UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
<X> Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 on March 1, 1997, the aggregate market value of
common stock held by non-affiliates of the registrant was $9,625,839.
The number of outstanding common shares of the registrant was 2,610,397 as
of March 1, 1997.
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 $30 million, or 88%, of the Company's total premium revenues in
1996, 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 $3.7 million of
premium and policy charge revenues, or 11% of the Company's total premiums and
policy charges in 1996, 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 5
of the Notes to Consolidated Financial Statements appearing elsewhere in the
Form 10-K 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, until
late 1996, Interstate (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.
The Company has historically operated 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. Both the individual life insurance and the auto
auction segments have been presented as discontinued operations in the Company s
consolidated financial statements. See Note 5 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
In March 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 March 1997, the Company signed a
definitive agreement with the direct writer whereby that company will recapture
this business and pay the Company a recapture consideration of $1.05 million.
See Note 21 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K for further information regarding this transaction.
In March 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 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 (the Merger Agreement ) with LaSalle Group,
Inc., pursuant to which the Company will become a wholly-owned subsidiary of
LaSalle. This transaction, which was approved by the Company s common
shareholders on March 25, 1997, is subject to the approval of various state
insurance department regulators. See Note 4 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K for additional
information with respect to this matter.
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 remaining industry
segment. Information relating to the discontinued individual life insurance and
auto auction segments has been excluded.
<TABLE>
<CAPTION> Years Ended December 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Automotive Resource Division
Credit Insurance:
Life $13,542 $14,742 $15,444
Disability 18,923 20,973 21,739
Warranty contracts 1,191 1,684 1,647
Other products and services 87 129 170
33,743 37,528 39,000
Corporate 19 21 10
Net realized investment losses-
not allocated (160) (120) (476)
Total revenues (before
reinsurance ceded) $33,602 $37,429 $38,534
</TABLE>
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
remaining industry segment. Information relating to the discontinued individual
life insurance and auto auction segments has been excluded.
<TABLE>
<CAPTION> Years Ended December 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Automotive Resource Division:
Credit insurance:
Life ($577) ($1,094) ($1,059)
Disability (1,996) (1,511) (1,422)
Warranty contracts 31 219 321
Other products and services 42 (6) (22)
(2,500) (2,392) (2,182)
Corporate (874) (307) (401)
(3,374) (2,699) (2,583)
Realized investment losses (160) (120) (476)
Pre-tax loss from continuing operations ($3,534) ($2,819) ($3,059)
</TABLE>
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 1. - General, the
Company disposed of a significant portion of its individual life insurance
business in October 1992 and December 1994 and, in March 1997, entered into an
agreement to dispose of its remaining individual life business.
The following table sets forth the amounts of life insurance in force at
the dates indicated:
<TABLE>
<CAPTION> December 31,
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Direct and assumed:
Credit $1,418,853 $1,434,897 $1,427,252
Individual life 596,690 697,176 838,667
2,015,543 2,132,073 2,265,919
Reinsurance ceded (927,916) (947,363) (1,184,134)
Net in force $1,087,627 $1,184,710 $1,081,785
</TABLE>
For information concerning future policy benefits and unearned premiums,
see Notes 1 and 10 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.
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.
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 $327,000 in 1996 and $1.8
million in 1995. Certain credit insurance accounts in Virginia were also
cancelled in 1996 because of unprofitable results. Those accounts produced
premium revenues of $914,000 and $1,434,000 in 1996 and 1995, respectively. In
July 1995, the Company discontinued marketing credit insurance in Kentucky.
Written premiums in that state were $844,000 in 1995.
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. The Company does not believe
the loss of the Pennsylvania endorsement will have a materially adverse impact
on its future operating results, although the loss of the endorsement could
result in the loss of up to 15% of the Company s Pennsylvania credit insurance
premium revenues and service contract commission income. To assist the Company
in developing dealer relationships, the Company employs two home office sales
managers, one finance and insurance training specialist and 16 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 88% of the Company's premium revenues during 1996
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.
Effective July 31, 1996, the Company and its joint venture partner
cancelled 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. In the event the LaSalle merger is not completed, any payment to
the joint venture partner will be determined under a separate calculation.
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. 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 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. Until mid-1996, the Company also assumed, through another subsidiary,
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.<PAGE>
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 coinsured 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 were made in various
direct and indirect costs. Although the remaining block of assumed universal
life business has generally been profitable, the Company has signed an agreement
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 $1.05 million. See Note 21 of the Notes to Consolidated
Financial Statements appearing elsewhere in this Form 10-K for additional
information regarding this transaction.
As a result of the agreement to dispose of the remaining insurance
business of the individual life insurance division, the operating results of
this segment have been presented as discontinued operations in the Consolidated
Financial Statements appearing elsewhere in this Form 10-K.
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 5 of
the Notes to Consolidated Financial Statements appearing elsewhere in this Form
10-K 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 1996, prior to the sale of the business, approximately 28,000 cars were
registered for sale at Interstate through the regular weekly consignment
auction, and approximately 57% of all vehicles registered were sold. In 1995,
approximately 35,000 cars were registered for sale at Interstate through the
regular weekly consignment auction, and approximately 56% of those vehicles 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.
BEST'S RATINGS
In both 1996 and 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 two operating subsidiaries, Consumers
Life Insurance Company of North Carolina and Investors Fidelity Life Assurance
Corp., are currently rated NR-2 (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 primarily in fixed maturity securities
and, to a lesser extent, in 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 the Company s direct 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 73% of the $2.3 million in mortgage loan balances at
December 31, 1996 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.
During the past two years, the Company has substantially reduced its investments
in mortgage loans in order to improve its liquidity. See the Management s
Discussion and Analysis 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, 1996, 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,
1996 1995 1994
Net Net Net
Investment Yield Investment Yield Investment Yield
Income % Income % Income %
<S> <C> <C> <C> <C> <C> <C>
Interest:
Fixed maturities $2,364 6.2 $2,175 6.8 $2,773 6.4
Mortgage loans 421 9.0 692 8.1 2,138 10.1
Policy loans 33 6.6 58 13.9 (2 250 6.6
)
Short-term investments 223 4.5 186 4.4 168 3.3
Real estate 157 (1) 332 30.7 (3 177 15.5
Other 59 2.7 38 1.8 117 6.3
3,257 6.5 3,481 7.2 5,623 7.4
Investment expenses (680) (0.9) (702) (0.9) (649) (0.9)
Total net investment
income 2,577 5.6 2,779 6.3 4,974 6.5
Less net investment
income discontinued 490 543 2,096
operations
Net investment income
attributable to
continuing $2,087 $2,236 $2,878
operations
</TABLE>
(1) Represents rental income related to three properties classified as non-
investment real estate.
(2) 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%.
(3) 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.
REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the states in which they are 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 17 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-K.
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.
EMPLOYEES AND AGENTS
As of December 31, 1996, the Company had approximately 54 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 66% of the remaining space to third
party tenants. Annual rental income to the Company under these sub-leases totals
$83,000. 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 expired in March 1997
and was not renewed. 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 approximately
$27,000.
Investors Fidelity Life Assurance Corp. maintains an office in leased
facilities in Columbus, Ohio. This office primarily provides sales support and
supervision for credit insurance agents in the State of Ohio. Annual rental for
this office is approximately $13,000 plus insurance, taxes and utilities.
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 14 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K 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 1996 to the
shareholders of the Company for their consideration through the solicitation of
proxies or otherwise.<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> 1996 QUARTERLY STOCK PRICES
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Common Stock
High 4 3 1/2 3 3/8 3 15/16
Low 3 3 2 1/2 2 3/4
Convertible Preferred Stock
Series A
High 9 1/2 9 1/2 9 3/8 9 1/2
Low 8 8 1/4 8 1/4 8 1/4
</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, 1996, the Company s Employee Stock Ownership
Plan held 10% of the total common stock outstanding.
As of December 31, 1996, there were 6,834 shareholders of record who
collectively held 2,611,532 common shares and 130 shareholders of record of the
Convertible Preferred Stock, Series A, who held 481,461 shares.
Dividends on both the Company s common stock and Convertible Preferred
Stock, Series A, are declared by the Board of Directors. No common stock
dividends were declared in either 1996 or 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.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the Consolidated Financial Statements and the Notes thereto.
<TABLE>
(Not covered by Independent Auditor s Report)
Years Ended December 31,
(dollar amounts in thousands, except per 1996 1995 1994 1993 1992
share amounts) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Total revenues (before reinsurance ceded) $33,602 $37,430 $38,534 $37,169 $34,864
Premiums written (before reinsurance ceded) 30,350 33,832 34,916 31,944 29,623
Net investment income 2,087 2,236 2,878 3,403 4,270
Net return on average investments 5.4% 6.0% 6.7% 7.2% 7.4%
Loss from continuing operations (2,706) (2,072) (2,513) (2,513) (2,838)
Discontinued operations 1,472 471 1,301 685 3,361
Income (loss) before cumulative effect of
change in accounting principles (1,234) (1,601) (1,212) (815) 523
Cumulative effect of change in accounting 299 (710)
Net income (loss) (1,234) (1,601) (913) (1,525) 523
Income (loss) per common and common
equivalent share:
Loss from continuing operations (1.20) (0.96) (1.10) (0.71) (0.63)
Discontinued operations 0.56 0.18 0.48 0.25 0.65
Income (loss) before cumulative effect
In accounting principles (0.64) (0.78) (0.62) (0.46) 0.02
Cumulative effect of change in 0.11 (0.26)
Net income (loss) (0.64) (0.78) (0.51) (0.72) 0.02
December 31,
1996 1995 1994 1993 1992
Total assets 114,619 123,322 125,276 144,393 174,003
Total debt 0 2,537 3,389 4,683 5,987
Shareholders equity and redeemable 13,343 15,671 15,226 19,502 21,295
Shareholders equity per common share 3.31 4.20 3.96 5.41 5.91
Return on average total equity, including
preferred stock (7.9%) (9.9%) (5.1%) (7.4%) 2.8%
Cash dividends declared per common share NONE NONE 0.05 0.05 0.05
Life insurance in force (before reinsurance 2,015,543 2,132,073 2,265,919 2,489,330 2,917,021
ceded)
NOTE: The financial data for the years ended December 31, 1992 through 1995 has
been restated to reflect the operating results of the Company s individual
life insurance and auto auction businesses as discontinued operations.
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 1996
operating performance as well as its financial position at December 31, 1996 is
presented below. Information relating to 1995 and 1994 is also presented for
comparative purposes. This analysis should be read in conjunction with the
Consolidated Financial Statements and the related Notes.
