PRE14A
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
P. O. BOX 26 (17001-0026)
CAMP HILL, PENNSYLVANIA 17011-3744
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY ___, 1998
Dear Shareholders:
A Special Meeting of Shareholders of Consumers Financial Corporation, a
Pennsylvania corporation (the "Company") will be held on February ___, 1998 at
10:00 a.m., at Corporate Headquarters, 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania for the following purposes:
1. To consider and vote upon the approval of the sale of the
inforce credit insurance business and the related transfer of
certain assets of the Company to Life of the South Corporation,
a Georgia corporation (the Sale of Assets ), as described in
the Asset Purchase Agreement (the Asset Purchase Agreement ),
by and among the Company, Consumers Life Insurance Company, a
wholly-owned subsidiary of the Company, Investors Fidelity Life
Assurance Corp., a wholly-owned subsidiary of Consumers Life
Insurance Company, and Life of the South Corporation dated
December 30, 1997, a copy of which is attached as Appendix 1 to
this Proxy Statement.
2. To consider and vote upon the approval and adoption of the
Consumers Financial Corporation Plan of Liquidation and
Dissolution, a copy of which is attached as Appendix 2 to this
Proxy Statement (the Plan of Liquidation ), pursuant to which
the Company will be voluntarily liquidated and dissolved in
accordance with Subchapter F of Chapter 19 of the Pennsylvania
Business Corporation Law of 1988, as amended ( PBCL ) and
Section 331 of the Internal Revenue Code of 1986, as amended;
provided, however, that the Board of Directors may determine to
proceed under Subchapter H of Chapter 19 of the PBCL prior to
the filing of the Articles of Dissolution with the Pennsylvania
Department of State, notwithstanding the adoption by the
shareholders of this resolution.
3. To transact such other business as may properly come before the
Special Meeting and any adjournment or postponement thereof.
The Board of Directors of the Company has fixed the close of business on
Friday, November 28, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
PROPOSED SALE OF ASSETS AND THE PLAN OF LIQUIDATION AND BELIEVES THE SALE OF
ASSETS AND THE PLAN OF LIQUIDATION ARE IN THE BEST INTERESTS OF THE COMPANY AND
ITS SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF
THE SALE OF ASSETS AND THE PLAN OF LIQUIDATION.
Your proxy is important to ensure a quorum at the meeting, even if you hold
only a few shares of the Company s Stock. Whether or not you plan to be
present, please mark, sign and return promptly the enclosed proxy so that
your shares will be represented at the meeting. A return envelope, which
requires no postage if mailed in the United States, is enclosed for your
convenience.
By Order of the Board of Directors,
JAMES C. ROBERTSON
PRESIDENT and
CHIEF EXECUTIVE OFFICER
Camp Hill, PA
January ___, 1998
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
P. O. BOX 26 (17001-0026)
CAMP HILL PA 17011-3744
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY ___, 1998
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of Consumers
Financial Corporation, a Pennsylvania corporation (the Company ) in connection
with the solicitation on behalf of the Company s Board of Directors of proxies
to be used at the Special Meeting of Shareholders to be held on February ___,
1998 at Corporate Headquarters, 1200 Camp Hill By-Pass, Camp Hill, Pennsy-
lvania, at 10:00 a.m., local time, and any adjournment or adjournments
thereof (the Special Meeting ). This Proxy Statement, the Notice of Special
Meeting and the accompanying proxy card and related materials are first being
mailed to the Company s shareholders on or about January ___, 1998.
At the Special Meeting, holders of Company s Common Stock (the Common
Stock ) and holders of the Company s 8 1/2% Convertible Preferred Stock, Series
A (the Preferred Stock ), each voting separately as a class, will be asked to
consider and vote upon the approval of the Sale of Assets between the Company
and Life of the South Corporation, a Georgia corporation ( LOTS ) and the Plan
of Liquidation.
If the Sale of Assets and the Plan of Liquidation are not consummated for
any reason, the Board of Directors expects to conduct the business of the
Company as described under Business of Consumers Financial Corporation while
continuing to explore other alternatives.
SUMMARY OF PROXY STATEMENT
The following is a brief summary of certain information in this Proxy
Statement and certain of the Appendices attached hereto. This summary is
qualified in its entirety by the more detailed information contained elsewhere
in this Proxy Statement and the Appendices. SHAREHOLDERS ARE URGED TO READ THE
ENTIRE PROXY STATEMENT, INCLUDING THE APPENDICES, AND THE OTHER DOCUMENTS
ACCOMPANYING THE PROXY STATEMENT. SOME OF THE TERMS USED IN THIS SUMMARY ARE
DEFINED ELSEWHERE IN THIS PROXY STATEMENT. Copies of any documents referred to
in this Proxy Statement are available for inspection at the principal executive
offices of Consumers Financial Corporation which are located at 1200 Camp Hill
By-Pass, Camp Hill, Pennsylvania.
BUSINESS OF THE COMPANY
The Company is an insurance holding company which, until October 1, 1997,
was an underwriter, through its subsidiaries, of credit life and credit
disability insurance in the Middle Atlantic region of the United States,
marketed primarily through approximately automobile dealers in six key states.
The Company also marketed automobile extended service contracts in a general
agency capacity and generated other revenues from services it provided to its
automobile dealer customers. Effective October 1, 1997, the Company began
reinsuring 100% of its new credit insurance production to a designee of LOTS,
and on January 1, 1998, the Company transferred all of its credit insurance and
fee income accounts to LOTS. At that time, LOTS also retained certain sales and
marketing personnel of the Company and assumed the administration of the in-
force credit insurance business of the Company. The Company has not written
any new individual life insurance business since 1992 and completed the sale of
its remaining block of individual life insurance business on March 27, 1997 in a
transaction which was effective January 1, 1997. The Company s auto auction
operations conducted through its subsidiary, Interstate Auto Auction, Inc.
( Interstate ), were discontinued as the result of the sale of Interstate's
business and related operating assets in November 1996. See "Business of
Consumers Financial Corporation."
BUSINESS OF LOTS
LOTS is a privately owned, Georgia-based financial services holding
corporation, with its administrative offices located in Jacksonville, Florida
and currently owns and operates eight (8) subsidiary companies performing
insurance underwriting, marketing and administrative functions, with annual
premium, underwritten and administered, of $150,000,000. LOTS markets credit
insurance products to financial institutions, automobile dealers and consumer
finance companies, through the efforts of company employed marketing associates
and independent general agents.
THE SPECIAL MEETING
The Special Meeting of the shareholders of the Company will be held at
Corporate Headquarters located at 1200 Camp Hill By-Pass, Camp Hill, Cumberland
County, Pennsylvania, on February ___, 1998 at 10:00 a.m., local time. At the
Special Meeting, the shareholders of the Company will be asked to consider and
to vote upon the approval of the Sale of Assets and the Plan of Liquidation.
Only shareholders of record at the close of business on Friday, November 28,
1997, will be entitled to vote at the Special Meeting. As of the close of
business on such date, there were 3,022,253 shares of Common Stock outstanding
and entitled to vote held by 6,712 shareholders of record and 514,261 shares of
Preferred Stock outstanding and entitled to vote held by 115 shareholders of
record. The presence, in person or by proxy, of the shareholders of a majority
of the outstanding shares of both the Common Stock and Preferred Stock entitled
to vote, each determined separately, is necessary to constitute a quorum at the
Special Meeting, and the affirmative vote of a majority of the votes cast by
holders of Common Stock and Preferred Stock, each entitled to vote separately
as a class, is required for approval of the Sale of Assets and the Plan of
Liquidation. See Voting and Proxy Information.
THE SALE OF ASSETS
GENERAL INFORMATION
The Company intends to sell its inforce block of credit insurance policies
and transfer the related assets to LOTS (the Sale of Assets ). In connection
with the Sale of Assets, LOTS or its designee will assume from the Company
approximately $52.2 million in policy liabilities, and the Company will
transfer to LOTS or its designee approximately $38.6 million in invested
assets, cash and receivables. As a result of the transaction, the Company will
write off $17.6 million in deferred policy acquisition costs and intangible
assets related to the block of credit insurance business. The Company will
therefore incur a pre-tax loss of approximately $4 million as a result of the
Sale of Assets. In conjunction with the Sale of Assets, the Company also
intends to sell its Arizona-domiciled insurance subsidiary to LOTS for which
it expects to receive cash of approximately $2.9 million, which approximates
the carrying value of the subsidiary. See Asset Purchase Agreement and Sale
of Assets: Consideration Received. The Sale of Assets is subject to approval
by the Arizona, Delaware and Ohio state insurance departments and the approval
of the holders of the Common Stock and Preferred Stock, each voting separately
as a class. A copy of the Asset Purchase Agreement is attached as Appendix I
to this Proxy Statement.
CONDITIONS
Under the Asset Purchase Agreement, the Closing (defined below) of the
Sale of Assets is conditioned upon the satisfaction of certain conditions,
including (i) the affirmative vote approving the Sale of Assets by a majority
of the votes cast by all holders of the Common Stock and Preferred Stock, each
voting separately as a class, and (ii) regulatory approvals by each state
insurance department having jurisdiction over the Company s insurance
subsidiaries. See Asset Purchase Agreement and Sale of Assets: Conditions,
Representations and Covenants.
EFFECTIVE TIME AND CLOSING
The Sale of Assets shall be effective October 1, 1997 with Closing to
occur after the receipt of necessary regulatory and shareholder approvals (the
Closing ).The Company expects to consummate the Sale of Assets in the first
quarter of 1998. See Asset Purchase Agreement and Sale of Assets: Effective
Time and Closing.
TERMINATION; EXPENSES
The Asset Purchase Agreement may be terminated at any time prior to the
Closing (i) by mutual action of the Boards of Directors of the Company and
LOTS,(ii) by either party in the event the Sale of Assets is not consummated on
or before May 31, 1998, or (iii) by either party if the regulatory and
shareholder approvals have not been received, provided that such termination
may not be effected by a party whose failure to fulfill any of its obligations
under the Asset Purchase Agreement was the reason for such non-consummation.
Except as indicated below, each party will pay its own costs and expenses
incurred in connection with the Asset Purchase Agreement and the transactions
contemplated thereby. The Company has agreed to pay LOTS a $250,000 break-up
fee if the Company proceeds with another transaction which it believes is more
favorable to its shareholders. See Asset Purchase Agreement and Sale of
Assets: Termination, Amendment, Fees and Expenses.
THE PLAN OF LIQUIDATION AND DISSOLUTION
GENERAL INFORMATION
On November 25, 1997, the Board of Directors of the Company unanimously
approved and adopted a plan of liquidation and dissolution (the "Plan of
Liquidation") and directed that the Plan of Liquidation be submitted to a vote
of the holders of the Common Stock and Preferred Stock, each voting separately
as a class, at the Special Meeting. A copy of the Plan of Liquidation is
attached hereto as Appendix 2. As more fully set forth in the Plan of
Liquidation, the Plan of Liquidation provides that, if approved by its
shareholders, the Company will wind up its affairs and be liquidated and
dissolved (the "Liquidation").
ASSETS TO BE DISTRIBUTED
If the Plan of Liquidation is approved by the shareholders, the Company
will be liquidated by (i) the sale of its remaining assets; (ii) the payment of
all of its claims, liabilities and expenses; (iii) the redemption and
cancellation of all of the outstanding shares of Preferred Stock at par value
($10.00 per share), and (iv) the pro rata distribution of all cash remaining
after payment of all claims, liabilities and expenses to the holders of Common
Stock at such time or times as the Board of Directors, in its absolute
discretion, may determine. The Liquidation is expected to commence as soon as
practicable after approval of the Plan of Liquidation by the shareholders and
is expected to be concluded on or about the fifth anniversary thereof by a
final liquidating distribution to the shareholders of the Company. The Board of
Directors is currently unable to predict the precise amount or timing of any
distributions pursuant to the Plan of Liquidation. The actual amount, timing
of, and record date for all distributions will be determined by the Board of
Directors, in its sole discretion, and will depend in part upon (i) the ability
of the Board of Directors and management, or the Trustees, to sell the remain-
ing assets of the Company, (ii) the amount of fee revenues to be received from
LOTS from the sale of the credit insurance and fee income accounts, (iii)
the amount, if any, to be received from the Contingency Fund and (iv)
expenses incurred during the period of Liquidation. However, subject to the
uncertainties indicated above and based upon the information currently avail-
able to the Board of Directors and management, the estimated range of
distributions to the holders of Common Stock, after payment of all claims,
liabilities and expenses and the redemption of the Preferred Stock for cash at
$10.00 per share, is expected to be between $.72 per share and $1.54 per
share. See The Plan of Liquidation and Dissolution: Liquidating
Distributions; Amount; Timing.
The assets and liabilities of the Company may be transferred, at the
discretion of the Board of Directors, to a liquidating trust for the benefit of
the creditors and shareholders. Any distribution after such transfer time would
be made by the trustees from the liquidating trust directly to the shareholders
after the satisfaction of all liabilities. Approval of the Plan of Liquidation
will constitute shareholder approval of the appointment by the Board of
Directors of one or more trustees to the liquidating trust and the execution of
the liquidating trust agreement (substantially in the form attached as Exhibit
1 to the Plan of Liquidation) on such terms and conditions as the Board of
Directors, in its absolute discretion, shall determine. See The Plan of
Liquidation and Dissolution for a complete description of the Plan of
Liquidation. See also The Plan of Liquidation and Dissolution: Contingent
Liabilities; Liquidating Trust for further information relating to the
establishment of the liquidating trust required by the Plan of Liquidation.
Since the adoption of the Plan of Liquidation by the Board of Directors,
management and the Board of Directors have continued to reduce operating costs
and steps have been taken to direct the Company s administrative structure
toward implementation of the Plan of Liquidation.
LIQUIDATION RECORD DATE
The date for determining shareholders of record for purposes of the
distribution of assets pursuant to the Liquidation is February ___, 1998 (the
Final Record Date ). The stock transfer records of the Company will be closed
at the close of business on the Final Record Date and the shares of the Common
Stock and Preferred Stock will no longer be traded on the NASDAQ National
Market. Shareholders will be provided with written instructions from the
Company regarding the required delivery of their stock certificates in
exchange for payment.
FEDERAL INCOME TAX CONSEQUENCES
The receipt by shareholders of their distributive share of the assets of
the Company pursuant to the Plan of Liquidation will be, in the Company s
opinion, a taxable transaction pursuant to Section 331 of the Internal Revenue
Code of 1986, as amended, and it is the Company s belief that each shareholder
will recognize a gain or loss equal to the difference between the value of the
distribution received by such shareholder and the shareholder's adjusted tax
basis in the shares. See The Plan of Liquidation and Dissolution: Federal
Income Tax Consequences.
ABANDONMENT; AMENDMENT
Under the Plan of Liquidation, the Board of Directors may modify, amend
or abandon the Plan of Liquidation, notwithstanding shareholder and regulatory
approval, to the extent permitted by the Pennsylvania Business Corporation Law
( PBCL ). Until the Articles of Dissolution are filed with the Department of
State of the Commonwealth of Pennsylvania, the Company intends to continue to
evaluate any other alternatives to the Plan of Liquidation which may be
presented by parties interested in acquiring the Company and its remaining
assets, either through a merger, tender offer or similar transaction.
APPRAISAL RIGHTS
Under the PBCL, there are no appraisal, dissenter's or similar rights
available to the shareholders of the Company as a result of the Liquidation.
QUALIFICATIONS AND ASSUMPTIONS
After the Sale of Assets is completed, the Company will be left with no
operations and will own assets consisting principally of bonds, real estate,
other investments and cash. The Board of Directors, in proposing the Plan of
Liquidation for approval by the shareholders, concluded that continuing to
operate the Company as a holding company without any business operations would
not create sufficient values for the Company s shareholders to justify the
costs involved. The adoption of the Plan of Liquidation would facilitate the
liquidation of the Company s assets to satisfy its outstanding liabilities and
thereafter redeem the outstanding shares of Preferred Stock for cash at $10.00
per share, plus any unpaid dividends accrued to date, followed by a pro rata
distribution of all remaining assets to the holders of Common Stock.
THIS PROXY STATEMENT CONTAINS CERTAIN FORWARD LOOKING STATEMENTS,
INCLUDING STATEMENTS, BASED ON THE BOARD S ESTIMATE OF THE VALUES OF THE
COMPANY S NET ASSETS, THAT THE BOARD OF DIRECTORS BELIEVES THAT THE LIQUIDATION
VALUE PER SHARE OF COMMON STOCK IN THE HANDS OF THE SHAREHOLDERS IS LIKELY TO
EXCEED ITS PROBABLE TRADING VALUE IN THE FORESEEABLE FUTURE ABSENT THE PROPOSED
LIQUIDATION. THE METHODS USED BY THE BOARD OF DIRECTORS AND MANAGEMENT IN
ESTIMATING THE VALUE OF THE COMPANY S ASSETS DO NOT RESULT IN AN EXACT
DETERMINATION OF VALUE NOR ARE THEY INTENDED TO INDICATE THE AMOUNT A
SHAREHOLDER WILL RECEIVE IN LIQUIDATION. THE PRICES AT WHICH THE COMPANY WILL
BE ABLE TO SELL ITS VARIOUS ASSETS DEPEND LARGELY ON FACTORS BEYOND THE
COMPANY S CONTROL, INCLUDING, WITHOUT LIMITATION, THE DEMAND FOR THE ASSETS,
THE RATE OF INFLATION, CHANGES IN INTEREST RATES, THE CONDITION OF FINANCIAL
MARKETS AND THE AVAILABILITY OF FINANCING TO PROSPECTIVE PURCHASERS. NO
ASSURANCE CAN BE GIVEN THAT THE AMOUNT TO BE RECEIVED IN LIQUIDATION WILL
EQUAL OR EXCEED THE PRICE OR PRICES AT WHICH THE COMMON STOCK HAS GENERALLY
TRADED OR IS EXPECTED TO TRADE IN THE FUTURE. SHAREHOLDERS WHO DISAGREE WITH
THE BOARD S DETERMINATION THAT THE VALUE OF THE NET ASSETS AS DISTRIBUTED TO
THE SHAREHOLDERS EXCEEDS THE PRICE AT WHICH THE COMMON STOCK HAS TRADED,
SHOULD VOTE AGAINST APPROVAL OF THE PLAN OF LIQUIDATION.
BACKGROUND OF THE SALE OF ASSETS AND THE PLAN OF LIQUIDATION
During recent years, the Board of Directors and management have consi-
dered various strategic alternatives in order to either eliminate or reduce
continuing operating losses incurred by the Company since 1993.
On March 11, 1996, the Company originally announced its plans to explore
various alternatives for selling or merging its business units. As a result,
direct contacts were then made with over 45 potential buyers to solicit their
interest in participating in an auction process to acquire the Company. This
auction process was intended to achieve maximum value and a timely sale through
simultaneous broad exposure to a wide range of potential purchasers.
Furthermore, both the Company and its financial advisor at the time, Ernst &
Young, LLP ( E&Y ) believed that the broad distribution and competitive
environment would enhance confidence in the reasonableness of the value
ultimately to be received.
Approximately 35 organizations expressed interest in acquiring all or
parts of the Company s operations. Following the receipt of signed
confidentiality agreements from these groups, each was provided with a sales
memorandum. This sales memorandum, which was intended to assist prospective
purchasers in their initial evaluation of the Company and in their decision to
proceed with future investigation, included independent actuarial appraisals of
the Company s credit insurance and vehicle service contract business (prepared
by CreditRe Corporation) and its universal life insurance business (prepared by
Allen Bailey & Associates, Inc.). The Company received 11 letters of intent
from prospective purchasers, including one from the LaSalle Group,
Inc. ( LaSalle ). From this group, four bidders, including LaSalle, were
invited to proceed with a more detailed investigation and a due diligence
review. Following completion of all due diligence procedures, LaSalle and the
three other prospective purchasers submitted revised letters of intent to the
Company.
After detailed discussions and negotiations were conducted with these four
bidders, the Company signed LaSalle s revised letter of intent on September 27,
1996, contemplating that LaSalle would acquire the Company in a merger
transaction whereby the holders of the Common Stock would receive approximately
$3.92 per share as adjusted for certain contingencies. A merger agreement was
signed with LaSalle on October 30, 1996 and the holders of Common Stock ap-
proved the merger transaction on March 25, 1997, subject to the approval of
insurance regulators in the four states in which the Company's insurance
subsidiaries were domiciled. Before approving the Merger Transaction, the
respective state insurance departments required satisfactory evidence from
LaSalle of the cash funds necessary to complete the transaction. On May 15,
1997, LaSalle disclosed to the Company that it was unlikely that its original
source of funding for the merger would be available by June 15, 1997 and that
it was in the process of securing alternate funding. While LaSalle s financial
advisor, Explorer Holdings, was confident that the alternate funding would be
completed by June 15, 1997, the Company exercised its right to renew its
search for another acquiror to protect the Company in the event LaSalle's
funding would not be available. The Company contacted a select number of
insurance companies who previously submitted a bid for the credit insurance
operations of the Company and requested that they resubmit their bids for
consideration. These companies were selected due to the fact they were
involved in the credit insurance industry and their previous offers were
compatible with the Board s objectives. Shortly thereafter, four bidders
submitted proposals for the Company s credit insurance business, contingent
upon due diligence review and an exclusivity provision.
On July 25, 1997, the merger agreement with LaSalle was terminated
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the merger transaction. The Board
subsequently reviewed each offer submitted by the four (4) bidders and
determined that the offer from LOTS was the best bid submitted. On July 28,
1997, the Company signed a letter of intent to sell its credit insurance
operations, which included its inforce block of credit insurance policies, its
marketing organization, credit insurance and fee income accounts, and the
Company s principal life insurance subsidiary, to LOTS.This sale was subject to
the completion of a due diligence review by LOTS, which is now completed,
insurance regulatory approval and the approval of the holders of both the Com-
mon Stock and Preferred Stock for the sale of the inforce block of credit
insurance policies. On September 17, 1997, after the completion of LOTS due
diligence review, the parties agreed to an adjusted purchase price for the
inforce credit insurance business and at the Company s request, LOTS agreed to
vacate its right to purchase the Company s principle life insurance subsidiary
and further agreed to purchase the Company s Arizona-domiciled reinsurance
subsidiary. On September 19, 1997, an amended Letter of Intent was signed by
the parties and an Asset Purchase Agreement was subsequently entered into
on December 30, 1997.
