closing price of March 1, 1996, the aggregate market value of
common stock held by non-affiliates of the registrant was $8,502,153.
The number of common shares outstanding of the registrant was 2,616,047 as
of March 1, 1996.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") is an insurance holding
company which, through its subsidiaries, is a leading provider of credit life
and credit disability insurance in the Middle Atlantic region of the United
States. The Company also owns and administers a small block of universal life
insurance business, but no longer markets those products. The insurance
subsidiaries are licensed in 33 states and the District of Columbia and
currently conduct the majority of their business in the states of Pennsylvania,
Delaware, Maryland, Nebraska, Ohio and Virginia. Credit insurance, which
accounted for $33.1 million, or 85%, of the Company's total premium revenues in
1995, is marketed primarily through approximately 900 automobile dealers. In
connection with its credit insurance operations, the Company also markets, as an
agent, an automobile extended service warranty contract and, until mid-1996,
assumed through reinsurance, certain underwriting risks on a small block of
warranty business. Universal life insurance, which accounted for $5.1 million
of premium and policy charge revenues, or 13% of the Company's total premiums
and policy charges in 1995, was marketed, until 1992, through general agents,
personal producing general agents and independent brokers. Additional
information regarding the termination of marketing activities in the Individual
Life Division and the sale of the majority of the Division's in-force business
appears below under "Operations."
The Company, through its wholly-owned subsidiary, Interstate Auto Auction,
Inc. ("Interstate"), has also conducted wholesale and retail automobile auctions
of used vehicles for automobile dealers, banks and leasing companies. See Note
21 of the Notes to Consolidated Financial Statements appearing elsewhere in the
Form 10-K/A for a discussion of the sale of the operating assets of Interstate
in November 1996 for cash in the amount of $4.85 million.
The Company was formed in 1966 as 20th Century Corporation (a Pennsylvania
business corporation) and adopted its present name on May 30, 1980. The Company
operates through its wholly-owned subsidiaries, principally Consumers Life
Insurance Company (a Delaware life insurance company) ("Consumers Life"),
Consumers Car Care Corporation (a Pennsylvania business corporation) and
Interstate Auto Auction, Inc. (a Pennsylvania business corporation). Consumers
Life Insurance Company of North Carolina (a North Carolina life insurance
company) and Investors Fidelity Life Assurance Corp. (an Ohio life insurance
company) are subsidiaries of Consumers Life Insurance Company.
The term "Company" when used herein refers to Consumers Financial Corporation
and its subsidiaries unless the context requires otherwise. The Company's
executive offices are located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania
17011. Its telephone numbers are (717) 761-4230 and (800) 933-3018.
Page 2
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10 The Company operates in three industry segments: the Automotive Resource
Division, which markets credit insurance and other products and services to its
automobile dealer customers, the Individual Life Insurance Division and the Auto
Auction Division. These segments exclude the corporate activities of Consumers
Financial Corporation which are insignificant in relation to the three segments.
The Automotive Resource segment consists principally of credit life and credit
disability insurance which is sold primarily through automobile dealers and, to
a limited extent, through banks and other financial institutions. This segment
also generates commission revenues on sales of automobile warranty contracts and
revenues from other related products and services. The Individual Life segment
emphasized the sale of universal life products which were introduced in 1985,
and had previously marketed whole-life, term, endowment and annuity products.
Until its sale in 1996, the Auto Auction segment operated an automobile auction
of used vehicles for automobile dealers, banks and leasing companies.
In March of 1992, the Company announced its decision to terminate the
operations of its Individual Life Insurance Division. The phase-out plan
included discontinuing the sale of insurance policies and the sale of the
Company's existing block of individual business. Effective October 1, 1992, the
Company sold its block of whole life, term and annuity products to an
unaffiliated insurer but continued to administer the block of universal life
policies. As of December 31, 1994, the Company sold its in-force block of
direct universal life insurance business to an unaffiliated insurer. As part of
that transaction, the Company irrevocably assigned to the same insurer, all of
its right, title and interest to a block of universal life business which had
been assumed previously from another unaffiliated insurer. The Company
continued to administer these blocks of universal life business until May 1,
1995 . The Company continues to own and administer an assumed block of universal
life business issued by an unaffiliated insurer. In January 1997, the Company
signed a letter of intent with the direct writer whereby that company will
recapture this business and pay the Company a recapture consideration of $1.2
million. See Note 21 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K/A for further information regarding this
recapture.
In March of 1996, the Company announced that it had retained a financial
advisor to assist management in evaluating various alternatives to best serve
the interests of its shareholders. The recent losses incurred in the Company's
core credit insurance operation have lead to this action in order to preserve
shareholder value. The various alternatives which were 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. During 1996, the Company solicited bids for both the
insurance operations and the auto auction business. In October 1996, the Company
entered into a merger agreement with LaSalle Group, Inc., pursuant to which the
Company will become a wholly-owned subsidiary of LaSalle. This transaction is
subject to the approval of various state insurance department regulators and the
Company's common shareholders. See Note 21 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K/A for additional
information with respect to this matter.
Page 3
<PAGE>
The following table sets forth for the periods indicated the contribution to
revenues, which are comprised of premiums written (before reinsurance ceded),
policy charges, net investment income, realized investment gains and other
revenues, of each of the product lines within the Company's three industry
segments:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------
(in thousands) 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Automotive Resource Division
Credit Insurance:
Life $14,742 $15,443 $14,450
Disability 20,973 21,739 19,802
Warranty contracts 1,684 1,647 1,851
Other products and services 129 170 168
---------- ---------- ----------
37,528 38,999 36,271
---------- ---------- ----------
Individual Life Insurance Division
Traditional life 40 49 25
Universal life 5,714 (1) 8,276 9,882
Annuities 5 4 11
Other 22 189 476
---------- ---------- ----------
5,781 8,518 10,394
---------- ---------- ----------
Auto Auction Division 3,221 3,304 2,328
---------- ---------- ----------
Corporate 21 10 18
---------- ---------- ----------
Net realized investment
gains (losses) - not allocated (119) (476) 671
---------- ---------- ----------
Total revenues (before
reinsurance ceded) $46,432 $50,355 $49,682
========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes $3.2 million in policy charge revenues which relate to business
which was 100% coinsured to another insurer as of December 31, 1994. The
coinsurance arrangement will be replaced by an assumption and novation
agreement following approval by the appropriate regulatory authorities.
Page 4
<PAGE>
The following table sets forth for the periods indicated the contribution to
pre-tax income (loss) of each of the product lines within the Company's three
industry segments:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------
(in thousands) 1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Automotive Resource Division:
Credit insurance:
Life ($945) ($469) $348
Disability (1,397) (843) (2,137)
Warranty contracts 219 321 313
Other products and services (6) (22) 24
------------ ------------ ------------
(2,129) (1,013) (1,452)
------------ ------------ ------------
Individual Life Insurance Division:
Traditional life (29) 32
Universal life (217) 169 (990)
Annuities (1) (3) (4)
Other (291) (80)
------------ ------------ ------------
(247) (93) (1,074)
------------ ------------ ------------
Insurance division results (2,376) (1,106) (2,526)
Auto Auction Division 771 469 181
Corporate (279) (333) (266)
------------ ------------ ------------
(1,884) (970) (2,611)
Realized investment gains (losses) (119) (476) 671
------------ ------------ ------------
Pre-tax loss before gain on sale
of insurance business (2,003) (1,446) (1,940)
------------ ------------ ------------
Gain on sale of insurance business 403
------------ ------------ ------------
Total pre-tax loss ($2,003) ($1,043) ($1,940)
============ ============ ============
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Page 5
</TABLE>
<PAGE>
The following table sets forth certain information pertaining to the Company's
industry segments:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------
(in thousands) 1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Premiums written and policy charges
(before reinsurance):
Automotive Resource Division $ 33,832 $ 34,916 $ 31,944
Individual Life Insurance Division 5,077 (1) 6,179 7,566
Fees and other income:
Automotive Resource Division $1,465 $1,215 $944
Individual Life Insurance Division 182 253 565
Auto Auction Division 3,200 3,294 2,317
Corporate 16 28
Net investment income:
Automotive Resource Division $2,231 $2,868 $3,383
Individual Life Insurance Division 522 2,086 2,263
Auto Auction Division 21 10 11
Corporate 5 10 (10)
Benefits and expenses:
Automotive Resource Division $25,638 $24,400 $26,658
Individual Life Insurance Division 3,182 7,704 10,541
Auto Auction Division 2,450 2,835 2,147
Corporate 300 343 284
Pre-tax income (loss), excluding
realized investment gains and gain
on sale of insurance business:
Automotive Resource Division ($2,129) ($1,013) ($1,452)
Individual Life Insurance Division (247) (93) (1,074)
Auto Auction Division 771 469 181
Corporate (279) (333) (266)
- -------------------------------------------------------------------------------------
</TABLE>
(1) See footnote under Revenue Table of this Form 10-K/A.
Additional segment information is contained in Note 18 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K/A.
Page 6
<PAGE>
OPERATIONS
The Company's principal subsidiaries, which are engaged in the credit
insurance and, until 1992, the individual life insurance business, are Consumers
Life Insurance Company, Consumers Life Insurance Company of North Carolina and
Investors Fidelity Life Assurance Corp. Together these companies are licensed
in 33 states and the District of Columbia. As noted in Item I. - General, the
Company disposed of a significant portion of its individual life business in
October 1992 and December 1994.
The following table sets forth the amounts of life insurance in force at
the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31,
--------------------------------------
(in thousands) 1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Direct and assumed:
Credit $1,434,897 $1,427,252 $1,409,081
Individual life 697,176 838,667 1,080,249
------------ ------------ ------------
2,132,073 2,265,919 2,489,330
Reinsurance ceded (947,363) (1,184,134) (894,119)
------------ ------------ ------------
Net in force $1,184,710 $ 1,081,785 $1,595,211
============ ============ ============
- ----------------------------------------------------------------
</TABLE>
For information concerning future policy benefits and unearned premiums,
see Notes 1 and 9 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K. Reserves for life insurance are developed using
generally accepted actuarial principles which are widely recognized in the
insurance industry. Methods of developing credit disability insurance claims
reserves vary widely in the industry. The Company's methods of establishing
credit disability claims reserves are based on its prior claims experience.
During the last three years, the difference between actual claims on credit
disability policies and amounts reserved has not been significant.
Page 7
<PAGE>
Automotive Resource Division
The Company sells credit insurance in connection with consumer credit
transactions, substantially all of which are automobile purchases. Credit life
insurance provides funds in the event of the insured's death for payment of a
specified loan or loans owed by the insured. Similarly, credit disability
insurance provides for the periodic paydown of such loans during the term of the
insured's disability. In most cases, the entire premium is paid at the time the
insurance is issued. Premiums collected are remitted to the Company net of
commissions. Credit insurance generally is written on a decreasing term basis
with the policy benefit initially being the full amount of the loan and
thereafter decreasing in amounts corresponding to the repayment schedule. The
primary beneficiary under credit insurance is the lender, with any proceeds in
excess of the unpaid portion of the loan payable to a named second beneficiary
or the insured's estate.
The Company underwrites all of its credit insurance certificates as to
certain health matters including cancer, heart disease, AIDS and AIDS related
complex (ARC). The Company also establishes maximum age limits beyond which
individuals are not eligible for coverage. The Company believes that its
comprehensive training programs increase the ability of its automobile dealer
accounts to sell insurance to a significant percentage of automobile purchasers,
which creates a larger and more diverse pool of insureds, thereby reducing its
mortality and morbidity risk. The Company typically experiences a higher level
of claims on disability policies during the first quarter of each year.
The Company has concentrated credit insurance sales efforts mainly in seven
states, and was ranked for 1994 by A.M. Best Company according to the volume of
direct written premiums as shown in the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Credit Life Credit Disability
---------------------- ------------------------
Number Number
Company of Company of
State Ranking Insurers Ranking Insurers
----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Delaware 4 54 2 55
Maryland 13 63 10 66
Nebraska 9 70 5 68
North Carolina 28 74 26 72
Ohio 23 87 19 85
Pennsylvania 5 57 4 60
Virginia 19 71 13 75
- ---------------------------------------------------------------------------
</TABLE>
Page 8
<PAGE>
In April 1996, the Company discontinued marketing its credit insurance
products in the State of North Carolina as a result of continued losses on that
business. Written premiums in North Carolina were $1.8 million in 1995 and $1.4
million in 1994.
The Company's success in selling credit insurance is dependent upon
establishing and maintaining favorable relationships with automobile dealers.
To accomplish these goals, the Company provides finance and insurance training
programs which assist dealers in arranging financing and increasing sales of
credit insurance; it offers certain dealers the opportunity to participate in
profits of the credit insurance business generated by them through reinsurance
arrangements; and it provides administrative support and claims handling
procedures to dealers. The Company also seeks the endorsement of local and
state automobile dealer and other credit insurance producing member
associations. In that regard, during 1996, the Company lost the Pennsylvania
Automotive Association endorsement which it held since 1987. See Note 21 of the
Notes to Consolidated Financial Statements appearing elsewhere in this
Form 10-K/A for more information concerning this matter. To assist the Company
in developing dealer relationships, the Company employs two home office sales
managers, three finance and insurance training specialists and 17 salaried field
representatives who solicit and service accounts. The Company's dealer
relationships may be terminated by the Company or the dealers at any time
without penalty. In addition to its direct sales efforts, the Company also
purchases closed blocks of credit insurance from unaffiliated companies and
administers the purchased business until all coverages expire.
The credit insurance business is the major source of the Company's revenues
and, until 1991, provided the majority of its profits as well. As indicated
above, approximately 85% of the Company's premium revenues during 1995 were
derived from its credit insurance business. Automobile sales account for
substantially all of the credit insurance sold by the Company, and have been and
will continue to be affected, directly and indirectly, by automobile prices,
interest rates, the availability of consumer credit and general economic
conditions. The credit insurance industry and the Company's credit business
have both been adversely affected in recent years by the increase in the number
of automobiles which are leased instead of purchased. This is principally due to
the lack of availability of approved credit insurance products applicable to
leases and to a reluctance on the part of automobile dealers to emphasize the
sale of credit insurance products on lease transactions. The Company has credit
insurance products available for lease transactions in most of the states in
which it actively markets.
The Company's ability to retain credit insurance premiums written is
limited by applicable statutory surplus requirements. For this reason, the
Company reinsures substantial percentages of its credit insurance premiums on a
written basis under quota share agreements with unaffiliated insurance
companies. These reinsurance agreements provide statutory surplus relief,
thereby increasing the Company's capacity to write credit insurance. An effect
of this reinsurance is, however, to reduce the profit that the Company might
otherwise realize on its credit insurance business. The agreements contain an
experience adjustment computation which results in the ultimate cost of this
reinsurance being a stated percentage of the amount of statutory surplus
provided.
Page 9
<PAGE>
Security funds are maintained by the Company in amounts which are generally
proportional to the ceded unearned premiums. This reinsurance does not discharge
the Company's primary liability as the original insurer. See Note 20 of the
Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K/A for information concerning certain regulatory matters involving these
reinsurance treaties.
The Company also markets, in an agency capacity, extended service
automobile warranty products through its wholly-owned subsidiary, Consumers Car
Care Corporation. These products are underwritten by unaffiliated insurance
companies, administered by unaffiliated third party administrators and sold
primarily through automobile dealers, who also sell the Company's credit
insurance. The Company, through another subsidiary, also assumes a portion of
the risks on these extended service contracts pursuant to a reinsurance
arrangement with one of the unaffiliated insurers who underwrite the business.
Other related products and services are also offered to the Company's automobile
dealer customers.
Individual Life Insurance Division
In March of 1992, the Company announced the termination of this Division's
marketing activities and announced its intent to sell its existing blocks of
whole-life, term, annuity and universal life business. Effective October 1,
1992, the traditional whole-life, term and annuity business was sold for $5.6
million to the Londen Insurance Group of Phoenix, Arizona. In early 1993, the
Company rejected offers it received for the sale of its universal life business
after determining that the offers were too low in relation to the projected
future profits on that block of business.
Effective December 31, 1994, the Company sold its direct universal life
business and irrevocably assigned all its right, title and interest in a block
of assumed universal life business (coinsured from AMEX Life Assurance Company
on a 90% quota share basis) to American Merchants Life Insurance Company,
Jacksonville, Florida, for $5.5 million. The Company continued to provide all
policyholder administrative functions for this business pursuant to a service
agreement until May 1, 1995.
The Company had experienced continuing losses in its individual life
operation due to insufficient premium levels to support the cost of operations.
With the sale of the direct universal life business and the AMEX business to
American Merchants and the termination of operations of CLMC Insurance Agency,
Inc. (a general agency which marketed life insurance and annuity products
through unaffiliated insurers), significant reductions have been made in various
direct and indirect costs. Although the remaining block of assumed universal
life business has generally been profitable, the Company has signed a Letter of
Intent with the direct writer of the business whereby the direct writer will
recapture the business effective January 1, 1997 and pay the Company a recapture
consideration of $1.2 million. See Note 21 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K/A for additional
information regarding this transaction.
Page 10
<PAGE>
The table below sets forth for the periods indicated the amount of policy
charge revenues (for universal life products) and premiums written (for other
individual life insurance products).