OVERVIEW
Because of the recurring losses in the Company s core credit insurance
business, in early 1996, the Company began evaluating alternatives to best serve
the interests of its shareholders. The Company considered several
alternatives, including the following: (1) the sale of its insurance
operations, (2) the sale of its credit insurance marketing organization (with
retention and ongoing administration of inforce business), (3) the sale of its
auto auction business, (4) the sale of the Company, (5) the reorganization of
the Company or (6) the combination of the Company with another organization in
the same or other line of business. In January 1996, the Company engaged a
financial advisor to assist in evaluating the many alternatives to maximize
shareholder value. The Company subsequently solicited bids for both its
credit and universal life insurance operations and its auto auction business.
In October 1996, the Company entered into an Agreement and Plan of Merger with
LaSalle Group, Inc. ( LaSalle ) whereby the Company will become a wholly-owned
subsidiary of LaSalle. The merger transaction, which is subject to insurance
regulatory approval, was approved by the Company s common shareholders on March
25, 1997. See Note 4 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K for additional information with respect to the
pending merger.
LaSalle's strategic plan following the merger includes focusing on and
rebuilding the Company's core credit insurance operation by combining it with
other credit insurance businesses LaSalle plans to acquire. Accordingly, in
November 1996, the Company sold the business and related operating assets of
Interstate Auto Auction, Inc. to an unrelated third party for cash in the amount
of $4.85 million. In addition, in March 1997, the Company signed an agreement to
sell its remaining block of individual life insurance business, following the
sale of other blocks of individual life business in both 1992 and 1994. As a
result of these sale transactions, in the Company's consolidated financial
statements appearing elsewhere in this Form 10-K, the operating results and the
net gain from disposal of both the individual life insurance and the auto
auction segments have been reported as discontinued businesses for all periods
presented. Further information regarding these transactions is presented later
in this analysis and in Note 5 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-K.
The Company reported a net loss for 1996 of $1.2 million ($.64 per share)
compared to a loss of $1.6 million ($.78 per share) in 1995 and a loss of
$913,000 ($.51 per share) in 1994. However, the loss from continuing operations
was $2.7 million in 1996 compared to losses of $2.1 million and $2.5 million, on
a restated basis, in 1995 and 1994, respectively. The higher 1996 loss from
continuing operations is due primarily to the costs incurred by the Company in
connection with valuing and offering for sale the Company's various businesses.
Discontinued operations for 1996 include not only the operating results of each
of the discontinued segments but also a $1.8 million gain on the disposal of the
auto auction business and related assets and a loss of $914,000 arising from the
write-off of deferred policy acquisition costs based on the consideration to be
received in 1997 from the sale of the individual life insurance business.
The Company's remaining business segment, the Automotive Resource
Division, continued to report operating losses in 1996. The Division's credit
insurance results declined slightly from 1995 due to higher disability claims,
which offset significantly lower general expenses.
A more detailed discussion of the operating performance of each of the
Company's business segments, including the two discontinued businesses, is
presented later in this analysis under Results of Operations.
The following table compares revenues and operating results for each of
the past three years. Amounts for 1995 and 1994 have been restated to reflect
the operating results of the individual life insurance and auto auction
businesses as discontinued operations.
</TABLE>
<TABLE>
<CAPTION>(in thousands, except per 1996 1995 1994
share amounts)
<S> <C> <C> <C>
Total revenues by business unit:
Automotive Resource Division:
(principally credit insurance) $33,743 $37,528 $39,000
Corporate 19 21 10
Realized investment losses-not (160) (120) (476)
$33,602 $37,429 $38,534
Pre-tax loss from continuing
operations:
Automotive Resource Division ($2,500) ($2,392) ($2,182)
Other (874) (307) (401)
(3,374) (2,699) (2,583)
Realized investment losses (160) (120) (476)
Pre-tax loss from continuing (3,534) (2,819) (3,059)
operations
Income tax benefit (828) (747) (546)
Loss from continuing operations (2,706) (2,072) (2,513)
Discontinued operations, net of 1,472 471 1,301
income taxes
Loss before cumulative effect
of change in accounting principle (1,234) (1,601) (1,212)
Cumulative effect of change in
accounting principle 299
Net loss ($1,234) ($1,601) ($913)
Income (loss) per common share:
Loss from continuing operations ($1.20) ($0.96) ($1.10)
Discontinued operations 0.56 0.18 0.48
Loss before cumulative effect
change in accounting (0.64) (0.78) (0.62)
Cumulative effect of change in
accounting principle 0.11
Net loss ($0.64) ($0.78) ($0.51)
</TABLE>
RESULTS OF OPERATIONS
The Company's pre-tax operating results for the past three years can be
best understood through an analysis of each of its three business units. The
Automotive Resource Division, the Company's core business, is now the only
continuing business segment. 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 in a general
agency capacity and generates other revenues from services it provides to
approximately 900 automobile dealer customers. The Individual Life Insurance
Division has not written any new business since 1992. Closing on the sale of the
Division's remaining block of insurance business took place on March 27, 1997.
Auto auction operations were conducted through the Company's subsidiary,
Interstate Auto Action, Inc., until the sale of Interstate's business and
operating assets in late 1996.
Automotive Resource Division
Premium revenues from credit insurance, the Division's principal product,
declined 9.5% in 1996 from $33.1 million to $30 million. In 1995, premiums
decreased 3.3% from the $34.3 million in premiums written in 1994. The
cancellation of unprofitable business played a major part in the reduction in
premiums in both 1996 and in 1995. As a result of continued unprofitable
results, all of the Division's accounts in the state of North Carolina and
numerous accounts in Virginia and Ohio were canceled during 1996. A similar
action was taken in the state of Kentucky in 1995. Excluding these accounts, the
1996 drop in premium revenues was nominal. The Division's credit insurance
premium production remains significantly below pre-1990 levels due to the
declines which occurred during the economic recession of the early 1990's. A
consequence of the decline in written premiums has been a reduction in earned
premiums, which in turn has resulted in a substantial increase in operating
expense ratios since 1989. Higher expense ratios have been a key reason for the
unprofitable operating results the Division has experienced in recent years.
During 1996, the Company lost the endorsement of the Pennsylvania Automotive
Association which it held since 1987. The Company believes that the loss of the
endorsement will have some effect on its future premium production in
Pennsylvania, although it is not expected to have a materially adverse impact on
future operating results.
The Division's pre-tax operating results for 1996 declined from a $2.4
million loss in 1995 to a loss of $2.5 million. A significant increase in the
credit disability claims ratio on retained business (i.e., business not
reinsured to captive insurance companies) offset a $900,000 reduction in general
expenses. General expenses in both years now include expenses which had
previously been allocated to the discontinued Individual Life Insurance Division
and, to a lesser extent, the discontinued Auto Auction Division. The Company
does not believe the level of disability claims in 1996 and the claims ratio in
1996 are an indication of any unfavorable trend. In that regard, claims ratios
in the first two months of 1997 are well below the ratios for the same period in
1996. While the Division's expense ratio improved in 1996, the present ratio is
still higher than the ratio which is required to return the Division to
profitability. As noted above, the increased expense ratio compared to the ratio
in the late 1980's is a key reason for the Division's continued losses.
In July 1996, the Company and its joint venture partner canceled an
agreement whereby the companies shared in the profits from the credit insurance
business written by the Company in Pennsylvania, the Company's most profitable
credit insurance state. As a result, on credit premiums produced in Pennsylvania
after July, 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 above-referenced merger with LaSalle is
consummated. In the event the LaSalle merger is not completed, any payment to
the joint venture partner will be determined under a separate calculation.
If the proposed merger with LaSalle is completed, LaSalle's strategy to
return the Company's credit insurance operation to profitability will include
acquisitions of other credit insurance companies and other blocks of credit
insurance business, expansion of the Company's marketing territory and growth in
existing markets. LaSalle intends to provide additional capital not only to
finance growth by also to build the insurance subsidiaries' capital base in
order to improve the ratings of those companies by insurance rating agencies.
Individual Life Insurance Division
Operations in the Individual Life Insurance Division in 1996 and 1995 were
limited to one closed block of assumed universal life business, following the
sale of the Division's direct universal life business in 1994 and the sale of
its traditional whole life and term business in 1992. In March 1997, the Company
signed an agreement with World Insurance Company ("World"), pursuant to which
World will recapture the universal life business previously assumed by the
Company from World through a joint venture agreement which began in 1987. World
will pay a recapture consideration to the Company in the amount of $1.05
million. In exchange, the Company will transfer to World assets supporting the
net statutory basis policy reserves for this business. Based on the recapture
consideration to be received, the Company has written off $1.4 million in
deferred policy acquisition costs which are not recoverable. This write-off,
which totaled $914,000 on an after-tax basis, has been presented as a loss on
disposal of the discontinued segment in the Company's 1996 financial statements.
Excluding the write-off, the Division reported pre-tax income of $393,000
in 1996 compared to restated pre-tax income of $83,000 in 1995. The Division's
operating results for 1996 reflect the elimination of any continuing overhead
and indirect costs which had previously been allocated to this Division. The
results for prior periods have been restated to also eliminate these costs.
These reallocated costs totaled $292,000 in 1996 and $330,000 in 1995. Higher
than normal claims costs in the first half of 1995 adversely affected the
results for that year and are the principal reason for the lower earnings in
1995.
Auto Auction Division
On November 6, 1996, the Company sold the auto auction business and
related operating assets (property and equipment and inventories) of Interstate
Auto Auction to ADESA Pennsylvania, Inc. for cash of $4.85 million. The
Division's pre-tax income for the first nine months of 1996, which excludes any
continuing overhead, was $554,000 compared to income of $732,000, as restated to
eliminate any continuing overhead, in 1995. The operating results of the auto
auction after September 30, 1996, when the Company finalized its plan to dispose
of the business, have been included with the gain realized on the disposal of
the auction business. The auction generated an $84,000 pre-tax loss ($57,000
after taxes) during this period.
Approximately $1.7 million of the proceeds from the sale of the auto
auction business was used to repay the remaining amount due on the Company's
bank loans.
FINANCIAL CONDITION
A discussion of the important elements affecting the Company's financial
position at December 31, 1996 and 1995 is presented below.
Invested Assets
Invested assets at December 31, 1996 totaled $51.2 million compared to $49
million at the end of 1995. The $3.1 million in proceeds received from the sale
of the auto auction business, after repayment of the bank debt, is the primary
reason for the increase in investments. Those proceeds were invested principally
in bonds. Approximately $750,000 of the proceeds will be required in 1997 for
Federal and state income taxes on the gain from this sale. The invested asset
base also increased as a result of the sale of $1.2 million in non-investment
real estate for cash, the proceeds from which were reinvested in bonds. In
addition, during 1996, the Company completed the sale of all but one of the town
homes in a real estate development acquired in 1995 through foreclosure. This
property, which had a $1.5 million carrying value at December 31, 1995, was
classified as non-investment real estate. The proceeds from the sales of the
town home units have also been reinvested primarily in bonds.