Inasmuch as the Board of Directors determined that no other viable
alternative was available to the Company, on November 25, 1997, at its regular-
ly scheduled meeting, the Board of Directors unanimously voted to approve the
Plan of Liquidation, contingent upon the execution of the Asset Purchase
Agreement which was entered into among the parties on December 30, 1997.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company believes that the Sale of Assets and
the Plan of Liquidation are in the best interests of and are fair to the
holders of both the Common Stock and Preferred Stock. The Board has unanimous-
ly approved the Sale of Assets and the Plan of Liquidation and recommends
approval of the Sale of Assets and the Plan of Liquidation by the shareholders
of the Company. The recommendation of the Board is based upon a number of
factors, including (i) the Board s consideration of other strategic and
financial alternatives available to the Company; (ii) the Board s knowledge of
the business, operations, properties, assets, earnings, financial condition,
capital needs and future prospects of the Company, and (iii) the independent
actuarial appraisals of the Company s insurance and related operations. See
Background of the Sale of Assets and the Plan of Liquidation.
INTERESTS OF CERTAIN PERSONS IN THE SALE OF ASSETS AND THE PLAN OF LIQUIDATION
Shareholders of the Company should be aware for purposes of evaluating the
Sale of Assets and the Plan of Liquidation that to the extent any person has an
interest in the Sale of Assets or the Plan of Liquidation, as described herein,
those persons may have a conflict of interest in voting for or recommending the
Sale of Assets or the Plan of Liquidation. The interests of those persons in
the Sale of Assets or the Plan of Liquidation are not necessarily the same as
those of unaffiliated shareholders.
Certain of the present Directors and two (2) executive officers will
continue to serve on a temporary basis in such capacities following the
approval of the Sale of Assets and the Plan of Liquidation by the shareholders
in order to oversee the timely liquidation of the Company in accordance with
the Plan of Liquidation. The Directors and one of the executive officers
will receive compensation for the duties being performed. The other executive
officer, the Company s President and Chief Executive Officer, will not receive
any compensation other than as a Director. Those officers and other employees
not retained by the Company or its insurance subsidiaries will receive
severance payments from the Company. None of the Directors of either the
Company or its insurance subsidiaries will receive any severance payments or
other fees in connection with the Sale of Assets or the Plan of Liquidation.
One senior marketing officer is expected to enter into an employment contract
with LOTS to be effective as of January 1, 1998.
There was no compensation paid to management or payments made to advisors,
consultants, accountants or attorneys which were contingent upon the
consummation of the Sale of Assets or the Plan of Liquidation. See Interests of
Certain Persons in the Sale of Assets and the Plan of Liquidation.
VOTING AND PROXY INFORMATION
The record date fixed by the Board of Directors for the determination of
shareholders entitled to notice of and to vote at the Special Meeting is
November 28, 1997, at the close of business (the Record Date). At November 28,
1997, the Company had outstanding and entitled to vote at the Special Meeting
3,022,253 shares of Common Stock and 514,261 shares of Preferred Stock. Each
share of Common Stock and Preferred Stock entitles the holder to one (1) vote
for each share. See Description of Capital Stock.
The presence, in person or by proxy, of the holders of a majority of the
total number of issued and outstanding shares of both the Common Stock and
Preferred Stock entitled to vote at the Special Meeting, each to be determined
separately, is necessary to constitute a quorum for the transaction of business
at the Special Meeting, and the affirmative vote of a majority of the votes
cast by all holders of both the Common Stock and Preferred Stock entitled to
vote,
separately as a class, is required for approval of the Sale of Assets and the
Plan of Liquidation. If a proxy in the accompanying form is duly executed and
returned, the shares represented thereby will be voted as specified. Any person
executing the proxy may revoke it at anytime prior to its exercise at the
Special Meeting, by delivery of written notice to the Secretary of the Company.
The proxy may also be revoked by delivery of a later dated executed proxy. Mere
attendance at the Special Meeting, without such notice, will not revoke the
proxy. Votes cast by proxy or in person at the Special Meeting will be
tabulated by the election inspectors appointed for the meeting, who will also
determine whether or not a quorum is present. A proxy submitted by a
shareholder may indicate that all or a portion of the shares of both or either
the Common Stock or Preferred Stock represented by such proxy are not to be
voted by such shareholder with respect to a particular matter. This could
occur, for example, when a broker is not permitted to vote shares held in
street name on certain matters in the absence of instructions from the
beneficial owner of the shares.
The shares subject to any such proxy which are not being voted with
respect to a particular matter will be considered shares not present and
entitled to vote on such matter, although such shares may be considered
present and entitled to vote for other purposes and will count for purposes
of determining the presence of a quorum. Shares voted to abstain as to a
particular matter will be considered<PAGE>
voted shares, and will count for purposes
of determining the presence of a quorum.
The officers and Directors of the Company as a group own 237,578 shares of
Common Stock and 29,263 shares of Preferred Stock as of the Record Date and
have indicated their intention to vote such shares in favor of the Sale of
Assets and the Plan of Liquidation. In addition, the Company s subsidiaries
together owned 422,955 shares of Common Stock and 32,800 shares of Preferred
Stock as of the Record Date, and the respective Boards of Directors of these
subsidiaries have authorized management to vote such shares in favor of the
Sale of Assets and the Plan of Liquidation. The Consumers Financial
Corporation and Subsidiaries Employee Stock Ownership Plan (the Plan ) also
owns 240,607 shares of outstanding Common Stock as of the Record Date. Each of
the Plan participants has voting power for the shares held for him or her in
the Plan. The officers of the Company, for whom 90,008 shares are held by the
Plan, have indicated their intention to vote such shares in favor of the Sale
of Assets and the Plan of Liquidation. Accordingly, at least 750,541 shares (
or 24.8 %) of the Common Stock and 62,063 shares (or 12.1%) of the Preferred
Stock are expected to be voted in favor of the Sale of Assets and the Plan of
Liquidation. See Security Ownership of Principal Shareholders and Management.
All shares of both the Common Stock and Preferred Stock represented at the
Special Meeting by proxies in the form accompanying this Proxy Statement which
are received prior to or at the Special Meeting will be voted in accordance
with the instructions thereon, provided the proxies are properly signed and
dated. If no instructions are indicated thereon, the proxies will be voted
FOR the approval of the Sale of Assets and FOR the approval of the Plan of
Liquidation. The Board of Directors knows of no other matters which are
expected to come before the Special Meeting.
The cost of soliciting proxies pursuant to this Proxy Statement will be
borne by the Company. There will be no additional solicitation of proxies
undertaken other than by mail. Arrangements will also be made with custodians,
nominees and fiduciaries for forwarding proxy solicitation materials as
beneficial owners of both the Common Stock and Preferred Stock held of record
by such custodians, nominees and fiduciaries, and the Company may reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
BACKGROUND OF THE SALE OF ASSETS AND THE PLAN OF LIQUIDATION
The Board of Directors of the Company decided in 1995 that the Company
either had to make a significant acquisition of another credit insurance
business or it had to offer to sell or merge its operations with another
insurance organization. This decision was primarily based on the losses from
operations incurred over the previous two-year period. From mid-1995, at which
time the Company signed a letter of intent to acquire another credit insurance
company, until December of 1995, the Company was operating on the premise that
it would complete an acquisition which would have increased revenues
sufficiently to return the Company to profitability. However, the acquisition
did not materialize because the company to be acquired terminated the letter of
intent in December of 1995 to pursue another alternative. As a result of the
failure to complete the acquisition in 1995 and the time required to rebuild
its revenues, the Board of Directors decided that the best alternative was to
offer to sell or merge the Company with a strategic buyer or partner.
Accordingly, on March 11, 1996, the Company announced its plans to explore
opportunities to find a strategic buyer or partner.
The Board of Directors decided to engage a financial advisor to assist in
the sale of the Company and to retain actuarial advisors to provide the
valuation expertise necessary to value the insurance business and related
assets of the Company. In selecting the financial advisor, the Board of
Directors considered the services provided by E&Y, investment banking firms,
and brokers specializing in selling either insurance companies or auto
auction companies. E&Y was selected as the financial advisor because of its
knowledge of the insurance industry and its expertise both in marketing
companies to prospective buyers and conducting an auction process aimed at
obtaining the highest value for the assets being sold. It was also estimated
that the cost to the Company for financial advisory services from E&Y would
be lower. CreditRe Corporation was the only actuarial firm considered for the
credit insurance and vehicle service contract business due to its expertise in
valuations of credit insurance and related products. Allen Bailey &
Associates, Inc. was the only actuarial firm considered for the universal life
insurance valuation as it had previously completed such a valuation for the
Company which could be updated at a reasonable cost.
E&Y was initially retained specifically to assist the management of the
Company in the preparation of a sales memorandum which would include a
description of the Company's three lines of business, including operations,
facilities, systems, revenue sources, products, employee structure and various
financial information. In addition, the sales memorandum incorporated a
valuation of the credit insurance and vehicle service contract businesses as
developed by CreditRe Corporation, an independent actuarial firm, and a
valuation of its universal life insurance business prepared by Allen Bailey &
Associates, Inc., also an independent actuarial firm. It also included a
description of the business and a valuation of the wholesale automobile auction
business of the Company prepared by the management of the Company. The
actuarial reports prepared by CreditRe Corporation and Allen Bailey &
Associates, Inc. were used as benchmarks by the Company to evaluate the
fairness of offers received for the Company from the various purchasers and
the adequacy of the prices offered for the various lines of insurance
business. CreditRe Corporation was paid approximately $57,000 for its
appraisal report and actuarial services. Allen Bailey & Associates, Inc. has
served as the Company s valuation actuary for its life insurance subsidiaries
since 1993 and currently serves in that capacity. Allen Bailey & Associates was
paid $43,000 for its actuarial services in 1996 and approximately $10,000 for
its updated valuation of the Company s universal life insurance business. The
Company and its advisors began targeting prospective purchasers; coordinating,
screening and processing the inquiries; mailing the confidentiality agreement
and sales memorandum to each prospective purchaser; and analyzing and
comparing the offers. Subsequently, E&Y was asked to assist management in
selecting the best four offers for purposes of proceeding with the due
diligence review of each potential purchaser, in evaluating the best final
offers, including separate offers for the purchase of the automobile auction
business, and in advising the Board of Directors as to the appropriate offer
to accept.
The Company determined that it could maximize the consideration received
for the sale of the auction business if it solicited a separate group of buyers
for the auto auction. Accordingly, a separate group of 60 potential purchasers
for the auction business was developed from industry and association listings
and from E&Y s and the Company s knowledge of potential buyers of auto
auctions. The potential purchasers were contacted by E&Y in a letter inquiring
about their interest in purchasing an auto auction. From this group, 16
expressed an interest in purchasing the auction business. After receiving
letters of intent from three potential buyers, the Company determined that the
best overall offer was from ADESA Corporation. As a result, the Company
entered into a letter of intent with ADESA Corporation and closed on the sale
of the auction business to an affiliate of ADESA Corporation on November 6,
1996. In addition, because the universal life insurance business had been
under an option agreement with World Insurance Company, on March 27, 1997 the
Company sold this business to World Insurance Company for $1.1 million. The
sale of this business was effective January 1, 1997.
In mid-February 1996, E&Y and the Company initiated calls to and sent
letters to over 45 insurance companies, not including the ultimate buyer,
LaSalle, concerning their interest in acquiring the Company or portions there-
of. After confidentiality agreements were signed, 35 sales memoranda were
mailed to potential buyers beginning on February 21, 1996. Between mid-March
and late April 1996, 11 offers were received to buy the Company or segments of
the Company. On May 22, 1996, the Company received an offer from LaSalle which
was structured as a stock purchase. E&Y assisted the Company s management in
analyzing the offers, facilitating negotiations between management and
<PAGE>
interested buyers, and provided counseling on deal structuring, tax issues and
communications. The four highest offers were selected and a series of meetings
with each buyer were held during May 1996 to review their bids, clarify the
offers and negotiate further when it was determined that certain aspects of the
offers were not competitive with the other offers. Each of the four potential
buyers was then invited to perform a due diligence review and submit a final
offer in the form of a binding letter of intent. The four buyers each performed
a due diligence review from the end of May to the beginning of July 1996, and
submitted revised offers.
From mid-July 1996 to early August 1996, E&Y reviewed with management and
the Board of Directors the contents of each potential buyer s letter of intent,
the impact of each offer on the Company and the tax effect of each offer with
regard to the Company. With E&Y s assistance, management reviewed and analyzed
each offer and recommended and advised the Board of Directors of the Company to
accept the LaSalle offer as the best offer. On August 12, 1996, at a special
meeting of the Board of Directors, the Board accepted the LaSalle offer and
authorized the signing of the letter of intent with LaSalle, subject to further
negotiations regarding certain financial information and price adjustments. A
subsequent letter of intent was signed by the parties on September 27, 1996,
providing that LaSalle would acquire the Company in a Merger transaction where-
by the holders of the Common Stock would receive the Merger Consideration. On
October 22, 1996 the Board of Directors met for a regularly scheduled meeting
to consider the proposed Merger and unanimously approved the recommendation of
management and E&Y to enter into a definitive agreement with LaSalle and
authorized the signing of the Merger Agreement. The Merger Agreement was signed
on October 30, 1996 and the Company issued a press release publicly announcing
the proposed Merger with LaSalle on October 31, 1996.
On March 25, 1997, the Company's holders of Common Stock approved the
merger transaction, which was still subject to the approval of insurance
regulators in the four states in which the Company's insurance subsidiaries
were domiciled. The regulators were awaiting satisfactory evidence from
LaSalle of the cash funds necessary to complete the transaction. On May 15,
1997, LaSalle disclosed to the Company that it was unlikely that its original
source of funding for the merger would be available by June 15, 1997 and that
it was in the process of securing alternate funding. While LaSalle s
financial advisor, Explorer Holdings, was confident that the alternate funding
would be completed by June 15, 1997, the Company exercised its right to renew
its search for another acquiror to protect the Company in the event LaSalle's
funding was not available by June 15, 1997. The Company contacted a select
number of insurance companies who previously submitted a bid for the credit
insurance operations of the Company and requested that they resubmit their
bids for consideration. Shortly thereafter, four (4) bidders submitted
proposals for the Company s credit insurance business, contingent upon due
diligence review and an exclusivity provision. CreditRe Corporation was
retained to update its valuation of the Company s insurance operations. The
valuation report was used by the Company to determine the fairness of the
offers received for the Company s insurance operations. CreditRe Corporation
was paid approximately $19,000 for its updated valuation report.
On July 25, 1997, the Company terminated its merger agreement with LaSalle
because, despite continued assurances to the contrary, LaSalle was unable to
provide the cash funds necessary to complete the merger transaction, which
would have provided the holders of the Company s Common Stock with cash of
$3.78 per share. The Board subsequently reviewed each offer submitted by the
four bidders and determined that the offer from LOTS was the best bid
submitted. On July 28, 1997, the Company signed a letter of intent to sell its
credit insurance operations, which included its inforce block of credit
insurance policies, credit insurance and fee income accounts, and the Company s
principal life insurance subsidiary, to LOTS. This sale was subject to the
completion of a due diligence review by LOTS, insurance regulatory approval
and the approval of the holders of both the Common Stock and Preferred Stock,
each voting separately as a class, for the sale of the inforce block of credit
insurance policies. On September 17, 1997, after the completion of LOTS due
diligence review, the parties agreed to an adjusted purchase price for the
inforce credit insurance business and at the Company s request, LOTS agreed to
vacate its right to purchase the Company s principle life insurance subsidiary
and further agreed to purchase the Company s Arizona-domiciled reinsurance
subsidiary. On September 19, 1997, an amended Letter of Intent was signed by
the parties and an Asset Purchase Agreement was subsequently entered into on
December 30, 1997. Inasmuch as the Board determined that no other viable
alternatives were available to the Company, on November 25, 1997, at its
regularly scheduled meeting the Board of Directors unanimously voted to
approve the Plan of Liquidation contingent upon the execution of the Asset
Purchase Agreement.
The primary considerations of the Board of Directors in approving the Sale
of Assets and the Plan of Liquidation were to maximize the value to the holders
of the Common Stock and to redeem the Preferred Stock at par value. The Board
of Directors, each of whom is a holder of Common Stock, consists of six
Directors, five of whom are independent non-employees of the Company. Four
Directors also collectively own 28,563 shares of Preferred Stock. Each
Director will vote his shares for the approval of the Sale of Assets and the
Plan of Liquidation and will receive the same consideration for his Common
Stock and Preferred Stock as will be received by all other holders of Common
Stock and Preferred Stock. None of the Directors will receive any severance
payments or other fees in connection with the Sale of Assets or the Plan of
Liquidation.
The Board of Directors believes that the value to the holders of the
Common Stock will be maximized as a result of the Sale of Assets and Plan of
Liquidation because it will produce the highest consideration to be distributed
to those shareholders. It was also very important to the Board that the
continuing operating losses and expenses be curtailed as soon as practical in
order to preserve shareholder value. Each of the two competing offers involved
other alternatives for distributing cash to the holders of Common Stock.
One alternative considered by the Board of Directors involved retaining
and earning off the Company s existing credit insurance business, selling its
credit insurance accounts in return for payments based upon the credit insur-
ance premiums produced by those accounts over a 5-year period, and liquidating
its remaining assets. This alternative would produce a greater risk than the
Sale of Assets since the Company would remain liable for all mortality and
morbidity risks (i.e., life and disability claims) associated with the
Company s credit insurance policies. In addition, any payments to the holders
of Common Stock would be conditioned upon the realization of the profits or
losses associated with the liquidation of the remaining assets of the Company.
The Board of Directors also considered a second alternative in which the
Company would continue in business and attempt to return its operations to
profitability. However, the Board of Directors determined that it was not
feasible to become profitable in the near future and the possibility existed
that the Company would become insolvent and/or would be subject to regulatory
supervision by various state insurance departments. In that event, any
distribution of the Company s assets to its shareholders would be upon the
liquidation of the Company by the insurance department regulators and would
almost certainly result in the holders of Common Stock receiving less
consideration than they would in the Sale of Assets, which was an unacceptable
approach.
Because of the financial advisory services provided by E&Y to the Company
in 1996, E&Y advised the Company on November 26, 1996 that it could no longer
remain as the Company s independent auditors for 1996 and recommended that the
Company retain new auditors to re-audit the Company s 1995 financial statements
in order to avoid any delays that might otherwise arise in the filing and
review of a Proxy Statement relating to the proposed LaSalle merger or
periodic reports to be filed thereafter. E&Y s decision that it could not
perform the audit of the Company s 1996 financial statements was acknowledged
on the same date by the Audit Committee of the Company s Board of Directors,
and Arthur Andersen, LLP was retained to perform the re-audit of the Company s
1995 financial statements and to perform the audit of the 1996 financial
statements. E&Y reimbursed the Company for the costs associated with the re-
audit of the Company s 1995 financial statements. See Independent Auditors .
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE SALE
OF ASSETS AND THE PLAN OF LIQUIDATION
The Board of Directors believes that the proposed Sale of Assets and the
Plan of Liquidation are in the best interests of and are fair to the Company s
shareholders. Accordingly, the Board of Directors unanimously approved the Sale
of Assets on September 23, 1997 and unanimously approved the Plan of Liquida-
tion on November 25, 1997 contingent upon the execution of the Asset Purchase
Agreement.
The principal factors considered by the Board of Directors in its
evaluation of the Sale of Assets and the Plan of Liquidation were:
a. The desire of the Board of Directors to maximize the value to be
received by the holders of the Common Stock.
b. The desire of the Board of Directors to redeem the Preferred Stock
at par value.
c. The conclusion by the Board of Directors that the best alternative
available at this time for maximizing value is to sell the assets and liquidate
the Company.
d. The determination by the Board of Directors that the alternative of
selling the Company s credit insurance accounts, retaining its existing credit
insurance business until all profits from that business had earned and
liquidating the Company s other assets would involve substantially more
uncertainty regarding the amount to be ultimately distributed to the holders of
Common Stock, primarily because of the potential for adverse claims experience
for which the Company would be responsible until the existing credit insurance
business had completely earned.
In view of the variety of factors considered in connection with the
evaluation of the Sale of Assets, the Board of Directors did not find it
practicable to and did not quantify or otherwise assign weights to the specific
factors considered in reaching its determination. In making its determination,
the Board of Directors also considered the risks and likelihood of achieving
the results discussed above.
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED SALE OF ASSETS AND THE PLAN OF
LIQUIDATION AND RECOMMENDS THE APPROVAL OF THE SALE OF ASSETS AND THE PLAN OF
LIQUIDATION TO THE HOLDERS OF BOTH THE COMMON STOCK AND PREFERRED STOCK AT THE
SPECIAL MEETING. IF THE SALE OF ASSETS AND THE PLAN OF LIQUIDATION ARE NOT
APPROVED, THE BOARD OF DIRECTORS EXPECTS TO CONDUCT THE BUSINESS OF THE COMPANY
AS DESCRIBED UNDER BUSINESS OF CONSUMERS FINANCIAL CORPORATION WHILE THE
COMPANY CONTINUES TO ATTEMPT TO PURSUE OTHER ALTERNATIVES.
BUSINESS OF CONSUMERS FINANCIAL CORPORATION
The Company is an insurance holding company which, until October 1, 1997,
was a leading provider, through its subsidiaries, of credit life and credit
disability insurance in the Middle Atlantic region of the United States. The
insurance subsidiaries are licensed in 33 states and the District of Columbia
and conducted 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, was marketed primarily through approximately 900 automobile dealers. In
connection with its credit insurance operations, the Company also marketed, as
an agent, an automobile extended service warranty contract. Effective
October 1, 1997, the Company began reinsuring 100% of its new credit insurance
production to a designee of LOTS and, on January 1, 1998, the Company
transferred all of its credit insurance and fee income accounts to LOTS.
Additional information regarding the termination of marketing activities in
the Automotive Resource Division and the sale of the credit insurance and fee
income accounts appears below under Automotive Resource Division. 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 through
December 31, 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
Insurance Division and the sale of the remainder of the Division s inforce
business appears below under Individual Life Insurance Division.
The Company also conducted, through Interstate, wholesale and retail
automobile auctions of used vehicles for automobile dealers, banks and leasing
companies. On November 6, 1996, the Company sold the operating assets of
Interstate to a third party purchaser for $4,850,000.
The Company currently operates through its wholly-owned subsidiaries,
Consumers Life Insurance Company (a Delaware life insurance company) and
Consumers Car Care Corporation (a Pennsylvania business corporation). Investors
Fidelity Life Assurance Corp. (an Ohio life insurance company) is a subsidiary
of Consumers Life Insurance Company.