<TABLE>
<CAPTION>
--------------------------------------------------------------
Years Ended December 31,
-------------------------------------
(in thousands) 1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
Universal life $5,037/(1)/ $6,130 $7,533
Traditional life 40 49 25
Annuities 8
--------- -------- ---------
$5,077 $6,179 $7,566
========= ======== =========
--------------------------------------------------------------
</TABLE>
(1) See footnote under Revenue Table of this Form 10-K/A.
Auto Auction Division
As indicated previously, the business and the related operating assets of
Interstate were sold in November 1996 for cash of $4.85 million. See Note 21 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K/A for further information concerning the sale and its impact on the
Company's operating results. Prior to the sale, Interstate conducted
wholesale automobile auctions of used vehicles at its facility in Mercer,
Pennsylvania (about 50 miles north of Pittsburgh). The Youngstown Auto Auction
business acquired in July of 1993 to expand the Company's auction operations,
relocated to Lordstown, Ohio in 1994 in order to attract additional accounts and
business to the auction. The Company subsequently ceased all operations at
Lordstown effective December 31, 1994 and transferred a portion of its business
operations to Interstate. In January 1995, Interstate began conducting the bi-
weekly bank repossession auction previously held at Lordstown. This resulted in
the termination, as of the end of 1994, of all of Lordstown's expenses while
maintaining a portion of its revenue base at Interstate with virtually no
incremental costs. Interstate's customers include automobile dealers and
leasing companies. In connection with its weekly auctions, Interstate provides
a body shop repair and conditioning service and an arbitration service through
which disputes between buyers and sellers can be resolved.
In 1995, approximately 35,000 cars were registered for sale at Interstate
through the regular weekly consignment auction, and approximately 56% of all
vehicles registered were sold. In 1994, approximately 32,000 cars were
registered and 59% of the cars registered were sold. Auction fees are generally
paid by the seller for each vehicle sold and an additional fee is paid by the
purchaser. The purchaser's fees vary according to the price paid for the
automobile.
Page 11
<PAGE>
Between 1986 and 1992, significant revenues and profits were generated in
connection with a contract with Ford Motor Company wherein Ford's executive and
fleet lease vehicles were sold through special monthly auctions held by
Interstate. The purchasers at these sales were limited to Ford's new car
dealers. In November 1992, Ford terminated its contract with Interstate.
Interstate is a member of the National Automobile Auction Association. It
is also bonded and maintains an Auction House License with the Pennsylvania
Department of Motor Vehicles.
BEST'S RATINGS
In 1995, Consumers Life Insurance Company received a C rating (Marginal)
from A.M. Best Company, principally because of its substantial amount of
financial reinsurance and its relatively small capital base. In 1994 Consumers
had a C-rating (Marginal). In 1992 and 1993, Consumers had an NA-9 rating (Not
Rated at Company Request), which is assigned to any company which is otherwise
eligible for a letter rating, but has requested that the rating not be
published. The NA-9 designation was requested by Consumers while it completed
the restructuring of its individual life insurance operations. In 1991,
Consumers was rated "B" (Good). Consumers Life Insurance Company of North
Carolina is currently rated "NA-3" (Insufficient Operating Experience), while
Investors Fidelity Life Assurance Corp. is classified as "NA-9." In 1996,
Consumers Life Insurance Company again received a rating of C, while each of the
three subsidiaries was rated NR-2 (Best's new designation for Insufficient
Operating Experience). Best's letter ratings range from A++ (Superior) to D
(Below Minimum Standards), with letters E and F assigned to companies under
state supervision or in liquidation. Best's ratings are based on a comparative
analysis of the statutory financial condition and operating performance of the
companies, rated as determined by their publicly available reports.
INVESTMENTS
The Company's general investment policy with respect to assets of its
insurance subsidiaries has been to invest in both fixed maturity securities and
mortgages with intermediate terms (generally not more than seven years).
Investments in mortgages have allowed the Company to obtain higher yields while
maintaining maturities in the five to seven year range. Prior to the sale of
most of the Company's universal life business, the Company's investment policy
also included investing in certain mortgage-backed securities which provided
competitive yields on assets supporting these interest sensitive products.
The Company's mortgage loan portfolio, which relates primarily to
commercial real estate, is concentrated in the central Pennsylvania area.
Specifically, about 75% of the $7 million in mortgage loan balances at December
31, 1995 are secured by properties within a 60 mile radius of Harrisburg. The
Company considers this strategy to be conservative because this region has
historically not been particularly susceptible to wide economic swings in
recessionary times, due to the diversity of industries throughout the area and
the presence of government operations and military installations. See the
Management's Discussion and Analysis
Page 12
<PAGE>
of Financial Condition and Results of Operations appearing elsewhere in this
Form 10-K for further information concerning mortgage loans and investments.
Investments in government and corporate bonds are limited to those with a
Moody's or Standard & Poors rating of "A" or better. The Company buys U.S.
Treasury Notes for their yield and superior liquidity features. The Company also
purchases U.S. Government agency bonds and corporate bonds provided such bonds
are part of large liquid issues (over $100 million) and, in the case of
corporate bonds, represent economic balance and diversification. The Company may
also buy foreign bonds denominated in U.S. dollars (Yankee Bonds), thereby
avoiding exposure to foreign currency risk. Short-term investments are
maintained primarily to meet anticipated cash requirements arising from
operations. As of December 31, 1995, the fixed maturities portfolio did not
contain any non-investment grade securities. The Company defines a non-
investment grade security as any security rated below Baa3 by Moody's Investors
Service and below BBB by Standard and Poor's Rating Service. The assets of the
Company's non-insurance subsidiaries generally have been invested in short-term
instruments.
The following table sets forth the Company's investment results for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1995 1994 1993
---------------------- -------------------- ----------------------
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
---------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Interest:
Fixed maturities $2,175 6.8 $2,773 6.4 $3,285 8.0
Mortgage loans 692 8.1 2,138 10.1 2,467 9.9
Policy loans 58 13.9 /(1)/ 250 6.6 221 6.1
Short-term
investments 186 4.4 168 3.3 155 1.9
Real estate 332 30.7 /(2)/ 177 15.5 150 13.2
Other 38 1.8 117 6.3 67 3.6
------------- ------------- -------------
3,481 7.2 5,623 7.4 6,345 7.9
Investment expenses (702) (0.9) (649) (0.9) (698) (0.9)
------------- ------------- -------------
$2,779 6.3 $4,974 6.5 $5,647 7.0
============= ============= =============
</TABLE>
(1) Includes $27,000 in interest which should have been included in 1994
income. If this income had been included in 1994, the yield in 1995 would
have been 7.4% and the 1994 yield would have been 7.3%.
Page 13
<PAGE>
(2) Includes $170,000 in rental income related to a property classified as non-
investment real estate. Excluding this income, the real estate yield is
6.8%.
COMPETITION
The Company competes with numerous other credit insurance companies, many
of which are larger than the Company and have greater financial and marketing
resources. The principal competitive factors in the automobile credit insurance
industry are commission levels, the quality of training for dealers, the variety
of related products, the availability of dealer incentive programs and the level
of administrative support and efficiency of claims handling procedures. The
Company believes that it is able to compete successfully on the basis of these
factors.
The Company pays relatively high commissions in order to remain competitive
in states that do not mandate maximum commissions. In states which have
established maximum commissions by regulation, there is generally no commission
competition among companies. The elimination of the existing commission limits
in Pennsylvania, Maryland and Nebraska, the only states where the Company has
any significant amount of business which regulate commission levels, could have
a detrimental effect on the Company's business because agents could negotiate
for higher commissions on the sale of credit insurance without a corresponding
increase in premiums. The Company is not aware that any of these states is
considering elimination of maximum commission regulations.
Because the Company markets its extended service warranty products
primarily in connection with its marketing of credit insurance to automobile
dealers, its ability to sell this product is a function of its ability to
compete in the credit insurance market. The availability of financially sound
insurance underwriters and capable third party warranty administrators are
additional factors which affect the Company's ability to market its extended
service warranty products effectively.
The marketing areas for the auto auction included western Pennsylvania,
western New York, eastern Ohio and the West Virginia panhandle. Interstate
competed with five automobile auctions in its market areas. The principal
competitive factors in this business are the quality of management, the amount
of auction fees charged, location in relation to major metropolitan markets, the
quality of the physical plant and facilities and other services offered, such as
title guarantees. The Company was able to compete effectively on the basis of
these factors.
Page 14
<PAGE>
REGULATION
The Company's insurance operations are subject to regulation and
supervision in the states in which it is licensed. The extent of such regulation
varies from state to state, but, in general, each state has statutory
restrictions and a supervisory agency which has broad discretionary
administrative powers. Such regulation is designed primarily to protect
policyholders and relates to the licensing of insurers and their agents, the
approval of policy forms, the methods of computing financial statement reserves,
the form and content of financial reports and the type and concentration of
permitted investments. The Company's insurance subsidiaries are subject to
periodic examination by the insurance departments in the states of their
formation and are also subject to joint regulatory agency examination and market
conduct examinations in the other states in which they are authorized to do
business.
Certain states in which the Company is licensed have regulations limiting
the credit insurance premium rates or the commissions payable to agents or, in
some cases, limiting both rates and commissions payable. In addition, some
states have regulations that require credit insurance claims ratios to be a
specified percentage of earned premiums. If an insurer's claims ratio is below
the prescribed benchmark, it is required to reduce premium rates and,
conversely, if the claims ratio is higher than the benchmark, the insurer may
request an increase in premium rates.
The dividends which a life insurance company may distribute are subject to
regulatory requirements based upon minimum statutory capital and surplus and/or
statutory earnings. In addition to regulatory considerations, the overall
financial strength of each operating entity is considered before dividends are
paid. Additionally, the amount of dividends a life insurance company can pay is
subject to certain tax considerations. See Notes 2 and 16 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K/A.
The Company is also subject to regulation under the insurance holding
company laws of various states in which it does business. These laws vary from
state to state, but generally require insurance holding companies and insurers
that are subsidiaries of holding companies to register and file certain reports,
including information concerning their capital structures, ownership, financial
condition and general business operations, and require prior regulatory agency
approval of changes in control of an insurer, most dividends and intercorporate
transfers of assets within the holding company structure. The purchase of more
than 10% of the outstanding shares of the Company's Common Stock by one or more
affiliated parties would require the prior approval of certain state insurance
departments which regulate the Company.
Page 15
<PAGE>
EMPLOYEES AND AGENTS
As of December 31, 1995, the Company had approximately 97 full-time
employees, including its management and sales personnel. In addition, as of that
date there were approximately 900 licensed agents selling credit insurance and
vehicle extended service contracts, most of whom were full-time employees of
automobile dealers, banks and other financial institutions.
The Company has adequate insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. The Company does not
have similar coverage for its agents. There can be no assurance that the Company
will be able to continue to obtain such coverage in the future or that it will
not experience uninsured losses.
ITEM 2. PROPERTIES
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 44,500 square feet of
office space. Prior to 1993, the Company leased the entire facility at an annual
rental of $421,000, plus insurance, taxes and utilities. As a result of the
termination in 1992 of all new business functions in the Individual Life
Insurance Division, the Company now occupies approximately 67% of the available
office space. The Company has leased about 85% of the remaining space to third
party tenants. Annual rental income to the Company under these sub-leases totals
$105,000. 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. In late 1996, the
Company, along with the other 50% owner, granted an option to purchase the home
office building to an unrelated third party. The option expires in March 1997.
See Note 21 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K/A for additional information concerning the option.
Except as otherwise noted, the business operations of the Company and all of the
subsidiaries are conducted at the above address in Camp Hill, Pennsylvania.
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 $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 $12,000 plus insurance, taxes and utilities.
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<PAGE>
Interstate's auction facilities are situated on approximately 50 acres of
land owned by Interstate. The auction building contains approximately 44,500
square feet which includes seven auction lanes, a restaurant and various lounges
and other amenities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits which are ordinary and routine
litigation incidental to its business. None of these lawsuits is expected to
have a materially adverse effect on the Company's financial condition or
operations. See Note 13 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K/A for additional information concerning
litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the Fourth Quarter of 1995 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Consumers Financial Corporation common stock and Convertible Preferred
Stock, Series A, are traded on the NASDAQ, National Market System. Ticker
symbols are CFIN and CFINP, respectively.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1995 QUARTERLY STOCK PRICES
March 31 June 30 September 30 December 31
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
- ------------
High 3 3 3/4 4 4 1/4
Low 2 2 1/2 3 3 1/4
Convertible Preferred Stock
- ---------------------------
Series A
- --------
High 8 1/2 8 3/4 9 9 1/2
Low 7 1/2 7 1/2 7 1/2 8
- -------------------------------------------------------------------------------------------------------
</TABLE>
Directors, officers and employees of Consumers Financial Corporation have a
sizeable ownership position in Consumers, which is derived from the Company's
belief that this provides a strong incentive for all parties involved to enhance
shareholder value. At December 31, 1995, the Company's Employee Stock Ownership
Plan held 10.7% of the total common stock outstanding.
As of December 31, 1995, there were 7,054 shareholders of record who
collectively held 2,621,090 common shares and 161 shareholders of the
Convertible Preferred Stock, Series A, who held 481,461 shares. Seven
institutions held approximately 138,700 shares of common stock at year end.
Dividends on both the Company's common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. A common stock dividend
was not declared in 1995; however, common stock dividends had been paid for 14
consecutive years through 1994. The 1994 common stock cash dividend was $.05 per
share. The Convertible Preferred Stock, Series A, dividends are paid quarterly
on the first day of January, April, July and October. The annual Convertible
Preferred Stock, Series A, cash dividend is $.85 per share.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(Not covered by Independent Auditor's Report)
(dollar amounts in thousands, except per share amounts) 1995 1994 1993 1992 1991
------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues (before reinsurance ceded) $46,432 $50,355 $49,682 $51,124 $55,167
Premiums written and policy charges
(before reinsurance ceded) 38,909 41,095 39,510 39,700 42,090
Net investment income 2,779 4,974 5,647 7,498 8,525
Net return on average investments 6.0% 6.7% 7.2% 7.4% 7.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principles (1,601) (1,212) (815) 523 (3,326)
Cumulative effect of change in accounting principles 299 (710)
Net income (loss) (1,601) (913) (1,525) 523 (3,326)
Income (loss) per common and common
equivalent share:
Income (loss) before cumulative effect of change
In accounting principles (0.78) (0.62) (0.46) 0.02 (1.26)
Cumulative effect of change in accounting principles 0.11 (0.26)
Net income (loss) (0.78) (0.51) (0.72) 0.02 (1.26)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 123,322 125,276 144,393 174,003 164,087
Total debt 2,537 3,389 4,683 5,987 7,220
Shareholders' equity and redeemable preferred stock 15,671 15,226 19,502 21,295 21,442
Shareholders' equity per common share 4.20 3.96 5.41 5.91 5.88
Return on average total equity, including redeemable
preferred stock (9.9%) (5.1%) (7.4%) 2.8% (13.4%)
Cash dividends declared per common share NONE 0.05 0.05 0.05 0.14
Life insurance in force (before reinsurance ceded) 2,132,073 2,265,919 2,489,330 2,917,021 3,658,779
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's 1995
operating performance as well as its financial position at December 31, 1995 is
presented below. Information relating to 1994 and 1993 is also presented for
comparative purposes. This analysis should be read in conjunction with the
Consolidated Financial Statements and the related Notes.
OVERVIEW
The Company's net loss for 1995 was $1.6 million ($.78 per share) compared
to losses of $913,000 ($.51 per share) and $1.5 million ($.72 per share) in 1994
and 1993, respectively. The 1994 loss included a $403,000 pre-tax gain from the
sale of a major portion of the Company's universal life insurance business and
$299,000 related to the cumulative effect of an accounting change. A $502,000
pre-tax loss arising from the termination of two lines of business is also
included in the 1994 operating results. The net loss in 1993 included a
$710,000 loss from the cumulative effect of two accounting changes adopted in
that year.
The Company's operating results declined in 1995 because of increased
losses in the Automotive Resource Division, which were primarily due to an
increase in both credit life and credit disability claims ratios. The Individual
Life Insurance Division also reported a slightly higher operating loss due to
increased claims on its remaining block of universal life business. The Auto
Auction Division produced another substantial increase in operating profits,
following a similar increase in 1994.
A more detailed discussion of the operating performance of each of the
Company's business segments appears later in this analysis under Results of
Operations.
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 an unrelated third party whereby the
Company will become a wholly-owned subsidiary of the acquirer. The
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<PAGE>
merger transaction is subject to insurance regulatory approval and the approval
of the Company's common shareholders. See Note 21 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K/A for additional
information with respect to this matter.