The increases discussed above were partially offset by a $923,000
reduction in the carrying value of the Company's bond portfolio as a result of
higher interest rates since the end of 1995. The Company's bond portfolio is
carried at fair value pursuant to the requirements of Statement of Financial
Accounting Standards No. 115, based on the Company's determination that all of
its bonds should be considered as "available-for-sale", although the Company has
no current intentions to sell any of these securities (except for approximately
$8.3 million in bonds which were sold in 1997 in order to complete the above-
referenced sale transaction with World - see the Individual Life Insurance
Division section of this Management s Discussion and Analysis). 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 1996, the Company increased its loan loss reserves for mortgage
loans and investment and non-investment real estate by $35,000. Loan loss
reserves were increased by $93,000 and $450,000 in 1995 and 1994, respectively.
Management believes that its reserves at December 31, 1996 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, 1996 was
$3.4 million compared to $10.7 million at the end of 1995.
During 1996, the Company's mortgage loan portfolio declined from $7
million to $2.3 million. The substantial reduction is the result of the early
payoff of four mortgages with balances at the end of 1995 of $2.7 million and
the sale to a local bank of seven loans with balances totaling $2 million. The
proceeds from these transactions were reinvested primarily in bonds.
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.
Dividends and other distributions to the Company from Consumers Life are
limited in that the subsidiary is required to maintain minimum capital and
surplus, determined in accordance with regulatory accounting practices. All
distributions are further limited by Delaware state insurance laws to the
greater of the previous year s earnings, computed in accordance with statutory
accounting principles, or 10% of statutory capital and surplus as of the end of
the previous year. In some instances such payments may require the prior
approval of the insurance department. Also, any loans or advances to the Company
of a material amount must be reported to the insurance department. The Company
may have limited cash funds available to pay dividends in excess of amounts
transferred from Consumers Life and other subsidiaries. In addition, separate
restrictions apply to the surplus note owed to the Company by a subsidiary of
Consumers Life. Note 2 of the Notes to Consolidated Financial Statements
discusses these restrictions more specifically. The Company s non-life insurance
operations, particularly its insurance agency business, provide sources of cash
which are not subject to regulatory restrictions. Prior to its sale, the auto
auction business was also a source of significant cash flows for the Company.
The 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 to evaluate other alternatives to best serve the
interests of its shareholders. This evaluation process, in turn, led to the
proposed merger transaction discussed in the Overview section of this
Management s Discussion and Analysis and in Note 4 of the Notes to Consolidated
Financial Statements.
During 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 and 1996, as a
result of additional reductions in general expenses, 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, including redeemable preferred stock,
decreased by approximately $2.2 million during 1996. The decrease is
attributable to (1) the current year net loss of $1.2 million, (2) the decline
in the carrying value of the bond portfolio ($923,000 less $314,000 in
applicable deferred income taxes), (3) $409,000 in dividends to preferred
shareholders and (4) the purchase of treasury shares at a cost of $50,000.
Shareholders equity per common share also decreased from $4.20 at December 31,
1995 to $3.31 at the end of 1996.
The Company continued to reduce its outstanding bank debt during 1996.
During the first ten (10) months of the year, principal payments of $845,000
were made. On November 6, 1996, in conjunction with the sale of the auto auction
business discussed above, the remaining $1.7 million in debt was repaid.
Inflation
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.
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. 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 years ended December 31,
1996 and 1995 have been audited by Arthur Andersen LLP, independent auditors.
The consolidated financial statements for the year ended December 31, 1994 have
been audited by Ernst & Young LLP, independent auditors. Such audits were
conducted in accordance with generally accepted auditing standards, and include
a review and evaluation of our internal accounting control structure, tests of
the accounting records and other auditing procedures they consider necessary to
express their informed professional opinion on the consolidated financial
statements.
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
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 sheets of Consumers
Financial Corporation (a Pennsylvania corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders equity and cash flows for the years then ended. These
financial statements and the schedules referred to below are the responsibility
of the Company s management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
As discussed in Note 4 of the Notes to Consolidated Financial Statements,
on October 30, 1996, the Company entered into an Agreement and Plan of Merger
with LaSalle Group, Inc. (LaSalle). The merger is subject to the approval of the
insurance regulators in the four states in which the Company s insurance
subsidiaries are domiciled. In addition, the Company is addressing regulatory
matters in various states, and the Company s plans relative to those matters are
discussed in Note 20.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Financial
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 14(a) are presented for purposes
of complying with the Securities and Exchange Commission s rules and are not
part of the basic financial statements. The 1996 and 1995 amounts included in
these schedules have been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 28, 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated statement of operations,
shareholders equity and cash flows of Consumers Financial Corporation and
subsidiaries for the year ended December 31, 1994. Our audit also included the
1994 amounts in the financial statement schedules listed in the index at item
14(a). These financial statements and schedules are the responsibility of the
Company s management. Our responsibility is to express an opinion on these
financial statements and the 1994 amounts in the schedules based on our audit.
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 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of the
operations of Consumers Financial Corporation and subsidiaries and their cash
flows for the year ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the 1994 amounts in the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in 1994
the Company changed its method of recognizing earnings on credit disability
insurance.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 24, 1995
<TABLE>
<CAPTION>CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(dollar amounts in thousands) 1996 1995
Assets
<S> <C> <C>
Investments:
Fixed maturities $42,618 $35,048
Mortgage loans on real estate 2,286 7,041
Investment real estate 1,020
Policy loans 518 482
Other invested assets 1,866 2,512
Short-term investments 3,901 2,892
Total investments 51,189 48,995
Cash 556 451
Accrued investment income 731 653
Receivables 20,290 23,820
Prepaid reinsurance premiums 17,338 18,604
Deferred policy acquisition costs 18,949 21,926
Property and equipment 2,168 4,118
Other real estate 1,115 2,645
Other assets 2,283 2,110
$114,619 $123,322
Liabilities, Redeemable Preferred Stock
and Shareholders Equity
Liabilities:
Future policy benefits $35,386 $36,582
Unearned premiums 56,178 57,943
Other policy claims and benefits payable 2,736 2,851
Other liabilities 5,495 6,259
Income taxes:
Current 1,185 299
Deferred 296 1,180
Notes payable 2,537
Total liabilities 101,276 107,651
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized
632,500 shares; issued 1996 and 1996m 536,500 shares;
outstanding 1996 and 1995, 481,461 shares; redemption amount 4,693 4,657
1996 and 1996m $4,815; net of treasury stock of $453 in 1996
and 1995.
Shareholders equity:
Common stock, $.01 stated value, authorized 10,000,000
shares; issued 1996, 3,021,496 shares, 1995, 3,031,054 30 30
shares; outstanding 1996, 2,611,532 shares, 1995, 2,621,090
shares
Capital in excess of stated value 7,966 8,016
Net unrealized appreciation of debt and equity 70 705
securities
Retained earnings 2,009 3,688
Treasury stock (1,425) (1,425)
Total shareholders equity 8,650 11,014
$114,619 $123,322
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts) 1996 1995 1994
(Restated) (Restated)
<S> <C> <C> <C>
Revenues:
Premiums written $30,350 $33,832 $34,916
Decrease (increase) in unearned premiums 1,765 (1,392) (2,345)
Gross premium income 32,115 32,440 32,571
Less reinsurance ceded (11,689) (12,627) (13,267)
Net premium income 20,426 19,813 19,304
Net investment income 2,087 2,236 2,878
Realized investment losses (160) (120) (476)
Fees and other income 1,325 1,481 1,216
Total revenues 23,678 23,410 22,922
Benefits and expenses:
Death and other benefits 11,698 10,267 8,877
Amortization of deferred policy 10,134 10,154 10,388
acquisition costs
Operating expenses 5,380 5,808 6,716
Total benefits and expenses 27,212 26,229 25,981
Loss from continuing operations before
income tax benefit (3,534) (2,819) (3,059)
Income tax benefit (828) (747) (546)<PAGE>
Loss from continuing operations (2,706) (2,072) (2,513)
Discontinued operations:
Income from operations of discontinued
businesses (net of income taxes) 587 471 1,035
Gain on disposal of discontinued
businesses (net of income taxes) 885 266
1,472 471 1,301
Loss before cumulative effect of change in
accounting principle (1,234) (1,601) (1,212)
Cumulative effect of change in accounting 299
principle
Net loss ($1,234) ($1,601) ($913)
<S> <C> <C> <C>
Income (loss) per common and common
equivalent share:
Loss from continuing operations ($1.20) ($0.96) ($1.10)
Discontinued operations 0.56 0.18 0.48
Loss before cumulative effect of (0.64) (0.78) (0.62)
change in accounting principle
Cumulative effect of change in 0.11
accounting principle
Net loss ($0.64) ($0.78) ($0.51)
Weighted average number of shares 2,614 2,634 2,690
outstanding
</TABLE>
See notes to consolidated financial statements<PAGE>
<TABLE>
<CAPTION> CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 1996, 1995 and 1994
<CAPTION> Capital in Net unrealized
in excess appreciation
of (depreciation)
Common stock stated Fixed Equity
(dollar amounts in thousands, except Shares Amount value maturities securities
per share amounts)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 3,067 $31 $8,167 $567 $32
Change in net unrealized appreciation
of fixed maturities and equity (2,541) (10)
securities for the year
Preferred stock dividends
Common stock dividends ($.05 per share)
Accretion of difference between fair
value and mandatory redemption value
of preferred stock
Purchase of treasury shares
Retirement of treasury shares (6) (38)
Net loss for the year
Balance, December 31, 1994 3,061 31 8,129 (1,974) 22
Change in net unrealized appreciation
(depreciation) of fixed maturities 2,648 9
and equity securities for the year
Preferred stock dividends
Accretion of difference between fair
value and mandatory redemption
value of preferred stock
Purchase of treasury shares
Retirement of treasury shares (30) (1) (113)
Net loss for the year
Balance, December 31, 1995 3,031 30 8,016 674 31
Change in net unrealized appreciation
(depreciation) of fixed maturities (609) (26)
and equity securities for the year
Preferred stock dividends
Accretion of difference between fair
value and mandatory redemption
value of preferred stock
Purchase of treasury shares
Retirement of treasury shares (10) (50)
Net loss for the year
Balance, December 31, 1996 3,021 $30 $7,966 $65 $5
</TABLE>
See notes to consolidated financial statements<PAGE>
<TABLE>
<CAPTION> CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (continued)
Years Ended December 31, 1996, 1995 and 1994
Retained Treasury stock Total
(dollar amounts in thousands, except per share amounts) earnings Shares Amount amount
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $7,230 (317) ($1,149) $14,878
Change in net unrealized appreciation of fixed (2,551)
maturities and equity securities for the year
Preferred stock dividends (412) (412)
Common stock dividends ($.05 per share) (135) (135)
Accretion of difference between fair value and (36) (36)
mandatory redemption value of preferred stock
Purchase of treasury shares (71) (226) (226)
Retirement of treasury shares 6 38
Net loss for the year (913) (913)
Balance, December 31, 1994 5,734 (382) (1,337) 10,605
Change in net unrealized appreciation (depreciation) 2,657
of fixed maturities and equity securities for the year
Preferred stock dividends (409) (409)
Accretion of difference between fair value and (36) (36)
mandatory redemption value of preferred stock
Purchase of treasury shares (58) (202) (202)
Retirement of treasury shares 30 114
Net loss for the year (1,601) (1,601)
Balance, December 31, 1995 3,688 (410) (1,425) 11,014
Change in net unrealized appreciation (depreciation) of (635)
fixed maturities and equity securities for the year
Preferred stock dividends (409) (409)
Accretion of difference between fair value and (36) (36)
mandatory redemption value of preferred stock
Purchase of treasury shares (10) (50) (50)
Retirement of treasury shares 10 50
Net loss for the year (1,234) (1,234)
Balance, December 31, 1996 $2,009 (410) ($1,425) $8,650
</TABLE>
See notes to consolidated financial statements<PAGE>
<TABLE>
<CAPTION>CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ($1,234) ($1,601) ($913)
Adjustments to reconcile net loss to cash
provided by (used in) operatingactivities:
Deferred policy acquisition costs incurred (8,987) (11,005) (10,647)
Amortization of deferred policy acquisition costs 11,964 10,734 19,663
Other amortization and depreciation 433 613 817
Change in future policy benefits 454 2,063 (14,493)
Change in unearned premiums (1,765) 1,392 2,982
Amounts due reinsurers 2 (86) 2,147
Income taxes (22) (318) (721)
Change in receivables 4,721 3,805 (20,230)
Change in other liabilities (695) (117) 600
Cumulative effect of change in accounting (299)
principle
Other (38) 81 (875)
Total adjustments 6,067 7,162 (21,056)
Net cash provided by (used in) operating activities 4,833 5,561 (21,969)
Cash flows from investing activities:
Purchase of investments (13,140) (9,657) (14,180)
Maturity of investments 6,484 7,027 9,035
Sale of investments 6,598 2,190 31,886
Purchase of property and equipment (24) (371) (1,104)
Net cash provided by (used in) investing activities (82) (811) 25,637
Cash flows from financing activities:
Principal payments on debt (2,537) (852) (1,295)
Receipts from universal life and investment products 4,775 4,938 7,256
Withdrawals on universal life and investment products (6,425) (9,029) (8,547)
Purchase of treasury stock, including 8 1/2% (50) (201) (265)
redeemable preferred stock
Cash dividends to shareholders (409) (409) (546)
Net cash used in financing activities (4,646) (5,553) (3,397)
Net increase (decrease) in cash 105 (803) 271
Cash at beginning of year 451 1,254 983
Cash at end of year $556 $451 $1,254
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $255 $305 $319
Income taxes $154 $75 $1,104
</TABLE>See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.<PAGE>
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 1996.