AUTOMOTIVE RESOURCE DIVISION
Until October 1, 1997, the Company sold and retained the risk on 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
pay down 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 life 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. As the result of continuing losses in its credit insurance operations,
the Board of Directors decided in 1997 (i) to discontinue the marketing of all
of its credit insurance products; (ii) to sell its inforce block of credit
insurance policies and all of its credit insurance and fee income accounts to
LOTS, and (iii) to sell its Arizona-domiciled insurance subsidiary to LOTS.
The selling price for the credit insurance and fee income accounts is
dependent upon the amount of credit insurance premiums and the fee income
profits produced by the Company s current accounts over a five-year period.
INDIVIDUAL LIFE INSURANCE DIVISION
As a result of continuing losses in its individual life insurance
operations, the Board of Directors decided in early 1992 to discontinue
marketing all universal life products and to sell all of the Company s whole
life, term, annuity and universal life business. The Company subsequently sold
its traditional whole life and term business in late 1992 and most of its
universal life business at the end of 1994. The remaining block of assumed
universal life business was sold to World Insurance Company, the direct writer
of that business, on March 27, 1997 with an effective date of January 1, 1997.
INVESTMENTS
The Company's general investment policy with respect to the assets of its
insurance subsidiaries has been to invest in fixed maturity securities and, to
a lesser extent, mortgages with intermediate terms (generally not more than
seven years). Investments in mortgages have allowed the Company to obtain
higher yields while maintaining maturities in the five to seven year range.
Prior to the sale of most of the Company s universal life business, the
Company's investment policy also included investing in certain mortgage-backed
securities which provided competitive yields on assets supporting those
interest sensitive<PAGE>
products.
COMPETITION
Prior to the sale of its credit insurance and fee income accounts to LOTS
effective October 1, 1997, the Company competed with numerous other credit
insurance companies, many of which were larger than the Company and had 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 effi-
ciency of claims handling procedures.
REGULATION
The Company's insurance operations are subject to regulation and
supervision in the states in which it is licensed. The extent of such regula-
tion 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 re-
serves, 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.
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.
BUSINESS OF LOTS
LOTS is a privately owned, Georgia-based financial services holding
corporation, with its administrative offices located in Jacksonville, Florida
with a mailing address of 100 West Bay Street, P. O. Box 44130, Jacksonville,
Florida and its telephone number is 1-800-888-2738. LOTS currently owns and
operates eight (8) subsidiary companies, including Life of the South Insurance
Company, Classic Life Assurance Company, Life of the South Agency, Inc.,
Life of the South, TPA, Inc., Life of the South Service Company and LOTS
Reassurance Company, performing insurance underwriting, marketing and
administrative functions, with annual premium, underwritten and administered,
of $150,000,000.
LOTS maintains an active strategy of growth through merger, acquisition and
aggressive marketing.
Life of the South Insurance Company ( LOTSIC ) is a Georgia corporation
licensed to write life and accident and sickness lines of insurance in Georgia,
Florida, Alabama, Tennessee, South Carolina, Mississippi, and Louisiana
marketed primarily through financial institutions, automobile dealers and
consumer finance companies. Additionally, LOTSIC, through its wholly-owned
subsidiary, Bankers Life of Louisiana ( Bankers ), a Louisiana corporation,
writes life and accident and sickness lines of insurance in Louisiana. Classic
Life Assurance Company (Classic) is an Ohio corporation licensed to write life
and accident and sickness lines of insurance in Ohio. Life of the South
Agency, Inc., a Georgia corporation, acts as a corporate general agent
representing a variety of nationally known insurance companies as well as
OTSIC, marketing individual life, health, disability and payroll deduction
products through a network of independent agents.
In addition, Life of the South TPA, Inc., a Georgia corporation, is a
third party administrator performing claims administration and reinsurance
administrative services for the self-funded group health market, and markets
its services through independent agents, primarily to large employers.
Likewise, Life of the South Service Company, a Georgia corporation, provides
administrative services for the credit insurance business of LOTSIC, Bankers,
Classic and, currently, twelve other insurance companies from its office in
Jacksonville, Florida, and markets credit insurance products to financial
institutions, automobile dealers and consumer finance companies, through the
efforts of company employed agents and independent general agents. LOTS
Reassurance Company is a reinsurance company licensed under the laws of the
Turks and Caicos Islands, providing reinsurance on credit life, credit accident
and sickness, and credit property lines of insurance.
INTERESTS OF CERTAIN PERSONS IN THE SALE OF ASSETS
AND THE PLAN OF LIQUIDATION
Shareholders of the Company should be aware that certain persons with
interests in the Sale of Assets or the Plan of Liquidation, as described
herein, may have a conflict of interest in voting for or recommending the Sale
of Assets or the Plan of Liquidation and, thus, their interests in the Sale of
Assets or the Plan of Liquidation are not necessarily the same as those
of unaffiliated shareholders.
Three of the six present Directors along with James C. Robertson,
President and Chief Executive Officer and R. Fredric Zullinger, Senior Vice
President, Chief Financial Officer and Treasurer will continue to serve on a
temporary basis in such capacities following the approval of the Sale of Assets
and the Plan of Liquidation by the shareholders in order to oversee the timely
liquidation of the Company in accordance with the Plan of Liquidation and,
except for Mr. Robertson, will receive compensation for the duties being
performed as determined by the Board of Directors. The Directors and Mr.
Zullinger will receive compensation for the duties being performed. However,
the compensation to the Directors will be reduced beginning in 1998, inasmuch
as Board of Director s meetings are planned to be held quarterly as opposed to
monthly. Mr. Robertson will not receive any compensation other than as a
Director. Those officers and other employees who are not retained by the Com-
pany or its insurance subsidiaries will receive severance payments from the
Company, based generally on years of service and compensation level as
approved by the Board of Directors. Neither Mr. Robertson nor any of the
Directors of either the Company or its insurance subsidiaries will receive any
severance payments in connection with the Sale of Assets or the Plan of
Liquidation. Mr. Zullinger, upon his termination from the Company, will
receive a severance payment from the Company based upon his years of service
and compensation level.
Ralph R. Byrnes, a senior vice president and top marketing executive of
the Company s insurance subsidiaries, was retained by LOTS in substantially the
same capacity he held with the Company. Mr. Byrnes is expected to receive an
employment contract to be effective as of January 1, 1998 and will receive an
annual salary of $120,000 with additional bonuses to be paid based upon
performance during the term of his employment with LOTS. The employment con-
tract is expected to contain non-competition provisions which will apply
during the term of Mr. Byrnes employment with LOTS and for a period
thereafter.
There was no compensation paid to Directors or management, or payments
made to advisors, consultants, or attorneys contingent upon consummation of the
Sale of Assets or the adoption of the Plan of Liquidation.
ASSET PURCHASE AGREEMENT AND SALE OF ASSETS
All references to and summaries of the Sale of Assets in this Proxy
Statement are qualified in their entirety by reference to the Asset Purchase
Agreement, a copy of which is attached hereto as Appendix 1.
GENERAL INFORMATION
The material provisions of the Asset Purchase Agreement provide that,
subject to the approval of the holders of both the Common Stock and Preferred
Stock, each voting as a separate class, the approval of the state insurance
department regulators in Arizona, Delaware and Ohio, and the satisfaction or
waiver or certain other conditions, the Company will sell its inforce block of
credit insurance policies and its Arizona-domiciled reinsurance subsidiary to
LOTS. The sale of the credit insurance business will be accomplished through
various reinsurance agreements which have been entered into between the
Company s insurance subsidiaries and American Republic Insurance Company, of
Des Moines, Iowa ( American Republic ), which has agreed to act as LOTS
financial partner in acquiring the inforce credit insurance business.
CONSIDERATION RECEIVED
In connection with the Sale of Assets, American Republic, acting as LOTS
financial partner, will assume from the Company approximately $52.2 million in
policyholder liabilities and other related liabilities, and the Company will
transfer assets to American Republic of approximately $38.6 million, resulting
in a pre-tax gain to the Company of $13.6 million. However, the Company will
write off $16.8 million in deferred policy acquisition costs and an additional
$800,000 in intangible assets related to the block of inforce business,
resulting in a total pre-tax loss from the Sale of Assets of approximately $4
million. The assets to be transferred by the Company will be primarily cash but
will also include certain invested assets and receivables. In order to provide
the liquidity necessary to consummate the transaction and to reduce the market
risk in its bond investments, the Company has already sold a significant por-
tion of its bond portfolio (the proceeds of which have exceeded the book value
of such securities) and, prior to closing, will have sold substantially all of
the bond portfolio.
In connection with the sale to LOTS of the Company s Arizona-domiciled
subsidiary, the Company will receive cash of approximately $2.9 million, which
approximates the carrying value of the subsidiary. The proceeds received will
be used to reduce the cash otherwise due by the Company to American Republic in
connection with the Sale of Assets.
The terms of the Asset Purchase Agreement also provide that on or about
September 30, 2002, the Company may receive all or a portion of the amounts
which are deposited by the Company and LOTS into a contingency fund (the
Contingency Fund ). This fund will consist of $755,000 (60% of the total fund)
which will be paid by the Company to LOTS at the time the Sale of Assets is
consummated and $503,000 (representing the remaining 40% of the fund) which
will be deposited by LOTS from amounts which it withholds from the payments
which are otherwise due to the Company from the sale of the Company s credit
insurance and fee income accounts. Depending on the level of claims incurred
by LOTS on the inforce block of credit insurance business acquired from the
Company during the five-year period ending September 30, 2002, the Contingency
Fund and the investment income thereon will be either (i) retained in full by
LOTS, (ii) shared between Company and LOTS according to a pre-determined
formula, or (iii) transferred in full to the Company.
The Company is also entitled to receive 50% of any underwriting profits
earned by LOTS on the inforce credit insurance business if the level of in-
curred claims referred to above is lower than the level which allows the
Company to receive the entire Contingency Fund.
CONDITIONS, REPRESENTATIONS AND COVENANTS
The respective obligations of the Company and LOTS to consummate the Sale
of Assets are subject to certain conditions including the following: (i) the
truth in all material respects at Closing of the representations and warranties
made by the Company (in the case of LOTS) and by LOTS (in the case of the
Company) in the Asset Purchase Agreement and in any certificate or other wri-
ting delivered pursuant to the Asset Purchase Agreement; (ii) the performance
by the Company (in the case of LOTS) and by LOTS (in the case of the Company)
in all material respects of all of the obligations required by the Asset
Purchase Agreement to be performed by them, respectively; (iii) the absence of
any writ, order, decree or injunction of a court of competent jurisdiction
which prohibits or restricts the consummation of the Sale of Assets; (iv) the
approval of the Sale of Assets by the majority of the holders of Common Stock
and Preferred Stock each voting separately as a class; (v) the receipt of all
consents, approvals or waivers , including the approvals from the Insurance
Departments of Arizona, Delaware and Ohio; and (vi) the receipt by each party
of certificates of officers of the other party to evidence compliance with
the conditions to the Sale of Assets. See Article IV of the Asset Purchase
Agreement attached as Appendix 1 to this Proxy Statement. The Company and LOTS
may each waive compliance with certain obligations, covenants, agreements or
conditions of the Asset Purchase Agreement.
The Company has agreed that, so long as the Asset Purchase Agreement is in
effect, the Company and the officers, employees or other representatives or
agents of the Company will not take any action to solicit, initiate or
encourage any discussions or negotiations with any person with respect to the
Sale of Assets (other than in the ordinary course of business), other than the
transactions contemplated by the Asset Purchase Agreement. The Company is
obligated to notify LOTS promptly after receipt of any inquiry or proposal it
receives in regard to a proposed Sale of Assets.
The Company has also agreed to conduct its business in the ordinary course
subject to certain permitted exceptions. The Company and LOTS have each agreed
to use commercially reasonable efforts to obtain consents of all third parties
and governmental authorities necessary to the consummation of the Sale of
Assets and the transactions contemplated thereby.
EFFECTIVE TIME AND CLOSING
The Effective Time of the Sale of Assets will be October 1, 1997 and the
Closing shall occur after receipt of all of the respective state insurance
department approvals and the shareholder approval.
TERMINATION, AMENDMENT, FEES AND EXPENSES
The Asset Purchase Agreement may be terminated at any time prior to the
Closing, whether before or after its approval by the holders of the Common
Stock and Preferred Stock, (i) by mutual action of the Boards of Directors of
the Company and LOTS; or (ii) by either party if the Sale of Assets has not
been consummated by May 31, 1998; or (iii) by either party if the regulatory
and shareholder approvals have not been received, provided that such
termination may not be effected by a party whose failure to fulfill any of
its obligations under the Asset Purchase Agreement was the reason for such
non-consummation.
In the event of the termination of the Asset Purchase Agreement in
accordance with its terms for any reason, the Asset Purchase Agreement shall
become void and have no effect and no liability will exist with reference to
the Company s inforce credit insurance policies, except as described in the
following paragraph.
The Asset Purchase Agreement provides that all costs and expenses
incurred in connection with the Sale of Assets thereby shall be paid by the
party incurring such costs and expenses. The Asset Purchase Agreement further
provides that if, prior to consummation of the Sale of Assets, the Asset
Purchase Agreement is terminated because the Company proceeds with another
transaction which it believes is more favorable to its shareholders, the
Company shall pay LOTS a $250,000 break-up fee. In addition, LOTS will
administer the inforce credit insurance policies pursuant to an administrative
services agreement between the Parties.
Any provision of the Asset Purchase Agreement may be amended or waived by
written agreement of the parties thereto at any time prior to the Closing,
whether before or after the Special Meeting, except that after the Special
Meeting, the Company will not, without the further approval of the sharehol-
ders, consent to any amendment or grant any waiver which reduces the considera-
tion to be received in exchange for the Sale of Assets.
INSURANCE DEPARTMENT APPROVALS
The Company is subject to regulation under the Insurance Holding Company
laws of the States of Arizona, Delaware, and Ohio. 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. The purchase of more than 10% of
the outstanding shares of an insurance company s common stock by one or more
affiliated parties requires the prior approval of the respective domiciliary
state department of insurance and the filing of a statement regarding the
acquisition of control of a domestic insurer ( Form A ) with the respective
state department of insurance which has broad discretionary administrative
authority. LOTS has filed a Form A Statement with the Arizona Insurance
Department, and, while there can be no assurance that LOTS Form A will be
approved by the Arizona Insurance Department, the Company and LOTS are not
currently aware of any reason why such approval will not be granted. In
addition, the reinsurance agreements involving the credit insurance business of
the Company s insurance subsidiaries transferring all of the credit insurance
to American Republic Insurance Company require the prior approval of the
Delaware and Ohio Insurance Departments. While there can be no assurance that
the reinsurance agreements will be approved by the Delaware and Ohio Insurance
Departments, the Company and LOTS are not currently aware of any reason why
such approval will not be granted.
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
For Federal income tax purposes, the Sale of Assets will produce a loss
which is significantly smaller than the financial statement loss discussed
under Asset Purchase Agreement and Sale of Assets: Consideration Received due
to the difference between the tax and financial statement bases of certain
assets and liabilities transferred. The tax loss, which is expected to be less
than $750,000, will result in some Federal income tax benefit to the extent
such loss can be carried back to previous tax years in which the Company
reported taxable income. The Sale of Assets, however, may cause the Company s
insurance subsidiaries to no longer qualify for taxation as life insurance
companies. If that occurs, those subsidiaries will incur approximately
$520,000 in Federal income taxes relating to their Policyholders Surplus
Accounts. Further, the tax loss from the Sale of Assets cannot be used to
offset the tax on the subsidiaries Policyholders Surplus Accounts.
THE PLAN OF LIQUIDATION AND DISSOLUTION
GENERAL INFORMATION
All references to and summaries of the Plan of Liquidation in this Proxy
Statement are qualified in their entirety by reference to the Plan of
Liquidation, a copy of which is attached hereto as Appendix 2. The Plan of
Liquidation will become effective on the date on which the Plan of Liquidation
is adopted by the requisite vote of the shareholders. As promptly as practical
after the Plan of Liquidation Effective Date and upon the filing of Articles of
Dissolution in the Pennsylvania Department of State, the Company will be
dissolved pursuant to Chapter 19, Subchapter F of the PBCL.
TERMS OF THE PLAN OF LIQUIDATION
In accordance with Chapter 19, Subchapter F of the PBCL, the Company will
notify potential claimants of the dissolution, pay existing liabilities, redeem
and cancel all of the outstanding shares of Preferred Stock, and make a pro
rata distribution of the remaining cash to the holders of the Common Stock. The
holders of Preferred Stock are entitled to receive from the remaining assets of
the Company payment in cash of an amount equal to $10.00 per share, along with
any unpaid dividends accrued to the date of such payment, before distribution of
assets can be made to the holders of Common Stock. Subchapter F further
provides that any claims against the Company which are not asserted within
two (2) years after the filing of the Articles of Dissolution will be forever
barred. The Liquidation is expected to commence as soon as practical after
approval of the Plan of Liquidation by the shareholders and is expected to be
concluded on or about the fifth anniversary thereof by a final liquidating pro
rata distribution directly to the shareholders. Any sales of the Company s
assets will be made, in private or public transactions, on such terms as are
approved by the Board of Directors. It is not anticipated that any further
shareholder votes will be solicited with respect to the approval of the
specific terms of any particular sales of assets approved by the Board of
Directors.
The Plan of Liquidation provides that subject to the payment or provision
for payment of the Company s indebtedness and other obligations, the cash
proceeds of any asset sales together with other available cash will be used to
cancel and redeem all of the outstanding shares of the Preferred Stock, and to
make from time to time, a pro rata distribution in cash to the holders of the
Common Stock on dates selected by the Board of Directors with respect to each
such distribution. Only shareholders of record on the record date set by the
Board of Directors for Liquidation will receive distributions. No assurances
can be given that available cash and amounts received on the sale of assets
will be adequate to provide for the Company s obligations, liabilities,
expenses and claims and to make cash distributions to shareholders. The
Company currently has no plans to repurchase shares of Common Stock or
Preferred Stock from its shareholders.
The Board of Directors may, at its discretion, transfer all of the
Company s assets to a trust along with any liabilities of the Company after
receipt of all requisite approvals of the Plan of Liquidation (the Liquidating
Trust ). Notwithstanding the foregoing, to the extent that a transfer of any
asset cannot be effected without the consent of a governmental authority, no
such transfer shall be effected without such consent. In the event of a trans-
fer of assets to the Liquidating Trust, the Company would distribute, on a pro
rata basis to its shareholders, with the holders of Preferred Stock having
priority over the holders of Common Stock, beneficial interests in the
Liquidating Trust. The Plan of Liquidation authorizes the Board of Directors
to appoint one or more individuals or entities to act as trustee or trustees
of the Liquidating Trust and to cause the Company to enter into a liquidating
trust agreement with such trustee or trustees on such terms and conditions as
may be approved by the Board of Directors (the Liquidating Trust Agreement ).
Approval of the Plan of Liquidation also will constitute the approval by the
Company s shareholders of such appointment and the Liquidating Trust
Agreement. For further information relating to the Liquidating Trust, the
appointment of trustees and the Liquidating Trust Agreement, reference is made
to Contingent Liabilities; Liquidating Trust.
The Company will close its stock transfer records and discontinue
recording transfers of shares of Common Stock and Preferred Stock at the close
of business on the record date fixed by the Board of Directors for the
Liquidation (the Final Record Date ) and, thereafter, certificates represen-
ting shares of Common Stock and Preferred Stock will not be assignable or
transferable on the books of the Company except by will, intestate succession
or operation of law. After the Final Record Date, the Company will not issue
any new stock certificates, other than replacement certificates. See Final
Record Date below.
LIQUIDATING DISTRIBUTIONS; AMOUNT; TIMING
Although the Board of Directors has not established a firm timetable for
distributions to shareholders if the Plan of Liquidation is approved by the
shareholders, the Board of Directors will, subject to exigencies inherent in
winding up the Company s business, make such distributions as promptly as
practicable. The Liquidation is expected to commence as soon as practicable
after approval of the Plan of Liquidation by the shareholders and is expected
to be concluded on or about the fifth anniversary thereof by a final liquida-
ting distribution to the shareholders of the Company. The Board of Directors
is, however, currently unable to predict the precise amount or timing of any
distributions pursuant to the Plan of Liquidation. The actual amount, timing
of, and record date for all distributions will be determined by the Board of
Directors, in its sole discretion, and will depend in part upon (i) the ability
of the Board of Directors and management, or the Trustees, to sell the remain-
ing assets of the Company, (ii) the amount of fee revenues to be received from
LOTS, over a five-year period, from the sale of the credit insurance and fee
income accounts, (iii) the amount, if any, to be received from the Contingency
Fund in 2002 (see Asset Purchase Agreement and Sale of Assets: Consideration
Received ) and (iv) expenses incurred during the period of Liquidation.
Uncertainties as to the net realizable value of the Company s assets and
the ultimate amount of its liabilities make it impracticable to predict with
precision the aggregate amount which will be ultimately distributed to
shareholders. Claims, liabilities and expenses from operations (including
operating costs, salaries, income taxes, payroll and local taxes and
miscellaneous office expenses), although currently declining, will continue to
occur following approval of the Plan of Liquidation and the Company anticipates
that expenses for professional fees and other expenses of liquidation will
likewise continue. These expenses will reduce the amount of assets available
for ultimate distribution to shareholders, and, while the Company does not
believe that a precise estimate of those expenses can currently be made,
management and the Board of Directors believe that available cash and amounts
received from the sales of assets and the sale of the credit insurance and fee
income accounts will be adequate to provide for the Company s obligations,
liabilities, expenses and claims (including contingent liabilities) and to
make cash distributions to shareholders. However, no assurances can be given
that the total funds available will be adequate to provide for the Company s
obligations, liabilities, expenses and claims and to make cash distributions
to shareholders. If such available funds are not adequate to provide for the
Company s obligations, liabilities, expenses and claims, distributions to the
Company s shareholders will be reduced.
The amount of the liquidating distributions ultimately to be received by
the holders of Common Stock is dependent primarily on the factors identified
above and could be positively or negatively affected by those and other
factors, as discussed above. However, the following table provides an
estimated range of such liquidating distribution(s) based upon the
information currently available to management.