The following table compares revenues and operating results for each of the
past three years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues by business unit:
- ---------------------------------------------------------------------------------------------
Automotive Resource Division:
(principally credit insurance) $37,528 $38,999 $36,271
Individual Life Insurance Division 5,781 8,518 10,394
Auto Auction Division 3,221 3,304 2,328
Other 21 10 18
Realized investment gains
(losses) - not allocated (119) (476) 671
- ---------------------------------------------------------------------------------------------
$46,432 $50,355 $49,682
=============================================================================================
Pre-tax income (loss):
Automotive Resource Division ($2,129) ($1,013) ($1,452)
Individual Life Insurance Division (247) (93) (1,074)
Auto Auction Division 771 469 181
Other (279) (333) (266)
- ---------------------------------------------------------------------------------------------
(1,884) (970) (2,611)
Realized investment gains (losses) (119) (476) 671
- ---------------------------------------------------------------------------------------------
(2,003) (1,446) (1,940)
Gain on sale of life insurance business 403
- ---------------------------------------------------------------------------------------------
Pre-tax loss (2,003) (1,043) (1,940)
Income tax expense (benefit) (402) 169 (1,125)
- ---------------------------------------------------------------------------------------------
Loss before cumulative effect
of change in accounting principles (1,601) (1,212) (815)
Cumulative effect of change in
accounting principles 299 (710)
- ---------------------------------------------------------------------------------------------
Net loss ($1,601) ($913) ($1,525)
=============================================================================================
Income (loss) per common share:
Loss before cumulative effect of
change in accounting principles ($0.78) ($0.62) ($0.46)
Cumulative effect of change in
accounting principles 0.11 (0.26)
- ---------------------------------------------------------------------------------------------
Net loss ($0.78) ($0.51) ($0.72)
=============================================================================================
</TABLE>
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<PAGE>
RESULTS OF OPERATIONS
The Company's pre-tax operating results can be best understood through an
analysis of each of its three business units: the Automotive Resource Division,
the Individual Life Insurance Division and the Auto Auction Division. The
Automotive Resource Division, the Company's core business, contributed 81% of
the Company's total revenues in 1995. The Division's principal product is credit
insurance, which it markets primarily through automobile dealers in six key
states. It also markets automobile extended service contracts principally in a
general agency capacity and generates other revenues from services it provides
to its over 900 automobile dealer customers. The Individual Life Insurance
Division has not written any new business since 1992. This Division currently
administers about $2.3 million of annualized universal life premiums. Auto
auction operations are conducted through the Company's subsidiary, Interstate
Auto Auction, Inc.
Automotive Resource Division
The Division's credit insurance premium revenues declined 3.3% in 1995,
following 10.8% and 4.5% revenue increases in 1994 and 1993, respectively.
Premium production for 1995 totaled $33.1 million compared to $34.3 million in
1994 and $31 million in 1993. The absence of any meaningful growth in
automobile sales and the cancellation of all accounts in one unprofitable state
were the principal reasons for the drop in revenues.
Despite the revenue increases in 1994 and 1993, the Division's credit
insurance premium production remains significantly below pre-1990 levels due to
the declines which occurred in the early 1990's as a result of the economic
recession and its effects on automobile sales. A consequence of the reduced
level of written premiums is a decline in earned premiums (the portion of total
premium revenues which is reported as income in a given period). Lower earned
premiums have resulted in a substantial increase in operating expense ratios
since 1989, which is a key reason for the unprofitable results this Division has
experienced in recent years.
The Automotive Resource Division's pre-tax loss increased from $1 million
in 1994 to $2.1 million in 1995. Increased credit life and disability claims
ratios are the primary reason for the poorer results, although the Division also
incurred a $250,000 loss in the fourth quarter which resulted from the write-off
of the costs related to the attempted acquisition of another credit insurance
operation, which terminated when the target company consummated a transaction
with another party.
Individual Life Insurance Division
Operations in the Individual Life Insurance Division in 1995 were limited
to one closed block of assumed universal life business, following the sale of
the Division's direct UL business at the end of 1994. The Division reported a
$247,000 pre-tax loss in 1995 compared to a $93,000 loss in 1994. Higher than
normal claims costs in the second quarter of the year adversely impacted the
1995 results from this block of business.
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<PAGE>
The second quarter claims level appears to have been an aberration, since claims
costs were closer to expected levels in the other three quarters of 1995 and are
better than expected in the first quarter of 1996.
Auto Auction Division
Auto Auction Division results in 1994 include the operations from a small
auction facility in Ohio which was terminated at the end of 1994. During 1994,
the Ohio auction produced revenues of $566,000 and a pre-tax loss of $211,000.
Excluding the 1994 revenues from the Ohio facility, the revenues at Interstate
Auto Auction increased by 6.4 % in 1995 to $2.9 million. An increase in the
volume of vehicles registered and sold accounts for the majority of the growth
in revenues, although a portion of the increase is due to the transfer of the
bank repossession auction from the Ohio facility to Interstate.
The Division's pre-tax profits grew from $469,000 in 1994 to $771,000 in
1995. The increased revenues, the elimination of the Ohio losses and a non-
recurring gain of $208,000 (representing the excess of fire insurance proceeds
received over the book value of the property damaged in a February fire) all
contributed to the rise in profits.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's financial
position at December 31, 1995 and 1994 is presented below.
Invested Assets
The Company's invested assets at December 31, 1995 were $49 million
compared to $47 million at the end of 1994. Substantially all of the increase
is attributable to the increase in bond values which occurred during 1995.
Since the Company's bonds are stated at fair value in the financial statements
(as discussed below), this recovery in the bond market resulted in a $3 million
increase in the carrying value of the bond portfolio compared to December 31,
1994. At the end of 1995, the fair value (market value) of the portfolio
exceeded its amortized cost by $1 million. Partially offsetting the increase in
invested assets related to changes in bond values is the foreclosure on a $2.2
million construction loan in mid-1995 and the reclassification of this loan to
non-investment real estate. The Company is in the process of finishing and
selling the units in this town home development. As a result of the sales of
ten units, the carrying value of this real estate was $1.5 million at December
31, 1995. During 1996, an additional two units have been sold and four more
units are under contract of sale.
At December 31, 1995 and 1994, the Company's bond portfolio was carried at
fair value pursuant to the requirements of Financial Accounting Standards Board
(FASB) Statement No. 115, based on the Company's determination that all of its
bonds should be considered as "available-for-sale", although the
Page 23
<PAGE>
Company has no current intentions to sell any of these securities. The
unrealized appreciation or depreciation on available-for-sale securities is
reported as a separate component of shareholders' equity.
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.
During 1995, the Company increased its loan loss reserves for mortgage
loans and investment and non-investment real estate by $93,000. Loan loss
reserves were increased by $450,000 and $275,000 in 1994 and 1993, respectively.
Management believes that its reserves at December 31, 1995 are adequate to cover
any possible losses which may develop in its mortgage loan and real estate
portfolios. The carrying value of these investments at December 31, 1995 was
$10.7 million compared to $12.4 million at the end of 1994.
Liquidity
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.
Page 24
<PAGE>
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 auto auction business and, to a
lesser extent, its insurance agency business, provide sources of cash which are
not subject to regulatory restrictions.
The principal sources of cash funds of the life insurance subsidiaries are
premiums and investment income, as well as proceeds from sales and maturities of
investments. These companies use cash primarily to pay commissions, claims and
operating expenses. Credit insurance is the Company's principal product line and
credit insurance premiums are therefore the Company's principal source of
premium revenues. Credit insurance premium levels during the past five years are
substantially lower than the premium levels prior to the economic recession in
the early 1990's. This continued reduction in cash funds has depleted most of
the Company's short-term cash reserves and has caused some decline in its long-
term investment base. The assessment by the Company's management and its Board
of Directors that this decrease in revenues and the related decline in operating
results could not be reversed within a reasonable period of time led to the
decision in early 1996 that the Company had to evaluate other alternatives to
best serve the interests of its shareholders. These alternatives are discussed
in the "Overview" section of this Management's Discussion and Analysis.
During 1993 and 1994, the funds generated from the sale and maturity of
investments exceeded the funds used to acquire new investments, which was
indicative of the Company's need for additional cash for operating needs. In
1995, as a result of additional reductions in general expenses and the positive
impact of slightly increased credit insurance premium revenues during 1994 and
1995, the Company was able to reinvest the funds it generated from the sale and
maturity of other investments. During 1994, a substantial amount of investments
were sold in connection with the sale of the Company's direct universal life
business to a third party. Cash and other assets were transferred to the
reinsurer along with the Company's liability for future policy benefits on this
business.
Capital Resources
The Company's total equity, which includes redeemable preferred stock,
increased by $445,000 during 1995. The increase is attributable to a $2.6
million increase (net of applicable income taxes) in the value of the Company's
bond portfolio, which is carried at fair value. The unrealized appreciation in
the portfolio at
Page 25
<PAGE>
December 31, 1995 totaled $1 million before deducting $347,000 in related income
taxes. The increase in equity resulting from the improvement in the bond market
was offset by the $1.6 million operating loss, by $409,000 in dividends to
preferred shareholders and by $202,000 used to purchase treasury shares.
Shareholders' equity per common share also increased from $3.96 at the end of
1994 to $4.20 at December 31, 1995.
The Company continued to reduce its bank loans and its ratio of debt to
total capital in 1995. During 1995, total debt declined by $900,000 from $3.4
million to $2.5 million following a $1.3 million reduction in 1994. The ratio of
debt to total capital also improved in 1995 from 18.2% at the start of the year
to 13.9% at year end. The loans mature in January 1997.
Inflation
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.
Page 26
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation, integrity
and objectivity of the financial information contained in this Form 10-K/A. 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.
Accounting procedures and related systems of internal control have been
established to provide reasonable assurance that the books and records reflect
the transactions of the Company and that established policies and procedures are
properly implemented by qualified personnel. Such systems are evaluated
regularly to determine their effectiveness.
The consolidated financial statements for the year ended December 31, 1995
have been audited by Arthur Andersen LLP, independent auditors. The consolidated
financial statements for the years ended December 31, 1994 and 1993 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.
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.
James C. Robertson R. Fredric Zullinger
Chairman, Chief Executive Officer Chief Financial Officer
and President
Page 27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance sheet of Consumers
Financial Corporation (a Pennsylvania corporation) and subsidiaries as of
December 31, 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows 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.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 21 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 and the approval of the Company's common
shareholders. 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, 1995, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
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. 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.
Page 28
<PAGE>
New York, New York ARTHUR ANDERSEN LLP
January 28, 1997
Page 29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance sheets of Consumers
Financial Corporation and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1994. Our audits also
included 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 schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Consumers Financial Corporation and subsidiaries at December 31, 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, 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.
As discussed in Note 3 to the consolidated financial statements, in 1994
the Company changed its method of recognizing earnings on credit disability
insurance, and in 1993 the Company changed its methods of accounting for income
taxes, determining deferred policy acquisition costs, and accounting for certain
investments in debt and equity securities.
Philadelphia, Pennsylvania ERNST & YOUNG LLP
March 24, 1995
Page 30
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
=============================================================================================================================
(dollar amounts in thousands) 1995 1994
=============================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Fixed maturities $ 35,048 $ 28,180
Mortgage loans on real estate 7,041 9,938
Investment real estate 1,020 1,144
Policy loans 482 351
Other invested assets 2,512 1,791
Short-term investments 2,892 5,627
- -----------------------------------------------------------------------------------------------------------------------------
Total investments 48,995 47,031
Cash 451 1,254
Accrued investment income 653 835
Receivables 23,820 26,931
Prepaid reinsurance premiums 18,604 19,183
Deferred policy acquisition costs 21,926 21,655
Property and equipment 4,118 4,178
Other real estate 2,645 1,271
Other assets 2,110 2,938
- -----------------------------------------------------------------------------------------------------------------------------
$123,322 $125,276
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
=============================================================================================================================
Liabilities, Redeemable Preferred Stock and Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits $ 36,582 $ 38,609
Unearned premiums 57,943 56,551
Other policy claims and benefits payable 2,851 2,848
Other liabilities 6,259 6,405
Income taxes:
Current 299 876
Deferred 1,180 1,372
Notes payable 2,537 3,389
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 107,651 110,050
- -----------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500 shares;
issued 1995 and 1994, 536,500 shares; outstanding 1995
and 1994, 481,461 shares; redemption amount 1995
and 1994, $4,815; net of treasury stock of $453 in 1995 and 1994. 4,657 4,621
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $.01 stated value, authorized 10,000,000 shares;
issued 1995, 3,031,054 shares, 1994, 3,060,802 shares;
outstanding 1995, 2,621,090 shares, 1994, 2,678,577 shares 30 31
Capital in excess of stated value 8,016 8,129
Net unrealized appreciation (depreciation) of debt and equity securities 705 (1,952)
Retained earnings 3,688 5,734
Treasury stock (1,425) (1,337)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 11,014 10,605
- -----------------------------------------------------------------------------------------------------------------------------
$123,322 $125,276
=============================================================================================================================
</TABLE>
See notes to consolidated financial statements
Page 31
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums written and policy charges $38,909 $41,095 $39,510
Decrease (increase) in unearned premiums (1,392) (2,345) 2,248
- --------------------------------------------------------------------------------------------------------------------
Gross premium income and policy charges 37,517 38,750 41,758
Less reinsurance ceded (15,473) (14,174) (14,240)
- --------------------------------------------------------------------------------------------------------------------
Net premium income and policy charges 22,044 24,576 27,518
Net investment income 2,779 4,974 5,647
Realized investment gains (losses) (119) (476) 671
Fees and other income 4,863 4,762 3,854
- --------------------------------------------------------------------------------------------------------------------
Total revenues 29,567 33,836 37,690
- --------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits 7,373 10,229 12,053
Increase in future policy benefits 4,754 2,298 2,493
Amortization of deferred policy acquisition costs 10,734 11,921 13,901
Operating expenses 8,709 10,834 11,183
- --------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 31,570 35,282 39,630
- --------------------------------------------------------------------------------------------------------------------
Loss before gain on sale of life insurance
business and income taxes (2,003) (1,446) (1,940)
Gain on sale of life insurance business 403
- --------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,003) (1,043) (1,940)
Income tax expense (benefit) (402) 169 (1,125)
- --------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in
in accounting principles (1,601) (1,212) (815)
Cumulative effect of change in accounting
principles 299 (710)
- --------------------------------------------------------------------------------------------------------------------
Net loss ($1,601) ($913) ($1,525)
====================================================================================================================
Income (loss) per common and common
equivalent share:
Loss before cumulative effect
of change in accounting principles ($0.78) ($0.62) ($0.46)
Cumulative effect of change in
accounting principles 0.11 (0.26)
- --------------------------------------------------------------------------------------------------------------------
Net loss ($0.78) ($0.51) ($0.72)
====================================================================================================================
Weighted average number of shares outstanding 2,634 2,690 2,740
====================================================================================================================
</TABLE>
See notes to consolidated financial statements
Page 32
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized
Capital in appreciation (depreciation)
Common stock excess of ------------------------------
(dollar amounts in thousands, ----------------------- stated Fixed Equity Retained
except per share amounts) Shares Amount value maturities securities earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 3,110 $31 $8,324 $32 $9,349
Change in net unrealized appreciation of fixed
maturities for the year $567
Preferred stock dividends (418)
Common stock dividends ($.05 per share) (140)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares (43) (157)
Retirement of treasury shares
Net loss for the year (1,525)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 3,067 31 8,167 567 32 7,230
Change in net unrealized appreciation of fixed
maturities and equity securities for the year (2,541) (10)
Preferred stock dividends (412)
Common stock dividends ($.05 per share) (135)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (6) (38)
Net loss for the year (913)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 3,061 31 8,129 (1,974) 22 5,734
Change in net unrealized appreciation
(depreciation) of fixed maturities and
equity securities for the year 2,648 9
Preferred stock dividends (409)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares
Retirement of treasury shares (30) (1) (113)
Net loss for the year (1,601)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,031 $30 $8,016 $674 $31 $3,688
====================================================================================================================================
<CAPTION>
Treasury stock
(dollar amounts in thousands, -------------------------------- Total
except per share amounts) Shares Amount amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1993 (291) ($1,080) $16,656
Change in net unrealized appreciation of fixed
maturities for the year 567
Preferred stock dividends (418)
Common stock dividends ($.05 per share) (140)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares (69) (226) (226)
Retirement of treasury shares 43 157
Net loss for the year (1,525)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 (317) (1,149) 14,878
Change in net unrealized appreciation of fixed
maturities and equity securities for the year (2,551)
Preferred stock dividends (412)
Common stock dividends ($.05 per share) (135)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares (71) (226) (226)
Retirement of treasury shares 6 38
Net loss for the year (913)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 (382) (1,337) 10,605
Change in net unrealized appreciation
(depreciation) of fixed maturities and
equity securities for the year 2,657
Preferred stock dividends (409)
Accretion of difference between fair value and
mandatory redemption value of preferred stock (36)
Purchase of treasury shares (58) (202) (202)
Retirement of treasury shares 30 114
Net loss for the year (1,601)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (410) ($1,425) $11,014
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements
Page 33
<PAGE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ($1,601) ($913) ($1,525)
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Deferred policy acquisition costs incurred (11,005) (10,647) (9,914)
Amortization of deferred policy acquisition costs 10,734 19,663 13,901
Other amortization and depreciation 613 817 1,012
Change in future policy benefits 2,063 (14,493) 1,197
Change in unearned premiums 1,392 2,982 (2,734)
Amounts due reinsurers (86) 2,147 287
Income taxes (318) (721) (1,131)
Change in receivables 3,805 (20,230) 1,378
Change in other liabilities (117) 600 (4,963)
Cumulative effect of change in
accounting principles (299) 710
Other 81 (875) 341
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,561 (21,969) (1,441)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (9,657) (14,180) (26,484)
Maturity of investments 7,027 9,035 23,527
Sale of investments 2,190 31,886 8,722
Purchase of property and equipment (371) (1,104) (138)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (811) 25,637 5,627
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on debt (852) (1,295) (1,303)
Receipts from universal life and investment products 4,938 7,256 8,294
Withdrawals on universal life and investment products (9,029) (8,547) (9,905)
Purchase of treasury stock, including 8 1/2%
redeemable preferred stock (201) (265) (277)
Cash dividends to shareholders (409) (546) (559)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,553) (3,397) (3,750)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (803) 271 436
Cash at beginning of year 1,254 983 547
- ---------------------------------------------------------------------------------------------------------------
Cash at end of year $451 $1,254 $983
===============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $305 $319 $409
Income taxes $75 $1,104 ($76)
===============================================================================================================
</TABLE>
See notes to consolidated financial statements
Page 34
<PAGE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. Summary of Significant Accounting Policies
Description of business
- -----------------------
Consumers Financial Corporation is an insurance holding company which,
through its subsidiaries, is a leading provider of credit life and credit
disability insurance in the Middle Atlantic region of the United States.