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. (Interstate) 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.
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.
Fair values of financial instruments<PAGE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
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 (see Note 6).
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.
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. These intangible assets are periodically reviewed for
impairment, based on an assessment of future operations, to ensure that they are
appropriately valued.
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).
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.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), in 1996. Under the
provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related Interpretations. The Company has elected to
continue using the intrinsic value method to account for its stock-based
compensation plans. SFAS 123 requires companies electing to continue using the
intrinsic value method to make certain pro forma disclosures (see Note 16).
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121), was adopted as of January 1, 1996. SFAS 121 standardized the
accounting practices for the recognition and measurement of impairment losses on
certain long-lived assets. The adoption of SFAS 121 had no material effect on
the Company s results of operations or financial position.
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 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 17.
(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 in each of the states in which it is licensed, determined in accordance
with regulatory accounting practices. The amount of minimum capital and surplus
required is $5.5 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, 1996, approximately
$8.6 million of Consumers Life's net assets cannot generally be transferred to
the parent company and $585,000 is available for transfer during 1996 as long as
the minimum capital and surplus requirements mentioned above are maintained.
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 $5.9 million at December 31, 1996 and $7.1 million at December
31, 1995. After reflecting the impact of both the disallowed reinsurance treaty
and the excess subsidiary investments discussed in Note 20, the statutory
capital and surplus of the life insurance subsidiaries at December 31, 1995
would have been $4.6 million. The insurance companies combined statutory net
income was $29,000 in 1996. In 1995, the companies reported a combined net loss
of $3,589,000, and in 1994 they reported net income of $477,000.
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 both December 31, 1996 and 1995
was $5.3 million.
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. 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, 1996 and 1995, the premiums in process of collection receivable totaled $1.8
million and $2 million, respectively.
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).
4. Pending Merger
Because of the recurring losses in the Company s core credit insurance
business, in early 1996, the Company began evaluating alternatives to best serve
the interests of its shareholders. The Company considered several alternatives,
including the following: (1) the sale of its insurance operations, (2) the sale
of its credit insurance marketing organization (with retention and ongoing
administration of inforce business), (3) the sale of its auto auction business,
(4) the sale of the Company, (5) the reorganization of the Company or (6) the
combination of the Company with another organization in the same or other lines
of business.
In January 1996, the Company engaged a financial advisor to assist in
evaluating the many alternatives to maximize shareholder value. In February
1996, the Company began soliciting bids for both its credit and universal life
insurance operations and its auto auction business. From March until May 1996,
12 offers were received to buy the Company or segments of the Company, including
one from LaSalle Group, Inc. (LaSalle), an investment management firm, which was
structured as a cash merger. Following the completion of due diligence reviews
and the submission of revised offers by the four highest bidders, the Company
and its financial advisor reviewed and analyzed each offer. In October 1996,
management recommended and advised the Company s Board of Directors to accept
the revised offer from LaSalle.
On October 30, 1996, the Company entered into an Agreement and Plan of
Merger with LaSalle and Consumers Acquisition Corp. ("CAC"), whereby CAC will be
merged with and into the Company (the "Merger"). As the surviving corporation in
the Merger, the Company will become a wholly-owned subsidiary of LaSalle. The
Merger is subject to, among other things, the approval of insurance regulators
in the four states in which the Company's insurance subsidiaries are domiciled.
The Company s common shareholders approved the Merger at a Special Meeting held
on March 25, 1997. The Agreement and Plan of Merger provides that the holders of
the Company's outstanding common stock will receive cash in the amount of $3.92
per share, subject to certain adjustments. The Company's Preferred Stock will
remain outstanding following the Merger, and the holders thereof will retain all
of the rights and preferences which currently exist for such stock.
5. Discontinued Operations
In late September 1996, the Company finalized a plan to dispose of the
business and the related operating assets of Interstate as part of an overall
plan to merge or otherwise combine its core insurance operations with those of
another insurance company. On November 6, 1996, the Company sold Interstate s
auto auction business and all of its property, plant and equipment and
inventories to ADESA Pennsylvania, Inc., an unrelated third party, for cash of
$4.85 million. The sale resulted in a fourth quarter after-tax gain of
approximately $1.8 million. The gain on disposal includes a loss from operations
of $84,000 from September 30, 1996 (the measurement date) to December 31, 1996,
less an income tax benefit of $28,000.
Accordingly, in the accompanying financial statements, Interstate s
operating results have been reported as discontinued operations for all periods
presented. Interstate s non-operating net assets, principally cash, receivables,
investments and trade payables, were retained by the Company.
In March 1997, the Company signed a Recapture Agreement to reinsure its
remaining block of individual life insurance business back to the direct writer
of the business (see Note 21). The Recapture Agreement provides that the direct
writer will pay the Company a recapture consideration equal to $1.05 million in
exchange for the transfer by the Company of assets in an amount equal to the net
statutory policy reserves for this business. Based upon the recapture
consideration to be received, the transaction will result in an after-tax loss
of approximately $900,000. This loss has been reflected in the Company s 1996
financial statements.
The Company had previously 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 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.
Accordingly, in the accompanying financial statements, the operating
results of the Company s individual life insurance business have been reported
as discontinued operations for all periods presented.
A summary of the results of operations of the discontinued segments is
presented below:
<TABLE> 1996
Individual
Life Auto
(in thousands) Insurance Auction Total
<S> <C> <C> <C>
Revenues $4,349 $2,688 $7,037
Income from operations before
income tax expense $393 $554 $947
Income tax expense 134 226 360
Income from operations 259 328 587
Gain (loss) on disposal before income
tax expense (benefit) (1,385) 3,031 1,646
Income tax expense (benefit) (471) 1,232 761
Gain (loss) on disposal (914) 1,799 885
Income (loss) from discontinued operations ($655) $2,127 $1,472
</TABLE>
<TABLE> 1995
<CAPTION> Individual
Life Auto
(in thousands) Insurance Auction Total
<S> <C> <C> <C>
Revenues $5,781 $3,221 $9,002
Income from operations before
income tax expense $83 $732 $815
Income tax expense 28 316 344
Income from discontinued operations $55 $416 $471
</TABLE>
<TABLE> 1994
<CAPTION> Individual
Life Auto
(in thousands) Insurance Auction Total
<S> <C> <C> <C>
Revenues $8,517 $3,304 $11,821<PAGE>
Income from operations before
income tax expense $1,135 $478 $1,613
Income tax expense 386 192 578
Income from discontinued operations 749 286 1,035
Gain on disposal before income tax expense 403 403
Income tax expense 137 137
Gain on disposal 266 266
Income from discontinued operations $1,015 $286 $1,301
</TABLE>
At December 31, 1996 and 1995, the remaining net assets of the
discontinued individual life insurance segment consisted of the following:
<TABLE>
<CAPTION> December 31
(in thousands) 1996 1995
<S> <C> <C>
Invested assets $8,576 $7,787
Accrued investment income and receivables 135 218
Deferred policy acquisition costs 2,535 4,284
Future policy benefits and other policy (11,246) (10,743)
liabilities
Net assets $0 $1,546
</TABLE>
At December 31, 1995, the net assets of the discontinued auto auction
business consisted of $1.8 million in property and equipment and $84,000 in
inventories.
6. Investments and Investment Income
<PAGE> Investments, which are valued for financial statement purposes as
described in Note 1, consist of the following at December 31, 1996:
<TABLE>
<CAPTION> Quoted or Balance
Amortized estimated sheet
(in thousands) cost fair value amount
<S> <C> <C> <C>
Fixed maturities:
Bonds:<PAGE>
United States government and government $25,650 $25,889 $25,889
agencies and authorities
Foreign governments 287 298 298
Public utilities 3,979 3,868 3,868
All other 12,399 12,358 12,358
42,315 42,413 42,413
Certificates of deposit 205 205 205
Total fixed maturities 42,520 42,618 42,618
Mortgage loans on real estate 2,286 2,425 2,286
Policy loans 518 518 518
Other invested assets 1,861 1,931 1,866
Short-term investments 3,901 3,901 3,901
Total investments $51,086 $51,393 $51,189
</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, 1996 and 1995, no mortgage loans or other loans were
considered to be non-performing loans.