<TABLE>
Estimated Range
Proforma of Liquidating
Amount Distributions
at to holders of
(in thousands, except per share amounts) Sept 30, Common Stock
1997 Low High
<S> <C> <C> <C>
1. Existing net assets of the Company:
Net Assets per Pro Forma
Consolidated Balance Sheet $2,615
(see Financial Information )
Adjustment to reflect estimated value of
charter and state licenses of remaining
insurance subsidiaries in excess of 466
carrying values
Accretion of remaining difference
between fair value and mandatory
redemption value of Preferred Stock (193)
$2,888 $2,455 (a) $3,032 (a)
2. Fee revenues due from LOTS for sale of 1,661 (b) 2,001 (b)
credit insurance and fee income accounts,
net of Contingency Fund deposits withheld
by LOTS
3. Distribution of Contingency Fund plus - 0 - (c) 1,077 (c)
related investment income held by LOTS
(based on claims experience of the inforce
credit insurance business sold to LOTS)
4. Operating losses incurred by the Company (1,950) (d) (1,450) (d)
and dividends paid on Preferred Stock
during liquidation period (excluding fee
revenues and Contingency Fund distribution
in Items 2 and 3 above)
$2,166 $4,660
Shares of Common Stock outstanding 3,022 3,022
Amount per share $0.72 $1.54
</TABLE>
(a) The low range for distributions from existing net assets assumes a
15% decrease from the adjusted pro forma amount of $2,888. The high
range assumes a 5% increase over the adjusted proforma amount.
(b) The low range for distributions from the fee revenues received from
LOTS assumes a 10% annual decline in premiums (with respect to the
credit insurance business) and a 10% annual decline in profits
(with respect to the fee income business) on the credit insurance
and fee income accounts sold to LOTS. The high range assumes
level premiums and profits from those accounts. Both amounts
include estimated investment income (at 6%) earned on the fee
revenues, and both amounts are net of income taxes.
(c) The low range for the distribution of the Contingency Fund and
related investment income (at 6%) assumes the level of claims
incurred by LOTS on the inforce block of credit insurance busness
is too high to permit any distribution to the Company. The high
range assumes the level of claims is low enough to permit the
distribution to the Company of the entire Contingency Fund. Both
amounts are net of income taxes.
(d) The Company s estimated after-tax operating losses during the
liquidation period will be approximately $880,000, and dividend
payments to the holders of Preferred Stock will be approximately
$819,000. The low range for operating losses and dividend payments
assumes actual costs are $250,000 higher than the $1.7 million of
computed costs. The high range assumes actual costs are $250,000
less than the computed costs. In developing the estimate of future
operating losses, various assumptions were made concerning the
levels of investment income, corporate expenses and the timing of
an amount received from the liquidation of the Company s assets as
well as the payment of its liabilities. The assumptions as to the
timing of the liquidation of certain significant assets, such as
the Company s home office building, also affects the assumption as
to the time at which the Preferred Stock would be redeemed, which
in turn affects the assumed level of dividends paid on the
Preferred Stock.
The Company does not plan to satisfy all of its liabilities and
obligations prior to making distributions to its shareholders, but instead will
reserve assets deemed by management and the Board of Directors to be adequate
to provide for such liabilities and obligations. See Contingent Liabilities;
Liquidating Trust. Management and the Board of Directors expect to satisfy
all of the Company s current and accrued obligations through the sale of a
portion of its assets.
SALES OF THE COMPANY S ASSETS
The Plan of Liquidation gives the Board of Directors the authority to
sell all of the assets of the Company. As of November 30, 1997, no sale has
been effected pursuant to the Plan of Liquidation and, except for the Asset
Purchase Agreement, no agreement to sell any of the assets of the Company has
been reached. The sale contemplated by the Asset Purchase Agreement is expected
to be consummated by February 28, 1998. However, agreements for the sale of
assets may be entered into prior to the Special Meeting and, if entered into,
may be contingent upon the approval of the Plan of Liquidation at the Special
Meeting. Approval of the Plan of Liquidation will constitute approval of any
such agreements. Sales of the Company s assets will be made on such terms as
are approved by the Board of Directors and may be conducted by competitive
bidding, public sales on applicable stock exchanges or over-the-counter or
through privately negotiated sales. Any sales will only be made after the Board
of Directors has determined that any such sale is in the best interests of the
shareholders. It is not anticipated that any further shareholder votes will be
solicited with respect to the approval of the specific terms of any particular
sales of assets approved by the Board of Directors. The Company does not
anticipate amending or supplementing the Proxy Statement to reflect any such
agreement or sale. The prices at which the Company will be able to sell its
various assets will depend largely on factors beyond the Company s control,
including, without limitation, the rate of inflation, changes in interest
rates, the condition of financial markets, the availability of financing to
prospective purchasers of the assets and certain regulatory approvals. In
addition, the Company may not obtain as high a price for a particular property
as it might secure if the Company were not in Liquidation.
CONDUCT OF THE COMPANY FOLLOWING ADOPTION OF THE PLAN OF LIQUIDATION
Following approval of the Plan of Liquidation by the shareholders, the
Company s activities will be limited to winding up its affairs, taking such
action as may be necessary to preserve the value of its assets and distributing
its assets in accordance with the Plan of Liquidation. The Company will seek to
liquidate all of its assets in such manner and upon such terms as the Board of
Directors or the trustees of the Liquidating Trust, in their absolute
discretion, determines to be in the best interests of the Company s
shareholders.
Following approval of the Plan of Liquidation by the Company s
shareholders, the Company shall continue to indemnify its officers, Directors,
employees and agents in accordance with its certificate of incorporation, as
amended, by-laws, any contractual arrangements, and the PBCL for actions taken
in connection with the Plan of Liquidation and the winding up of the affairs
of the Plan of Liquidation. The Company s obligation to indemnify such persons
may be satisfied out of the assets of any liquidating trust. The Board of
Directors or the trustees of the Liquidating Trust, in their absolute
discretion, are authorized to obtain and maintain insurance as may be
necessary to cover the Company s indemnification obligations under the Plan
of Liquidation.
CONTINGENT LIABILITIES; LIQUIDATING TRUST
Under the PBCL the Company is required in connection with its dissolu-
tion, to pay or provide for payment of all of its liabilities and obligations.
Following approval of the Plan of Liquidation by the shareholders, the Company
will pay all expenses and fixed and other known liabilities with assets which
it believes to be adequate for payment thereof. The Company is currently
unable to estimate with precision the exact amount of those payments which may
be required, but any such amount (in addition to any cash contributed to the
Liquidating Trust) will be deducted before the determination of amounts
available for distribution to shareholders. After the liabilities, expenses and
obligations of the Company have been satisfied in full, the Company will
distribute any remaining funds in cash payments to its shareholders, with the
holders of Preferred Stock having priority over the holders of Common Stock.
After the approval of the Plan of Liquidation by the Company s
shareholders, the Board of Directors may, at its discretion, transfer such
remaining assets of the Company to the Liquidating Trust. Notwithstanding the
foregoing, to the extent that the distribution or transfer of any asset cannot
be effected without the consent of a governmental authority, no such
distribution or transfer shall be effected without such consent. The purpose of
the Liquidating Trust would be to distribute such property or to sell such
property on terms satisfactory to the liquidating trustees, and distribute the
proceeds of such sale after paying those liabilities of the Company, if any,
assumed by the trust, to the Company s shareholders. The Liquidating Trust
would acquire all of the cash and other assets of the Company and would assume
all of the liabilities and obligations of the Company which remain unsatisfied.
The Plan of Liquidation authorizes the Board of Directors to appoint one
or more individuals or entities to act as trustee or trustees of the Liquida-
ting Trust and to cause the Company to enter into the Liquidating Trust
Agreement with such trustee or trustees on such terms and conditions as may be
approved by the Board of Directors. It is anticipated that the Board of
Directors will select Directors or officers of the Company as trustees.
Approval of the Plan of Liquidation by the shareholders will also constitute
the approval by the Company s shareholders of any such appointment and the
Liquidating Trust Agreement.
The Liquidating Trust is intended to serve as a temporary repository for
the trust property prior to its disposition. The trust would be responsible for
satisfying all of the Company s liabilities and obligations and for the
distribution to the Company s shareholders of any remaining assets. Pursuant to
the Liquidating Trust Agreement, the trust property would be transferred to the
trustees immediately prior to the distribution of interests in the trust to the
Company s shareholders, and would be held in trust for the benefit of the
shareholder beneficiaries, subject to the terms of the Liquidating Trust
Agreement. It is anticipated that the interests would be evidenced only by the
records of the trust and there would be no certificates or other tangible
evidence of such interests and that no shareholder would be required to pay any
cash or other consideration for the interests to be received in the distribu-
tion or to surrender or exchange shares of the Company s stock in order to
receive the interests. It is further anticipated that, pursuant to the
Liquidating Trust Agreement, (i) the trustees would consist of certain members
of the Company s current Board of Directors and/or management or such third
party as designated by the Board of Directors; (ii) approval of the trustees
would be required to take any action; (iii) the trust would be irrevocable and
would terminate after the earlier of (a) the trust property having been fully
distributed, or (b) a majority in interest of the beneficiaries of the trust,
or a majority of the trustees, having approved of such termination, or (c) a
specified number of years having elapsed after the creation of the trust.
FINAL RECORD DATE
The Company will close its stock transfer records and discontinue
recording transfers of shares of Common Stock and Preferred Stock on the Final
Record Date, and thereafter certificates representing shares of Common Stock
and Preferred Stock will not be assignable or transferable on the books of the
Company except by will, intestate succession or operation of law. After the
Final Record Date the Company will not issue any new stock certificates, other
than replacement certificates. It is anticipated that no further trading of the
Company s shares will occur on the NASDAQ National Market on or after the Final
Record Date. All liquidating distributions from the Company or the Liquidating
Trust on or after the Final Record Date will be made to shareholders according
to their proportionate holdings of Common Stock and Preferred Stock as of the
Final Record Date. Subsequent to the Final Record Date, the Company may at its
election require shareholders to surrender certificates representing their
<PAGE>
shares of the Common Stock and Preferred Stock in order to receive subsequent
distributions. Shareholders should not forward their stock certificates before
receiving instructions to do so. If surrender of stock certificates should be
required, all distributions otherwise payable by the Company or the Liquidating
Trust, to shareholders who have not surrendered their stock certificates may be
held in trust for such shareholders, without interest, until the surrender of
their certificates (subject to escheat pursuant to the laws relating to
unclaimed property). If a shareholder s certificate evidencing the Common Stock
or Preferred Stock has been lost, stolen or destroyed, the shareholder may be
required to furnish the Company with satisfactory evidence of the loss, theft
or destruction thereof, together with a surety bond or other indemnify, as a
condition to the receipt of any distribution.
REGULATORY APPROVALS
Except for (i) compliance by the Company with the applicable rules and
regulations of the Securities and Exchange Commission in connection with the
distribution by the Company of its assets in the form of cash payments to its
shareholders and (ii) prior approval from the various domiciliary state
insurance departments in regard to the disposition by the Company of its
insurance company subsidiaries, no United States federal or state regulatory
requirements must be complied with or approvals obtained in connection with the
Liquidation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material Federal
income tax consequences of the Plan of Liquidation to the Company s
shareholders, but does not purport to be a complete analysis of all the
potential tax effects. The discussion addresses neither the tax consequences
that may be relevant to particular categories of investors subject to special
treatment under certain Federal income tax laws (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and foreign individuals
and entities) nor any tax consequences arising under the laws of any state,
local or foreign jurisdiction. The discussion is based upon the Code, Treasury
Regulations, Internal Revenue Service (the IRS ) rulings, and judicial
decisions now in effect, all of which are subject to change at any time; any
such changes may be applied retroactively. The following discussion has no
binding effect on the IRS or the courts and assumes that the Company will
liquidate substantially in accordance with the Plan of Liquidation.
Distributions pursuant to the Plan of Liquidation may occur at various
times and in more than one tax year. No assurance can be given that the tax
treatment described herein will remain unchanged at the time of such
distributions. The following discussion presents the opinion of the Company. No
ruling has been requested from the IRS with respect to the anticipated tax
treatment of the Plan of Liquidation and the Company will not seek an opinion
of counsel with respect to the anticipated tax treatment. The failure to obtain
a ruling from the IRS or an opinion of counsel results in less certainty that
the anticipated tax treatment summarized herein will be obtained. If any of the
conclusions stated herein proves to be incorrect, the result could be increased
taxation at the corporation and/or shareholder level, thus reducing the benefit
to the shareholders and the Company from the Liquidation.
CONSEQUENCES TO THE COMPANY
After the approval of the Plan of Liquidation and until the Liquidation is
completed, the Company will continue to be subject to income tax on its taxable
income. The Company will recognize gain or loss on sales of its property
pursuant to the Plan of Liquidation. Cash distributions to shareholders will
not result in any tax consequences to the Company. It is not anticipated that
the sale of the Company s assets will result in any significant gain or loss
or the recognition of any significant tax obligations.
CONSEQUENCES TO SHAREHOLDERS
As a result of the Liquidation, it is the Company s belief that sharehol-
ders will recognize gain or loss equal to the difference between (i) the amount
of cash distributed to them, and (ii) their tax basis for their shares of the
Common Stock and/or Preferred Stock. A shareholder s tax basis in his or her
shares will depend upon various factors, including the shareholder s cost and
the amount and nature of any distributions received with respect thereto.
A shareholder s gain or loss will be computed on a per share basis. The
Company expects to make more than one liquidating distribution, each of which
will be allocated proportionately to each share of stock owned by a sharehol-
der. The value of each liquidating distribution will be applied against and
reduce a shareholder s tax basis in his or her shares of stock. Gain will be
recognized by reason of a liquidating distribution only to the extent that the
aggregate value of such distributions received by a shareholder with respect
to a share exceeds his or her tax basis for that share. Any loss will
generally be recognized only when the final distribution from the Company has
been received and then only if the aggregate value of the liquidating
distributions with respect to a share is less than the shareholder s tax basis
for that share. Gain resulting from distributions from a corporation pursuant
to a plan of liquidation is therefore generally capital gain rather than
ordinary income. Ordinary income would result in the event of the receipt of a
distribution, not in liquidation, that is characterized as a dividend for tax
purposes, subject, in the case of corporate holders, to a dividends received
deduction. If it were to be determined that distributions made pursuant to the
Plan of Liquidation were not liquidating distributions, the result could be
treatment of the distributions as either dividends, return of capital
distributions or capital gain distributions. After the close of its taxable
year, the Company will provide shareholders and the IRS with a statement of
the amount of cash distributed to the shareholders during that year.
THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO
ANY SHAREHOLDER. THE TAX CONSEQUENCES OF THE PLAN OF LIQUIDATION MAY VARY
DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF THE SHAREHOLDER. THE COMPANY
RECOMMENDS THAT EACH SHAREHOLDER CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES OF THE PLAN OF LIQUIDATION.
ABANDONMENT; AMENDMENT
Under the Plan of Liquidation, the Board of Directors may modify, amend or
abandon the Plan of Liquidation, notwithstanding shareholder and regulatory
approval, to the extent permitted by the PBCL. Until the Articles of Dissolu-
tion are filed with the Department of State of the Commonwealth of
Pennsylvania, the Company intends to continue to evaluate any other
alternatives to the Plan of Liquidation which may be presented by parties
interested in acquiring the Company and its remaining assets, either through a
merger, tender offer or similar transaction, and will pursue any viable
opportunity which the Board of Directors believes is in the best interests of
the Company and its shareholders.
APPRAISAL RIGHTS
Under the PBCL, the shareholders of the Company are not entitled to
dissenters rights of appraisal in connection with the matters to be voted on at
the Special Meeting.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of the following:
COMMON STOCK
As of November 28, 1997, there were 10,000,000 authorized shares of Common
Stock with a stated value of $.01, of which 3,022,253 are issued and
outstanding. The holders of the Common Stock vote as a single class and are
entitled to one vote per share on all matters to be voted on by shareholders
and have the right of cumulative voting in connection with election of
Directors. The holders of Common Stock are entitled to receive pro rata
dividends, when and as declared by the Board of Directors in its discretion,
out of funds legally available therefor, but only if all dividends on the
Preferred Stock having preferential dividend rights have been paid or provided
for according to its terms. On January 2, 1998, the trading day prior to the
public announcement of the Sale of Assets and the Plan of Liquidation, the
reported bid and ask prices were $1.00 and $1.25 per share, respectively.
8 1/2% CONVERTIBLE PREFERRED STOCK, SERIES A
As of November 28, 1997, there were 632,500 authorized shares of Preferred
Stock, with a liquidation preference of $10.00, of which 514,261 shares are
issued and outstanding. The Preferred Stock is convertible at any time, unless
previously redeemed, into shares of Common Stock at the rate of 1.482 share of
Common Stock for each share of Preferred Stock (equivalent to a conversion
price of $6.75.) The Preferred Stock is currently redeemable at the option of
the Company at $10.00 per share, and, commencing July 1, 1998, a sinking fund
will be established requiring mandatory annual payments sufficient to redeem
10% of the number of shares of Preferred Stock initially issued, calculated
to redeem all of the Preferred Stock by July 1, 2007. On January 2, 1998, the
trading day prior to the public announcement of the Sale of Assets and the Plan
of Liquidation, the reported bid and ask prices were $7.00 and $9.50 per share,
respectively.
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 of each year. 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 Common Stock as well as redemptions or
acquisitions by the Company of shares of the Common Stock will be restricted.
If the Company is in default in an aggregate amount equal to four quarterly
preferred dividends, the holders of Preferred Stock will be entitled to elect
two additional board members to the then existing Board of Directors while such
arrearage exists. As of November 28, 1997, there were no arrearages with
respect to the payment of the Preferred Stock dividends.
In the event of liquidation, dissolution of winding up of the Company, the
holders of Preferred Stock are entitled to receive from the assets of the
Company, payment in cash of an amount equal to $10.00 per share, plus a further
amount equal to unpaid cumulative dividends on the Preferred Stock and divi-
dends on the Preferred Stock accrued to the date of such payment, before any
distribution of assets shall be made to the holders of Common Stock or other
shares ranking junior to the Preferred Stock as to dividends or distribution of
assets on liquidation. There are no shares of the Company senior to the
Preferred Stock as to dividends or distribution of assets on liquidation
outstanding at this time.
Except in certain limited circumstances, the holders of Preferred Stock
have no voting rights; however, they can vote as a single class when the Com-
pany attempts to (i) sell, transfer or dispose of all or substantially all of
the property, business or assets of the Company or participate in a statutory
share exchange whereby the Preferred Stock or the Common Stock is converted
into other securities or property or in a consolidation or sale of assets of
the Company with any corporation; provided, however, that this restriction
shall not prevent any such statutory share exchange, consolidation or sale of
assets or require such separate class vote if none of the preferences or other
rights of the holders of the Preferred Stock shall be adversely affected
thereby and if the Corporation resulting from or surviving any such statutory
share exchange, consolidation or sale of assets shall not have authorized or
outstanding, after such statutory share exchange, consolidation or sale of
assets, any preferred stock or other class of shares ranking prior to or on
parity with the Preferred Stock with respect to payment of dividends or
distribution of assets on liquidation; or (ii) amend the Articles of
Incorporation or By-Laws of the Company so as to affect adversely any of the
preferences or other rights of the holders of the Preferred Stock; or (iii)
authorize any additional series of preferred stock or any class of stock
ranking prior to the Preferred Stock with respect to either the payment of
dividends or the distribution of assets on any liquidation or any securities
convertible into preferred stock or any such shares ranking prior thereto.
Since the Company is proposing the sale of substantially all of the
operating assets of the Company, along with the complete and final liquidation
of the Company, the holders of the Preferred Stock have a right to vote
separately as a single class at the Special Meeting.
FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the Consolidated Financial Statements and the Notes thereto as contained
in the Company s Annual Report on Form 10-K for the year ended December 31,
1996, and the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
<TABLE>
(Not covered by Independent Auditor s Report)
(dollar amounts in thousands, except per Nine months ended
share amounts) September 30, Year ended December 31,
1997 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues (before reinsurance ceded) $23,251 $26,818 $33,602 $37,430 $38,534 $37,169 $34,864
Premiums written and policy charges
(before reinsurance ceded) 20,535 24,328 30,350 33,832 34,916 31,944 29,623
Net investment income 1,589 1,578 2,087 2,236 2,878 3,403 4,270
Net return on average investments 5.3% 5.3% 5.4% 6.0% 6.7% 7.2% 7.4%
Loss from continuing operations (1,081) (1,326) (2,706) (2,072) (2,513) (1,500) (2,838)
Discontinued operations 125 435 1,472 471 1,301 685 3,361
Income (loss) before cumulative effect of
change in accounting principles (1,206) (891) (1,234) (1,601) (1,212) (815) 523
Cumulative effect of change in accounting
principles 299 (710)
Net income (loss) (1,206) (891) (1,234) (1,601) (913) (1,525) 523
Income (loss) per common and common
equivalent share:
Loss from continuing operations (0.55) (0.64) (1.20) (0.96) (1.10) (0.71) (0.63)
Discontinued operations (0.05) 0.17 0.56 0.18 0.48 0.25 0.65
Income (loss) before cumulative effect
of change in accounting principles (0.60) (0.47) (0.64) (0.78) (0.62) (0.46) 0.02
Cumulative effect of change in
accounting principles 0.11 (0.26)
Net income (loss) (0.60) (0.47) (0.64) (0.78) (0.51) (0.72) 0.02
Sept 30, December 31,
1997 1996 1995 1994 1993 1992
Total assets 91,490 114,619 123,322 125,276 144,393 174,003
Total debt 0 0 3,389 4,683 5,987
Shareholders equity and redeemable 11,917 13,343 15,226 19,502 21,295
preferred stock
Shareholders equity per common share 2.79 3.31 4.20 3.96 5.41 5.91
Return on average total equity, including
redeemable preferred stock (12.0%) (7.9%) (9.9%) (5.1%) (7.4%) 2.8%
Cash dividends declared per common share NONE NONE NONE 0.05 0.05 0.05
</TABLE>
PRO FORMA FINANCIAL INFORMATION
The pro forma consolidated balance sheet included herein presents the pro
forma adjustments which would have been made to the Company s historical
consolidated balance sheet as of September 30, 1997 if the proposed Sale of
Assets and the sale of the Company s Arizona-domiciled insurance subsidiary had
been effective on that date. If reflects the assumption by American Republic,
LOTS financial partner, of all of the Company s policyholder liabilities and
related liabilities and the transfer to American Republic of assets sufficient
to cover such liabilities less the Company s selling price for the credit
insurance business. It also reflects the write-off of certain deferred costs
and intangible assets and the accrual of severance costs to terminated
employees.