Basis of financial statements
- -----------------------------
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 1994.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of Consumers
Financial Corporation (the Company) and its wholly-owned subsidiaries, the most
significant of which are Consumers Life Insurance Company (Consumers Life),
Interstate Auto Auction, Inc. and Consumers Car Care Corporation. Consumers
Life Insurance Company of North Carolina, Investors Fidelity Life Assurance
Corp. and Consumers Reinsurance Company are subsidiaries of Consumers Life. All
material intercompany accounts and transactions have been eliminated.
Use of estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Investments
- -----------
Fixed maturities includes bonds, notes and certificates of deposit maturing
after one year. Management determines the appropriate classification of bonds
and notes at the time of purchase and reevaluates such designation as of each
balance sheet date. These securities are classified as held-to-maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. All other
bonds and notes are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of income taxes, reported as a separate component of shareholders' equity. The
amortized cost of securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. All certificates of deposits
maturing after one year are deemed to be held to maturity. Equity securities
(common and non-redeemable preferred stocks) held by the insurance subsidiaries
are stated at fair value, while such securities held by the non-insurance
subsidiaries are stated at the lower of aggregate cost or fair value.
Page 35
<PAGE>
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.
Interest on fixed maturities and short-term investments is credited to income
as it accrues on the principal amounts outstanding, adjusted for amortization of
premiums and discounts computed by the interest method. Dividends are recorded
as income on the ex-dividend dates. Loan origination and commitment fees are
amortized, using the interest method, over the life of the mortgage loan. The
accrual of interest on mortgage loans is generally discontinued when the full
collection of principal is in doubt, or when the payment of principal or
interest has become contractually 90 days past due.
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.
The Company considers cash on hand and demand deposits with banks and other
financial institutions as cash for purposes of the Statements of Cash flows.
Fair values of financial instruments
- ------------------------------------
The following methods and assumptions were used by the Company in estimating
its fair value disclosure for financial instruments (see Note 5):
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
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. The
fair values for equity securities are based on quoted market prices and are
recognized in the balance sheet.
Mortgage loans and real estate and policy loans: The fair values for
mortgage loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar credit
ratings. Similarly, real estate fair values are estimated using discounted cash
flow analyses. The carrying amounts for policy loans approximate their fair
values.
Long-term debt: The carrying amount for long-term debt approximates its fair
value.
Page 36
<PAGE>
Deferred policy acquisition costs
- ---------------------------------
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 and depreciation
- ---------------------------------------
Property and equipment are stated at cost. Depreciation is being provided on
the straight-line method over the estimated useful lives of the assets.
Other real estate
- -----------------
Real estate is carried at the lower of cost or fair value.
Intangibles
- -----------
Costs in excess of underlying net assets of acquired companies and acquired
intangible assets are being amortized over the estimated periods expected to
benefit (5 - 40 years) using the straight-line and other methods which provide
periodic charges to operations proportionate to the anticipated benefits to be
received.
Future policy benefits
- ----------------------
The liability for future policy benefits for individual life insurance has
been provided on a net level premium method based on estimated investment
yields, withdrawals, mortality and other assumptions which were appropriate at
the time the policies were issued. Such estimates were based upon industry data
and the Companies' past experience, as adjusted to provide for possible adverse
deviation from the estimates. Benefit reserves for universal life products
represent policy account balances before applicable surrender charges plus
certain deferred policy initiation fees that are recognized in income over the
term of the policies.
Unearned premiums
- -----------------
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, effective January 1, 1994, credit
disability using a 65% - 35% weighted average of the Rule of 78's and Pro Rata
methods. (see Note 3).
Page 37
<PAGE>
Recognition of premium revenue and related costs
- ------------------------------------------------
For individual life insurance contracts, excluding universal life-type
policies and investment products, premiums are recognized as revenue over the
premium-paying period. Future benefits and expenses are associated with earned
premiums, so as to result in recognition of profits principally over the
premium-paying period. This association is accomplished by means of the
provision for liabilities for future benefits and the deferral and amortization
of acquisition costs. Provisions are also made for the risk of adverse
deviation from the reserve assumptions over the lives of the contracts.
Revenues for universal life-type policies and investment products consist of
policy charges for the cost of insurance, policy administration, and surrenders
assessed during the period, and expenses include interest credited to policy
account balances and benefit claims incurred in excess of policy account
balances. For credit insurance, premiums are earned over the terms of the
policies, as discussed above. Policy and contract claims include provisions for
claims reported and claims incurred but not reported. The Company believes that
the liabilities for claims and related expenses are adequate. Anticipated
investment income is considered in determining whether future earned premiums on
existing credit insurance will be sufficient to cover the present value of
future benefits and maintenance expenses and to recover the unamortized portion
of deferred policy acquisition costs.
Income taxes
- ------------
The Company and its subsidiaries provide income taxes, for financial
reporting purposes, on the basis of the liability method as required by
Statement of Financial Accounting Standards No. 109.
2. Basis of Financial Statements
The more significant GAAP 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) Investments in securities of unaffiliated companies are reported as
described in Note 1, rather than in accordance with valuations
established by the National Association of Insurance Commissioners
(NAIC). Pursuant to NAIC valuations, bonds eligible for amortization are
reported at amortized value; other securities are carried at values
prescribed by or deemed acceptable to the NAIC, including common stocks,
other than stocks of affiliates, at market value.
(b) Costs of acquiring new business are deferred and amortized rather than
being charged to operations as incurred.
(c) The liability for future policy benefits and expenses on individual life
insurance is based on conservative estimates of expected mortality,
morbidity, interest, withdrawals, and future maintenance and settlement
expenses, rather than on statutory rates for mortality and interest. For
credit life insurance, the liability is based upon the unearned premium
reserve, computed as described in Note 1, rather than on statutory rates
for mortality and interest. The credit disability policy liability,
principally the unearned premium reserve, is calculated as described in
Note 1. Effective January 1, 1994, the statutory liability is computed
using predominantly the average of the
Page 38
<PAGE>
Rule of 78's and Pro Rata methods. Prior to 1994, the statutory liability
was computed using primarily the Pro Rata method.
(d) Deferred income taxes, if applicable, are provided as described in
Note 16.
(e) The statutory liabilities for the interest maintenance reserve and asset
valuation reserve, designed to lessen the impact on surplus of market
fluctuations of securities and mortgage loans, have not been provided in
the financial statements.
(f) Certain assets are reported as assets rather than being charged directly
to surplus and excluded from the balance sheets.
(g) Commission allowances pertaining to financing-type reinsurance agreements
are not included in results of operations.
(h) Loan origination fees are deferred and recognized over the life of the
applicable mortgage as an adjustment of yield rather than being reported
in income as received.
(i) Revenues for universal life-type policies and investment products consist
of policy charges primarily for the cost of insurance rather than
premiums due and/or collected on such policies. Expenses include interest
credited to policy account balances and benefit claims incurred in excess
of policy account balances rather than the increase in benefit reserves
and gross benefit claims incurred for these types of policies.
Dividends and other distributions to the Company from Consumers Life are
limited in that Consumers Life is required to maintain minimum capital and
surplus, determined in accordance with regulatory accounting practices. The
amount of minimum capital and surplus required is $2.5 million. All
distributions are further limited by Delaware state insurance laws to the
greater of previous year 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. Accordingly, based on amounts reported to
regulatory authorities, at December 31, 1995, approximately $11.4 million of
Consumers Life's net assets cannot generally be transferred to the parent
company and $728,000 is available for transfer during 1996 as long as the
minimum capital and surplus requirements mentioned above are maintained.
However, after reflecting the impact of both the disallowed reinsurance treaty
and the excess subsidiary investments discussed in Note 20, at December 31,
1995, approximately $11.7 million of Consumers Life's net assets cannot
generally be transferred to its parent company and only $474,000 is available
for transfer during 1996. Also, any loans or advances to the parent 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 subsidiaries. In addition, separate restrictions apply to the
surplus note owed to the Company by a subsidiary of Consumers Life. Payment of
interest and repayment of principal on the note are permitted by the applicable
state insurance department as long as the subsidiary's statutory capital and
surplus exceeds $3 million.
The reported statutory capital and surplus of the life insurance subsidiaries
was $7.1 million at December 31, 1995 and $10.2 million at December 31, 1994.
After reflecting the impact of both the disallowed reinsurance treaty and the
excess subsidiary investments discussed in Note 20, the statutory capital
and
Page 39
<PAGE>
surplus of the life insurance subsidiaries at December 31, 1995 would have been
$4.6 million. The insurance companies' combined statutory net loss was
$3,589,000 in 1995. In 1994 and 1993, the companies reported net income of
$477,000 and $402,000, respectively.
Insurance laws require that certain amounts be deposited with various state
insurance departments for the benefit and protection of policyholders. The
approximate carrying amount of such deposits at December 31, 1995 and 1994 is
$5.3 million and $5.4 million, respectively.
After receiving consent from the Delaware Insurance Department, the Company
adopted, for statutory reporting purposes, an accelerated method of reserving
disability unearned premiums. The change allows the Company to recognize
revenue in a manner which more appropriately matches its incidence of claims.
The change resulted in a $488,000 addition to capital and surplus at December
31, 1994. In addition to the use of this unearned premium method, the insurance
subsidiaries have also requested and received approval from their respective
domiciliary states to carry as an admitted asset a receivable for credit
insurance premiums, net of commissions, which have been collected by the
companies' agents but have not yet been remitted to the companies. At December
31, 1995 the premiums in process of collection receivable totaled $2
million.
3. Accounting Changes
As of January 1, 1994, the Company changed its method of earning credit
disability premiums for a substantial portion of its credit disability business.
The method used prior to 1994 was computed based on the average of the Rule of
78's and the Pro Rata methods, while the new method utilizes a weighted average
of those two methods, based on 65% of the Rule of 78's method and 35% of the Pro
Rata method. The new weighted average method accelerates the premium earning
pattern and provides a better matching of earned premiums with the incidence of
incurred disability claims based on the Company's actual experience. The
Company's method of amortizing deferred policy acquisition costs for credit
disability business was also revised in proportion to the change in earned
premiums.
The cumulative effect of this change on years prior to 1994 has been included
in results of operations for 1994. This change reduced the 1994 net loss by
$299,000 ($.11 per share).
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The new accounting
standard was adopted prospectively, as permitted by Statement 109, and prior
periods' financial statements were therefore not restated.
As of January 1, 1993, the Company also changed its method of accounting for
certain costs associated with acquiring new credit insurance business. These
sales-related costs had been charged to operations when incurred in years prior
to 1993. In order to provide a more appropriate matching of these costs with
the related revenues, they are now being deferred and amortized so as to charge
each period's operations in direct proportion to premiums earned.
The cumulative effect of these changes on years prior to 1993 was a $710,000
charge to operations, which includes a $969,000 charge ($.35 per share) related
to the adoption of FAS 109 and $259,000 of income
Page 40
<PAGE>
($.09 per share) relating to the change in deferral policy.
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under the new standard, the carrying amount for a
significant portion of the Company's investments in bonds at December 31, 1993
was changed to fair value instead of amortized cost since these bonds are
considered to be available-for-sale securities. Statement 115 requires any
unrealized appreciation or depreciation on bonds classified as available-for-
sale and therefore carried at fair value to be included as a separate component
of shareholders' equity. In conformity with the requirements of the Statement,
prior periods' financial statements were not restated to reflect adoption of the
new accounting principle. Adoption of Statement 115 increased total
shareholders' equity at December 31, 1993 by $567,000, after deducting $292,000
in deferred income taxes. On December 31, 1994, the Company reclassified the
portion of its portfolio that was carried at amortized cost to the
available-for-sale category (see Note 5).
Page 41
<PAGE>
4. Sale of Individual Life Insurance Business
As of December 31, 1994, the Company sold a substantial portion of its direct
and assumed universal life business to an unaffiliated company. The business
written on a direct basis was coinsured to the acquiring company. The parties
are currently awaiting regulatory approval of an assumption reinsurance
agreement with respect to this business. The assumed business was transferred
to the purchaser with approval of the direct writing company and with no
recourse to the Company in the event the purchaser is unable to fulfill its
obligations under the reinsurance agreement. These transactions, which took
place on December 30, 1994, resulted in the transfer of $32.7 million in policy
liabilities and $24.1 million in cash, mortgage loans and policy loans to the
purchaser. In addition, $7.7 million in deferred policy acquisition costs were
written off. The sale produced a pre-tax gain of $895,000, which was partially
offset by a $492,000 loss on the sale of investments necessary to close on the
transaction.
5. Investments and Investment Income
Investments, which are valued for financial statement purposes as described in
Note 1, consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government
agencies and authorities $17,535 $18,319 $18,319
Public utilities 3,822 3,792 3,792
All other 12,461 12,728 12,728
- -------------------------------------------------------------------------------------------
33,818 34,839 34,839
Certificates of deposit 209 209 209
- -------------------------------------------------------------------------------------------
Total fixed maturities 34,027 35,048 35,048
Mortgage loans on real estate 7,041 7,492 7,041
Investment real estate 1,020 1,180 1,020
Policy loans 482 482 482
Other invested assets 2,481 2,503 2,512
Short-term investments 2,892 2,892 2,892
- -------------------------------------------------------------------------------------------
Total investments $47,943 $49,597 $48,995
===========================================================================================
</TABLE>
A portion of the Company's invested funds is restricted as to use. Deposits
are required with various state insurance departments for the benefit and
protection of policyholders (see Note 2).
At December 31, 1995 and 1994, no mortgage loans or other loans were
considered to be non-performing loans. The interest excluded from investment
income on loans on non-accrual status in 1993 amounted to $180,000.
At December 31, 1995, substantially all of the Company's investments in
mortgage loans were secured
Page 42
<PAGE>
by commercial real estate. Approximately 75% of the loans involved properties
located in Central Pennsylvania. Such investments consist principally of first
mortgage liens on completed income-producing properties (office buildings,
shopping centers, multi-family residential units). Two mortgage loans exceeded
10% of shareholders' equity at December 31, 1995. Three mortgage loans exceeded
10% of shareholders' equity at December 31, 1994. The Company has established
mortgage valuation reserves of $100,000. Five mortgage loans with total
balances at December 31, 1995 of $4.7 million represent 65% of the total
portfolio balance.
Accumulated depreciation on investment real estate amounted to $51,000 and
$20,000 at December 31, 1995 and 1994, respectively.
Net investment income is applicable to the following investments:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Years ended December 31,
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Interest:
Fixed maturities $2,175 $2,773 $3,285
Mortgage loans 692 2,138 2,467
Policy loans 58 250 221
Other invested assets 38 117 67
Short-term investments 186 168 155
Real estate income 332 177 150
- -------------------------------------------------------------------
3,481 5,623 6,345
Less investment expenses (702) (649) (698)
- -------------------------------------------------------------------
Totals $2,779 $4,974 $5,647
===================================================================
</TABLE>
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1995 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $17,492 $794 $12 $18,274
Corporate securities 15,354 303 68 15,589
Mortgage-backed securities 972 6 2 976
- ---------------------------------------------------------------------------------------------
Totals $33,818 $1,103 $82 $34,839
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1994 Gross Gross Estimated
Available for sale Amortized unrealized unrealized fair
(In thousands) cost gains losses value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of
U.S. government corporations and $10,623 $93 $507 $10,209
agencies
Corporate securities 16,954 53 1,488 15,519
Mortgage-backed securities 2,328 8 133 2,203
- ---------------------------------------------------------------------------------------------
Totals $29,905 $154 $2,128 $27,931
=============================================================================================
</TABLE>
Page 43
<PAGE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Amortized Estimated
(in thousands) cost fair value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in 1996 $ 1,509 $ 1,520
Due in 1997 - 2001 20,725 21,307
Due in 2002 - 2006 10,467 10,896
Due after 2006 145 140
- -------------------------------------------------------------------------------
32,846 33,863
Mortgage-backed securities 972 976
- -------------------------------------------------------------------------------
Totals $33,818 $34,839
===============================================================================
</TABLE>
Proceeds from sales of investments in debt securities and assets held for
sale during 1995 were $4.1 million. Gross gains of $3,000 and gross losses of
$29,000 were realized on those sales. Proceeds from such sales in 1994 were $9.6
million. Gross gains of $41,000 and gross losses of $38,000 were realized on
those sales. Proceeds from sales in 1993 were $21.4 million. Gross gains of
$858,000 and gross losses of $5,000 were realized on those sales.