At December 31, 1996, approximately 81% of the Company's investments in
mortgage loans were secured by commercial real estate and the remaining mortgage
loans were secured by residential real estate. Approximately 73% of the loans
involved properties located in Central Pennsylvania. Such investments consist
principally of first mortgage liens on completed income-producing properties,
primarily office buildings . One mortgage loan exceeded 10% of shareholders
equity at December 31, 1996, and two mortgage loans exceeded 10% of
shareholders equity at December 31, 1995. The Company s mortgage loan
valuation reserve at December 31, 1996 and 1995 was $100,000.
Accumulated depreciation on investment real estate amounted to $51,000 at
December 31, 1995. At December 31, 1996, all the Company s real estate is
classified as non-investment real estate, since the Company intends to sell
these properties. Accumulated depreciation on the properties at the time they
were reclassified totaled $22,663.
Net investment income is applicable to the following investments:
<TABLE>
<CAPTION> Years
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Interest:
Fixed maturities $2,364 $2,175 $2,773
Mortgage loans 421 692 2,138
Policy loans 33 58 250
Other invested assets 59 38 117
Short-term investments 223 186 168
Real estate income 157 332 177
3,257 3,481 5,623
Less investment expenses (680) (702) (649)
Total net investment income 2,577 2,779 4,974
Less net investment income attributable to 490 543 2,096
discontinued operations
Net investment income attributable to $2,087 $2,236 $2,878
continuing operations
</TABLE>
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 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 $24,749 $409 $139 $25,019
Corporate securities 16,665 121 262 16,524
Mortgage-backed securities 901 2 33 870
Totals $42,315 $532 $434 $42,413
</TABLE>
<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>
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION> Amortized Estimated
(in thousands) cost fair value
<S> <C> <C>
Due in 1997 $4,896 $4,910
Due in 1987 - 2002 26,466 26,673
Due in 2003 - 2007 8,459 8,395
Due after 2007 1,593 1,565
41,414 41,543
Mortgage-backed securities 901 870
Totals $42,315 $42,413
</TABLE>
Proceeds from sales of investments in debt securities and assets held for
sale during 1996 were $4.1 million. Gross gains of $6,000 and gross losses of
$20,000 were realized on those sales. Proceeds from such sales in 1995 were $4.1
million. Gross gains of $3,000 and gross losses of $29,000 were realized on
those sales. Proceeds from sales in 1994 were $9.6 million. Gross gains of
$41,000 and gross losses of $38,000 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 amortzied cost and
investment quoted or
gains estimated
(in thousands) (losses) fair value Total
<S> <C> <C> <C>
1996
Fixed maturities ($14) ($923) ($937)
Tax effect 314 314
Totals ($14) ($609) ($623)
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)
</TABLE>
Realized gains and losses in the years ended December 31, 1996, 1995 and
1994 also arose from the sale of other investments.
7. Receivables
<TABLE>
<CAPTION> December 31
(in thousands) 1996 1995
<S> <C> <C>
Amounts due from agents $2,981 $3,399
Reinsurance receivable 17,543 20,022
Other 805 1,492
21,329 24,913
Less allowance for uncollectible accounts (1,039) (1,093)
Balance $20,290 $23,820
</TABLE>
8. Deferred Policy Acquisition Costs
<TABLE>
<CAPTION> Individual
(in thousands) Credit Life Total
<S> <C> <C> <C>
Balance, January 1, 1994 $17,130 $13,899 $31,029
Cumulative effect of change in accounting (359) (359)
principle (Note 3)
Costs deferred 10,495 152 10,647
Amortization (10,388) (1,533) (11,921)
Write-off attributable to sale of universal (7,741) (7,741)
life insurance
Balance, December 31, 1994 16,878 4,777 21,655
Costs deferred 10,917 88 11,005
Amortization (10,153) (581) (10,734)
Balance, December 31, 1995 17,642 4,284 21,926
Costs deferred 8,905 82 8,987
Amortization (10,133) (446) (10,579)
Write-off attributable to pending sale (1,385) (1,385)
of universal life insurance
Balance, December 31, 1996 $16,414 $2,535 $18,949
</TABLE>
9. Property and Equipment
<TABLE>
<CAPTION> December 31
(in thousands) 1996 1995
<S> <C> <C>
Data processing equipment and software $2,062 $2,176
Furniture and equipment 1,087 1,660
Buildings and land 1,978 3,563
Improvements to property 523 1,634
5,650 9,033
Less accumulated depreciation (3,482) (4,915)
Balance $2,168 $4,118
</TABLE>
10. Policy Liabilities
The composition of future policy benefits and unearned premiums at
December 31, 1996 and the assumptions pertinent thereto are as follows:<PAGE>
<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 $596,690 $23,966 4 1/2% - 11 1/2%
1961 - 1992
Credit life 1,418,853 $21,689 (a)
1987 - 1996
Credit disability 11,420 34,489 (a)
1987-1996
Balance $2,015,543 $35,386 $56,178
</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 $3.0 million at December 31, 1996.
Future policy benefits and unearned premiums do not include any deduction
for reinsurance ceded to other companies. At December 31, 1996 and 1995, future
policy benefits relating to such reinsurance totaled $16.1 and $18.5 million,
respectively. These amounts have been classified with Receivables. Unearned
premiums with respect to reinsured business totaled $17.3 and $18.6 million at
December 31, 1996 and 1995, respectively. These unearned premiums are separately
stated on the Consolidated Balance Sheets as Prepaid Reinsurance Premiums.
Insurance in force net of reinsurance ceded was $1.1 billion at December 31,
1996.
Transactions affecting the Company s credit disability claim liabilities
and reserves, net of reinsurance, are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
<S> <C> <C>
Balance as of January 1 $11,250 $11,262
Less reinsurance recoverable 3,267 3,296
Net balance as of January 1 7,983 7,966
Incurred claims related to:<PAGE>
Current year 7,344 6,669
Prior year (425) (849)
Total incurred claims 6,919 5,820
Paid claims related to:
Current year 2,161 2,033
Prior years 4,068 3,770
Total paid claims 6,229 5,803
Net balance as of December 31 8,673 7,983
Plus reinsurance recoverable 3,667 3,267
Balance as of December 31 $12,340 $11,250
</TABLE>
11. 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 $20.5 million at December 31, 1996 as an advance of
future statutory profits on the blocks of business reinsured under these
agreements. 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 except for the cost of this financing, which
amounted to $608,000, $603,000 and $616,000 in 1996, 1995 and 1994,
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.
Credit insurance premiums ceded to other companies were $10.4 million, $12
million and $16.3 million in 1996, 1995 and 1994, respectively.
Incurred benefits and losses reinsured in 1996 were $6.2 million compared
to $6.7 million in 1995. 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, 1996 and 1995, reinsurance recoverable for paid and unpaid
benefits was $17.5 million and $20 million, respectively. Reinsurance
recoverable is classified with Receivables.
12. 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, a reduction in the
Company s required debt service payments and the transfer of a portion of the
remaining balance to 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 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 on these loans was
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 and its inventories were separately pledged for Interstate s loan.
The security for each loan was cross-collateralized to the other loan. Both of
these loans were repaid in full in 1996 in connection with the sale of the
Company s auto auction business, resulting in a release of the liens on
Interstate s property and equipment and the release of the stock of the
subsidiaries (see Note 5).
Interest costs incurred on long-term debt during each of the last three
years are as follows: 1996, $230,000; 1995, $286,000; 1994, $305,000.
13. 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. Effective July 31, 1996, the Company froze the benefits payable to
participants under the pension plan. As a result, contributions to the plan,
which have approximated $210,000 per year, will be reduced in the future.
The profit sharing plans, which include an employee stock ownership plan,
provide for annual contributions in amounts to be determined by the Board of
Directors. Such contributions are based upon the annual compensation of each
employee. No contributions were made in either 1996, 1995 or 1994.
The funded status of the plan is as follows:
<TABLE>
<CAPTION> December 31,
(in thousands) 1996 1995
<S> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $3,000 $2,783
Accumulated benefit obligation $3,016 $2,814
Actuarial present value of projected $3,016 $2,947
benefit obligation
Plan assets at fair value 2,727 2,558
Projected benefit obligation in excess of plan (289) (389)
assets
Unrecognized net losses 472 401
Unrecognized net liability at transition 74 86
Unrecognized reduction in projected benefit (136)
obligation
Unamortized prior year loss (410) (354)
Prepaid (accrued) pension cost ($289) ($256)
(in thousands) 1996 1995 1994
Net periodic pension cost included the
following components:
Service cost during the period $139 $172 $178
Interest cost on projected benefit 213 196 173
obligation
Actual return on plan assets (175) (161) (153)
Net amortization and deferral 2 2 9
Net periodic pension cost $179 $209 $207
</TABLE>
Rates used in determining pension expense and related obligations were:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Discount rate for expense computation, 7.50% 7.50% 7.50%
beginning of year
Assumed annual rate of return on plan assets 7.50% 7.50% 7.50%
Discount rate for projected benefit obligation, 7.50% 7.50% 7.50%
end of year
Assumed annual rate of increase in compensation 3.00% 3.00% 3.00%
</TABLE>
14. Commitments and Contingencies
Rental expense in 1996, 1995 and 1994 was approximately $351,000, $355,000
and $450,000, 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.
In connection with the cancellation of a joint venture agreement in 1996,
the Company has agreed to pay $500,000 in cash to its former joint venture
partner at the time the pending Merger with LaSalle (see Note 4) is consummated.
In the event the Merger with LaSalle is not completed, any payment to the joint
venture partner will be determined under a separate calculation 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 pro rata share of the proceeds, if any, it receives from the
sale of the marketing organization. The Company agreed to make such payments to
the joint venture partner as consideration for terminating the venture, which
will allow the Company to retain the profits or losses on credit insurance
premiums previously reinsured to the partner.
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.
In March 1997, the Company received a demand for arbitration and statement
of claim from a former general agency with whom the Company had a partnership
agreement. The partnership agreement provided that the agency would market
universal life insurance business for the Company, pursuant to specific criteria
established by the Company, and would also be entitled to a share of the
profits, if any, which arose from the business produced. The claimant is seeking
monetary damages to compensate it for the Company s alleged failure to share
profits and for other alleged losses resulting from the Company s rejection of
policy applications involving unacceptable risks. While management believes this
claim is completely without merit and intends to vigorously defend itself in
this matter, the ultimate outcome of this claim cannot be determined at this
time.
The Company had been 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. During 1996, the
Company settled this litigation for a nominal amount.
In connection with the sale of Interstate s business, as discussed in Note
5, the Company provided the buyer with limited indemnifications with respect to
certain potential environmental liabilities asserted within two years from the
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.