The pro forma consolidated statements of operations included herein
present the pro form adjustments which would have been made to the Company s
historical consolidated statements of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively,
if the proposed Sale of Assets and the sale of the Arizona-domiciled insurance
subsidiary had been effective on January 1, 1996. The pro forma statements
reflect the elimination of the operating results of the Automotive Resource
Division as a result of the Sale of Assets. They also reflect the fee revenues
which would have been received in those periods from LOTS for the sale of the
credit insurance and fee income accounts, as well as certain overhead expenses
allocated to the business being sold but which would not have been eliminated
as a result of the sale.
The pro forma consolidated financial statements have been prepared by the
Company based upon assumptions which were deemed appropriate. The pro forma
statements presented herein are shown for illustrative purposes only and are
not necessarily indicative of either the future financial position and future
results of operations of the Company or of the financial position and results
of operations of the Company which would have actually occurred had the Sale of
Assets taken place as of the date or for the periods presented.
The pro forma consolidated financial statements should be read in
conjunction with the Company s historical financial statements and related
notes incorporated by reference herein.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
PRO FORMA ADJUSTMENTS
Automotive
Resource
(IN THOUSANDS) Historical Division Other Pro Forma
<S> <C> <C> <C> <C>
Assets (a)
Investments:
Fixed maturities $32,459 ($30,661) $1,798
Mortgage loans on real estate 2,112 (867) 1,245
Other invested assets 1,841 (13) 1,828
Short-term investments 4,747 (4,220) 527
Total investments 41,159 (35,761) 5,398
Cash 503 503
Accrued investment income 596 (524) 72
Receivables 3,087 (2,311) 776
Reinsurance recoverable 13,761 9,553 (a) 23,314
Prepaid reinsurance premiums 10,926 39,876 (a) 50,802
Deferred policy acquisition costs 16,877 ($16,849) (b) 28
Property and equipment 2,074 2,074
Other real estate 1,012 1,012
Other assets 1,495 (20) (804) (b) 671
$91,490 $10,813 ($17,653) $84,650
Liabilities, Redeemable Preferred
Stock and Shareholders Equity
Liabilities:
Future policy benefits $21,074 (a) $21,074
Unearned premiums 51,836 (a) 51,836
Other policy claims and
benefits payable 2,482 (a) 2,482
Other liabilities 4,111 ($2,794) $401 (c) 1,718
Income taxes:
Current 21 (136) (c) 239
354 (d)
Deferred 49 (110) (d) 7
68 (e)
79,573 (2,794) 577 77,356
Redeemable preferred stock:
Series A, 8 1/2%
cumulative convertible,
net of treasury stock 4,679 4,679
Shareholders equity:
Common stock 30 30
Capital in excess of stated value 7,989 7,989
Net unrealized appreciation
of debt and equity securities 230 (217) 13
Retained earnings 460 13,824 (18,230) (3,946)
Treasury stock (1,471) (1,471)
7,238 13,607 (18,230) 2,615
$91,490 $10,813 ($17,653) $84,650
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(UNAUDITED)
(a) To reflect the assets and liabilities transferred pursuant to the
sale, through reinsurance, of the Company s inforce credit insurance
business and the sale of the Company s Arizona-domiciled reinsurance
subsidiary. In accordance with the provisions of Financial
Accounting Standards Board Statement No. 113, the reinsured
liabilities for future policy benefits, unearned premiums and unpaid
claims are classified in the Proforma Consolidated Balance Sheet
with Reinsurance Recoverable and Prepaid Reinsurance Premiums rather
than as offsets to the respective liabilities.
(b) To reflect the write-off of deferred policy acquisition costs and
certain intangible assets related to the credit insurance business
sold to LOTS.
(c) To reflect the after-tax cost of severance pay obligations owed to
terminated employees.
(d) To reflect the additional current income tax liability resulting
from the sale transaction and the elimination of deferred tax
liabilities associated with the reversal of temporary differences
between financial statement and tax bases of assets and liabilities
transferred.
(e) To reflect the elimination of certain deferred tax assets.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
Pro Forma Adjustments
(in thousands, except per share Automotive
data) Resource
Historical Division Other Pro Forma
<S> <C> <C> <C> <C>
Revenues: (a)
Premiums written $30,350 ($29,997) $353
Decrease in unearned premiums 1,765 (1,701) 64
Gross premium income 32,115 (31,698) 417
Less reinsurance ceded (11,689) 11,689 0
Net premium income 20,426 (20,009) 417
Net investment income 2,087 (2,028) $9 (b) 68
Net realized investment losses (160) (160)
Fees and other income 1,325 (1,290) 452 (b) 487
23,678 (23,327) 461 812
Benefits and expenses:
Death and other benefits 11,698 (11,118) 580
Amortization of deferred policy
acquisition costs 10,134 (10,122) 12
Operating expenses 5,380 (4,492) 1,139 (c) 2,428
401 (d)
27,212 (25,732) 1,540 3,020
Income (loss) before income taxes (3,534) 2,405 (1,079) (2,208)
Income tax expense (benefit) (828) 564 154 (b) (471)
(267) (c)
(94) (d)
Income (loss) from
continuing operations (2,706) 1,841 (872) (1,737)
Discontinued operations:
Income from operations of
discontinued business
(net of income taxes) 587 587
Gain (loss) on disposal of
discontinued businesses
(net of income taxes) 885 ($4,358) (d) (3,473)
1,472 0 (4,358) (2,886)
Net income (loss) ($1,234) $1,841 ($5,230) ($4,623)<PAGE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
Pro Forma Adjustments
Automotive
Resource
(IN THOUSANDS, EXCEPT PER SHARE DATA) Historical Division Other Pro Forma
Income (loss) per common and common
equivalent share:
Loss from continuing operations ($1.20) ($0.83)
Discontinued operations 0.56 (1.11)
Net loss ($0.64) ($1.94)
Weighted average number of shares
outstanding 2,614 2,614
Loss per common share - assuming
full dilution * *
* Anti-dilutive
Cash dividends declared per common share None None
(a) To eliminate the after-tax operating income of the Automotive Resource
Division for the year.
(b) To reflect the after-tax effect of fee revenues to be received from LOTS
for the sale of the credit insurance and fee income accounts.
(c) To reflect costs that would not have been eliminated as a result of
the Sale of Assets.
(d) To reflect the after-tax cost of severance payments to terminated
employees.
(e) To reflect the after tax loss from the Sale of Assets as of January
1, 1996.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
Pro Forma Adjustments
(in thousands, except per share Automotive
data) Resource
Historical Division Other Pro Forma
<S> <C> <C> <C> <C>
Revenues: (a)
Premiums written $20,535 ($20,562) ($27)
Decrease in unearned premiums 2,858 (2,562) 296
Gross premium income 23,393 (23,124) 269
Less reinsurance ceded (7,771) 7,771 0
Net premium income 15,622 (15,353) 269
Net investment income 1,589 (1,443) $20 (b) 166
Net realized investment gains 224 224
Fees and other income 903 (729) 307 (b) 481
18,338 (17,525) 327 1,140
Benefits and expenses:
Death and other benefits 9,456 (9,082) 374
Amortization of deferred policy 0
acquisition costs 7,080 (7,072) 8
Operating expenses 3,711 (3,465) 745 (c) 991
20,247 (19,619) 745 1,373
Income (loss) before income taxes (1,909) 2,094 (418) (233)
Income tax expense (benefit) (828) 908 104 (b) (139)
(323) (c)
Income (loss from
Income (loss) from
continuing operations (1,081) 1,186 (199) (94)
Discontinued operations:
Income from operations of
business (net of
income taxes)
Loss on disposal of discontinued
businesses (net of income (125) (125)
(125) (125)
Net income (loss) ($1,206) $1,186 ($199) ($219)
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
</TABLE>
<TABLE>
Pro Forma Adjustments
Automotive
(in thousands, except per share Resource
data) Historical Division Other Pro Forma
<S> <C> <C> <C> <C>
Per share data:
Loss from continuing operations ($0.55) ($0.17)
Discontinued operations (0.05) (0.05)
Net loss ($0.60) ($0.22)
Weighted average number of shares
outstanding 2,602 2,602
Loss per common share - assuming
full dilution * *
* Anti-dilutive
Cash dividends declared
per common share None None
(a) To eliminate the after-tax operating income of the Automotive Resource
Division for the nine month period.
(b) To reflect the after-tax effect of fee revenues to be received from LOTS
for the sale of the credit insurance and fee income accounts.
(c) To reflect costs that would not have been eliminated as a result of
the Sale of Assets.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table presents information as to the beneficial ownership
of the Common Stock and Preferred Stock and as of September 30, 1997 for any
person known to the Company to hold 5% or more of the Common Stock and
Preferred Stock.
Amount and
Title Nature of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
Common Consumers Financial Corporation and Subsidiaries Employee Stock 240,607 8.0 %
Ownership Plan (ESOP), (1)
1200 Camp Hill By-Pass, Camp Hill, PA 17011
Common Various wholly-owned subsidiaries and 422,955 14.0 %
affiliates of Consumers Financial Corporation,
1200 Camp Hill By-Pass, Camp Hill, PA 17011
(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 September 30, 1997, the number of
shares of the Common Stock 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.
Amount and
Nature of Percent
TITLE OF Name of Beneficial of
CLASS Beneficial Owner Ownership (1) Class
(a)
Common Groninger, John E. 57,521 (2) 1.9
Preferred 22,410 (3) 4.4
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) 1.0
(b)
Common Byrnes, Ralph R. 73,030 (6)(7) 2.4
Common Walsh Jr., William J. 62,811 (8) 2.1
Common Zullinger, R. Fredric 54,521 (9) 1.8
(c)
Common Directors and Executive 365,408 (10) 11.8
Preferred Officers as a Group 29,263 5.7
(9 individuals)
</TABLE>
(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 spouses for the shares
indicated.
(5) Includes 700 shares 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 that
are acquirable through the exercise of stock options and stock apprecia-
tion rights.
(7) Mr. Byrnes resigned as an employee of the Company effective January 1,
1998 and became an employee of LOTS at that time.
(8) 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 that
are acquirable through the exercise of stock options and stock
appreciation rights.
(9) 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 that are acquirable through the exercise of stock options and
stock appreciation rights.
(10) Includes shares that are acquirable through the exercise of stock options
and SAR s.
FEES AND EXPENSES
All expenses in connection with solicitation of proxies will be borne by
the Company. The Company will pay brokers, nominees, fiduciaries or other
custodians their reasonable expenses for sending proxy materials to, and
obtaining instructions from, persons for whom they hold stock of the Company.
The Company expects to solicit proxies primarily by mail, but Directors,
officers and other employees of the Company may also solicit proxies in person,
by telephone, by telegraph or otherwise. With certain limited exceptions, all
of the fees and expenses (including investment banking, legal and accounting
fees and other expenses) of the Sale of Assets will be paid by the party
incurring such fees and expenses, whether or not the Sale of Assets is
consummated. See Sale of Assets: Termination, Amendment, Fees and Expenses.
ANNUAL REPORT ON FORM 10-K AND QUARTERLY REPORTS ON FORM 10-Q
A copy of the Company s 1996 Annual Report on Form 10-K and a copy of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997 (each without exhibits unless such exhibits are specifically incorporated
therein by reference) are being mailed along with this Proxy Statement to
each shareholder of record. Shareholders not receiving a copy of such Annual
Report or Quarterly Report may obtain one without charge by writing or calling
the Secretary, Consumers Financial Corporation, 1200 Camp Hill By-Pass, [P.O.
Box 26 (17001-0026)], Camp Hill, PA 17011-3744, telephone (717) 761-4230.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company s Annual Report on Form 10-K for the year ended December 31,
1996, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997 and Current Reports on Form 8-K dated
April 8, May 8, and August 11, 1997, respectively, have been filed with the
Securities and Exchange Commission (the Commission ) under the Securities
Exchange Act of 1934, as amended (the Exchange Act ) and are incorporated
herein by reference. The Company's SEC file number is 0-2616.
The information relating to the Company contained in this Proxy Statement
does not purport to be comprehensive and should be read together with the
information in the documents incorporated by reference herein. All documents
filed by the Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the
Exchange Act subsequent to the date hereof and prior to the date of the Special
Meeting shall be deemed to be incorporated by reference herein and to be a part
hereof from the date any such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is incorporated by reference
herein) modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed to constitute a part hereof except as so
modified or superseded. All information appearing in this Proxy Statement is
qualified in its entirety by the information and consolidated financial
statements (including notes thereto) appearing in the documents incorporated
herein by reference, except to the extent set forth in the immediately
preceding statement.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Proxy Statement
other than those contained herein or in the documents incorporated by reference
herein. Any information or representations with respect to such matters not
contained herein or therein must not be relied upon as having been authorized
by the Company. The delivery of this Proxy Statement shall not under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information in this
Proxy Statement or in the documents incorporated by reference herein is correct
as of any time subsequent to the date hereof or thereof.
The Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents (other than exhibits
to such documents, unless such exhibits are specifically incorporated therein
by reference) are available, without charge, to any person, including any
beneficial owner of stock of the Company to whom this Proxy Statement is
delivered, on written or oral request to the Secretary of the Company, 1200
Camp Hill By-Pass [P. O. Box 26 (17001-0026)], Camp Hill, Pennsylvania,
17011-3744, telephone number (717) 761-4230.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain regional offices of the
Commission located at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such information can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission s home page on the Internet (http://www.sec.gov).
LEGAL OPINIONS
Certain matters relating to the Sale of Assets and the Plan of Liquidation
will be passed upon by Duane, Morris & Heckscher, LLP, counsel to the Company.
Certain maters relating to the Sale of Assets will be passed upon by Kilpatrick
Stockton, LLP, counsel to LOTS.
INDEPENDENT AUDITORS
The consolidated financial statements and schedules of the Company and its
subsidiaries included in the Company s Annual Report on Form 10-K as of
December 31, 1996, are incorporated by reference in this Proxy Statement. Such
financial statements are incorporated by reference herein in reliance upon the
report of Arthur Anderson LLP ( AA ), and upon the authority of said firm as
experts in accounting and auditing. Representatives of AA are expected to be
present at the Special Meeting and will have an opportunity to make a
statement if they desire to do so and are also expected to be available to
respond to appropriate shareholder questions.
On November 26, 1996, E&Y advised the Company that it could no longer
continue as the Company s independent auditors, 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 at E&Y s
expense in order to avoid any delays that might otherwise arise in the filing
and review of a Proxy Statement relating to the proposed LaSalle merger or
periodic reports to be filed thereafter.
E&Y s report on the Company s financial statements for 1994 did not
contain an adverse opinion or disclaimer of opinion, nor was the report
qualified or modified as to uncertainty, audit scope or accounting principles.
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
retained Arthur Andersen LLP to perform the audit of the Company s 1996
financial statements and the re-audit of the 1995 financial statements.
Prior to this time, during the Company s two most recent fiscal years and
subsequent interim periods, neither the Company nor anyone acting on its behalf
consulted Arthur Andersen regarding (i) either the application of accounting
principles to a specified transaction, completed or proposed, or the type of
audit opinion that might be rendered on the Company s financial statements, and
neither a written report nor oral advice was provided to the Company which
Arthur Andersen concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial reporting
issue; or (ii) any matter that was the subject of a disagreement with E&Y (no
such disagreement existed) or as to a reportable event.
OTHER BUSINESS
The management of the Company knows of no matter other than the approval
of the Sale of Assets and the Plan of Liquidation to be brought before the
Special Meeting, but if any matters are properly presented, it is the intention
of the persons named in the accompanying proxy to vote on such matters in
accordance with their best judgment.
The foregoing Notice and Proxy Statement are sent by order of the Board
of Directors.
JAMES C. ROBERTSON
PRESIDENT and
CHIEF EXECUTIVE OFFICER
Dated: January ___, 1998
CONSUMERS FINANCIAL CORPORATION COMMON STOCK
SPECIAL MEETING OF SHAREHOLDERS
FIRST ADDRESS LINE
2ND LINE
3RD LINE
4TH LINE
5TH LINE
PLEASE VOTE YOUR SHARES, SIGN AND RETURN THE BOTTOM PORTION OF THIS PROXY CARD.
A A POSTPAID ENVELOPE IS ENCLOSED.
TEAR HERE
- --
CONSUMERS FINANCIAL CORPORATION COMMON STOCK
PROXY
SPECIAL MEETING OF SHAREHOLDERS
The undersigned Shareholder(s) of Consumers Financial Corporation, a
Pennsylvania corporation, hereby appoint James C. Robertson and R. Fredric
Zullinger as Proxies, acting individually or collectively, each with full power
of substitution, to vote all shares of Consumers Financial Corporation COMMON
STOCK which the undersigned is entitled to vote at the Special Meeting of
Shareholders to be held on February , 1998 at Corporate Headquarters,
1200 Camp Hill By-Pass, Camp Hill, Pennsylvania, and at any adjournment(s)
thereof.
NAME OF SHAREHOLDER A/C#
2ND ADS LINE NUMBER OF SHS:
3RD ADS LINE SS#
4TH ADS LINE
5TH LINE (IF NECESSARY)
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
Every properly signed proxy will be voted in accordance with the specifications
made thereon. If not otherwise specified, this Proxy will be voted FOR the Sale
of Assets and FOR the Plan of Liquidation. In addition, the Proxies are
authorized to vote upon such other business as may properly come before the
meeting.
(1) To consider and vote upon the approval of the sale of the inforce credit
insurance business and the related transfer of certain assets of the
Company to Life of the South Corporation, a Georgia corporation (the
Sale of Assets ), as described in the Asset Purchase Agreement (the
Asset Purchase Agreement ), by and among the Company, Consumers Life
Insurance Company, a wholly-owned subsidiary of the Company, Investors
Fidelity Life Assurance Corp., a wholly-owned subsidiary of Consumers
Life Insurance Company, and Life of the South Corporation dated December
30, 1997, a copy of which is attached as Appendix 1 to this Proxy
Statement.
FOR AGAINST ABSTAIN
(2) To consider and vote upon the approval and adoption of the Consumers
Financial Corporation Plan of Liquidation and Dissolution, a copy of
which is attached as Appendix 2 to this Proxy Statement (the Plan of
Liquidation ), pursuant to which the Company will be voluntarily
liquidated and dissolved in accordance with Subchapter F of Chapter 19
of the Pennsylvania Business Corporation Law of 1988, as amended
( PBCL ) and Section 331 of the Internal Revenue Code of 1986, as
amended; provided, however, that the Board of Directors may determine
to proceed under Subchapter H of Chapter 19 of the PBCL prior to the
filing of the Articles of Dissolution with the Pennsylvania Department
of State, notwithstanding the adoption by the shareholders of this
resolution.
FOR AGAINST ABSTAIN
(3) To transact such other business as may properly come before the Special
Meeting and any adjournment or postponement thereof.
SIGNATURE(S) / Dated: , 1998
Please sign exactly as your name(s) appears hereon. When signing as attorney,
executor, administrator, trustee or guardian, give your full title as such. If
a corporation, sign the full corporate name by an authorized officer. If a
partnership, sign in partnership name by an authorized person.
PLEASE SIGN AND RETURN THIS PORTION PROMPTLY, USING THE ENCLOSED ENVELOPE.
CONSUMERS FINANCIAL CORPORATION PREFERRED STOCK
SPECIAL MEETING OF SHAREHOLDERS
FIRST ADDRESS LINE
2ND LINE
3RD LINE
4TH LINE
5TH LINE
PLEASE VOTE YOUR SHARES, SIGN AND RETURN THE BOTTOM PORTION OF THIS PROXY
CARD. A POSTPAID ENVELOPE IS ENCLOSED.
TEAR HERE
CONSUMERS FINANCIAL CORPORATION PREFERRED STOCK
PROXY
SPECIAL MEETING OF SHAREHOLDERS
The undersigned Shareholder(s) of Consumers Financial Corporation, a
Pennsylvania corporation, hereby appoint James C. Robertson and R. Fredric
Zullinger as Proxies, acting individually or collectively, each with full power
of substitution, to vote all shares of Consumers Financial Corporation
PREFERRED STOCK which the undersigned is entitled to vote at the Special
Meeting of Shareholders to be held on February , 1998 at Corporate
Headquarters, 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania, and at any
adjournment(s) thereof.
NAME OF SHAREHOLDER A/C#
2ND ADS LINE NUMBER OF SHS:
3RD ADS LINE SS#
4TH ADS LINE
5TH LINE (IF NECESSARY)
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
Every properly signed proxy will be voted in accordance with the specifications
made thereon. If not otherwise specified, this Proxy will be voted FOR the Sale
of Assets and FOR the Plan of Liquidation. In addition, the Proxies are
authorized to vote upon such other business as may properly come before the
meeting.
(1) To consider and vote upon the approval of the sale of the inforce credit
insurance business and the related transfer of certain assets of the
Company to Life of the South Corporation, a Georgia corporation (the
Sale of Assets ), as described in the Asset Purchase Agreement (the
Asset Purchase Agreement ), by and among the Company, Consumers Life
Insurance Company, a wholly-owned subsidiary of the Company, Investors
Fidelity Life Assurance Corp., a wholly-owned subsidiary of Consumers
Life Insurance Company, and Life of the South Corporation dated December
30, 1997, a copy of which is attached as Appendix 1 to this Proxy
Statement.
FOR AGAINST ABSTAIN
(2) To consider and vote upon the approval and adoption of the Consumers
Financial Corporation Plan of Liquidation and Dissolution, a copy of
which is attached as Appendix 2 to this Proxy Statement (the Plan of
Liquidation ), pursuant to which the Company will be voluntarily
liquidated and dissolved in accordance with Subchapter F of Chapter 19
of the Pennsylvania Business Corporation Law of 1988, as amended
( PBCL ) and Section 331 of the Internal Revenue Code of 1986, as
amended; provided, however, that the Board of Directors may determine
to proceed under Subchapter H of Chapter 19 of the PBCL prior to the
filing of the Articles of Dissolution with the Pennsylvania Department
of State, notwithstanding the adoption by the shareholders of this
resolution.
FOR AGAINST ABSTAIN
(3) To transact such other business as may properly come before the Special
Meeting and any adjournment or postponement thereof.
SIGNATURE(S) / Dated: , 1998
Please sign exactly as your name(s) appears hereon. When signing as attorney,
executor, administrator, trustee or guardian, give your full title as such.
If a corporation, sign the full corporate name by an authorized officer. If a
partnership, sign in partnership name by an authorized person.
PLEASE SIGN AND RETURN THIS PORTION PROMPTLY, USING THE ENCLOSED ENVELOPE.
APPENDIX 1
ASSET PURCHASE AGREEMENT
AMONG
CONSUMERS FINANCIAL CORPORATION
CAMP HILL, PA
CONSUMERS LIFE INSURANCE COMPANY
CAMP HILL, PA
INVESTORS FIDELITY LIFE ASSURANCE CORP.