A summary of the consolidated net realized gains (losses) and the change in
the difference between cost and quoted or estimated fair value for fixed
maturity investments is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Change in the
Net difference between
realized amortized cost and
investment quoted or estimated
(in thousands) gains (losses) fair value Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Fixed maturities ($26) $2,995 $2,969
Tax effect (347) (347)
- --------------------------------------------------------------------------------
Totals ($26) $2,648 $2,622
================================================================================
1994
Fixed maturities $3 ($2,833) ($2,830)
Tax effect 292 292
- --------------------------------------------------------------------------------
Totals $3 ($2,541) ($2,538)
================================================================================
1993
Fixed maturities $853 ($482) $371
Equity securities 1 1
- --------------------------------------------------------------------------------
853 (481) 372
Tax effect (128) 164 36
- --------------------------------------------------------------------------------
Totals $725 ($317) $408
================================================================================
</TABLE>
Page 44
<PAGE>
Realized gains and losses in the years ended December 31, 1995, 1994
and 1993 also arose from the sale of other investments.
6. Receivables
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31
(in thousands) 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Amounts due from agents $ 3,399 $ 3,478
Reinsurance receivable 20,022 22,623
Federal income tax refund 68
Other 1,492 1,853
- -------------------------------------------------------------------------------
24,913 28,022
Less allowance for (1,093) (1,091)
uncollectible accounts
- -------------------------------------------------------------------------------
Balance $ 23,820 $ 26,931
===============================================================================
</TABLE>
7. Deferred Policy Acquisition Costs
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Individual
(in thousands) Credit Life Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1993 $ 18,413 $ 16,211 $ 34,624
Cumulative effect of
change in accounting
principle (Note 3) 392 392
Costs deferred 9,499 415 9,914
Amortization (11,174)) (2,727)) (13,901)
- -------------------------------------------------------------------------------
Balance, December 31, 1993 17,130 13,899 31,029
Cumulative effect of
change in accounting
principle (Note 3) (359) (359)
Costs deferred 10,495 152 10,647
Amortization (10,388) (1,533) (11,921)
Decrease attributable to
sale of
universal life (7,741) (7,741)
insurance
- -------------------------------------------------------------------------------
Balance, December 31, 1994 16,878 4,777 21,655
Costs deferred 10,917 88 11,005
Amortization (10,154) (580) (10,734)
- -------------------------------------------------------------------------------
Balance, December 31, 1995 $ 17,641 $ 4,285 $ 21,926
===============================================================================
</TABLE>
<PAGE>
8. Property and Equipment
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Data processing equipment and $ 2,176 $ 2,144
software
Furniture and equipment 1,660 1,710
Buildings and land 3,563 3,362
Improvements to property 1,634 1,689
- --------------------------------------------------------------------------------
9,033 8,905
Less accumulated depreciation (4,915) (4,727)
- --------------------------------------------------------------------------------
Balance $ 4,118 $ 4,178
================================================================================
</TABLE>
9. Policy Liabilities
The composition of future policy benefits and unearned premiums at December
31, 1995 and the assumptions pertinent thereto are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Life Future Investment
insurance policy Unearned yields: years
(in thousands) in force benefits premiums of issue
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Individual life $ 697,176 $26,171 4 1/2% - 11 1/2%
1961-1992
Credit life 1,434,897 $22,393 (a)
1987-1995
Credit disability 10,411 35,550 (a)
1987-1995
- --------------------------------------------------------------------
Balance $2,132,073 $36,582 $57,943
====================================================================
</TABLE>
(a) There are no interest rate assumptions in the credit reserve factors.
Mortality and withdrawal assumptions generally are based on industry data
and the life insurance companies' prior experience. The mortality tables
predominantly used in calculating benefit reserves are the 1955 - 1960 Basic
Select and Ultimate for males (special graduation) and the 1965 - 1970 Basic
Select and Ultimate for males (special graduation).
The withdrawal assumptions for individual life insurance are predominantly
Linton B and Linton C.
Future policy benefits reported to regulatory authorities were less than
the above total by approximately $3.3 million at December 31, 1995.
Future policy benefits and unearned premiums do not include any deduction
for reinsurance ceded to other companies. At December 31, 1995, future policy
benefits relating to such reinsurance totaled $18.5
<PAGE>
million and have been classified with Receivables. Unearned premiums with
respect to reinsured business totaled $18.6 million at December 31, 1995. These
unearned premiums are separately stated on the Consolidated Balance Sheets as
Prepaid Reinsurance Premiums. Insurance in force net of reinsurance ceded is
$1.2 billion.
Transactions affecting the Company's credit disability claim liabilities
and reserves, net of reinsurance, are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Balance as of January 1 $11,262,269 $13,046,577
Less reinsurance recoverable 3,295,994 3,585,158
----------- -----------
Net balance as of January 1 7,966,275 9,461,419
----------- -----------
Incurred claims related to:
Current year 6,668,901 6,568,567
Prior year (849,270) (1,526,577)
----------- -----------
Total incurred claims 5,819,631 5,041,990
----------- -----------
Paid claims related to:
Current year 2,032,806 3,079,131
Prior years 3,769,958 3,458,003
----------- -----------
Total paid claims 5,802,764 6,537,134
----------- -----------
Net balance as of December 31 7,983,142 7,966,275
Plus reinsurance recoverable 3,266,557 3,295,994
- -------------------------------------------------------------
Balance as of December 31 $11,249,699 $11,262,269
=============================================================
</TABLE>
10. Reinsurance
The life insurance companies routinely cede and, in certain instances,
assume reinsurance. Ceded insurance is treated as a risk and liability of the
assuming companies. Net premium income, benefits, and expenses are presented net
of non-financing reinsurance ceded and include non-financing reinsurance
assumed.
The life insurance companies have entered into various financing-type
reinsurance agreements with unaffiliated insurance companies. Such agreements
are primarily designed to minimize the reduction of statutory capital and
surplus arising at the time premiums are written. In connection with these
agreements, the insurance subsidiaries have received and reported, in the
aggregate, approximately $19.2 million at December 31, 1995 as an advance of
future statutory profits on the blocks of business reinsured under these
agreements. Excluding the effects of the disallowed reinsurance treaty discussed
in Note 20, the amount of such advances totaled $18.3 million. The life
insurance subsidiaries are obligated to repay the advances from future statutory
profits. The effects of these agreements have been removed from the financial
statements
<PAGE>
except for the cost of this financing, which amounted to $603,000, $616,000 and
$595,000 in 1995, 1994 and 1993, respectively.
Individual life insurance coverage in excess of $50,000 written by any
of the life insurance companies is reinsured. The retention limit for some
substandard risks is less than $50,000.
Written premiums ceded to other companies are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------
(in thousands) 1995 1994 1993
- ----------------------------------------------------
<S> <C> <C> <C>
Credit $12,048 $16,299 $13,407
- ----------------------------------------------------
Individual life 2,845 908 927
- ----------------------------------------------------
Totals $14,893 $17,207 $14,334
====================================================
</TABLE>
Written premiums and policy charges on assumed business amounted to
$1.8 million in 1995, $3 million in 1994 and $3.6 million in 1993.
Incurred benefits and losses reinsured in 1995 were $11.6 million
compared to $6.6 million in 1994. These amounts have been deducted in arriving
at death and other benefits and the increase in future policy benefits in the
Consolidated Statements of Operations.
At December 31, 1995 and 1994, reinsurance recoverable for paid and
unpaid benefits was $20 million and $22.6 million, respectively. Reinsurance
recoverable is classified with Receivables.
11. Notes Payable
In 1990, the Company obtained financing in the form of a $10 million
term loan. In 1993, the terms of this loan were restructured, resulting in the
elimination or modification of several financial covenants with respect to the
life insurance subsidiaries, a reduction in the Company's required debt service
payments and the transfer of a portion of the remaining balance to Interstate
Auto Auction (Interstate) pursuant to a separate loan agreement. In 1995, the
Company further restructured the new loans. These restructuring changes included
an extension of the maturity date to January 1997, the removal of several
additional financial covenants relating to the life insurance subsidiaries and
the transfer of an additional $685,000 of the remaining loan balance directly to
Interstate. A balloon payment was due at the end of the term. The interest rate
remained at one percentage point above the bank's prime rate. The Company
assigned all of the outstanding common stock of Consumers Life, Interstate and
Consumers Car Care Corporation as security for its loan, while Interstate's
property and equipment were separately pledged for Interstate's loan. The
security for each loan was cross-collateralized to the other loan.
In accordance with the provisions of the restructured loan agreements,
certain covenants were required to be maintained, the most significant of which
include: (1) maintaining a prescribed ratio of available cash flow to total debt
service; (2) maintaining a ratio of total debt to shareholders' equity which is
less than a prescribed maximum; and (3) imposing restrictions and/or limitations
on the Company's ability to incur debt and to dispose of or pledge assets. The
Company was in compliance with or received waivers for all debt covenants at
December 31, 1995.
<PAGE>
Both of the loans discussed above were repaid in full in 1996 in
connection with the sale of the Company's auto auction business (see Note 21).
Interest costs incurred on long-term debt during each of the last
three years are as follows: 1995, $286,000; 1994, $305,000; 1993, $368,000.
Future maturities of long-term debt are as follows: 1996 - $660,000; 1997 -
$1.88 million.
12. Pension and Other Retirement Plans
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. See Note 21 for information regarding the Company's
decision in 1996 to freeze the benefits payable 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. No contributions were made in 1995, 1994 and 1993.
Contributions under the profit sharing plans are based upon the annual
compensation of each employee.
<PAGE>
The funded status of the plan is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31,
(in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $2,783 $2,510
Accumulated benefit obligation $2,814 $2,543
================================================================================
Actuarial present value of projected
benefit obligation $2,947 $2,679
Plan assets at fair value 2,558 2,328
- --------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (389) (351)
Unrecognized net losses 401 347
Unrecognized net liability at transition 86 98
Unamortized prior year loss (354) (309)
- --------------------------------------------------------------------------------
Prepaid (accrued) pension cost ($256) ($215)
================================================================================
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Net periodic pension cost included in the
following components:
Service cost during the period $ 172 $ 178 $ 175
Interest cost on projected benefit obligation 196 173 156
Actual return on plan assets (161) (153) (168)
Net amortization and deferral 2 9 49
- --------------------------------------------------------------------------------
Net periodic pension cost $ 209 $ 207 $ 212
================================================================================
</TABLE>
Rates used in determining pension expense and related obligations were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for expense computation, beginning of year 7.50% 7.50% 7.50%
Assumed annual rate of return on plan assets 7.50% 7.50% 7.50%
Discount rate for projected benefit obligation, end of 7.50% 7.50% 7.50%
year
Assumed annual rate of increase in compensation 3.00% 3.00% 3.00%
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
13. Commitments and Contingencies
Rental expense in 1995, 1994 and 1993 was approximately $355,000,
$450,000 and $616,000, 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 continues to lease the entire
building, which is classified as an operating lease, but at monthly rent of
$17,000 through July 1999, although the Company has subleased a significant
portion of the office space which it does not otherwise occupy. The Company has
no other significant leases.
Two subsidiaries have obtained standby letters of credit from banks
totaling $575,000 in order to satisfy regulatory requirements relating to
reinsurance transactions. In the event funds are drawn under the letters of
credit, the Company has guaranteed the repayment of such amounts.
Reinsurance risks would give rise to liability to the insurance
companies only in the event that the reinsuring company might be unable to meet
its obligations under the reinsurance agreements in force.
The Company is currently a defendant in a lawsuit in an Alabama state
court originally filed as a class action lawsuit in 1994. The plaintiff
subsequently voluntarily dismissed the count to his complaint seeking class
certification and no longer seeks to assert claims on behalf of the class. The
plaintiff is seeking monetary and punitive damages alleging breach of contract
and fraud against the Company in an amount less than $50,000. The Company is
defending the lawsuit and has denied any and all liability and wrongdoing.
During 1996, the Company settled this litigation for a nominal amount.
Certain claims suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company or its subsidiaries.
In the opinion of management, based on opinions of legal counsel, adequate
reserves, if deemed necessary, have been established for these matters and their
outcome will not result in a significant effect on the financial condition or
future operating results of the Company or its subsidiaries. The Company has
taken certain income tax positions in previous years that it believes are
appropriate. If such positions were to be successfully challenged by the
Internal Revenue Service, the Company could incur additional income taxes as
well as interest and penalties. Management believes that the ultimate outcome of
any such challenges will not have a material effect on the Company's financial
statements.
<PAGE>
14. Redeemable Preferred Stock
The redeemable Convertible Preferred Stock has a liquidation preference
of $10.00 per share and is convertible at any time, unless previously redeemed,
into shares of common stock at the rate of 1.482 shares of common stock for each
share of Convertible Preferred Stock (equivalent to a conversion price of $6.75
per share). The Convertible Preferred Stock is redeemable at the option of the
Company initially at a redemption price of $10.85 per share and thereafter at
prices declining to $10.00 per share on and after July 2, 1996.
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.
Except in certain limited instances, the holders of the Convertible
Preferred Stock have no voting rights.
A sinking fund will be established requiring mandatory and annual
payments sufficient to redeem 10% of the number of shares of Convertible
Preferred Stock initially issued, commencing July 1, 1998, calculated to redeem
all of the Convertible Preferred Stock by July 1, 2007.
If, at any time, the Company is in arrears as to preferred dividends or
sinking fund appropriations for the Convertible Preferred Stock, dividends to
holders of the Company's common stock as well as purchases, redemptions or
acquisitions by the Company of shares of the Company's common stock are
restricted. If the Company is in default in an aggregate amount equal to four
quarterly preferred dividends, the holders of the Convertible Preferred Stock
shall be entitled, only while such arrearage exists, to elect two additional
members to the then existing Board of Directors.
The difference between the fair value of the Convertible Preferred Stock
at the date of issue and the mandatory redemption value is being recorded
through periodic accretions, using the interest method, with the related charge
to retained earnings ($36,000 in 1995, 1994 and 1993).
At December 31, 1995 and 1994, 713,275 shares of common stock were
reserved for the conversion of the Convertible Preferred Stock.
15. Stock Options
In May 1982, the shareholders of the Company approved a Stock Option
Plan which permitted the granting of incentive stock options (as defined in the
Internal Revenue Code). The Plan provided for the granting of Stock Options to
purchase shares of the Company's common stock at not less than its fair market
value on the date of grant. Options granted under the Plan expire not later than
six years from date of grant.
The Plan authorized 300,000 shares for purchase upon the exercise of
such options, which were made available from either authorized but unissued
shares or shares issued and reacquired by the Company.
In May 1989, the shareholders of the Company approved the Stock
Incentive Plan which permits the granting of any or all of the following types
of awards: (1) stock options, including incentive stock options and non-
qualified stock options and (2) stock appreciation rights (SAR) either in tandem
with stock options or free standing. This Plan is intended as an enhancement of
the 1982 Stock Option Plan.
All officers and salaried key employees of the Company and its
subsidiaries and affiliates are eligible to be participants. Persons who serve
only as directors are not eligible. The Plan provides for the issuance of up to
250,000 shares of Common Stock (the Stock). The shares of Stock deliverable
under the Plan will consist in whole or in part of authorized and unissued
shares or Treasury shares.
<PAGE>
The purchase price per share of Stock under any stock option will be
determined by the Personnel Committee, but will not be less than 100% of the
fair market value of the Stock on the date of the grant of such option. The term
of each option will be fixed by the Personnel Committee. Options will be
exercisable at such time or times as determined by the Committee, but no option
will be exercisable after the expiration of six years from the date the option
is granted.
The grant price with respect to a freestanding SAR or an SAR granted in
tandem with an option will be the fair market value of the Stock on the date of
the grant. Upon exercise of an SAR, the participant will be entitled to receive
up to, but no more than, an amount in cash or Stock equal to the excess of the
fair market value of the shares with respect to which the SAR is exercised
(calculated as of the exercise date) over the grant price of the SAR. Payment by
the Company upon a participant's exercise could be in cash or Stock, as the
Committee may determine. With respect to SARs granted together with options, any
related option will no longer be exercisable to the extent the SAR had been
exercised and the exercise of any option will cancel the related SAR to the
extent of such exercise.
The changes in option shares outstanding during
the past three years are as follows:
<TABLE>
<CAPTION>
- ---------------------------- ----------------------
Option Price
shares per share
- ----------------------------------------------------
<S> <C> <C>
Balance, January 1, 1993 217,588 5.00 - 5.25
Options terminated (139,000) 5.25
Options granted 179,000 2.25
- ----------------------------------------------------
Balance, December 31, 1993 257,588 2.25 - 5.25
Options terminated (26,794) 2.25 - 5.00
- ----------------------------------------------------
Balance, December 31, 1994 230,794 2.25 - 5.25
Options terminated (67,794) 5.00 - 5.25
Options granted 16,000 2.25
- ----------------------------------------------------
Balance, December 31, 1995 179,000 2.25
====================================================
</TABLE>
At December 31, 1995, 133,117 shares were reserved for options which
are available to be granted and 179,000 options were exercisable.