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.
15. Redeemable Preferred Stock
The Redeemable Convertible Preferred Stock (the Preferred Stock ) will
remain outstanding following the pending merger described in Note 4, and the
holders thereof will retain all of the rights and preferences which currently
exist for such stock, as discussed below. The 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 Preferred Stock (equivalent to a conversion price of
$6.75 per share). The 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
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 Preferred Stock initially issued, commencing July 1, 1998,
calculated to redeem all of the 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 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 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 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 1996, 1995 and 1994).
At December 31, 1996 and 1995, 713,275 shares of common stock were
reserved for the conversion of the Preferred Stock.
16. 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 at price 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.
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
<PAGE>
<CAPTION> Option Price
shares per share
<S> <C> <C>
Balance, January 1, 1994 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 - 5.00
Balance, December 31, 1995 179,000 2.25
Options terminated upon exercise of SAR s (30,000) 2.25
Balance, December 31, 1996 149,000 2.25
</TABLE>
During 1996, 30,000 SAR s were exercised, resulting in a cash payment of
$41,250 based on a market price of $3.625 on the date of exercise. At December
31, 1996, 133,117 shares were reserved for options which are available to be
granted and all of the 149,000 outstanding options were exercisable.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
123 - Accounting for Stock-Based Compensation. As permitted by the statement,
the Company has elected to continue to account for stock-based compensation
using the intrinsic value method under Accounting Principles Board Opinion
No. 25. Accordingly, no compensation expense has been recognized for stock
options. The Company believes the computation of compensation expense based on
the fair value method of accounting, as defined in SFAS No. 123, would have no
material effect on the results of operations.
17. 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
(b) Distributions, other than stock dividends, 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, 1996 Policyholders' Surplus for the life insurance
companies combined aggregated approximately $1.6 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.
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, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>(in thousands) 1996 1995
<S> <C> <C>
Deferred tax liabilities:
Fixed maturities $33 $347
Deferred policy acquisition costs 6,366 7,426
Other 359 437
6,758 8,210
Deferred tax assets:
Future policy benefits and financial 5,796 5,827
reinsurance
Net operating loss carryforwards 1,589 2,143
Other 301 284
7,686 8,254
Valuation allowance for deferred tax assets (1,224) (1,224)
6,462 7,030
Net deferred tax liability $296 $1,180
</TABLE>
Significant components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal ($835) ($149) $109
State 10 65 131
Total current (825) (84) 240
Deferred (3) (663) (786)
Income tax benefit related to continuing (828) (747) (546)
operations
Income tax expense (benefit) included with
discontinued operations:
Current 1,688 220 680
Deferred (567) 124 35
1,121 344 715
Deferred income taxes included with cumulative 154
effect of change in accounting principle<PAGE>
Total income tax expense (benefit) $293 ($403) $323
</TABLE>
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) 1996 1995 1994
<S> <C> <C> <C>
Loss from continuing operations before income ($3,534) ($2,819) ($3,059)
tax benefit
Income tax benefit at 34% statutory rate on (1,202) (958) (1,040)
pre-tax loss
Effect of rate difference on net operating 288
loss carryback
Adjustment of prior year s income tax expense (8) 50 291
Dividends received deduction (11) (10)
State income taxes 17 35 87
Items not includable for tax purposes 20 12 94
Other, net 68 124 22
Actual income tax benefit ($828) ($747) ($546)
</TABLE>
At December 31, 1996 the life insurance companies have available
approximately $4.7 millon of Federal net operating losses. These losses will be
carried forward to future years, and may only be used to offset the taxable
income of the life insurance companies. Approximately $3.6 million of these net
operating losses are subject to limitations on their use under Internal Revenue
Code Section 382 and the consolidated return regulations. This operating loss
will expire in 2004. The remaining $1.1 million of net operating losses will
expire in 2009.
18. 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 Preferred Stock, which is not considered a common stock
equivalent, was not dilutive in 1996, 1995 or 1994.
19. Segment Information
As a result of the disposal of the auto auction business in 1996 and the
planned disposal of the remaining block of individual life insurance business in
early 1997, the Company now operates in one industry segment: credit insurance
and related products and services (the Automotive Resource Division). Revenues
(net of non-financing reinsurance) and pre-tax loss for the Automotive Resource
Division are presented below for the years ended December 31, 1996, 1995 and
1994. Certain corporate activities, which are insignificant in relation to the
Automotive Resource Division, are presented separately.
<TABLE>
<CAPTION>(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Revenues (net of reinsurance):
Automotive Resource Division $23,820 $23,509 $23,388
Corporate 18 21 10
23,838 23,530 23,398
Realized investment losses not allocated (160) (120) (476)
$23,678 $23,410 $22,922
Pre-tax loss from continuing operations:
Automotive Resource Division ($2,500) ($2,392) ($2,182)
Corporate (874) (307) (401)
(3,374) (2,699) (2,583)
Realized investment losses (160) (120) (476)
($3,534) ($2,819) ($3,059)
</TABLE>
Operating expenses include amortization of deferred policy acquisition
costs and other amortization and depreciation for the years ended December 31,
1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Automotive Resource Division $10,315 $10,379 $10,854
Corporate 40 47 47
$10,355 $10,426 $10,901
</TABLE>
20. Regulatory Matters
In connection with the proposed Merger with LaSalle discussed in Note 4
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 remaining agreement was terminated, and this business was
subsequently coinsured to a third party reinsurer in connection with the planned
sale of the subsidiary (see Note 21). 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 subsidiary
included this adjustment in its 1996 statutory financial statements as a direct
charge to its surplus.
As discussed in Note 21, the Company has signed a Consent Order issued by
the North Carolina Insurance Department requiring the Company s North Carolina
subsidiary to either relocate its office and records to North Carolina or
redomesticate to another state by September 11, 1997 to avoid having its
Certificate of Authority revoked.
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. Consumers Life included both of these
adjustments in its 1996 statutory financial statements as a direct charge to its
surplus. Its reported capital and surplus at December 31, 1996 was $5.9 million.
As disclosed in Note 21, the Company has entered into a definitive agreement 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
approvals, will eliminate the excess investment in subsidiaries and the related
$1.5 million surplus reduction Consumers Life recorded at December 31, 1996.
At the Company s request, the Delaware Insurance Department reviewed one
of Consumers Life s surplus relief reinsurance treaties for compliance with a
new state regulation regarding reinsurance agreements. While the Department
determined that the treaty was in compliance at December 31, 1996, the
Department has indicated that one modification to the agreement must be made in
order for the treaty to remain in compliance in the future. The Company plans to
make this modification, which is not expected to result in any significant
additional costs to the Company or have a material effect on the Company s
financial statements.
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, 1996, 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
On March 6, 1997, the Company signed a stock purchase agreement 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 has reinsured the in-force credit insurance business of the
subsidiary to a third-party insurer which will then retrocede the business back
to the subsidiary's current insurance company parent on an earned basis. The
transaction is conditioned upon the approval of the North Carolina and Texas
insurance departments. The North Carolina Insurance Department has conditioned
its approval, in part, upon the concurrent redomestication of the Company to
another state, consistent with its policy which no longer permits North Carolina
domestic companies to have their principal administrative offices located
outside the state. At the buyer s request, the Company plans to change its state
of domicile to Texas. The Company has filed the required petition for
redomestication with the North Carolina Insurance Department. A redomestication
petition is expected to be filed with the Texas Insurance Department, together
with the buyer s Form A filing relating to the change in control, in early April
1997. The sale will result in a pre-tax gain to the Company of approximately
$281,000.
On March 10, 1997, the Company signed a Consent Order issued by the North
Carolina Insurance Department relating to the Company s North Carolina insurance
subsidiary. Pursuant to the Order, the Company has agreed to either relocate the
subsidiary s principal operations office and corporate records to North Carolina
or redomesticate it to another state. If the subsidiary has not completed either
the relocation of its office or the redomestication by September 11, 1997, its
Certificate of Authority in North Carolina will be revoked. The planned
redomestication and concurrent sale of the subsidiary, as discussed above, is
expected to be completed prior to September 11.
On March 27, 1997, the Company completed a reinsurance transaction with
World Insurance Company ( World ), in which World recaptured the individual
life insurance business previously assumed by the Company from World through a
joint venture agreement. World paid the Company a recapture consideration equal
to $1.05 million in exchange for the transfer to World of assets supporting the
net statutory basis policy reserves for this business. Based on the recapture
consideration received, the Company has written off approximately $1.4 million
in deferred policy acquisition costs which are not recoverable. This write-off
resulted in an after-tax charge to the Company s fourth quarter 1996 operating
results of approximately $900,000 (see Note 5).
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 expired in March 1997 and was not renewed.
QUARTERLY FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION> 1996
(in thousands, except per share amounts) 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Total revenues - continuing operations $8,498 $9,781 $8,538 $6,785
(before reinsurance ceded)
Loss from continuing operations before ($909) ($213) ($644) ($1,768)
income tax (benefit)
Income tax expense (benefit) (253) 176 (363) (388)
Loss from continuing operations (656) (389) (281) (1,380)
Discontinued operations 232 146 56 1,038
Net loss ($424) ($243) ($225) ($342)
Per share data:
Loss from continuing operations ($0.29) ($0.20) ($0.15) ($0.57)
Discontinued operations 0.09 0.06 0.02 0.40
Net loss ($0.20) ($0.14) ($0.13) ($0.17)
1995
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(Restated) (Restated) (Restated) (Restated)
Total revenues - continuing operations ($8,918) $10,286 $10,482 $7,743
(before reinsurance ceded)
Loss from continuing operations before
income tax (benefit) ($577) ($371) ($630) ($1,241)
Income tax benefit (85) (77) (170) (415)
Loss from continuing operations (492) (294) (460) (826)
Discontinued operations 97 203 247 (76)
Net income (loss) ($395) ($91) ($213) ($902)
Per share data:
Loss from continuing operations ($0.23) ($0.16) ($0.21) ($0.36)
Discontinued operations 0.04 0.08 0.09 (0.03)
Net loss ($0.19) ($0.08) ($0.12) ($0.39)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The firm of Ernst & Young LLP ("E&Y") served 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 1994 or
1995 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, through November 26, 1996, there were 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.
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,
1997.