CAMP HILL, PA
AND
LIFE OF THE SOUTH CORPORATION
NASHVILLE, GA
EFFECTIVE DATE: OCTOBER 1, 1997
ASSET PURCHASE AGREEMENT
TABLE OF CONTENTS
ARTICLE I SALE OF INFORCE BUSINESS . . . . . . . . . . . . . . . 2
Section 1.1 Inforce Business Reinsured (2)
Section 1.2 Reinsurance Commission (2)
Section 1.3 Basic Asset Transfer Amount (2)
Section 1.4 Contingency Fund (3)
Section 1.5 Inforce Business Transactions between the
Effective Date and December 31, 1997 (3)
Section 1.6 Excluded Liabilities (3)
ARTICLE II NEW CREDIT BUSINESS FRANCHISE . . . . . . . . . . . . 4
Section 2.1 Sale of New Credit Business (4)
Section 2.2 Compensation for New Credit Business Franchise
(4)
Section 2.3 Method of Payment (5)
Section 2.4 New Credit Business Transactions Between the
Effective Date and December 31, 1997 (5)
Section 2.5 Reinsurance Arrangement for New Credit Business
(6)
Section 2.6 Amounts Due to or From Agents (7)
ARTICLE III FEE INCOME BUSINESS . . . . . . . . . . . . . . . . 7
Section 3.1 Sale of Fee Income Business (7)
Section 3.2 Compensation for Fee Income Business (7)
Section 3.3 Change in Corporate Name (7)
ARTICLE IV ADMINISTRATIVE SERVICES; PERSONNEL . . . . . . . . . 8
Section 4.1 Administrative Services (8)
Section 4.2 Personnel (8)
Section 4.3 Books, Accounts and Records (8)
ARTICLE V CLOSING; EFFECTIVE DATE AND TERMINATION . . . . . . . 9
Section 5.1 Closing (9)
Section 5.2 Effective Date (9)
Section 5.3 Termination (9)
Section 5.4 Effect of Termination (10)
Section 5.5 Amendment (10)
Section 5.6 Waiver (10)
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF CONSUMERS . . . . 10
Section 6.1 Organization and Good Standing of CFC (10)
Section 6.2 Organization and Good Standing of CLIC (11)
Section 6.3 Organization and Good Standing of IFLAC (11)
Section 6.4 Proper Corporate Action (11)
Section 6.5 Absence of Conflicting Laws or Agreements (11)
Section 6.6 Financial Statements (12)
Section 6.7 Litigation (13)
Section 6.8 Absence of Undisclosed Liabilities (13)
Section 6.9 Rates, Compliance with Laws (13)
Section 6.10 Taxes (13)
Section 6.11 Employment Matters (14)
Section 6.12 Full Disclosure (14)
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF LOTS . . . . . . 14
Section 7.1 Organization and Good Standing (14)
Section 7.2 Proper Corporate Action (14)
Section 7.3 Absence of Conflicting Laws or Agreements (14)
Section 7.4 Financial Statements (15)
Section 7.5 Litigation (15)
Section 7.6 Absence of Undisclosed Liabilities (15)
Section 7.7 Full Disclosure (16)
ARTICLE VIII ADDITIONAL COVENANTS AND AGREEMENTS . . . . . . 16
Section 8.1 Shareholder Approval (16)
Section 8.2 Conduct of Consumers Business (17)
Section 8.3 Expenses; Break-up Fee (18)
Section 8.4 Other Agreements (18)
Section 8.5 Public Announcements (18)
Section 8.6 Exclusive Dealing (18)
Section 8.7 Noncompete Covenant of Consumers (19)
Section 8.8 Access and Information (20)
ARTICLE IX CONDITIONS PRECEDENT TO CLOSING . . . . . . . . . 20
Section 9.1 Conditions Precedent to LOTS' Obligation to
Close (20)
Section 9.2 Conditions Precedent to Consumers' Obligation
to Close (22)
ARTICLE X SURVIVAL AND INDEMNIFICATION . . . . . . . . . . . . 23
Section 10.1 Survival of Representations, Warranties and
Covenants (23)
Section 10.2 Indemnity by LOTS (24)
Section 10.3 Indemnity by Consumers (24)
Section 10.4 Notice to Indemnify (24)
Section 10.5 Retention of Rights (25)
ARTICLE XI ARBITRATION . . . . . . . . . . . . . . . . . . . . 25
Section 11.1 Arbitration (25)
Section 11.2 Procedure (26)
ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . 26
Section 12.1 Exhibits (26)
Section 12.2 Expenses (26)
Section 12.3 Contents of Agreement; Parties in Interest (27)
Section 12.4 Further Documents (27)
Section 12.5 Execution (27)
Section 12.6 Effect of Table of Contents; Use of Descriptive
Headings; Etc (27)
Section 12.7 Notices (27)
Section 13.8 Governing Law (28)
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") made this
day of December, 1997, by and between CONSUMERS FINANCIAL
CORPORATION, a Pennsylvania corporation having its principal place
of business located at Camp Hill, Pennsylvania, (hereinafter
referred to as "CFC"), CONSUMERS LIFE INSURANCE COMPANY, a Delaware
corporation having its principal place of business located at Camp
Hill, Pennsylvania (hereinafter referred to as "CLIC"), INVESTORS
FIDELITY LIFE ASSURANCE CORP., an Ohio corporation having its
principal place of business at Camp Hill, Pennsylvania (hereinafter
referred to as IFLAC and, collectively with CLIC and CFC or its
other affiliates as "Consumers"), and LIFE OF THE SOUTH
CORPORATION, a Georgia corporation having its principal place of
business located at Nashville, Georgia (hereinafter referred to as
LOTS ). CFC, CLIC, IFLAC and LOTS are sometimes hereinafter
together referred to as "Parties", or individually, as "Party".
WITNESSETH:
WHEREAS, CLIC and IFLAC are members of the CFC Insurance
Holding Company System with CFC owning all of the outstanding
capital stock of CLIC, and CLIC owning all of the outstanding
capital stock of IFLAC; and
WHEREAS, CFC desires to sell to LOTS and LOTS desires to
purchase from CFC the inforce credit life and credit accident and
health insurance premiums of CLIC, IFLAC and Consumers Life
Insurance Company of North Carolina ( CNC ), a former wholly-owned
subsidiary of CLIC, as identified in the Reinsurance Agreements
attached hereto as Exhibits A, B and C (hereinafter referred to as
"Inforce Business"); and
WHEREAS, CFC desires to sell and LOTS desires to purchase from
CFC the franchise for future sales of credit life and credit
accident and health insurance premiums produced by the customer
accounts of CLIC and IFLAC in exchange for payments to be paid by
LOTS over a five (5) year period on such accounts as identified on
Exhibit D to this Agreement (hereinafter referred to as "New Credit
Business"); and
WHEREAS, CLIC and LOTS desire to enter into a reinsurance
arrangement in order to provide for an orderly transfer of existing
CLIC and IFLAC accounts to LOTS or its designee; and
WHEREAS, LOTS has contracted for reinsurance for the Inforce
Business and New Credit Business with American Republic Insurance
Company (hereinafter referred to as American Republic ); and
WHEREAS, LOTS agrees to market and sell automobile extended
service contracts and other fee income business through an agency
arrangement and enter into a profit sharing arrangement with CFC
(hereinafter referred to as "Fee Income Business ); and
WHEREAS, LOTS further agrees to hire certain employees of CLIC
and IFLAC and continue using certain administrative services to be
provided by CLIC for a limited period of time; and
WHEREAS, LOTS further agrees to purchase CLIC s interest in
all of the outstanding common stock of Consumers Reinsurance
Company ( CRC ) pursuant to a Stock Purchase Agreement attached
hereto as Exhibit E.
NOW THEREFORE, in consideration of the premises and mutual
covenants, representations, warranties, conditions and agreements
set forth herein, and intending to be legally bound hereby, the
Parties hereto agree as follows:
ARTICLE I
SALE OF INFORCE BUSINESS
SECTION 1.1 INFORCE BUSINESS REINSURED
Consumers agrees to sell and LOTS agrees to acquire the
Inforce Business, through reinsurance, subject to and in accordance
with the provisions of this Agreement. On or before Closing (as
hereinafter defined), LOTS shall contract with American Republic to
allow for CLIC and IFLAC to cede to American Republic one hundred
percent (100%) of the liabilities on the Inforce Business as of the
Effective Date (as hereinafter defined) in accordance with the
terms of (i) the Indemnity Reinsurance Agreement between CLIC and
American Republic effective October 1, 1997, in substantially the
form as attached hereto as Exhibit A, and (ii) the Assumption and
Novation Reinsurance Agreement between IFLAC and American Republic
effective October 1, 1997, in substantially the form as attached
hereto as Exhibit B. On or before Closing, Consumers and LOTS shall
enter into an assignment agreement substantially in the form as
attached hereto as Exhibit C whereby Consumers shall assign to
LOTS all of its right, title and interest in the Retrocession
Agreement with Alabama Reassurance Company relating to the Inforce
Business of CNC. Exhibits A, B and C are collectively hereinafter
referred to as the Reinsurance Agreements .
SECTION 1.2 REINSURANCE COMMISSION
At Closing, LOTS shall pay or cause to be paid to CLIC and
IFLAC, as the purchase price for the Inforce Business of CLIC, CNC
and IFLAC, a reinsurance commission (the Reinsurance Commission )
. The payment of the Reinsurance Commission shall be accomplished
by deducting such Reinsurance Commission in the calculation of the
Basic Asset Transfer Amount described in Section 1.3.
SECTION 1.3 BASIC ASSET TRANSFER AMOUNT
At Closing, CLIC and IFLAC shall transfer to American Republic
cash or other assets acceptable to both American Republic and LOTS
which have a market value on the Closing Date (as hereinafter
defined) equal to the amount computed in Exhibit F attached hereto
(the Basic Asset Transfer Amount ). The Basic Asset Transfer
Amount shall be reduced by $980,714, which amount has previously
been transferred to American Republic for the Inforce Business of
CNC.
SECTION 1.4 CONTINGENCY FUND
At Closing, CLIC and IFLAC shall transfer to LOTS or its
designee cash or other assets acceptable to LOTS which have a
market value on the Closing Date (as hereinafter defined) equal to
60% of the contingency fund (the Contingency Fund ) as computed in
Exhibit F attached hereto. LOTS or its designee shall deposit such
amount into a trust account (the Trust Account ) pursuant to a
trust agreement with terms mutually acceptable to the Parties. The
remaining 40% of the Contingency Fund shall be deposited by LOTS or
its designee into the Trust Account over a three-year period which
shall begin on the Effective Date. LOTS shall deposit into the
Contingency Fund all amounts which are withheld from the New
Business Fee payments otherwise due to Consumers, and as described
in Section 2.3.
CFC, its successor or assigns, may be entitled to receive all
or a portion of the Contingency Fund, with interest thereon, as
well as additional cash payments from LOTS or its designee based
on the calculation of the claims ratio on the direct risk portion
of the Inforce Business for the five-year period beginning October
1, 1997 and ending September 30, 2002, as further described in
Exhibit F.
SECTION 1. 5 INFORCE BUSINESS TRANSACTIONS BETWEEN THE EFFECTIVE
DATE AND DECEMBER 31, 1997
With regard to transactions relating to the Inforce Business
which occur between the Effective Date and December 31, 1997 (the
Interim Period ) and in accordance with the Reinsurance
Agreements, LOTS shall pay or cause to be paid to CLIC and IFLAC
an amount equal to (i) claims paid; plus (ii) premium refunds paid
net of related commissions and premium and privilege taxes; plus
(iii) reinsurance settlement payments made by CLIC and IFLAC to any
producer-owned reinsurance companies. The amount due pursuant to
this Section shall be settled on a combined basis with the amount
computed in Section 2.4.
SECTION 1. 6 EXCLUDED LIABILITIES
Except for the obligation to pay claims and refunds arising
after the Closing, and to perform any administrative services with
respect thereto, for the Inforce Business acquired by LOTS
hereunder, LOTS shall not assume and Consumers shall remain solely
liable and responsible for all liabilities of Consumers, including
but not limited to, liabilities for bad faith, fraud, special,
consequential or punitive damages resulting from actions, inactions
or omissions of Consumers with respect to the Inforce Business; any
damages arising out of litigation which is not specifically assumed
herein by LOTS; any losses arising out of any line of business or
division of CLIC and IFLAC ; other than the Inforce Business, for
which Consumers shall only remain contingently liable in accordance
with the Reinsurance Agreements, or premium taxes allocable to
periods prior to the Effective Date, whether voluntary or
involuntary, or any assessment allocable to periods prior to the
Effective Date by any guaranty fund or association established or
governed by state or federal law (hereinafter collectively referred
to as "Excluded Liabilities").
ARTICLE II
NEW CREDIT BUSINESS FRANCHISE
SECTION 2.1 SALE OF NEW CREDIT BUSINESS
Consumers agrees to sell and LOTS agrees to acquire and use
its best efforts to convert and retain all of the New Credit
Business. Consumers agrees to use its best efforts to assist LOTS
in the timely transfer of the New Credit Business. LOTS further
agrees that it will retain, manage and develop the accounts within
the New Credit Business in a sound and responsible business manner,
and shall not apply standards of profitability or contractual
continuation more stringent than applied to its current inforce
business. LOTS reserves the right to cancel or non-renew any
account within the New Credit Business for sound business reasons,
which include, but are not limited to, profitability, breach in
financial fidelity and the location within unfavorable legal and
regulatory environments. LOTS agrees to provide Consumers with
prior written notice of its intent to cancel or non-renew any
account within the New Credit Business, along with any supporting
documentation if requested by Consumers, and Consumers will be
afforded an opportunity to object. If Consumers objects in writing
to any such cancellation or non-renewal within 10 business days
after its receipt of notice thereof from LOTS, , then authorized
representatives of LOTS and Consumers shall work together in good
faith to resolve such dispute, and if no such resolution can be
reached, then the matter shall be submitted to arbitration in
accordance with Section 11.
SECTION 2.2 COMPENSATION FOR NEW CREDIT BUSINESS FRANCHISE
LOTS agrees to purchase Consumers' franchise for New Credit
Business and shall pay to Consumers a New Business Fee based upon
Net Written Premium (as hereinafter defined) from the New Credit
Business, as follows:
First full year after Effective Date-2.25% of Net Written Premium
Second full year after Effective Date-2.25% of Net Written Premium
Third full year after Effective Date-2.25% of Net Written Premium
Fourth full year after Effective Date-1.50% of Net Written Premium
Fifth full year after Effective Date-1.50% of Net Written Premium
For the purposes of computing the New Business Fee, Net
Written Premium shall be the gross premiums processed after the
Effective Date less premium refunds on such gross premiums and
shall be limited to premiums produced by CLIC s and IFLAC s
existing accounts as of the Effective Date, which accounts are
listed on Exhibit D attached hereto and made a part hereof, and any
such additional accounts as may be added through such accounts.
SECTION 2.3 METHOD OF PAYMENT
The New Business Fee payments to Consumers shall be payable
quarterly on the 25th day of the month following each calendar
quarter, commencing with the first calendar quarter ending after
the Effective Date, unless the Closing has not occurred as of the
date the first payment is otherwise due, in which case the first
payment shall be paid at the Closing. The New Business Fee payments
otherwise due to Consumers during the three-year period following
the Effective Date shall be reduced by amounts, as specified below,
which are required to be deposited into the Contingency Fund
referred to in Section 1.4 and described in Exhibit F. The amounts
to be withheld from the New Business Fee payments and deposited
into the Contingency Fund shall be computed as follows: (i) 40% of
the remaining portion of the Contingency Fund shall be withheld
from New Business Fee payments due in the first year following the
Effective Date, (ii) 30% of such remaining portion shall be
withheld from payments due in the second year following the
Effective Date and (iii) 30% of such remaining portion shall be
withheld from payments due in the third year following the
Effective Date. The amount to be withheld for each year shall be
withheld equally from each quarterly New Business Fee payment.
If the New Business Fee calculation for any quarter is less
than the amount which is required to be withheld for that quarter,
then no New Business Fee payment shall be made to Consumers and
LOTS shall be entitled to carry over any deficiency as a deduction
against the New Business Fee payment due for the next quarter. If,
at the end of the three-year period, the New Business Fees are
insufficient or if for any other reason the entire amount required
to be withheld and deposited into the Contingency Fund has not been
withheld, then LOTS shall withhold all subsequent New Business Fee
payments otherwise due to Consumers until the required amount has
been withheld, following which time Consumers shall be entitled to
the entire New Business Fee as computed.
In the event Shareholder Approval is not received pursuant to
Section 8.1 and Consumers does not make the required fee payments
(the Administrative Fees ) under the Administrative Services
Agreement effective January 1, 1998, LOTS shall have the right,
until such Administrative Fees are paid on a current basis by
Consumers to (i) withhold such Administrative Fees from the New
Business Fee payments otherwise due Consumers, as set forth in this
Section 2.3 and (ii) reduce the payment frequency of the New
Business Fee payments from quarterly to annually.
SECTION 2.4 NEW CREDIT BUSINESS TRANSACTIONS BETWEEN THE
EFFECTIVE DATE AND DECEMBER 31, 1997
With regard to transactions relating to the New Credit
Business which occur during the Interim Period and in accordance
with the terms of the Reinsurance Agreements, CLIC and IFLAC shall
pay to LOTS or its designee an amount equal to (i) the net written
credit insurance premiums; less (ii) claims paid; less (iii)
commissions paid; less (iv) premium and privilege taxes incurred on
the net written credit insurance premiums; less (v) reinsurance
settlement payments made by CLIC and IFLAC to any producer-owned
reinsurance companies. The amount due pursuant to this Section
shall be settled on a combined basis with the amount computed in
Section 1.5.
SECTION 2.5 REINSURANCE ARRANGEMENT FOR NEW CREDIT BUSINESS
CLIC shall continue to write credit insurance on its policy or
certificate forms in the New Credit Business accounts designated by
LOTS in accordance with the terms as set forth in Section 2.1 for a
period of up to two (2) years from the Effective Date with LOTS
having the right to terminate the arrangement by giving CLIC at
least 30 days written notice of termination. Except during the
Interim Period, all premiums on the New Credit Business shall be
collected by LOTS and all commissions and claims shall be paid
directly by LOTS. Premium and privilege taxes shall continue to be
paid by CLIC and reimbursed by LOTS or its designee. All New Credit
Business produced under this arrangement shall be reinsured on a
monthly basis (except during the Interim Period when the reinsured
amounts shall be reinsured and settled at the Closing) to American
Republic under the terms of the Indemnity Reinsurance Agreement.
Except during the Interim Period, LOTS agrees to provide the
administrative and marketing services during this period in
accordance with the provisions as set forth in Article IV hereof.
CLIC shall not be entitled to receive any ceding fees or other
compensation for any credit insurance business reinsured under this
arrangement.
IFLAC shall continue to write credit insurance on its policy
or certificate forms in the New Credit Business accounts designated
by LOTS in accordance with the terms as set forth in Section 2.1
until January 16, 1998. Except during the Interim Period, all
premiums on the New Credit Business shall be collected by LOTS and
all commissions and claims shall be paid directly by LOTS. Premium
and privilege taxes shall continue to be paid by CLIC and
reimbursed by LOTS or its designee. All New Credit Business
produced under this arrangement shall be reinsured on a monthly
basis (except during the Interim Period when the reinsured amounts
shall be reinsured and settled at the Closing) to American Republic
under the terms of the Assumption and Novation Reinsurance
Agreement. Except during the Interim Period, LOTS agrees to provide
the administrative and marketing services during this period in
accordance with the provisions as set forth in Article IV hereof.
IFLAC shall not be entitled to receive any ceding fees or other
compensation for any credit insurance business reinsured under this
arrangement. Effective January 17, 1998, all New Credit Business
previously written on IFLAC s policy or certificate forms, except
for New Credit Business written in West Virginia, shall be
written on the policy or certificate forms of Classic Life
Assurance Company ( Classic ), an Ohio corporation owned by LOTS.
New Credit Business written in West Virginia shall be written on
CLIC s policy or certificate forms.
CLIC and IFLAC authorize representatives of LOTS to use their
names and stationery, forms and other related documents only for
the purposes of the marketing and sale of the New Credit Business
under this Agreement. Any other use of the CLIC and IFLAC names and
documents relating thereto, is expressly prohibited without the
prior written consent of CLIC and IFLAC.
SECTION 2.6 AMOUNTS DUE TO OR FROM AGENTS
LOTS shall be responsible for, and shall transfer to CLIC and
IFLAC on the Closing Date, the net agents balances which arise
from credit insurance business issued and processed during the
Interim Period. With respect to cash payments made by agents which
are received by CLIC and IFLAC after the Interim Period, CLIC and
IFLAC shall promptly remit such amounts to LOTS unless CLIC and
IFLAC determine that those collections relate to business issued
and processed on or before the Effective Date.
ARTICLE III
FEE INCOME BUSINESS
SECTION 3.1 SALE OF FEE INCOME BUSINESS
Consumers agrees to sell and LOTS agrees to acquire and use
its best efforts to convert and retain all of the Fee Income
Business and will manage such business on a state by state basis.
Consumers agrees to assist and use its best efforts to facilitate
the timely transfer of the Fee Income Business to LOTS.
SECTION 3.2 COMPENSATION FOR FEE INCOME BUSINESS
In exchange for Consumers assistance in facilitating the
transfer of the Fee Income Business, LOTS agrees to pay to
Consumers 50% of the Net Fee Income (as hereinafter defined)
collected on the Fee Income Business generated by all of the
accounts of Consumers as of the Effective Date (which accounts are
listed on Exhibit D attached hereto and hereby made a part hereof)
for a 60 month term beginning on the Effective Date (the Marketing
Fee ). For purposes of computing the Marketing Fee, extended
service contract business underwritten and administered by
Acceleration National Insurance Company under the product name
CostGuard shall be excluded. Payment will be made by LOTS by the
25th day following the end of each month commencing with the first
month ending after the Effective Date and continuing for a period
of 60 months. "Net Fee Income shall be defined as the fee and
commission income derived from the marketing of Fee Income
Business, less (i) sales bonuses and commissions incurred, less
(ii) the cost of products sold, and less (iii) direct
administrative expenses, as identified in the Marketing and Sales
Agreement, attached hereto as Exhibit G.
With respect to Fee Income Business produced by Consumers
during the Interim Period, Consumers shall transfer to LOTS at the
Closing the Net Fee Income less the Marketing Fee.