16. Income Taxes
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:
(a) The Policyholders' Surplus exceeds a prescribed maximum, or
<PAGE>
(b) Distributions, other than stock, are made to shareholders in
excess of Shareholders' Surplus as defined by prior law, or
(C) A company ceases to qualify for taxation as a life insurance
company.
At December 31, 1995 Policyholders' Surplus for the life insurance
companies combined aggregated approximately $1.7 million. The companies have no
present plans for distributing the amounts in Policyholders' Surplus.
There are currently no significant amounts of retained earnings in
excess of statutory surplus upon which neither current nor deferred income taxes
have been provided.
As discussed in Note 3, as of January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, which requires the use of
the liability method rather than the deferred method in accounting for income
taxes. The cumulative effect of adopting Statement 109 as of January 1, 1993,
which totaled $969,000, has been included in the Company's results of operations
for 1993.
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, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(in thousands) 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Fixed maturities $ 347
Deferred policy acquisition costs 7,426 $ 7,361
Other 437 349
- ----------------------------------------------------------------------
8,210 7,710
- ----------------------------------------------------------------------
Deferred tax assets:
Fixed maturities 684
Future policy benefits and financial reinsurance 5,827 5,677
Net operating loss carryforwards 2,143 1,502
Other 284 383
- ----------------------------------------------------------------------
8,254 8,246
Valuation allowance for deferred tax assets (1,224) (1,908)
- ----------------------------------------------------------------------
7,030 6,338
- ----------------------------------------------------------------------
Net deferred tax liability $ 1,180 $ 1,372
======================================================================
</TABLE>
The valuation allowance at December 31, 1994, includes $684,000 to
reflect the Company's expectation that it will receive no future tax benefit
from the recognition of the unrealized losses on the Company's bond portfolio.
At December 31, 1995, this portion of the valuation allowance was not required
since the fair value of the Company's bond portfolio exceeded its amortized
cost.
<PAGE>
Significant components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 12 $ 732 ($114)
State 124 188 202
- --------------------------------------------------------
Total current 136 920 88
Deferred (538) (751) (1,213)
- --------------------------------------------------------
Income tax expense (benefit) ($402) $ 169 ($1,125)
========================================================
</TABLE>
Deferred income tax charges in the amount of $154,000 in 1994, and
$133,000 in 1993, which relate to the cumulative effect of the accounting
changes discussed in Note 3, have been presented as offsets to the cumulative
effect of those accounting changes.
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes ($2,003) ($1,043) ($1,940)
- -----------------------------------------------------------------------------
Income taxes (benefit) at 34% statutory
rate on pre-tax income (loss) (681) (355) (660)
Special life insurance company deductions (182)
Adjustment of prior year's income tax expense 54 288 (456)
Dividends received deduction (12) (13)
State income taxes 74 125 133
Items not includable for tax purposes 16 79 50
Other, net 147 32 3
- -----------------------------------------------------------------------------
Actual income tax expense (benefit) ($402) $ 169 ($1,125)
=============================================================================
</TABLE>
At December 31, 1995, the life insurance companies have available
approximately $6.3 million 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 $2.7 million of net operating losses will
expire in 2009 and 2010.
<PAGE>
17. Per Share Information
Per share information has been computed based upon the weighted
average number of common and dilutive common equivalent shares and dilutive
convertible securities outstanding.
All options are common stock equivalents and have been included in
computing the weighted average number of common and dilutive common equivalent
shares outstanding for the applicable periods in which these options are not
anti-dilutive. The 8 1/2% redeemable convertible preferred stock, which is not
considered a common stock equivalent, was not dilutive in 1995, 1994 or 1993.
18. Segment Information
The Company operates in three industry segments: credit insurance and
related products and services (Automotive Resource Division), individual life
insurance and auto auction operations. Certain corporate activities, which are
insignificant in relation to the three segments, are presented separately.
Revenues (net of non-financing reinsurance) and pre-tax income (loss) by segment
are presented below for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (net of reinsurance):
Automotive Resource Division $ 23,509 $ 23,387 $ 25,205
Individual Life Insurance Division 2,935 7,611 9,468
Auto Auction Division 3,221 3,304 2,328
Other 21 10 18
- -----------------------------------------------------------------------------------
29,686 34,312 37,019
Realized investment gains (losses) not allocated (119) (476) 671
- -----------------------------------------------------------------------------------
$ 29,567 $ 33,836 $ 37,690
===================================================================================
Pre-tax income (loss):
Automotive Resource Division ($2,129) ($1,013) ($1,452)
Individual Life Insurance Division (247) (93) (1,074)
Auto Auction Division 771 469 181
Other (279) (333) (266)
- -----------------------------------------------------------------------------------
(1,884) (970) (2,611)
Realized investment gains (losses) (119) (476) 671
- -----------------------------------------------------------------------------------
(2,003) (1,446) (1,940)
Gain on sale of life insurance business 403
- -----------------------------------------------------------------------------------
($2,003) ($1,043) ($1,940)
===================================================================================
</TABLE>
<PAGE>
Operating expenses include amortization of deferred policy acquisition
costs and other amortization and depreciation for the years ended December 31,
1995, 1994 and 1993 as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands) 1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Automotive Resource Division $10,379 $10,854 $11,820
Individual Life Insurance Division 589 1,567 2,974
Auto Auction Division 231 208 190
Other 47 47 106
- ---------------------------------------------------------------
$11,246 $12,676 $15,090
===============================================================
</TABLE>
The Company discontinued writing new business in its Individual Life
Insurance Division in 1992. As described in Note 3, during 1994, the Company
sold portions of its in-force individual life business, resulting in the
$403,000 gain shown above. In 1997, the Company signed a Letter of Intent to
dispose of the remaining life insurance business in its individual life
insurance division (see Note 21).
19. Pending Accounting Pronouncement
In October 1995, the FASB issued Financial Accounting Standard Number
123 (FAS 123), " Accounting for Stock-Based Compensation," which prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options and restricted stock plans. Under FAS 123,
companies may adopt a fair method of expense recognition for all stock-based
compensation or continue to account for all stock-based compensation under the
measurement standards of Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees" (APB 25). The implementation of FAS
123 in 1996 is not expected to affect the Company's consolidated financial
position or results of operations because the Company presently expects to
continue to apply the principles of APB 25.
<PAGE>
20. Regulatory Matters
In connection with the proposed Merger with LaSalle discussed in Note 21
and as required by state insurance laws, LaSalle has filed documents with the
insurance regulators in each of the states in which the Company's four insurance
subsidiaries are domiciled in order to obtain their approval of the Merger.
These Form A filings are currently under review by each of the respective
insurance departments.
In June 1996, the North Carolina Department of Insurance issued its
December 31, 1993 Report on Examination on one of the Company's subsidiaries. As
a result of its examination, the Department concluded that two of the
subsidiary's surplus relief reinsurance agreements did not comply with the
state's reinsurance statutes and that the financial impact of these agreements
should be reversed. Only one of the agreements was still in effect in June 1996,
while the other agreement had been terminated prior to the end of 1994. As of
June 30, 1996, the subsidiary terminated the remaining agreement and replaced it
with another agreement. If the financial impact of the remaining treaty had been
reversed as of December 31, 1995, the statutory capital and surplus of both the
subsidiary and its parent, Consumers Life (which carries its investment in the
subsidiary based on the capital and surplus of the subsidiary), would have been
reduced by approximately $930,000. The North Carolina Insurance Department is in
the process of reviewing the subsidiary's current reinsurance treaty for
compliance with its laws, although Management believes this treaty complies with
the applicable North Carolina statutes.
In September 1996, the Delaware Department of Insurance notified
Consumers Life that its level of investments in subsidiaries exceeded the amount
permitted under Delaware Insurance laws and that the company's capital and
surplus should be reduced by the amount of such excess. The Company later
determined that Consumers Life's investments in subsidiaries had exceeded the
permitted level as of December 31, 1995 by approximately $1.6 million. If the
adjustment for the North Carolina subsidiary's reinsurance treaty and the
adjustment for the excess investment in subsidiaries had been reflected in the
December 31, 1995 statutory financial statements of Consumers Life, its capital
and surplus would have been reduced from $7.3 million to $4.7 million. As
disclosed in Note 21, the Company has entered into a letter of intent to sell
the North Carolina insurance subsidiary to a third party. The sale of this
subsidiary, which is expected to occur promptly after receipt of regulatory
approval, will eliminate the excess investment in subsidiaries matter discussed
above.
At the Company's request, the Delaware Department of Insurance is
currently reviewing two of Consumers Life's surplus relief reinsurance treaties
for compliance with a new state regulation regarding reinsurance agreements. If
such treaties are determined to not be in compliance with the Delaware
regulation, the Company and the reinsurers believe that appropriate
modifications to the agreements can be promptly made so that they will comply
with the regulation. Such modifications, if necessary, are not expected to
result in any significant additional costs to the Company or have a material
effect on the Company's financial statements.
<PAGE>
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, 1995, each of the Company's insurance subsidiaries
have more than sufficient capital to meet the NAIC's RBC requirements. However,
if the effects of the surplus relief reinsurance treaties are excluded from the
statutory financial statements, certain of the insurance subsidiaries would not
meet minimum required RBC levels.
As discussed above, the Company has received correspondence from and
conducted discussions with various state insurance departments concerning the
reinsurance agreements, capital levels and unprofitable operations of certain of
the Company's insurance subsidiaries. These insurance departments have indicated
their expectation that the insurance subsidiaries would be sold or merged or
otherwise raise additional capital. Failure to complete the Merger with LaSalle
or otherwise raise additional capital and satisfactorily resolve the regulatory
matters discussed above could subject the Company's insurance subsidiaries to
possible sanctions which may include, among other things, restrictions on
marketing and other operations, mandatory asset dispositions and other forms of
regulatory intervention. The financial statement impact, if any, of such
regulatory actions cannot presently be determined.
21. Subsequent Events
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. The Company
subsequently solicited bids for both its credit and universal life insurance
operations and its auto auction business.
On October 30, 1996, the Company entered into an Agreement and Plan of
Merger with LaSalle Group, Inc. ("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 and the approval of the Company's common
shareholders. 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 8 1/2% Convertible
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.
<PAGE>
On November 6, 1996, the Company sold the business and the related
operating assets of Interstate to ADESA Pennsylvania, Inc., an unrelated third
party, for cash of $4.85 million. Because the real estate and equipment which
were sold to ADESA were pledged as collateral for the Company's two bank loans,
at closing, approximately $1.7 million of the proceeds was used to repay the
loans in full, resulting in the release of the liens on these properties as well
as the release of all of the common stock of three of the Company's
subsidiaries, which had also been held as collateral by the bank. The net
proceeds received by Interstate from the sale, after deducting certain sales
expenses, totaled $3.1 million. The after-tax gain realized from the sale was
approximately $1.9 million. In connection with the sale, the Company provided
the buyer with limited indemnifications with respect to certain potential
environmental liabilities asserted within two years from the above-referenced
closing date. The Company does not believe that these limited indemnifications
will have a materially adverse effect on the Company's financial position or
results of operations.
On November 21, 1996, the Company signed a letter of intent to sell its
North Carolina domiciled insurance subsidiary to Safeguard Health Enterprises,
Inc., a specialized health care marketing company based in California, for cash
equal to the subsidiary's regulatory capital and surplus on the closing date
plus $416,000 for the subsidiary's state licenses. The Company is no longer
marketing any insurance products through this insurance subsidiary. The Company
plans to reinsure the existing insurance in-force of the subsidiary to a third-
party insurer which will then retrocede the business back to the subsidiary's
current insurance company parent. The transaction is conditioned upon the
completion by Safeguard of its due diligence review, the signing of a definitive
purchase agreement and the approval by insurance regulators in two states.
Approval by the North Carolina Insurance Department is, in part, conditioned
upon the redomestication of the subsidiary to another state which is
satisfactory to the acquirer.
On January 16, 1997, the Company signed a letter of intent with World
Insurance Company ("World"), pursuant to which World will recapture the
individual life insurance business previously assumed by the Company from World
through a joint venture agreement. World will pay a recapture consideration to
the Company equal to $1.2 million in exchange for the transfer to World of
assets supporting the net statutory basis policy reserves for this business. The
transaction is subject to the completion of due diligence by World and the
execution of a recapture agreement. Although the sale will result in a $1.1
million increase in the regulatory surplus of the Company's principal insurance
subsidiary, it will result in an after-tax operating loss to the Company of
approximately $900,000, which will be reported in the financial statements in
the fourth quarter of 1996.
Effective July 31, 1996, the Company and its joint venture partner
canceled an agreement whereby the companies shared in the profits or losses from
the credit insurance business written by the Company in Pennsylvania, the
Company's most profitable credit insurance state. As a result, on credit
insurance premiums produced in Pennsylvania after July 31, the Company will now
retain the profits or losses which were previously shared with the joint venture
partner. As consideration for terminating the venture, the Company has agreed to
pay its former partner $500,000 in cash at the time the Merger with LaSalle is
consummated.
<PAGE>
In the event the LaSalle Merger is not completed, any payment to the joint
venture partner will be determined as follows: (a) if the Company enters into a
transaction similar to the LaSalle transaction in which it is acquired by or
merged with another entity, the parties have agreed to negotiate a mutually
acceptable termination price; (b) if the Company enters into a transaction
whereby, as part of a plan to terminate its insurance operations and sell all of
its assets, it sells its credit insurance marketing organization to an unrelated
third party, the Company has agreed to pay its former partner a prorata share of
the proceeds, if any, it receives from the sale of the marketing organization.
Effective July 31, 1996, the Company froze the benefits payable to
participants under its defined benefit pension plan. As a result, future
contributions to the plan, which have approximated $225,000 per year, will be
substantially reduced, although certain contributions will continue to be made
to eliminate the unfunded liability of approximately $389,000 which existed in
the plan at December 31, 1995.
On September 23, 1996, the Company, along with the other 50% co-owner of
the Company's home office building, granted a 90-day option to purchase the
property to an unrelated third party for an option price of $3.4 million. The
option was subsequently extended for an additional 90 days until March 19, 1997.
The sale of the building at the option price would result in no significant gain
or loss to the Company.
In October 1996, the Company was notified by the Pennsylvania Automotive
Association (the "Association") that the Association had terminated its
endorsement of the Company's credit insurance and service contract products. The
Association had endorsed the Company's products to its Pennsylvania automobile
dealer members since 1987. While the Company seeks such association endorsements
in the states in which it operates, it does not believe the loss of the
Pennsylvania endorsement will have a materially adverse impact on its future
operating results, although the Company believes it could lose up to 15% of its
Pennsylvania credit insurance premium revenues and service contract commission
income.
<PAGE>
QUARTERLY FINANCIAL DATA
(Not Covered by Independent Auditor's Report)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1995
-------------------------------------------------------------
(in thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues
(before reinsurance ceded) 11,115 12,630 12,738 9,949
Loss before income taxes (414) (40) (232) (1,317)
Net loss (395) (91) (213) (902)
Net loss per common and
common equivalent share (0.19) (0.08) (0.12) (0.39)
Net loss per common share -- assuming full dilution -- -- -- --
1994
-------------------------------------------------------------
) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues
(before reinsurance ceded) 11,541 14,449 13,470 10,895
Loss before gain on sale of life insurance business (466) (181) (463) (336)
Income (loss) before cumulative effect of
change in accounting principle (541) (170) (621) 120
Cumulative effect of change in accounting principle 299
Net income (loss) (242) (170) (621) 120
Net loss per common and common equivalent share (0.13) (0.11) (0.27) 0.00
Net loss per common share -- assuming full dilution -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The firm of Ernst & Young LLP ("E&Y") serves as the Company's Independent
Auditors from October 23, 1990 to November 26, 1996. On that date, E&Y advised
the Company that it could no longer continue as the Company's independent public
accountants, and that it could not perform the audit of the Company's 1996
financial statements. E&Y made this determination because it had provided
certain financial advisory services to the Company in connection with the
Company's efforts to sell or merge its business operations. These services, in
E&Y's judgment, impaired the firm's independence as it relates to the Company's
1996 financial statements. E&Y further advised the Company that its independence
with respect to the Company's 1995 financial statements was not impaired;
however E&Y recommended that the Company retain new auditors to re-audit the
1995 financial statements to avoid any delays that might otherwise arise in the
filing and review of a proxy statement covering the proposed merger of the
Company with a subsidiary of LaSalle, or periodic reports to be filed
thereafter.
None of E&Y's reports on the Company's financial statements for the
past two years contained an adverse opinion or disclaimer of opinion, nor was
any such report qualified or modified as to uncertainty, audit scope or
accounting principles. Further, during the two most recent fiscal years and the
subsequent interim periods of 1996, there have been no disagreements between the
Company and E&Y on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure and no reportable events
have occurred.
E&Y 's decision that it could not perform the audit of the Company's
1996 financial statements was acknowledged by the Audit Committee of the
Company's Board of Directors on November 26, 1996. On the same date, the Audit
Committee acted to retain Arthur Andersen LLP to perform the audit of the
Company's 1996 financial statements and the re-audit of the 1995 financial
statements.