<TABLE>
<CAPTION> Principal Occupation for the Past
Name Five Years, Office (if any) Held in Director Term
the Company and Other Information Since Expires (Age)
<S> <C> <C> <C>
Leon A. Guida Retired, Former Co-Owner and General 1986 1996**
(72) Manager, S & H Pontiac, Harrisburg,
PA
*James C. Robertson Chairman of the Board, President and 1967 1996**
(65) Chief Executive Officer of the
Company
*Sterling P. Martz Retired Clergyman, Winfield, PA 1968 1996**
(76)
*Edward J. Kremer President, Hanna, Kremer & Tilghman 1983 1997
(66) Insurance, Inc., Salisbury, MD;
Director and Chairman of the Board,
Delmar Bancorp,
Delmar, MD
John E. Groninger President, John E. Groninger, Inc., 1968 1998
(70) 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
(67) Hospital, Williamsport, PA; Director,
Bucktail Bank and Trust Co.,
Williamsport, PA
</TABLE>
* Denotes Member of Executive Committee
** Due to the pending merger with LaSalle, there was no election of Directors
held in 1996, and the existing Directors agreed to continue to serve
beyond their terms until the merger is completed, or the Company otherwise
disposes of its business operations.
The following information is provided as of March 1, 1997 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 65 President and Chief Executive
Officer
William J. Walsh, Jr. 54 Executive Vice President and
Chief Operating Officer
Ralph R. Byrnes 54 Senior Vice President-Automotive
Resource Division
R. Fredric Zullinger 48 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.
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, 1996, 1995 and 1994 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
<PAGE>
<CAPTION> Annual
Compensation
Other All
Annual Other
Name and Principal Position Year Salary Bonus Compensation Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James C. Robertson, 1996 $88,998 (1) - 0 - $7,950 (2) $73,016 (3)
Chairman, President and 1995 $145,000 - 0 - $6,300 (2) - 0 -
Chief Executive Officer 1994 $145,000 - 0 - $6,300 (2) - 0 -
William J. Walsh, Jr., 1996 $114,000 - 0 - - 0 - $18,605 (3)
Executive Vice President and 1995 $114,000 - 0 - - 0 - - 0 -
Chief Operating Officer 1994 $114,000 - 0 - - 0 - - 0 -
Ralph R. Byrnes, 1996 $109,500 $30,000 - 0 - $20,362 (3)
Senior Vice President- 1995 $109,500 - 0 - - 0 - - 0 -
Automotive Resource Division 1994 $109,500 - 0 - - 0 - - 0 -
</TABLE>
(1) Mr. Robertson s status as a salaried employee of the Company terminated
effective July 19, 1997. Since that time, Mr. Robertson has been
compensated at a daily rate of $150 for any work performed in his capacity
as President and CEO of the Company. Mr. Robertson earned $83,654 as a
salaried employee and $5,344 as a non-salaried officer of the Company.
(2) Represents Retainer and Board Fees earned by Mr. Robertson as Chairman of
the Board of the Company, including fees which were deferred.
(3) Represents distribution from the Company s Excess Benefit Plan which was
terminated in July 1997
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options and/or stock appreciation rights were granted by the
Company to the named executive officers in 1996.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
Shown below is information with respect to the stock options and stock
appreciation rights ("SARS") awarded under the Company's 1989 Stock Incentive
Plan ("1989 Plan") to the named executive officers and held by them at December
31, 1996. 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 ($2.25) and the maximum
term to exercise the grant is six (6) years. The options have accompanying SARS
which permit the holder to receive common stock or cash equal to the excess of
the fair market value covered by the option over the option price. To the extent
that accompanying SARS are exercised, the corresponding stock options are
canceled and the shares subject to the option are charged against the maximum
number of shares authorized under the 1989 Plan. When a stock option is
exercised, the related SAR is likewise surrendered. All of the options listed in
the table were granted in 1993 in place of an equal number of options that were
awarded in May 1989 and subsequently canceled.
<TABLE>
<CAPTION> Number of Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARS Options/SARS
Shares at Fiscal at Fiscal
Acquired Value Year-End (#) Year-End ($)(2)
on Exercise Realized Exercisable (E) Exercisable (#)
Name (#) ($) Unexercisable (U) Unexercisable (U)
<S> <C> <C> <C> <C>
James C. Robertson 30,000 41,250 (1) - 0 - - 0 -
William J. Walsh, Jr. - 0 - - 0 - 25,000 35,938
Ralph R. Byrnes - 0 - - 0 - 25,000 35,938
</TABLE>
(1) In December 1996, Mr. Robertson exercised all of the 30,000 SAR s issued
to him in tandem with stock options. As a result, the payment received by
Mr. Robertson represents the difference between $3.625, the high bid price
of the Common Stock on December 13, 1996, and $2.25, the exercise price of
the options, multiplied by the 30,000 SAR s.
(2) The values in this column are based on the difference between the market
value of the Company s common stock on December 31, 1996 and the exercise
price of the options.
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 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. With the exception of the senior marketing Executive
Officer, the CEO and the remaining Executive Officers of the Company do not have
employment contracts with the Company. As a condition of closing the Merger
required by LaSalle, Ralph R. Byrnes, a Senior Vice President and top marketing
executive of the insurance subsidiaries, entered into a three year employment
contract with the Company which became effective at the time the Merger
Agreement with the LaSalle was signed. Under the terms of the employment
agreement, Mr. Byrnes receives an annual salary of $120,000 and received a
$30,000 bonus at the time the Merger Agreement was signed and is entitled to
receive a $20,000 bonus at the effective time of the Merger, as well as
additional bonuses based upon his performance during the term of the three year
contract.
Annual bonuses and long term stock option incentives have been used by the
Company as a form of compensation and 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. Since
the criteria established by the Company for awarding bonuses has not been met,
no bonuses have been earned by the CEO and the other Executive Officers since
1989 under this bonus program. Grants of stock options with accompanying stock
appreciation rights ("SARS") have been used by the Company to retain and
motivate the CEO and the other 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 1996.
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 plan to merge or otherwise sell the Company during 1996 while
continuing the manage the Company as if independent. During 1996, the Company
was able to enter into the Merger Agreement with the LaSalle Group, Inc. and
reduced its general expenses by over $1.8 million. 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. In 1996, Mr. Robertson stated his
intention to retire from the Board of Directors and resign as President and CEO
upon the closing of the merger or the sale of the Company. While Mr. Robertson
continues to serve in these capacities, his status as a salaried employee of the
Company was terminated effective July 19, 1996. Since that time, Mr. Robertson
has been compensated at $150 per day for any work performed for the Company in
his capacity as a non-salaried employee while serving as President and CEO, and
the standard retainer and board meeting fees in his role as Chairman of the
Board.
The Committee believes that the total compensation for Mr. Robertson
during 1996 is reasonable based upon Mr. Robertson's experience, leadership and
contributions made to the Company during this transition period.
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
STOCK PRICE PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
12/91 12/92 12/93 12/94 12/95 12/96
<S> <C> <C> <C> <C> <C> <C>
Consumers Financial Group (CFIN) 100 78 96 90 110 12
PEER GROUP (PPEER1) 100 116 128 120 175 215
NASDAQ STOCK MARKET-US (INAS) 100 116 134 131 185 227
</TABLE>
*Assumes $100 invested on December 31, 1991 in the Company s common
stock, NASDAQ Stock Index and Peer Group common stock. Total
shareholder returns assume reinvestment of dividends.
[FN](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.
PENSION PLAN BENEFITS
The Company has a defined benefit plan, the Consumers Financial
Corporation Employees Retirement Plan (the Plan). The Plan was established
effective January 1, 1984. Under the Plan the retirement benefit is determined
by a formula which reflects compensation and years of service. Benefits are
fully vested after seven (7) years of service. The Plan was amended effective
January 1, 1989 to reflect changes mandated by ERISA and, as of the same date, a
supplemental non-qualified Excess Benefit Plan was adopted covering certain
employees, primarily those with higher compensation levels. Compensation
includes base salary, bonuses and other forms of compensation and generally
corresponds to the amounts shown in the Summary Compensation Table. During 1996,
the Company froze the benefits payable to participants under the Plan. The
Company also terminated the Excess Benefit Plan in 1996 and distributed the plan
assets to the participants.
The formula provides that for each year of service prior to 1975, the
benefit consists of (1) 0.5% of average monthly compensation, plus (b) 1.5% of
average monthly compensation in excess of $1,000 where Average Monthly
Compensation is average monthly compensation for the five calendar years ending
December 31, 1983. For each year of service of January 1, 1984 through December
31, 1988, the benefit consists of (a) 1.5% of monthly compensation times the
number of years of service under the Plan, plus (b) 1.4% of monthly compensation
in excess of the social security wage base. For each year of service after
January 1, 1989, the benefit consists of (a) 1.5% of monthly compensation times
the number of years of service under the Plan, plus (b) .65% of monthly
compensation in excess of the social security wage base (Employee Retirement
Plan), plus (c) .75% of monthly compensation in excess of the social security
wage base (Excess Benefit Plan).
At December 31, 1996, the estimated monthly defined benefit payable upon
retirement at age 65 for each of the named executive officers is as follows:
William J. Walsh, Jr., $2,429 and Ralph R. Byrnes, $2,794. Amounts shown are
straight-life annuity amounts and are not reduced by a joint and survivorship
provision which is available to the named executive officers. In addition,
following his retirement as a salaried employee in July 1996, James C. Robertson
began receiving a monthly annuity benefit in the amount of $3,667.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 1, 1997, 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>
Common Consumers Financial Corporation 255,339 8.4%
and Subsidiaries Employee Stock
Ownership Plan (ESOP)(1)
1200 Camp Hill By-Pass
Camp Hill, PA 17011
Common Consumers Life Insurance Company 409,964 12.7%
of North Carolina, Consumers
Reinsurance Company and Interstate
Auto Auction, Inc., affiliates of
Consumers Financial Corporation
1200 Camp Hill By-Pass
Camp Hill, PA 17011
</TABLE>
[FN](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.
The following table sets forth as of March 1, 1997, 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 Groninger, John E. 57,521 (2) 1.9
Preferred 22,410 (3) 4.2
Common Guida, Leon A. 3,000 *
Common Kremer, Edward J. 1,607 *
Common Little, Jr., Robert G. 9,143 (4) *
Preferred 218 (4) *
Common Martz, Sterling P. 4,000 (4) *
Preferred 1,400 (4) *
Common Robertson, James C. 99,775 3.3
Preferred 5,235 (5) *
(b)
Common Byrnes, Ralph R. 73,033 (6)(9) 2.4
Common Walsh, Jr., William J. 62,813 (7)(9) 2.1
Common Zullinger, R. Fredric 54,523 (8)(9) 1.8
(c)
Common Directors and Executive 365,415 (9) 11.8
Preferred Officers as a Group (9 28,263 5.5
individuals)
</TABLE>
[FN] * 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 700 shares of 8 1/2% Preferred Stock owned by Mr. Robertson's
wife.
(6) Includes 31,720 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.
(7) Includes 21,284 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.
(8) Includes 14,835 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.
(9) Includes shares that are acquirable through the exercise of stock options
and SAR s. In accordance with the terms of the proposed merger with
LaSalle, the holders of all outstanding stock options and SAR s shall
agree to exercise their SAR s in lieu of the exercise of the stock
options.