SECTION 3.3 CHANGE IN CORPORATE NAME
In conjunction with the sale of the Fee Income Business, at
Closing, Consumers shall cause to be transferred to LOTS the
service mark Consumers Car Care and any logos, slogans and any
other intangible property relating to such service mark and arrange
to have the necessary documents for such change of ownership filed
with the United States Patent and Trademark Office and any other
regulatory authority.
ARTICLE IV
ADMINISTRATIVE SERVICES; PERSONNEL
SECTION 4.1 ADMINISTRATIVE SERVICES
LOTS agrees to use and Consumers agrees to provide certain
administrative and support services (hereinafter referred to as
Administrative Services ) to administer the Inforce Business, the
New Credit Business and the Fee Income Business during the Interim
Period, in accordance with the terms of the Administrative Services
Agreement between the Parties attached hereto as Exhibit H,
provided that LOTS has the right to extend until January 31, 1998
the term of the Administrative Services Agreement by giving
Consumers at least 30 days prior written notice. Upon the
expiration of the Administrative Services Agreement, LOTS shall be
responsible for and provide administrative services pursuant to
an Administrative Services Agreement between the parties effective
January 1, 1998, the terms of which shall be consistent with the
Agreement to Perform Administration, a copy of which is attached
hereto as Exhibit I.
SECTION 4.2 PERSONNEL
LOTS agrees to use and Consumers agrees to provide CLIC s and
IFLAC s marketing and sales and support personnel during the
Interim Period in accordance with the terms of the Marketing and
Sales Agreement between the Parties attached hereto as Exhibit G.
As of January 1, 1998, LOTS agrees to retain the sales
management team of CLIC and IFLAC [Ralph R. Byrnes, Charles R.
McCloud and Stephen Twersky] and LOTS further agrees to retain the
remainder of the sales force of CLIC and IFLAC subject to the
recommendations of Mr. Byrnes. LOTS will bridge benefits to those
employees retained by LOTS and waive all waiting periods for LOTS
corporate benefits, including but not limited to, health insurance,
profit sharing, 401(k) plan participation, group insurance, and
other benefit programs typically offered to LOTS employees. LOTS
further agrees to credit the retained employees with their years
of service with CLIC and IFLAC as if they were employed for the
same period by LOTS.
4.3 BOOKS, ACCOUNTS AND RECORDS
All books, accounts, records, policies, forms and/or other
documents relating to the business of this Agreement shall be
subject at reasonable times to inspection by a duly authorized
representative either of Consumers or LOTS and copies thereof may
be requested and provided by one Party to the other. All of such
information shall be confidential and, except as may be required
under this Agreement or by law, shall not be disclosed to any third
party.<PAGE>
In addition, with respect to the credit insurance business
under this Agreement, LOTS shall provide Consumers with a periodic
accounting of all transactions consisting of data in the form
mutually agreed to by the Parties for proper entry into its books
for financial statement purposes. LOTS, with respect to the Fee
Income Business shall provide Consumers with a periodic accounting
of all transactions consisting of data in the form reasonably
required by Consumers from time to time for proper entry into its
books for financial statement purposes.
ARTICLE V
CLOSING; EFFECTIVE DATE AND TERMINATION
SECTION 5.1 CLOSING
The closing (the "Closing") shall take place at the offices of
Consumers on a mutually agreed day and time within ten (10) days
after (i) all required approvals of the transactions contemplated
hereby are received from the Arizona, Delaware and Ohio Departments
of Insurance and any other regulatory department or governmental
entity having jurisdiction over these transactions (the "Regulatory
Approvals"), and (ii) this Agreement and those transactions
contemplated herein are approved by the shareholders of CFC (the
"Shareholder Approval"). The actual date of the Closing shall be
the "Closing Date".
SECTION 5.2 EFFECTIVE DATE
Subject to receipt of the Regulatory and Shareholder
Approvals, the parties have agreed that the effective date of this
Agreement shall be October 1, 1997 (the "Effective Date").
SECTION 5.3 TERMINATION
This Agreement may be terminated at any time prior to the
Closing Date, whether before or after the approval of the
shareholders of CFC: (i) upon the mutual written consent of the
Parties, (ii) by LOTS, if there has been a material
misrepresentation or breach of a warranty, covenant or other
agreement by Consumers contained herein or if any of the conditions
precedent to LOTS' obligations hereunder shall not have been
satisfied on or before the Closing Date, (iii) by Consumers, if
there has been a material misrepresentation or breach of a
warranty, covenant or other agreement by LOTS contained herein or
if any of the conditions precedent to Consumers' obligations
hereunder shall not have been satisfied on or before the Closing
Date, or (iv) if the transactions contemplated herein are not
consummated on or before January 31, 1998, provided, however, that
this Agreement shall not terminate if the Closing has not occurred
due to a delay in receiving either the Regulatory Approvals or
Shareholder Approval which delay is beyond the control of the
Parties, in which case any of the Parties may request an extension
reasonably necessary to obtain regulatory or shareholder approval,
and which consent may not be unreasonably withheld prior to May 31,
1998 after which such consent may be withheld in the sole
discretion of any Party.
SECTION 5.4 EFFECT OF TERMINATION
Except as provided in Section 8.1(c) with respect to
Shareholder Approval and Section 8.3 with respect to expenses and
fees, in the event of the termination of this Agreement, this
Agreement shall thereafter become void and have no effect, and no
Party hereto shall have any liability to any other Party hereto or
its shareholders or directors or officers in respect thereof, and
each Party shall be responsible for its own expenses, except that
nothing herein shall relieve any Party from liability for any
willful breach of this Agreement.
SECTION 5.5 AMENDMENT
This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the Parties hereto; provided,
however, that after Shareholder Approval of the Sale of Assets, no
amendment may be made which decreases the consideration to which
Consumers is entitled to receive pursuant to this Agreement or
otherwise materially adversely affects the shareholders of CFC
without the further approval of the shareholders of CFC.
SECTION 5.6 WAIVER
Any time prior to the Closing Date, whether before or after
Shareholder Approval is received, any Party hereto may (a) in the
case of Consumers, extend the time for the performance of any of
the obligations or other acts of LOTS or, subject to the provisions
contained in Section 5.5, waive compliance with any of the
agreements of LOTS or with any conditions to the respective
obligations of Consumers, or (b) in the case of LOTS, extend the
time for the performance of any of the obligations or other acts of
Consumers, subject to the provisions contained in Section 5.5, or
waive compliance with any conditions to its own obligations. Any
agreement on the part of a Party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such Party by a duly authorized officer.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CONSUMERS
Consumers represents and warrants to LOTS as follows:
SECTION 6.1 ORGANIZATION AND GOOD STANDING OF CFC
CFC is a corporation duly organized and presently subsisting
under the laws of the Commonwealth of Pennsylvania. It has, or at
the Closing will have, the corporate legal capacity, power and
authority to enter into and consummate the transactions
contemplated in this Agreement and subject to receiving the
Regulatory Approvals and Shareholder Approval, such transactions
will be binding and valid obligations of CFC and will not violate
the terms of its Articles of Incorporation or By-laws. In
addition, at Closing there will be no legal impediments to CFC
proceeding with the transactions contemplated hereby. The closing
of such transactions will not cause a default or event of
termination under any material contract to which CFC is a party and
all necessary approvals have been or will be obtained prior to
Closing.
SECTION 6.2 ORGANIZATION AND GOOD STANDING OF CLIC
CLIC is a corporation duly incorporated, validly existing in
good standing under the laws of the State of Delaware, with full
corporate powers to own and operate its business and properties and
to carry on its business substantially as presently conducted by
it. Except as otherwise disclosed in this Agreement, CLIC is or
will be at Closing duly qualified, licensed and in good standing as
a domestic life insurance company in the State of Delaware and duly
qualified, licensed and in good standing as a foreign life
insurance company in the states and territories where such
qualification is required, and neither the character of the
properties owned or held nor the nature of the businesses conducted
at the date hereof requires qualification in any other state or
jurisdiction. A copy of the Articles of Incorporation and By-laws
of CLIC, as amended to date, have been provided to LOTS, and are
true, correct and in full force and effect.
SECTION 6.3 ORGANIZATION AND GOOD STANDING OF IFLAC
IFLAC is a corporation duly incorporated, validly existing in
good standing under the laws of the State of Ohio, with full
corporate powers to own and operate its business and properties and
to carry on its business substantially as presently conducted by
it. Except as otherwise disclosed in this Agreement, IFLAC is or
will be at Closing duly qualified, licensed and in good standing as
a domestic life insurance company in the State of Ohio and duly
qualified, licensed and in good standing as a foreign life
insurance company in the states and territories where such
qualification is required, and neither the character of the
properties owned or held nor the nature of the businesses conducted
at the date hereof requires qualification in any other state or
jurisdiction. A copy of the Articles of Incorporation and Code of
Regulations of IFLAC, as amended to date, have been provided to
LOTS, and are true, correct and in full force and effect.
SECTION 6.4 PROPER CORPORATE ACTION
The execution of this Agreement and the transactions
contemplated herein have been or will be before Closing duly
authorized by the Board of Directors of CFC, CLIC and IFLAC. These
transactions will be presented to the shareholders of CFC for
Shareholder Approval at a special meeting of shareholders held
prior to Closing, and CFC has delivered, or will deliver prior to
or at Closing, to LOTS true, correct and certified copies of the
resolutions of CFC's, CLIC's and IFLAC s Board of Directors and the
shareholders of CFC authorizing the transactions.
SECTION 6.5 ABSENCE OF CONFLICTING LAWS OR AGREEMENTS
Subject to receiving the Regulatory Approvals and Shareholder
Approval, the execution, delivery and performance of this Agreement
by Consumers does not, and the consummation of the transactions
contemplated in this Agreement will not, (i) contravene any
provision of the Certificate of Incorporation or Bylaws of CFC or
CLIC, or the Articles of Incorporation or Code of Regulations of
IFLAC; (ii) conflict with, result in a breach of, or constitute a
material default (or an event which would, with the passage of time
or the giving of notice or both, constitute a material default)
under, or give rise to a right to terminate, amend, modify, abandon
or accelerate, any material contract, agreement, lease, indenture,
instrument or license to which Consumers is a party or by which it
or its assets or properties may be bound or affected; (iii) to the
knowledge of Consumers, violate or conflict with any federal, state
or local law, statute, rule, regulation, order, judgment or decree;
or (iv) result in or require the creation or imposition of any
mortgage, pledge, lien, security interest, claim, charge or
encumbrance upon or with respect to the assets of Consumers.
SECTION 6.6 FINANCIAL STATEMENTS
Consumers has or will deliver to LOTS prior to Closing copies
of the following financial statements which have been prepared in
accordance with generally accepted accounting principles applied on
a basis consistent with that of the preceding years and which
present fairly the financial condition of CFC and its subsidiaries
as of said date and the results of their operations for said
period:
(i) Annual Report on Form 10-K for the year
ended December 31, 1996 filed with the
Securities and Exchange Commission (the
Commission ) which includes the Consolidated
Balance Sheet as of December 31, 1996 and
Consolidated Statement of Operations for the
year ended December 31, 1996, which have been
audited by Arthur Andersen LLP;
(ii) Quarterly Reports on Form 10-Q for the
periods ended March 31, June 30 and September
30, 1997 filed with the Commission which
include Unaudited Consolidated Balance Sheets
as of March 31, June 30 and September 30,
1997, respectively and Consolidated Statements
of Operations for the three, six and nine month
periods ended March 31, June 30 and September
30, 1997, respectively;
(iii) Any Reports on Form 8-K filed with
the Commission during the period beginning on
December 31, 1996 and ending on the Closing
Date.
Since September 30, 1997, there has been no material adverse
change in the assets being purchased hereunder from that set forth
in the September 30, 1997 financial statements described above.
SECTION 6.7 LITIGATION
There is no decree, judgment, order, action, suit,
investigation or claim or legal, administrative, arbitration or
other proceeding pending or to the knowledge of Consumers
threatened against it, at law or in equity, by or before any court
or governmental agency, department or instrumentality or
arbitration board (i) which might materially affect the financial
condition of Consumers on a consolidated basis or the conduct of
its business on a consolidated basis or (ii) which relate to the
transactions contemplated by this Agreement. Consumers is not in
default under any judgment, decree or order of any court,
arbitrator, or any governmental or administrative agency against or
affecting any of its assets or businesses.
SECTION 6.8 ABSENCE OF UNDISCLOSED LIABILITIES
Consumers does not know or has any reasonable grounds to know
of the assertion against it of any material liability of any nature
or in any amount existing as of the date of this Agreement, that
should properly have been reflected or reserved against in the
balance sheets prepared in accordance with generally accepted
accounting principles or statutory accounting principles, as may be
appropriate, which was not fully reflected or reserved against in
their balance sheets as of December 31, 1996 and September 30,
1997, including, without limitation, tax liabilities due or to
become due and whether incurred in respect of, or measured by, its
income for any period prior to such dates, or arising out of
transactions entered into, or any state of facts existing prior
thereto.
SECTION 6.9 RATES, COMPLIANCE WITH LAWS
The premium rates charged, the policy forms used, and the
commissions paid by CLIC and IFLAC on its credit insurance business
are those approved by the respective state insurance departments
under the applicable insurance laws and regulations (the "Laws and
Regulations"). The credit insurance business of CLIC and IFLAC has
been and is being conducted in compliance with all the Laws and
Regulations. Consumers has received no notice of violation of any
Law or Regulation with respect to its credit insurance business and
it is not subject to any judicial, regulatory or governmental
order, writ, judgment or decree.
SECTION 6.10 TAXES
Each of CLIC, IFLAC and CFC has duly and timely filed all
federal, state, municipal, local and foreign, if any, tax returns
and reports, including returns for estimated tax, with respect to
all taxes owed by each such company. All taxes imposed on Consumers
(including all deposits in connection therewith required by
applicable law, and all interest and penalties thereon) which have
become due and payable by Consumers for all periods through the
date hereof have been paid in full. There is not now any proposed
assessment against Consumers of additional taxes of any kind.
There is no dispute or action pending or threatened concerning any
tax liability of Consumers.
SECTION 6.11 EMPLOYMENT MATTERS
Consumers has provided to LOTS all contracts, agreements or
arrangements (written or oral) concerning Consumers employment of
any individual who will be employed by LOTS or its designee after
the Closing, including each such individual s title, compensation
and duties. Such information is true and correct in all material
respects. LOTS shall have no liability for, and Consumers shall
indemnify and hold LOTS harmless from and against any claim with
respect thereto, any severance, termination or other payment
required to be made to any Consumers employee as a result of this
Agreement or the consummation of the transactions contemplated
hereby.
SECTION 6.12 FULL DISCLOSURE
No representation or warranty by Consumers nor any statement
or certificate furnished or to be furnished to LOTS pursuant
hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF LOTS
LOTS represents and warrants to Consumers as follows:
SECTION 7.1 ORGANIZATION AND GOOD STANDING
LOTS is a corporation duly organized, validly existing and in
good standing under the laws of the state of Georgia with full
corporate powers to own and operate its business and properties and
to carry on its business substantially as presently conducted.
SECTION 7.2 PROPER CORPORATE ACTION
LOTS has full corporate power to enter into and perform this
Agreement. Its entry into this Agreement and the transactions
contemplated to occur pursuant thereto, have been or will be
before Closing duly authorized by resolution of its Board of
Directors and no further corporate action will be required.
SECTION 7.3 ABSENCE OF CONFLICTING LAWS OR AGREEMENTS
Subject to receiving the necessary Regulatory Approvals and
Shareholder Approval, the execution, delivery and performance of
this Agreement by LOTS, does not, and the consummation of the
transactions contemplated in this Agreement will not, (i)
contravene any provision of the articles of incorporation or bylaws
of LOTS; (ii) conflict with, result in a breach of, or constitute a
material default (or an event which would, with the passage of time
or the giving of notice or both, constitute a material default)
under, or give rise to a right to terminate, amend, modify, abandon
or accelerate, any material contract, agreement, lease, indenture,
instrument or license to which LOTS is a party or by which their
assets or properties may be bound or affected; (iii) to the
knowledge of LOTS, violate or conflict with any federal, state or
local law, statute, rule, regulation, order, judgment or decree; or
(iv) result in or require the creation or imposition of any
mortgage, pledge, lien, security interest, claim, charge or
encumbrance upon or with respect to any of the assets of LOTS.
SECTION 7.4 FINANCIAL STATEMENTS
LOTS has or will deliver to Consumers prior to Closing, copies
of its Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 and its Consolidated Statements of Operations
for the respective twelve and nine month periods then ended. Such
statements have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with that of
the preceding years and present fairly the financial condition of
LOTS and its subsidiaries as of said dates and the results of
their operations for said periods.
Since September 30, 1997, there has been no material adverse
change in the assets or financial condition of LOTS and its
subsidiaries from that set forth in the Consolidated Balance Sheet
dated September 30, 1997.
SECTION 7.5 LITIGATION
There is no decree, judgment, order, action, suit,
investigation or claim or legal, administrative, arbitration or
other proceeding pending or, to the knowledge of LOTS, threatened
against it, at law or in equity, by or before any court or
governmental agency, department or instrumentality or arbitration
board (i) which might materially affect the financial condition of
LOTS on a consolidated basis or the conduct of its business on a
consolidated basis or (ii) which relate to the transactions
contemplated by this Agreement. LOTS is not in default under any
judgment, decree or order of any court, arbitrator, or any
governmental or administrative agency against or affecting any of
its assets or businesses.
SECTION 7.6 ABSENCE OF UNDISCLOSED LIABILITIES
LOTS does not know or have any reasonable grounds to know of
the assertion against it of any material liability of any nature
or in any amount existing as of the date of this Agreement, that
should properly have been reflected or reserved against in the
balance sheets prepared in accordance with generally accepted
accounting principles or statutory accounting principles, as may be
appropriate, which was not fully reflected or reserved against in
its balance sheets of December 31, 1996 and September 30, 1997,
including, without limitation, tax liabilities due or to become due
and whether incurred in respect of, or measured by, its income for
any period prior to such dates, or arising out of transactions
entered into, or any state of facts existing prior thereto.
SECTION 7.7 FULL DISCLOSURE
No representation or warranty by LOTS nor any statement or
certificate furnished or to be furnished to Consumers pursuant
hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading.
ARTICLE VIII
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 8.1 SHAREHOLDER APPROVAL
(a) As soon as reasonably practicable following the date
hereof, CFC shall take all action necessary in accordance
with the Securities Exchange Act of 1934 (the Exchange
Act ), the laws of the Commonwealth of Pennsylvania and
its Articles of Incorporation and Bylaws to call and give
notice of a meeting (the "Meeting") of its shareholders
to consider and vote upon those items contemplated under
this Agreement which require Shareholder Approval (the
Sale of Assets ) and for such other purposes as may be
necessary or desirable. The Board of Directors of CFC has
unanimously determined that the Sale of Assets is
advisable and in the best interests of the shareholders
of CFC and, subject to their fiduciary duties as advised
by counsel, shall recommend without qualification of any
nature that CFC s shareholders vote to approve the Sale
of Assets and any other matters to be submitted to CFC s
shareholders in connection therewith. The Board of
Directors of CFC shall use commercially reasonable
efforts to solicit and secure from shareholders of CFC
such approval, subject to their fiduciary duties as
advised by counsel, which efforts shall include causing
CFC to solicit shareholder proxies therefor and advising
LOTS promptly upon its request from time to time as to
the status of the shareholder vote then tabulated.
(b) CFC shall prepare and file with the SEC under the
Exchange Act and the rules and regulations promulgated by
the SEC thereunder within 30 days following the date
hereof, a preliminary draft of the Proxy Statement. LOTS
shall cooperate with CFC in the preparation and filing of
the Proxy Statement and any amendments and supplements
thereto. CFC will use commercially reasonable efforts to
have any review of the Proxy Statement conducted by the
SEC promptly. As soon as reasonably practicable following
completion of any review by, or in the absence of such
review, the termination of any applicable waiting period
of, the SEC, CFC shall cause to be mailed a definitive
Proxy Statement to its shareholders entitled to vote on
the Sale of Assets.
(c) In the event Shareholder Approval is not received
for any reason, the Parties shall agree to the transfer
of (i) the New Credit Business in accordance with the
provisions set forth in Article II hereof, (ii) the Fee
Income Business in accordance with the provisions set
forth in Article III hereof, and (iii) the Administrative
Services and personnel in accordance with the provisions
set forth in Article IV hereof, which transfers are
expected to occur on January 1, 1998. The Inforce
Business shall be retained by Consumers and administered
by LOTS under the terms of the Administrative Services
Agreement between the Parties effective January 1, 1998
unless otherwise agreed to between the Parties.
SECTION 8.2 CONDUCT OF CONSUMERS BUSINESS
Except as otherwise provided in this Agreement, Consumers
covenants that until Closing, it will:
(a) Carry on CLIC's and IFLAC s credit insurance
business in the normal and usual course and without
limitation maintain normal and usual business practices.
(b) Use its best efforts to adequately maintain the
operating efficiency of its offices and equipment.
(c) Maintain its policies of insurance against fire or
other casualty to its property in full force and effect
pending Closing.
(d) Use its best efforts to maintain and preserve CLIC's
and IFLAC s business organization, to maintain the
services of CLIC's and IFLAC s present officers,
employees and field representatives, and to preserve the
goodwill of its suppliers, customers and others with whom
it has business relationships.
(e) Remain in compliance with all applicable laws, rules
and regulations.
(f) Maintain all of CLIC's and IFLAC s policy filings
on a current basis.
(g) Use its best efforts to obtain the Regulatory
Approvals and Shareholder Approval of this transaction.
(h) Continue to conduct its business in the normal
course.
(i) Not terminate, extend, or modify any contract with
the officers, employees or field representatives to be
retained by LOTS except as presently provided by
contract, or make any material change with respect to the
compensation or terms of employment of such officers,
employees or field representatives.
(j) Not grant any general or uniform increase in the
rates of pay for the officers, employees and field
representatives to be retained by LOTS, or institute any
pension, profit sharing, insurance or similar employee
benefit or welfare program for such officers, employees
and field representatives.
(k) Not make any change to CLIC's and IFLAC s
reinsurance treaties.
SECTION 8.3 EXPENSES; BREAK-UP FEE
If, prior to the Closing Date, CFC is offered a transaction
by another party that CFC believes is a more favorable transaction
for its shareholders, and the Board of Directors of CFC, in the
exercise of its fiduciary duty, decides to proceed with the new
party, CFC shall promptly (and, in any event, within five days) pay
LOTS a $250,000 break-up fee, which shall be LOTS sole remedy
against CFC for such action. Except as provided in the immediately
preceding sentence, whether or not the Sale of Assets is
consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be
paid by the Party incurring such expenses.