Page 63
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of the Company is divided into three (3)
groups, with the directors in each group serving terms of three (3) years and
until their successors are duly elected and qualified.
Rev. Sterling P. Martz, a director with the Company since 1968, reached the
mandatory age for retirement established by the Board of Directors on July 31,
1996. However, at its July 1996 meeting, the Board of Directors requested that
Rev. Martz continue to serve as a Director until the merger with LaSalle is
completed or the Company otherwise disposes of its business operations. The
table below sets forth the period for which the following individuals have
served as directors of the Company, the principal occupation or employment of
each for the last five(5) years, other major affiliations and age as of March 1,
1996.
<TABLE>
<CAPTION>
Principal Occupation for the
Past Five Years, Office (if
any) Held in the Company and Director Term
Name Other Information Since Expires
(Age)
================================================================================
<C> <S> <C> <C>
Leon A. Guida Retired, Former Co-Owner and 1986 1996
(71) General Manager, S & H Pontiac,
Harrisburg, PA
*James C. Robertson Chairman of the Board, 1967 1996
(64) President and Chief Executive
Officer of the Company
*Sterling P. Martz Retired Clergyman, Winfield, PA 1968 1996
(75)
**W. John Daub III President, Brown-Daub, Inc., 1993 1997
(58) Easton, PA; Director, National
Automobile Dealers Association;
Director, Pennsylvania Automotive
Association, Served as its
President in 1994-1995
*Edward J. Kremer President, Hanna, Kremer & 1983 1997
(65) Tilghman Insurance, Inc.,
Salisbury, MD; Director and
Chairman of the Board, Delmar
Bancorp, Delmar, MD
John E. Groninger President, John E. 1968 1998
(69) Groninger, Inc., Juniata Concrete,
Inc., Republic Development Corp.,
and Juniata Lumber & Supply Co.,
Mexico, PA; Director, Juniata
Valley Financial Corp.,
Mifflintown, PA
*Robert G. Little, Jr., D.V.M. Partner, Little's Veterinary 1966 1998
(66) Hospital, Williamsport, PA;
Director, Bucktail Bank and
Trust Co., Williamsport, PA
</TABLE>
* Denotes Member of Executive Committee
** Resigned as a Director on April 23, 1996.
Page 64
<PAGE>
The following information is provided as of March 1, 1996 for each
executive officer of the Company and the principal executives of its
subsidiaries. All of the executive officers listed also serve as executive
officers of the life insurance subsidiaries. The executive officers are
appointed annually by the Board of Directors and serve at the discretion of the
Board.
<TABLE>
<CAPTION>
Name Age Office
==============================================================================
<S> <C> <C>
James C. Robertson 64 President and Chief Executive Officer
William J. Walsh, Jr. 53 Executive Vice President and Chief
Operating Officer
Ralph R. Byrnes 53 Senior Vice President-Automotive
Resource Division
R. Fredric Zullinger 47 Senior Vice President, Chief Financial
Officer and Treasurer
</TABLE>
Mr. Robertson joined the Company in 1967 as General Counsel and was
elected a director and President of the Company in 1968. Mr. Robertson currently
serves as Chairman of the Board, President and Chief Executive Officer of the
Company.
Mr. Walsh joined the Company in 1976 as Vice President-Finance. He was
appointed Executive Vice President and Chief Operating Officer of the Company in
1985 and currently serves in that capacity.
Mr. Byrnes joined the Company in 1971 and was appointed Vice President-
Credit Sales of the Company's life insurance subsidiary in 1974. Mr. Byrnes was
appointed Senior Vice President of the Company's life insurance subsidiaries in
1986 and currently serves in that capacity.
Mr. Zullinger joined the Company in 1977 as Vice President-Accounting
of the Company's life insurance subsidiaries. He was appointed Treasurer of the
Company in 1979, and Vice President and Chief Financial Officer in 1985. Mr.
Zullinger currently serves as Senior Vice President, Chief Financial Officer and
Treasurer of the Company.
Page 65
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1995, 1994 and 1993 of the Chief Executive Officer and the
named executive officers whose annual compensation exceeded $100,000
(hereinafter referred to as "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Name and Principal Position Year Salary (1) Underlying
Options/SARS (2)
======================================================================
<S> <C> <C> <C>
James C. Robertson, 1995 $145,000 30,000
Chairman, President and 1994 145,000
Chief Executive Officer 1993 151,927
--------------------------------------------------------------------
William J. Walsh, Jr., 1995 $114,000 25,000
Executive Vice President and 1994 114,000
Chief Operating Officer 1993 112,654
--------------------------------------------------------------------
Ralph R. Byrnes, Senior 1995 $109,500 25,000
Vice President-Automotive 1994 109,500
Resource Division 1993 109,500
----------------------------------------------------------------------
</TABLE>
(1) While the Company has a bonus program, there have been no bonuses earned,
even if deferred, since 1989.
(2) Represents award of stock options and stock appreciation rights ("SARS")
made under the Company's 1989 Stock Incentive Plan ("1989 Plan"). The 1989
Plan was approved by the shareholders, and provides for the grant of both
options that qualify as incentive stock options under the Internal Revenue
Code and non-qualified (non-statutory) stock options. The option price is
100% of the fair market value on the date of grant and the maximum term to
exercise the grant is six (6) years. The options have accompanying SARS
which permit the holder to receive common stock or cash equal to the excess
of the fair market value covered by the option over the option price. To
the extent that accompanying SARS are exercised, the corresponding stock
options are canceled and the shares subject to the option are charged
against the maximum number of shares authorized under the 1989 Plan. When a
stock option is exercised, the related SAR is likewise surrendered. All of
the options listed in the table were granted in 1993 in place of an equal
number of options that were awarded in May 1989 and subsequently canceled.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Personnel Committee of the Board of Directors (the "Committee")
administers and approves all forms of compensation for the Chief Executive
Officer ("CEO"), Executive Officers and other officers of the Company. The
members of the Committee are independent, non-employee directors and review with
the full Board all aspects of compensation. In addition to reviewing and
evaluating the performance and compensation levels of the CEO and the other
Executive Officers, the Committee considers management succession and
Page 66
<PAGE>
the implementation and administration of the Company's various incentive plans,
including the stock option and bonus plans.
Compensation Philosophy
The compensation policy of the Company is based upon a belief that an
important portion of the annual compensation of each officer should relate to
and be contingent upon the performance of the Company, as well as the individual
contribution of each officer. The Company relies to a large degree on the
annual and longer term incentive compensation plans to attract and retain
corporate officers of outstanding abilities and to motivate them to perform to
the full extent of their abilities. In March of each year the Committee, along
with the CEO, review an annual salary plan for the Company's officers. The
salary plan is developed with the assistance of the Company's Human Resources
Department and is based on industry, peer group and national surveys along with
performance judgments as to the past and expected future contributions of the
individual officers. In addition, the Committee periodically is provided
independent compensation reports from various consulting groups concerning
salary competitiveness in its industry.
The compensation for the CEO and the other Executive Officers consists
of a base salary, potential annual bonuses and long-term stock option
incentives. The Committee considers the total compensation for the CEO and each
of the Executive Officers in establishing each element of compensation. Base
salaries are fixed at levels competitive in the market compared to other
comparably sized companies with officers having equal responsibilities engaged
in similar businesses as the Company. The CEO and the other Executive Officers
received no increase in salary in 1995. Annual bonuses and longer term stock
option incentives are tied to the Company's success at achieving significant
financial performance goals, as well as increasing shareholder value. Under the
Company's bonus program, the CEO and the other Executive Officers are paid a
percentage of their annual base salary as determined by pre-established
increases to the Company's pre-tax earnings. No bonuses have been earned by the
CEO and the other Executive Officers since 1989 because the criteria established
by the Company for awarding bonuses has not been met. Grants of stock options
with accompanying stock appreciation rights ("SARS") are used by the Company to
retain and motivate the CEO and Executive Officers to improve the long-term
stock market performance of the Company's common stock. In its decision to grant
incentive stock options the Committee looks to the expected value of the
Company's common stock during the period of time available to exercise the
options. No stock options or SARS were granted by the Company to the CEO or the
other Executive Officers during fiscal year 1995.
CEO Compensation
In evaluating the performance and setting the incentive compensation
of the CEO, James C. Robertson, the Committee has taken into consideration the
Company's efforts to pursue opportunities to combine its operations with a
larger, profitable strategic partner in order to achieve certain economies of
scale while continuing to manage the Company as if independent, seeking to
acquire blocks of credit insurance
Page 67
<PAGE>
business in order to increase revenues and improve expense ratios. While the
Company was not able to acquire any new blocks of credit insurance business
during 1995, the Company was able to reduce its general expenses by over $1.2
million and plans general expense reductions of $770,000 in 1996.The base salary
for Mr. Robertson has remained the same since 1991 and no bonuses were earned by
Mr. Robertson during this time period as well.
The Committee believes that the total compensation for Mr. Robertson
during 1995 continued to be reasonable based upon Mr. Robertson's experience,
leadership and contributions made to the Company and is comparable to similarly
situated CEOs of other publicly traded companies in the credit insurance
industry.
This report is submitted by the Personnel Committee of the Company's Board
of Directors.
Leon A. Guida, Chairman
John E. Groninger
Rev. Sterling P. Martz
Page 68
<PAGE>
STOCK PRICE PERFORMANCE COMPARISON
The graph below provides an indicator of the cumulative total
shareholder returns for the Company as compared with NASDAQ Stock Index and a
Peer Group (1).
COMPARATIVE FIVE-YEAR RETURN *
[COMPARATIVE FIVE-YEAR RETURN LINE CHART APPEARS HERE]
*Assumes $100 invested on December 31, 1990 in the Company's common
stock, NASDAQ Stock Index and Peer Group common stock. Total
shareholder returns assume reinvestment of dividends.
(1) The peer group companies are primarily in the same segment of the insurance
industry that market credit life and credit disability products to
automotive dealers and other financial institutions. While none of the
companies offer all of the products and services of the Company, each can
be considered a competitor of the Company. The members of the peer group
are as follows: ACCEL International Corporation, CNL Financial Corporation,
American Bankers Insurance Group and US Life Corporation.
Page 69
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1996, the number of shares of
voting stock owned by any person who is known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, the only class
of voting securities outstanding.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Amount and
Nature of Percent
Beneficial of
Title of Class Name and Address of Beneficial Owner Ownership Class
==============================================================================
<S> <C> <C> <C>
Common Consumers Financial Corporation 326,174 10.7 %
and Subsidiaries Employee Stock
Ownership Plan (ESOP)(1)
1200 Camp Hill By-Pass
Camp Hill, PA 17011
Common Consumers Life Insurance Company 384,361 12.68%
of North Carolina and Consumers
Reinsurance Company, affiliates of
Consumers Financial Corporation
1200 Camp Hill By-Pass
Camp Hill, PA 17011
Common James C. Robertson (2) 146,655 5.3 %
1200 Camp Hill By-Pass
Camp Hill, PA 17011
------------------------------------------------------------------------------
</TABLE>
(1) The Company's Employee Stock Ownership Plan is an employee benefit plan
which is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Participating employees of the Company have the power to
vote the shares allocated to them under the Plan. The Trustees of the Plan
have discretionary investment powers including the power to dispose of the
shares.
(2) Includes 66,821 shares for which Mr. Robertson has sole investment and
voting power, 43,115 shares for which he has voting power as to shares held
for him in the Employee Stock Ownership Plan, and 30,000 shares he has a
right to acquire through the exercise of stock options and stock
appreciation rights.
Page 70
<PAGE>
The following table sets forth as of March 1, 1996, the number of shares of
the Company's Common and Preferred Stock beneficially owned by (a) each
director; (b) each executive officer who is not a director; and (c) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Title of Name of Beneficial of
Class Beneficial Owner Ownership (1) Class
=========================================================================
<S> <C> <C> <C>
(a)
Common Daub III, W. John 11,000 *
Common Groninger, John E. 75,379 (2) 2.4
8 1/2% Preferred 22,410 (3) 4.1
Common Guida, Leon A. 3,000 *
Common Kremer, Edward J. 1,607 *
Common Little, Jr., Robert G. 9,143 (4) *
8 1/2% Preferred 218 (4) *
Common Martz, Sterling P. 4,000 (4) *
8 1/2% Preferred 1,400 (4) *
Common Robertson, James C. 146,655 (5) 5.3
8 1/2% Preferred 5,235 (6) 1.1
(b)
Common Byrnes, Ralph R. 73,030 (7) 2.4
Common Walsh, Jr., William J. 62,811 (8) 2.1
Common Zullinger, R. Fredric 54,521(9) 1.8
(c)
Common Directors and Executive 441,146 (10) 14.6
8 1/2% Preferred Officers as a Group (10 28,563 5.9
individuals)
</TABLE>
* Denotes less than 1%
(1) Except where otherwise indicated, the beneficial owner of the shares
exercises sole voting and investment power.
(2) Includes 42,542 shares owned by Mr. Groninger's wife.
(3) Includes 1,000 shares owned by Mr. Groninger's wife.
(4) Shared investment and voting power with their wives for the shares
indicated.
(5) Includes 66,821 shares for which Mr. Robertson has sole investment and
voting power, 43,115 shares for which he has voting power as to shares
held for him in the Employee Stock Ownership Plan, and 30,000 shares he
has a right to acquire through the exercise of stock options and stock
appreciation rights.
(6) Includes 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's
wife.
(7) Includes 31,717 shares for which Mr. Byrnes has voting power as to shares
held for him in the Employee Stock Ownership Plan,
and 25,000 shares he has a right to acquire through the exercise of
stock options and stock appreciation rights.
(8) Includes 21,282 shares for which Mr. Walsh has voting power as to shares
held for him in the Employee Stock Ownership Plan,
and 25,000 shares he has a right to acquire through the exercise of
stock options and stock appreciation rights.
(9) Includes 14,833 shares for which Mr. Zullinger has voting power as to
shares held for him in the Employee Stock Ownership Plan,
and 25,000 shares he has a right to acquire through the exercise of
stock options and stock appreciation rights.
(10) Includes 105,000 shares which the executive officers as a group have a
right to acquire through the exercise of stock options and stock
appreciation rights.
Page 71
<PAGE>
During the year ended December 31, 1995, Consumers Reinsurance Company, a
subsidiary of the Company, acquired 8,636 shares of the Company's common stock
but failed to file with the Securities and Exchange Commission on a timely basis
two (2) reports on Form 4 as required by Section 16(a) of the Securities
Exchange Act of 1934, as amended. However, a Form 5 which reported two (2)
acquisitions on two (2) separate dates during 1995 was timely filed with the
Securities and Exchange Commission on February 9, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One of the Company's directors, W. John Daub III, is affiliated with
automobile dealerships that are master group policyholders of a life insurance
subsidiary of the Company. Those dealerships receive commissions from the
subsidiary in connection with credit insurance they sell. All commissions paid
to the dealerships affiliated with Mr. Daub are at rates comparable with
commissions paid to other non-affiliated parties. Total commissions on credit
insurance business paid by the subsidiary to the dealerships affiliated with Mr.
Daub during 1995 were $105,104.
In June 1989, the Daub Trust, a trust controlled by W. John Daub III, a
director of the Company, purchased a reinsurance company from a life insurance
subsidiary of the Company for $155,000, its book value at that time. The Daub
Trust paid $55,000 in cash and gave the subsidiary a Note for $100,000,
repayable with interest at a rate which varies with the rate of interest earned
by the reinsurance company on its certificate of deposit investments. On
December 31, 1989, the subsidiary advanced to the Daub Trust an additional
$12,000, increasing the total outstanding loan to $112,000. The terms of the
Note are substantially the same as those which would have been offered to other
non-affiliated parties at that time. The loan is expected to be repaid from
profits developed by the reinsurance company. The subsidiary holds all of the
outstanding stock of the reinsurance company as collateral for the loan. The
loan balance at March 1, 1996, remains at $112,000 as no principal payments have
been made. On April 23, 1996, Mr. Daub resigned as a Director of the
Company.
Page 72
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
a) Listing of Documents filed:
1. Financial Statements (included in Part II of this report)
Report of Independent Auditors
Consolidated Balance Sheets-December 31, 1995 and 1994
Consolidated Statements of Operations - Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (included in Part IV of this
report):
(II) Condensed Financial Information of Registrant
(III) Supplementary Insurance Information
(IV) Reinsurance
(V) Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because
they are not required, not applicable or the required information
is set forth in the financial statements or notes thereto.
3. Exhibits:
(11) Statement regarding Computation of Earnings Per Common Share
(18) Letter regarding change in accounting principles
(21) Subsidiaries of Consumers Financial Corporation
b) Reports on Form 8-K:
No reports have been filed on Form 8-K for the fourth calendar quarter of 1995.
On November 13, 1996, the Company filed a Form 8-K with respect to (1) the
Agreement and Plan of Merger entered into between the Company, LaSalle Group,
Inc. and a subsidiary of LaSalle, and (2) the sale of the operating assets and
business of Interstate
Page 73
<PAGE>
Auto Auction, Inc. On December 4, 1996, the Company filed a Form 8-K regarding
the change in the Company's certifying accountants from Ernst & Young LLP to
Arthur Andersen LLP.