As required by Section 16(a) of the Securities Exchange Act of 1934, as
amended, the Company notes that Form 5 reports for Messrs. Robertson, Walsh,
Zullinger and Byrnes, reporting certain transactions during 1996 not required to
be reported on an earlier interim basis, were filed four (4) days late with the
Securities and Exchange Commission on February 18, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
W. John Daub III, a Director of the Company until his voluntary
resignation from the Board of Directors on April 23, 1996, 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 1996 were $102,450.
In addition, the Daub Trust, a trust controlled by Mr. Daub, purchased in
June 1989 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 earned by the reinsurance
company and the subsidiary holds all of the outstanding stock of the reinsurance
company as collateral for the loan. The loan balance at March 1, 1997 remains at
$112,000 as no principal payments have been made. Through December 31, 1996, the
reinsurance company has developed profits which are sufficient to repay over
half of the current loan balance. However, no payment can be made until the
reinsurance company receives approval from the Arizona Insurance Department for
a dividend distribution.
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, 1996 and 1995
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994
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:
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 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.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT<PAGE>
CONSUMERS FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>(in thousands) Liabilities, Redeemable
Preferred
Assets 1996 1995 Stock and Shareholders Equity 1996 1995
<S> <C> <C> <C> <C> <C>
Investments, other than Liabilities:
investments in affiliates: Note payable $1,159
Fixed maturities $1,304 Indebtedness to affiliates $544 425
Other invested assets 75 $72 Dividend payable 114 114
1,379 72 Income taxes 1,290 559
Cash 186 228 Miscellaneous 41 88
Investments in affiliates 8,867 12,672 Total liabilities 1,989 2,345
Indebtedness of affiliates 4,765 4,899
Accrued investment income 7
Receivables 7 Redeemable preferred stock:
Property and equipment, net of 18 18 Series A, 8 1/2% cumulative 4,693 4,657
accumulated depreciation convertible
Other assets 103 110
Shareholders equity:
$15,332 $18,016 Common stock 30 30
Capital in excess of stated 7,966 8,016
value
Equity in net unrealized 70 705
appreciation of debt and
equity securities of
subsidiaries
Retained earnings 2,009 3,688
Treasury stock (1,425) (1,425)
Total shareholders equity 8,650 11,014
$15,332 $18,016
</TABLE>
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE
<PAGE>
<CAPTION>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Revenues:
Net investment income $16 $5 $37
Other income 2 16 1
Total revenues 18 21 38
Expenses:
Amortization of deferred acquisition costs 825
(including write-off of $746 in 1994)
General expenses 765 221 291
Taxes, licenses and fees 9 14 21
Interest 143 145 203
Total expenses 917 380 1,340
Loss before income taxes (899) (359) (1,302)
Income taxes 103 210 184
Loss before equity in income (loss) of (1,002) (569) (1,486)
unconsolidated subsidiaries
Equity in income (loss) of unconsolidated
subsidiaries:
Continuing operations (1,704) (1,503) (1,027)
Discontinued operations 1,472 471 1,301
(232) (1,032) 274
Loss before equity in cumulative effect of change (1,234) (1,601) (1,212)
in accounting principle of unconsolidated
subsidiaries
Equity in cumulative effect of change in accounting 299
principle of unconsolidated subsidiaries
Net Loss ($1,234) ($1,601 ($913)
)
</TABLE>
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,234) ($1,601) ($913)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of deferred acquisition costs 825
Income taxes 741 (29) 20
Receivables and agents balances 127 31 19
Other liabilities 67 47 59
Equity in loss (income) of unconsolidated 998 1,736 897
subsidiaries
Amortization of intangibles 123 217 420
Equity in cumulative effect of change in (299)
accounting principles of unconsolidated
subsidiaries
Other 17 483 (133)
Total adjustments 2,073 2,485 1,808
Net cash provided by operating activities 839 884 895
Cash flows from investing activities:
Purchase of investments (2,115) (3) (14)
Maturity of investments 3
Sale of investments 808
Investments in affiliates 2,044 827 588
Purchase of property and equipment (1)
Net cash provided by investing activities 737 827 573
Cash flows from financing activities:
Principal payments on debt (1,159) (1,050) (900)
Purchase of treasury stock (50) (114) (38)
Cash dividends to shareholders (409) (409) (547)
Net cash used in financing activities (1,618) (1,573) (1,485)<PAGE>
Net increase (decrease) in cash (42) 138 (17)
Cash at beginning of year 228 90 107
Cash at end of year $186 $228 $90
</TABLE>
See notes to condensed financial statements
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 1996, 1995 and 1994 amounted
to $3,342,844, $827,000 and 600,000, 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. With respect to the consolidated non-life
sub-group, 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. For the consolidated life insurance
sub-group, taxes are allocated only to those companies in the group
reporting taxable income. Similarly, tax benefits for the life sub-group
are allocated only to those companies reporting a taxable loss.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>(in thousands)
Deferred Other policy
policy Future claims and Premium
acquisition policy Unearned benefits and other
Segment costs benefits premiums payable revenue
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Automotive Resource Division $16,414 $11,420 $56,178 $2,511 $21,749
Individual Life Insurance Division (c) 2,535 23,966 225
Other (d) 2
Total $18,949 $35,386 $56,178 $2,736 $21,751
Year ended December 31, 1995 (e):
Automotive Resource Division $17,642 $10,411 $57,943 $2,448 $21,278
Individual Life Insurance Division (c) 4,284 26,171 408
Other (d) 16
Total $21,926 $36,582 $57,943 $2,856 $21,294
Year ended December 31, 1994 (e):
Automotive Resource Division $16,878 $10,415 $56,551 $2,059 $20,519
Individual Life Insurance Division (c) 4,777 28,194 789
Other (d) 1
Total $21,655 $38,609 $56,551 $2,848 $20,520
</TABLE>
(a) Excludes realized investment gains.
(b) 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.
(c) The assets and liabilities of the discontinued individual life
insurance business have not been separately stated on the
consolidated balance sheets.
(d) Represents operations of Consumers Financial Corporation.
(e) Certain amounts for 1995 and 1994 have been restated to reflect the
presentation of the individual life insurance and the auto auction
businesses as discontinued operations.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION> Amortization
(in thousands) of deferred
Net Death policy
investment and other acquisition Operating
Segment income benefits costs expenses
<S> <C> <C> <C> <C>
(b) (b)
Year ended December 31, 1996:
Automotive Resource Division $2,070 $11,698 $10,133 $4,308
Individual Life Insurance Division (c)
Other (d) 17 917
Total $2,087 $11,698 $10,133 $5,225
Year ended December 31, 1995 (e):
Automotive Resource Division $2,231 $10,267 $10,154 $5,007
Individual Life Insurance Division (c)
Other (d) 5 471
Total $2,236 $10,267 $10,154 $5,478
Year ended December 31, 1994 (e):
Automotive Resource Division $2,868 $8,877 $10,388 $4,885
Individual Life Insurance Division (c)
Other (d) 10 602
Total $2,878 $8,877 $10,388 $5,487
</TABLE>
(a) Excludes realized investment gains.
(b) 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.
(c) The assets and liabilities of the discontinued individual life
insurance business have not been separately stated on the
consolidated balance sheets.
(d) Represents operations of Consumers Financial Corporation.
(e) Certain amounts for 1995 and 1994 have been restated to reflect the
presentation of the individual life insurance and the auto auction
businesses as discontinued operations.
SCHEDULE IV
REINSURANCE
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>(in thousands)
Assumed Percentage
Ceded to from of amount
Gross other other Net assumed to
Segment amount companies companies amount net
<S> <C> <C> <C> <C> <C>
(a) (a)
Year ended December 31, 1996:
Life insurance in-force (c) $1,733,522 $927,916 $282,021 $1,087,627 25.9%
Net premium income:
Credit insurance $31,573 $11,689 $124 $20,008 0.6%
Warranty 417 417 100.0%
$31,573 $11,689 $541 $20,425 2.6%
Year ended December 31, 1995 (b):
Life insurance in-force (c) $1,820,872 $947,363 $311,201 $1,184,710 26.3%
Net premium income:
Credit insurance $31,720 $12,628 $327 $19,419 1.7%
Warranty 394 394 100.0%
$31,720 $12,628 $721 $19,813 3.6%
Year ended December 31, 1994 (b):
Life insurance in-force (c) $1,911,119 $1,184,134 $354,800 $1,081,785 32.8%
Net premium income:
Credit insurance $31,120 $13,267 $1,173 $19,026 6.2%
Warranty 278 278 100.0%
$31,120 $13,267 $1,451 $19,304 7.5%
</TABLE>
(a) Includes premiums for credit insurance ceded and assumed on an earned
basis.
(b) Certain amounts for 1995 and 1994 have been restated to reflect the
presentation of the individual life insurance business as a
discontinued operation.
(c) Life Insurance in-force includes the remaining block of individual
life insurance business, which will be sold in 1997. See Note 5 of
the Notes to Consolidated Financial Statements appearing elsewhere
in this Form 10-K.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands)
Charged
Balance at Charged to to other Balance at
Description beginning costs and accounts, Deductions, end of
of period expenses describe describe period
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Provision for permanent decrease in market
value of:
Equity securities $15 $15 (a)
Mortgage loans 100 $100
Real estate 493 $35 400 (a) 128
Other invested assets 75 75
Provision for uncollectible receivables 1,093 233 288 (b) 1,038
$1,701 $343 $703 $1,341
Year ended December 31, 1995:
Provision for permanent decrease in market
value of:
Equity securities $15 $15
Mortgage loans 200 $100 (c) 100
Real estate 300 $193 493
Provision for uncollectible receivables 1,091 79 77 (b) 1,093
$1,606 $272 $177 $1,701
Year ended December 31, 1994:
Provision for permanent decrease in market
value of:
Equity securities $19 $4 (d) $15
Mortgage loans 670 $135 605 (c) 200
Real estate 20 300 20 (a) 300
Provision for uncollectible receivables 1,020 149 78 (b) 1,091
$1,729 $584 $707 $1,606
/TABLE
<PAGE>
(a) Write-off of reserve for assets sold
(b) Write-off of bad debts against reserve
(c) Loans transferred to real estate through foreclosure
(d) Write-off of worthless securities against reserve
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: March 25, 1997
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:
Signature Title Date
/S/James C. Robertson Director, President and March 25, 1997
Chairman of the Board
(Chief Executive Officer)
/S/William J. Walsh, Jr. Executive Vice President March 25, 1997
(Chief Operating Officer)
/S/R. Fredric Zullinger Senior Vice President and March 25, 1997
Treasurer
(Chief Financial Officer)
/S/John E. Groninger Director March 25, 1997
/S/Leon A. Guida Director March 25, 1997
/S/Edward J. Kremer Director March 25, 1997
/S/Robert G. Little,
Jr., D.V.M. Director March 25, 1997
/S/Rev. Sterling P. Martz Director March 25, 1997