Page 74
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands)
Assets 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Investments, other than
investments in affiliates:
Short-term investments $3
Other invested assets $72 69
----------- ----------
72 72
Cash 228 90
Investments in affiliates 12,672 12,883
Indebtedness of affiliates 4,899 4,924
Receivables 7
Property and equipment, net of
accumulated depreciation 35 65
Other assets 110 563
----------- ----------
$18,016 $18,604
=========== ==========
Liabilities, Redeemable Preferred
Stock and Shareholders' Equity 1995 1994
- --------------------------------------------------------------------------------
Liabilities:
Note payable $1,159 $2,209
Indebtedness to affiliates 425 415
Dividend payable 114 36
Income taxes 559 588
Miscellaneous 88 130
----------- ----------
Total liabilities 2,345 3,378
----------- ----------
Redeemable preferred stock:
Series A, 8 1/2% cumulative
convertible 4,657 4,621
----------- ----------
Shareholders' equity:
Common stock 30 31
Capital in excess of stated value 8,016 8,129
Equity in net unrealized
appreciation (depreciation)
of debt and equity securities
of subsidiaries 705 (1,952)
Retained earnings 3,688 5,734
Treasury stock (1,425) (1,337)
----------- ----------
Total shareholders' equity 11,014 10,605
----------- ----------
18,016 18,604
=========== ==========
</TABLE>
See notes to condensed financial statements
Page 75
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net investment income $5 $37 $4
Other income 16 1 28
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 21 38 32
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Amortization of deferred acquisition costs (including
write-off of $746 in 1994) 825 93
General expenses 221 291 309
Taxes, licenses and fees 14 21 20
Interest 145 203 314
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 380 1,340 736
- --------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (359) (1,302) (704)
Income taxes 210 184 491
Loss before equity in income (loss) of
unconsolidated subsidiaries (569) (1,486) (1,195)
Equity in income (loss) of unconsolidated subsidiaries (1,032) 274 380
- --------------------------------------------------------------------------------------------------------------------------
Loss before equity in cumulative effect of change
in accounting principles of unconsolidated subsidiaries (1,601) (1,212) (815)
Equity in cumulative effect of change in accounting
principles of unconsolidated subsidiaries 299 (710)
- --------------------------------------------------------------------------------------------------------------------------
Net Loss ($1,601) ($913) ($1,525)
==========================================================================================================================
</TABLE>
See notes to condensed financial statements
Page 76
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,601) ($913) ($1,525)
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Amortization of deferred acquisition costs 825 93
Income taxes (29) 20 219
Receivables and agents balances 31 19 (8)
Other liabilities 47 59 (267)
Equity in loss (income) of unconsolidated subsidiaries 1,736 897 (118)
Amortization of intangibles 217 420 584
Equity in cumulative effect of change in accounting
principles of unconsolidated subsidiaries (299) 710
Other 483 (133) (6)
- -------------------------------------------------------------------------------------------------------------------
Total adjustments 2,485 1,808 1,207
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 884 895 (318)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (3) (14) 44
Maturity of investments 3 260
Investments in affiliates 827 588 3,385
Purchase of property and equipment (1) (15)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 827 573 3,674
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on debt (1,050) (900) (2,878)
Purchase of treasury stock (114) (38)
Cash dividends to shareholders (409) (547) (559)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,573) (1,485) (3,437)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 138 (17) (81)
Cash at beginning of year 90 107 188
- -------------------------------------------------------------------------------------------------------------------
Cash at end of year $228 $90 $107
===================================================================================================================
</TABLE>
See notes to condensed financial statements
Page 77
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Consumers Financial Corporation and subsidiaries.
2. Cash dividends received from subsidiaries in 1995, 1994 and 1993 amounted
to $827,000, $600,000 and $2,765,000, respectively.
3. The Company files a consolidated Federal income tax return with its
non-life insurance company subsidiaries and with its consolidated life
insurance company subsidiaries, except for Consumers Reinsurance Company,
which files a separate return. Taxes are allocated proportionately to each
subsidiary within the consolidated group. Tax expense is allocated to those
subsidiaries reporting taxable income, while a tax benefit is allocated to
those companies reporting a taxable loss.
4. The 1993 condensed financial statements have been restated to properly
reflect certain intercompany transactions between Consumers Financial
Corporation and its unconsolidated subsidiaries.
Page 78
<PAGE>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred Other policy
policy Future claims and Premium Net
acquisition policy Unearned benefits and other investment
Segment costs benefits premiums payable revenue income
- -----------------------------------------------------------------------------------------------------------------------------
(1) (2)
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
- -----------------------------
Automotive Resource Division $17,642 $10,411 $57,943 $2,448 $21,278 $2,231
Individual Life Insurance Division 4,284 26,171 403 2,413 522
Auto Auction Division 3,200 21
Other (3) 16 5
- ------------------------------------------------------------------------------------------------------------------------------
Total $21,926 $36,582 $57,943 $2,851 $26,907 $2,779
==============================================================================================================================
Year ended December 31, 1994:
- -----------------------------
Automotive Resource Division $16,878 $10,415 $56,551 $2,059 $20,519 $2,868
Individual Life Insurance Division 4,777 28,194 789 5,524 2,086
Auto Auction Division 3,294 10
Other (3) 1 10
- ------------------------------------------------------------------------------------------------------------------------------
Total $21,655 $38,609 $56,551 $2,848 $29,338 $4,974
==============================================================================================================================
Year ended December 31, 1993:
- -----------------------------
Auto Resource Division $13,899 $12,051 $54,923 $2,475 $21,822 $3,383
Individual Life Insurance Division 17,130 42,342 773 7,205 2,263
Auto Auction Division 2,317 11
Other (3) 28 (10)
- ------------------------------------------------------------------------------------------------------------------------------
Total $31,029 $54,393 $54,923 $3,248 $31,372 $5,647
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(in thousands) Amortization
of deferred
Death policy
and other acquisition Operating
Segment benefits costs expenses
- -------------------------------------------------------------------------------------------
(2)
<S> <C> <C> <C>
Year ended December 31, 1995:
- -----------------------------
Automotive Resource Division $10,267 $10,154 $5,098
Individual Life Insurance Division (2,894) 580 742
Auto Auction Division 2,426
Other (3) 443
- -------------------------------------------------------------------------------------------
Total $7,373 $10,734 $8,709
===========================================================================================
Year ended December 31, 1994:
- -----------------------------
Automotive Resource Division $8,877 $10,388 $4,972
Individual Life Insurance Division 1,352 1,533 2,521
Auto Auction Division 2,807
Other (3) 534
- -------------------------------------------------------------------------------------------
Total $10,229 $11,921 $10,834
===========================================================================================
Year ended December 31, 1993:
- -----------------------------
Auto Resource Division $10,288 $11,174 $5,864
Individual Life Insurance Division 1,765 2,727 3,716
Auto Auction Division 952
Other (3) 651
- -------------------------------------------------------------------------------------------
Total $12,053 $13,901 $11,183
===========================================================================================
</TABLE>
(1) Excludes realized investment gains.
(2) Allocations of net investment and other operating expenses are based on
various assumptions and estimates. The results would change if
different assumptions and estimates or a different method were to be used.
(3) Represents operations of Consumers Financial Corporation
Page 79
<PAGE>
SCHEDULE IV
REINSURANCE
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Segment amount companies companies amount to net
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (a)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
- ----------------------------
Life insurance in-force $1,820,872 $947,363 $311,201 1,184,710 26.3%
=====================================================================================
Net premium income and policy charges:
Credit insurance $31,720 $12,628 $327 $19,419 1.7%
Individual life insurance 2,726 2,845 2,350 2,231 105.3%
Warranty 394 394 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
$34,446 $15,473 $3,071 $22,044 13.9%
====================================================================================================================================
Year ended December 31, 1994:
- ----------------------------
Life insurance in-force $1,911,119 $1,184,134 $354,800 $1,081,785 32.8%
=====================================================================================
Net premium income and policy charges:
Credit insurance $31,120 $13,267 $1,173 $19,026 6.2%
Individual life insurance 2,668 908 3,512 5,272 66.6%
Warranty 278 278 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
$33,788 $14,175 $4,963 $24,576 20.2%
====================================================================================================================================
Year ended December 31, 1993:
- ----------------------------
Life insurance in-force $1,921,677 $894,119 $567,653 $1,595,211 35.6%
=====================================================================================
Net premium income and policy charges:
Credit insurance $30,835 $13,313 $3,130 $20,652 15.2%
Individual life insurance 3,713 927 3,853 6,639 58.0%
Warranty 227 227 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
$34,548 $14,240 $7,210 $27,518 26.2%
====================================================================================================================================
</TABLE>
(a) Includes premiums for credit insurance ceded and assumed on earned basis
Page 80
<PAGE>
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Additions
-------------------------
Charged to
to Balance
Balance at Charged to other at
beginning costs and accounts, Deductions, end of
Description of period expenses describe describe period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
- ----------------------------
Provision for permanent decrease in market value of:
Equity securities $15 $15
Mortgage loans 200 $100/(a)/ 100
Provision for uncollectible receivables 1,091 $79 77/(b)/ 1,093
Real estate 300 193 493
- ------------------------------------------------------------------------------------------------------------------------------------
$1,606 $272 $177 $1,701
====================================================================================================================================
Year ended December 31, 1994:
- ----------------------------
Provision for permanent decrease in market value of:
Equity securities $19 $4/(c)/ $15
Mortgage loans 670 $135 605/(a)/ 200
Provision for uncollectible receivables 1,020 149 78/(b)/ 1,091
Real estate 20 300 20/(d)/ 300
- ------------------------------------------------------------------------------------------------------------------------------------
$1,729 $584 $707 $1,606
====================================================================================================================================
Year ended December 31, 1993:
- ----------------------------
Provision for permanent decrease in market value of:
Equity securities $19 $19
Mortgage loans 223 $275 $172/(e)/ 670
Provision for uncollectible receivables 985 186 $151/(b)/ 1,020
Real estate 20 20
- ------------------------------------------------------------------------------------------------------------------------------------
$1,227 $481 $172 $151 $1,729
====================================================================================================================================
</TABLE>
/(a)/ Loans transferred to real estate through foreclosure
/(b)/ Write-off of bad debts against reserve
/(c)/ Write-off of worthless securities against reserve
/(d)/ Write-off of reserve for properties sold
/(e)/ Reclassification of mortgage loan previously transferred to real estate
as "in-substance foreclosure"
Page 81
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ James C. Robertson
-----------------------------------
Chairman of the Board and President
Date: January 28, 1997
Page 82
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James C. Robertson Director, President and January 28, 1997
- -------------------------------------- Chairman of the Board
(Chief Executive Officer)
/s/ William J. Walsh, Jr. Executive Vice President January 28, 1997
- -------------------------------------- (Chief Operating Officer)
/s/ R. Fredric Zullinger Senior Vice President and January 28, 1997
- -------------------------------------- Treasurer
(Chief Financial Officer)
/s/ John E. Groninger Director January 28, 1997
- --------------------------------------
/s/ Leon A. Guida Director January 28, 1997
- --------------------------------------
/s/ Edward J. Kremer Director January 28, 1997
- --------------------------------------
/s/ Robert G. Little, Jr., D.V.M. Director January 28, 1997
- --------------------------------------
/s/ Rev. Sterling P. Martz Director January 28, 1997
- --------------------------------------
</TABLE>
Page 83
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION> Year Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
<S> <C> <C> <C>
Primary Earnings Per Share
Reconciliation of net income (loss) per Statements
of Operations to amount used in primary
per share computation:
Net loss ($1,601) ($913) ($1,525)
Preferred dividend requirement (409) (409) (413)
Accretion in carrying value of preferred (36) (36) (36)
Net loss, as adjusted ($2,046) ($1,358) ($1,974)
Reconciliation of weighted average number of shares
outstanding to amount used in primary earnings
share computation:
Weighted average number of common shares
outstanding 2,634 2,690 2,740
Add weighted average number of shares
from assumed exercise of stock
Weighted average number of shares of
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Stock and equivalents outstanding 2,634 2,690 2,740
Net loss per common and common equivalent share ($0.78) ($0.51) ($0.72)
</TABLE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
<S> <C> <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 ($1,601) ($913) ($1,525)
Reconciliation of weighted average number of shares
outstanding, as adjusted, per primary
on preceding page, to amount used in fully
diluted earnings per share computation:
Weighted average number of shares
as adjusted per primary computation
Preceding page 2,634 2,690 2,740
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Add shares issuable from assumed
8 1/2 % cumulative convertible 713 714 726
Weighted average number of shares of
Stock and equivalents outstanding 3,347 3,404 3,466
Fully Diluted Earnings Per Share * * *
</TABLE>
* Anti-dilutive
<PAGE>
EXHIBIT 18
February 14, 1997
Mr. R. Fredric Zullinger
Senior Vice President,
Chief Financial Officer & Treasurer
Consumers Financial Corporation
1200 Camp Hill By-Pass
Camp Hill, PA 17011
Dear Sir:
Note 3 of Notes to Consolidated Financial Statements of Consumers Financial
Corporation included in its Form 10-K for the year ended December 31, 1994
describes a change in the method of accounting for earning credit disability
premiums from one based on the average of the Rule of 78's and Pro Rata methods
to one based on 65% of the Rule of 78's method and 35% of the Pro Rata method.
You have also modified your method for amortizing deferred policy acquisition
costs for credit disability insurance to match the amortization of these costs
to the premium earning pattern. You have advised us that you believe that the
changes are to preferable methods in your circumstances because they provide a
better matching of earned premiums and amortization of acquisition costs with
the incidence of incurred disability claims based on your experience.
There are no authoritative criteria for determining a preferable credit
disability premium recognition or acquisition cost amortization
method based on the particular circumstances; however, we conclude that the
change in the methods of accounting for credit disability premiums and
acquisition costs are to acceptable alternative methods which, based on your
business judgement to make this change for the reason cited above, are
preferable in your circumstances.
Very truly yours,
Ernst & Young LLP
Philadelphia, Pennsylvania
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CONSUMERS FINANCIAL CORPORATION
Consumers Financial Corporation (23-1666392) owns 100% of the outstanding
common stock of the following subsidiaries:
Consumers Life Insurance Company 21-0706531
CLMC Insurance Agency, Inc. 25-1681245
Interstate Auto Auction, Inc. 25-1211251
Consumers Car Care Corporation 23-1720565
Investors Consolidated Reinsurance, Ltd. 31-1057420
Consumers Limited 25-1493313
Consumers II Limited 25-1718532
Consumers Life Insurance Company owns 100% of the outstanding common stock of
the following subsidiaries:
Consumers Life Insurance Company of North Carolina 56-0663555
Investors Fidelity Life Assurance Corp. 31-0646177
Consumers Life Insurance Company and Consumers Life Insurance Company of North
Carolina each own 50% of the outstanding common stock of the following
subsidiary:
Consumers Reinsurance Company 86-0414938
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994 DEC-31-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 35,048,212 28,180,436 0 0
<DEBT-CARRYING-VALUE> 0 0 0 0
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<MORTGAGE> 7,041,033 9,938,267 0 0
<REAL-ESTATE> 1,020,158 1,144,246 0 0
<TOTAL-INVEST> 48,994,969 47,030,814 0 0
<CASH> 450,861 1,235,620 0 0
<RECOVER-REINSURE> 20,022,311 22,623,139 0 0
<DEFERRED-ACQUISITION> 21,925,999 21,654,591 0 0
<TOTAL-ASSETS> 123,321,640 125,257,584 0 0
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<POLICY-OTHER> 2,850,660 2,848,180 0 0
<POLICY-HOLDER-FUNDS> 3,718 1,911 0 0
<NOTES-PAYABLE> 2,536,982 3,388,589 0 0
4,656,642 4,620,674 0 0
0 0 0 0
<COMMON> 30,310 30,608 0 0
<OTHER-SE> 8,015,698 8,128,959 0 0
<TOTAL-LIABILITY-AND-EQUITY> 123,321,640 125,275,584 0 0
22,043,759 24,576,149 5,573,580 6,824,360
<INVESTMENT-INCOME> 2,779,336 4,974,268 572,313 1,160,004
<INVESTMENT-GAINS> (119,571) (475,913) (83,762) (440,985)
<OTHER-INCOME> 4,863,011 4,762,053 1,154,388 1,171,524
<BENEFITS> 12,126,943 12,527,456 3,258,082 2,907,660
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<UNDERWRITING-OTHER> 8,708,834 10,431,342 2,570,819 2,738,234
<INCOME-PRETAX> (2,003,413) (1,043,276) (1,317,620) 67,430
<INCOME-TAX> (402,615) 168,709 (415,499) (52,288)
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 (298,551) 0 (597,102)
<NET-INCOME> (1,600,798) (913,434) (902,121) 119,718
<EPS-PRIMARY> (0.78) (0.51) (0.39) 0
<EPS-DILUTED> 0 0 0 0
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<PROVISION-CURRENT> 0 0 0 0
<PROVISION-PRIOR> 0 0 0 0
<PAYMENTS-CURRENT> 0 0 0 0
<PAYMENTS-PRIOR> 0 0 0 0
<RESERVE-CLOSE> 0 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0 0
</TABLE>