SECTION 8.4 OTHER AGREEMENTS
Subject to the terms and conditions herein provided, each of
the parties hereto agrees to use its commercially reasonable
efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, including using
commercially reasonable efforts to obtain all necessary waivers,
consents and approvals and to effect all necessary registrations
and filings, including, but not limited to, filings required under
the Exchange Act; provided that the foregoing shall not require
LOTS or CFC to make, or agree to make, any divestiture of a
material asset in order to obtain any waiver, consent or approval.
SECTION 8.5 PUBLIC ANNOUNCEMENTS
Neither LOTS nor CFC will make, issue or release any oral or
written public announcement or statement concerning, or
acknowledgment of the existence of, or reveal the terms, conditions
or status of, the transactions contemplated by this Agreement and
the Sale of Assets, or make any other communication to its
shareholders or the investing public, directly or indirectly
(including press releases and statements to securities analysts),
without first making a good faith attempt to obtain the prior
approval of, or concurrence in, the contents of such announcement,
acknowledgment or statement by the other Party or Parties, which
approval or concurrence shall not be unreasonably withheld or
delayed.
SECTION 8.6 EXCLUSIVE DEALING
Consumers shall not solicit, or, except to the extent required
by applicable law relating to fiduciary obligations of directors
upon advice of counsel, negotiate or enter into any agreement with
any other person or entity concerning the Sale of Assets or furnish
to any person or entity interested in making any such acquisition
any information concerning the Sale of Assets. Consumers shall
notify LOTS immediately upon the approach of any such person or
entity. Notwithstanding the foregoing, nothing contained in this
Agreement shall be construed to prohibit CFC or its Board of
Directors from (i) making any recommendation with respect to the
Sale of Assets and related disclosure to shareholders, or (ii)
disclosing, under protection of an appropriate confidentiality
agreement, non-public information concerning CFC to a person who
has made a bonafide, binding and firm, fully-financed offer to
acquire all of the outstanding common stock of CFC, including the
Sale of Assets for a price in excess of the price to be paid under
the terms of this Agreement, which are higher and better to CFC s
shareholders, which, in the judgment of CFC and its Board of
Directors, on the advice in writing of counsel, shall be required
by law.
SECTION 8.7 NONCOMPETE COVENANT OF CONSUMERS
(a) For the period commencing on the Effective Date and
ending on the fifth anniversary of the Effective Date
(the "Period"), Consumers agrees that it will not
directly or indirectly solicit or service any New Credit
Business or Fee Income Business account transferred under
the terms of this Agreement without the prior written
consent of LOTS unless (i) LOTS is no longer involved in
the marketing, sale or administration of credit
insurance, or (ii) the subject account is terminated by
LOTS or terminates its relationship with LOTS.
(b) Consumers shall not at any time during the Period,
without the prior written consent of LOTS, (i) request or
advise any customer of, or other person or entity having
business dealings with, LOTS, to withdraw, curtail or
cancel such business, or (ii) induce or attempt to
influence any employee or independent contractor of LOTS
to terminate his or her employment or his, her or its
status as an independent contractor.
(c) If the scope of any restriction contained in this
Section 8.7 is too broad to permit enforcement of such
restriction to its full extent, then such restriction
shall be enforced to the maximum extent permitted by law,
and Consumers hereby consents that such scope may be
judicially modified accordingly in any proceeding brought
to enforce such restriction. Consumers hereby
acknowledges and confirms that after the sale of the
credit insurance business to LOTS, any activity of the
nature referred to in this section by Consumers would
cause irreparable injury to LOTS.
(d) Consumers acknowledges that LOTS' remedy at law for
any breach of any of Consumers' obligations under this
Section 8.7 would be inadequate, and Consumers agrees
that temporary and permanent injunctive relief may be
granted in any proceeding which may be brought to enforce
any provision of this Section 8.7 without the necessity
of proof of actual damages. Prior to initiating such
proceeding, LOTS shall give Consumers written notice of
such breach. If Consumers does not remedy such breach to
the satisfaction of LOTS within ten (10) days following
receipt of such written notice, LOTS may proceed to
enforce the provisions of this Section 8.7.
SECTION 8.8 ACCESS AND INFORMATION
From and after the date of this Agreement and until Closing,
Consumers shall give to LOTS and its representatives full access
during normal business hours to all of the properties, books,
contracts, documents, and records relating to the business of
Consumers covered by this Agreement and will furnish to LOTS all
information with respect to the affairs of Consumers as LOTS may
from time to time reasonably request, provided; however, that any
furnishing of such information to LOTS and any investigation by
LOTS shall not affect the right of LOTS to rely upon the
representations and warranties made by Consumers in or pursuant to
this Agreement. LOTS and its representatives shall treat all
information originally obtained from Consumers and not otherwise
known to LOTS or already in the public domain as confidential;
provided, however, that nothing herein shall be construed to
prohibit LOTS from disclosing to any of its advisors any such
information. If this Agreement is not consummated, LOTS shall
return all copies made by LOTS and its representatives, of
materials belonging to Consumers or relating to its business.
Consumers shall treat as confidential any and all information not
otherwise in the public domain concerning LOTS.
ARTICLE IX
CONDITIONS PRECEDENT TO CLOSING
SECTION 9.1 CONDITIONS PRECEDENT TO LOTS' OBLIGATION TO CLOSE
The obligation of LOTS under this Agreement on the Closing
Date is subject to the fulfillment at or prior to the Closing of
each of the following conditions:
(a) All representations and warranties by Consumers
which are contained in this Agreement shall be true in
all material respects at and as of Closing as though such
representations and warranties were made at and as of
such time; and Consumers shall have performed and
complied with all agreements and conditions required by
this Agreement prior to or at Closing, and shall have
delivered to LOTS an officer's certificate certifying
thereto.
(b) Receipt of all Regulatory Approvals and Shareholder
Approval approving this Agreement and the transactions
contemplated herein.
(c) There shall not be in force at Closing any order or
decree, or any complaint praying for an order or decree,
restraining or enjoining the consummation of this
Agreement and none of the Parties shall have received
notice from any governmental department, court, agency or
commission of its intention to restrain or enjoin the
consummation of this Agreement or to nullify or render
ineffective this Agreement if consummated, or any inquiry
from such governmental department, court, agency or
commission indicating an intent to review this Agreement
under any laws of the United States.
(d) Delivery of the certificate of the Secretary of CFC
and CLIC setting forth the resolutions of CFC's, CLIC's
and IFLAC s Board of Directors authorizing the execution,
delivery and performance of this Agreement.
(e) Delivery of the certificate of the Secretary of CFC
setting forth the resolution duly adopted by the
shareholders of CFC evidencing the approval of the Sale
of Assets.
(f) An opinion of counsel for Consumers to the effect
that execution of this Agreement and each act and
document to be performed and executed by Consumers are
the valid and duly authorized or ratified act of
Consumers, and to such other matters as LOTS may
reasonably request and counsel for Consumers agrees to
give.
(g) Termination of all of CLIC's and IFLAC s existing
surplus relief reinsurance agreements.
(h) Delivery of the Initial Asset Transfer Amount
(i) The execution and delivery of the following
agreements .
(1) The Indemnity Reinsurance Agreement between
CLIC and American Republic.
(2) The Assumption and Novation Reinsurance
Agreement between IFLAC and American Republic.
(3) The Assignment by CLIC of the Alabama Reassurance
Company Retrocession Agreement to LOTS.
(4) The Marketing and Sales Agreement.
(5) The Administrative Services Agreement effective
October 1, 1997.
(6) The Administrative Services Agreement effective
January 1, 1998.
(7) The Stock Purchase Agreement for the purchase
of CRC by LOTS.
(8) The Assumption and Novation Agreements for the
producer-owned companies referred to in Schedule A
of the Reinsurance Agreements
(j) Closing on the purchase of CRC by LOTS in accordance
with the terms of the Stock Purchase Agreement.
(k) LOTS, in its sole discretion, may waive any defect
in any representations, conditions precedent or covenants
set forth in this Agreement.
SECTION 9.2 CONDITIONS PRECEDENT TO CONSUMERS' OBLIGATION TO
CLOSE
The obligation of Consumers under this Agreement on the
Closing Date is subject to the fulfillment at or prior to the
Closing of each of the following conditions:
(a) All representations and warranties by LOTS which are
contained in this Agreement shall be true in all material
respects at and as of Closing as though such
representations and warranties were made at and as of
such time and LOTS shall have performed and complied with
all agreements and conditions required by this Agreement
and shall have delivered to Consumers an officer's
certificate certifying thereto.
(b) Receipt of all Regulatory Approvals and Shareholder
Approval approving this Agreement and the transactions
contemplated herein.
(c) There shall not be in force at Closing any order or
decree, or any complaint praying for an order or decree,
restraining or enjoining the consummation of this
Agreement and none of the Parties shall have received
notice from any governmental department, court, agency or
commission of its intention to restrain or enjoin the
consummation of this Agreement or to nullify or render
ineffective this Agreement if consummated, or any inquiry
from such governmental department, court, agency or
commission indicating an intent to review this Agreement
under any laws of the United States.
(d) Delivery of the certificate of the Secretary of LOTS
setting forth the resolutions of LOTS Board of
Directors authorizing or ratifying the execution,
delivery and performance of this Agreement.
(e) The execution and delivery of the following
agreements:
(1) The Indemnity Reinsurance Agreement between
CLIC and American Republic
(2) The Assumption and Novation Reinsurance
Agreement between IFLAC and American Republic
(3) The Assignment by CLIC of the Alabama
Reassurance Company Retrocession Agreement to LOTS.
(4) The Marketing and Sales Agreement.
(5) The Administrative Services Agreement
effective October 1, 1997.
(6) The Administrative Services Agreement effective
January 1, 1998.
(7) The Stock Purchase Agreement for the purchase
of CRC by LOTS.
(8) The Assumption and Novation Agreements for the
producer owned companies referred to in Schedule A
of the Reinsurance Agreements
(f) Closing on the purchase of Consumers Reinsurance
Company by LOTS in accordance with the terms of the Stock
Purchase Agreement.
(g) An opinion of counsel for LOTS to the effect that
execution of this Agreement and each act and document to
be performed and executed by LOTS is the valid and duly
authorized or ratified act of LOTS and to such other
matters as Consumers may reasonably request and counsel
for LOTS agrees to give.
(h) The termination of the employment contract between
Ralph R. Byrnes and CLIC and the voluntary resignation of
those officers and employees of CLIC and IFLAC retained
by LOTS as provided in Section 4.2 hereof, effective
December 31, 1997 .
(i) Consumers, in its sole discretion, may waive any
defect in any representations, conditions precedent or
covenants set forth in this Agreement.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
SECTION 10.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS
All representations, warranties and covenants of the Parties
made under or pursuant to this Agreement shall survive the Closing
Date until the fifth anniversary thereof except Consumers
warranties and representations with respect to claims made for
payment for retrospective commissions which shall survive the
Closing Date for a period not to exceed two (2) years.
SECTION 10.2 INDEMNITY BY LOTS
Subject to the provisions of Section 10.4 hereof, LOTS hereby
covenants and agrees to indemnify and hold harmless Consumers and
its successors and assigns from and against any and all loss,
liability, damage, including punitive or extra contractual damages,
or expense (including, but not limited to, reasonable attorney's
fees) arising out of, or resulting from (i) any misrepresentation
or breach of any warranty, representation, covenant or agreement
made by LOTS in this Agreement, including the exhibits hereto and
any and all written statements, certificates, instruments and
documents delivered to Consumers pursuant to this Agreement, and
(ii) any actions taken by LOTS, its officers, employees, agents or
representatives in the marketing, sales and administration of the
credit insurance policies of CLIC and IFLAC or in adjusting,
denying, resisting or defending any claim under the said policies
after January 1, 1998. To the extent the loss, liability, damage,
including punitive or extra contractual damages, or expense has
resulted from the reasonable reliance by LOTS on statements made or
information forwarded by Consumers, this paragraph on
indemnification will not be applicable.
SECTION 10.3 INDEMNITY BY CONSUMERS
Subject to the provisions of Section 10.4 hereof, Consumers,
jointly and severally, hereby covenants and agrees to indemnify and
hold harmless LOTS and its successors and assigns from and against
any and all loss, liability, damage, including punitive or extra
contractual damages, or expense (including, but not limited to,
reasonable attorney's fees) arising out of, or resulting from (i)
any misrepresentation or breach of any warranty, representation,
covenant or agreement made by Consumers in this Agreement,
including the exhibits hereto and any and all written statements,
certificates, instruments and documents delivered to LOTS pursuant
to this Agreement, (ii) any actions taken by Consumers, their
officers, employees, agents or representatives in the marketing,
sales and administration of the credit insurance policies of CLIC
and IFLAC or in adjusting, denying, resisting or defending any
claim under the said policies, (iii) except for those liabilities
expressly assumed by LOTS hereunder, any and all liabilities of
Consumers of any nature, whether accrued, absolute, contingent or
otherwise, (iv) any liability arising from the defined term
Excluded Liabilities; and (v) any liability which arises out of or
results from any claim asserted by any inactive dealer account for
retrospective commission payments, to the extent of any amount
which was due as of the Effective Date. To the extent the loss,
liability, damage, including punitive or extra contractual damages,
or expense has resulted from the reasonable reliance by Consumers
on statements made or information forwarded by LOTS, this paragraph
on indemnification will not be applicable.
SECTION 10.4 NOTICE TO INDEMNIFY
Within sixty (60) days after receipt by Consumers or LOTS, as
the case may be (the "Indemnified Party"), of notice of the
commencement of any claim, action or proceeding against it, the
Indemnified Party shall give notice to the other Party (the
"Indemnifying Party") of such claim, action or proceeding and the
Indemnifying Party shall at its expense assume the defense of any
claim, action or proceeding; provided, however, that the failure by
the Indemnified Party to give timely notice as provided herein
shall absolutely relieve the Indemnifying Party of its
indemnification obligations under this Agreement, unless the
failure to give actual notice to the Indemnifying Party results in
no damage to the Indemnifying Party. In the defense of any such
claim against the Indemnified Party (whether singly or with the
Indemnifying Party) or of any action or proceeding in which the
Indemnified Party is named as a party, the Indemnifying Party shall
not, except with the consent of the Indemnified Party, consent to
the entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the
claimant or plaintiff to the Indemnified Party of a release from
all liability with respect to such claim, action or proceeding. The
Indemnified Party and the Indemnifying Party shall cooperate in the
defense of any claim, action or proceeding and the records of each
relating to the subject matter of such defense shall be available
to the other with respect to such defense.
SECTION 10.5 RETENTION OF RIGHTS
Notwithstanding anything in this Agreement to the contrary,
the Indemnified Party shall have the right to employ separate
counsel in any such claim, action or proceeding which counsel may
participate actively and fully as co-counsel in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party unless (i) the Indemnifying Party
has agreed in writing to pay such fees and expenses, (ii) the
Indemnifying Party has failed to assume the defense and employ
counsel in a timely manner, or (iii) the named parties to any such
action, suit or proceeding (including any impleaded parties)
include both the Indemnified Party and the Indemnifying Party and
the Indemnified Party shall have been advised by its counsel that
representation of the Indemnified Party and the Indemnifying Party
by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such
representation by the same counsel has been proposed), due to
actual or potential differing interests between them (in which case
the Indemnifying Party shall not have the right to assume the
defense of such action on behalf of the Indemnified Party). The
Indemnifying Party shall not be liable for any settlement of any
such claim, action or proceeding effected without its written
consent (which consent shall not be unreasonably withheld) but if
settled with such written consent, or if there be a final judgment
for the plaintiff in any such claim, action or proceeding, the
Indemnifying Party agrees to indemnify and hold harmless the
Indemnified Party to the extent provided herein by reason of such
settlement or judgment.
ARTICLE XI
ARBITRATION
SECTION 11.1 ARBITRATION
The Parties agree that should any dispute arise between the
Parties with reference to interpretation of this Agreement or their
rights with respect to any transaction involving this Agreement,
whether such dispute arises before or after termination hereof,
such dispute shall be submitted to arbitration to be held in
Philadelphia, Pennsylvania in accordance with the rules of
Commercial Arbitration of the American Arbitration Association.
Notwithstanding the foregoing, the provisions of this section shall
not prohibit any Party from seeking, and each Party shall have the
right to seek and obtain, injunctive relief in a court of proper
jurisdiction in order to maintain the status quo prior to or during
the pendency of any arbitration proceeding commenced hereunder.
SECTION 11.2 PROCEDURE
One arbitrator shall be chosen by LOTS, one by Consumers, and
an umpire chosen by the two arbitrators. If either Party fails to
name an arbitrator within thirty (30) days after receiving a
written request by the other Party to do so, the requesting Party
may choose two arbitrators who shall in turn choose an umpire. The
arbitrators and the umpire shall be disinterested executive
officers or former executive officers of credit insurance or
credit reinsurance companies authorized to transact business in the
United States or any Fellow of the Society of Actuaries or any
partner or principal in a nationally recognized accounting firm
with credit insurance experience. The arbitrators shall be relieved
from all judicial formalities and may abstain from following the
strict rules of law. They shall interpret this Agreement as an
honorable engagement and not merely as a legal obligation. A
majority decision by the arbitrators and umpire shall be final and
binding on both parties. Judgment may be entered upon the final
decision of the arbitrators in any court having jurisdiction. Each
Party shall bear the expense of its own arbitrator and shall
jointly and equally bear, with the other Party, the expense of the
umpire and the arbitration, unless otherwise determined by the
arbitrators and umpire.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 EXHIBITS
All Exhibits hereto are deemed a part hereof and
incorporated herein. All statements contained in any certificate or
other instrument delivered by or on behalf of the Parties hereto
pursuant to this Agreement or in connection with the transactions
contemplated hereby, or contained in any Exhibit hereof, shall be
true at Closing as though such representations and warranties were
made at and as of such time.
SECTION 12.2 EXPENSES
The Parties shall pay their own expenses, incident to the
preparation and execution of this Agreement and the consummation of
the transactions contemplated hereby, including but not limited to,
the payment of fees for professional services provided by their
attorneys, accountants, actuaries and experts. Neither Consumers
nor LOTS shall have any liability or responsibility to each other
for the payment of any finder's fee or broker's commission arising
from any transaction under this Agreement, and each of Consumers
and LOTS shall hold the other harmless from and against any such
fee or commission due or claimed to be due from it.
SECTION 12.3 CONTENTS OF AGREEMENT; PARTIES IN INTEREST
This Agreement sets forth the entire understanding of the
Parties. All terms and provisions of this Agreement shall be
binding upon and inure to the benefit of, and be enforceable by
their successors and assigns. No assignment of this Agreement shall
be made, however, without the written consent of the other Party,
which consent shall not be unreasonably withheld.
SECTION 12.4 FURTHER DOCUMENTS
Each Party shall cooperate and take such action as may
reasonably be requested by the other Party in order to carry out
the provisions and purpose of this Agreement
SECTION 12.5 EXECUTION
This Agreement, upon completion of all Exhibits hereto to the
mutual satisfaction of the Parties and the attachment of such
Exhibits to this Agreement, may be simultaneously executed in
several counterparts, each of which when executed shall be deemed
to be an original, and such counterparts shall together constitute
one and the same instrument.
SECTION 12.6 EFFECT OF TABLE OF CONTENTS; USE OF DESCRIPTIVE
HEADINGS; ETC.
The Table of Contents preceding this Agreement but under the
same cover, and the descriptive headings of the several paragraphs
and subparagraphs are for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
Whenever used in this Agreement, and the context so requires, the
singular shall include the plural and the plural the singular, and
the use of any gender shall be applicable to all genders.
SECTION 12.7 NOTICES
All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been
given if delivered to the person to whom it was addressed after
being sent by facsimile, mailed by an overnight delivery service
requiring a receipt (such as Federal Express) or mailed, postage
prepaid, certified or registered air-mail, return receipt requested
addressed to:
(a) If to Consumers to:
Consumers Financial Corporation
1200 Camp Hill By-Pass
P. O. Box 26
Camp Hill, Pennsylvania 17001-0026
Attention: R. Fredric Zullinger, Senior Vice President
Facsimile: 717-761-9473
(b) If to LOTS to:
Life of the South Corporation
100 West Bay Street
P. O. Box 44130
Jacksonville, FL 32231-4130
Attention: Ned Hamil, CLU, President
Facsimile: 904-354-4525
Either Party may change its address for notice by providing
notice to the other Party in the manner set forth above.
SECTION 13.8 GOVERNING LAW
This Agreement shall be governed and interpreted in accordance
with the laws of the Commonwealth of Pennsylvania, including its
statute of limitations but without regard to its conflict of laws
rule.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, the Parties by their duly authorized
officers have executed this Agreement on the day and year first
above written.
ATTEST: CONSUMERS FINANCIAL CORPORATION
/S/ Peter J. Kramer By /S/ James C. Robertson
Secretary
Its President
ATTEST: CONSUMERS LIFE INSURANCE COMPANY
/S/ Peter J. Kramer By /S/ R. Fredric Zullinger
Secretary Its Senior VP & CFO
ATTEST: INVESTORS FIDELITY LIFE
ASSURANCE CORP.
/S/ Peter J. Kramer By /S/ William J. Walsh, Jr.
Secretary Its Executive Vice President
ATTEST: LIFE OF THE SOUTH CORPORATION
/S/ David Hardegree By /S/ Ned Hamil
Assistant Secretary Its President
INDEX OF EXHIBITS
A INDEMNITY REINSURANCE AGREEMENT BETWEEN CLIC AND AMERICAN
REPUBLIC
B ASSUMPTION AND NOVATION REINSURANCE AGREEMENT BETWEEN IFLAC
AND AMERICAN REPUBLIC
C ASSUMPTION AND NOVATION AGREEMENT BETWEEN CLIC, LOTS AND
ALABAMA REASURANCE COMPANY (CNC INFORCE BUSINESS)
D CREDIT INSURANCE AND FEE INCOME ACCOUNTS
E STOCK PURCHASE AGREEMENT
F BASIC ASSET TRANSFER AND CONTINGENCY FUND CALCULATIONS
G MARKETING AND SALES AGREEMENT
H ADMINISTRATIVE SERVICES AGREEMENT (EFFECTIVE OCTOBER 1, 1997)
I AGREEMENT TO PERFORM ADMINISTRATION (EFFECTIVE JANUARY 1,
1998)
APPENDIX 2
CONSUMERS FINANCIAL CORPORATION
PLAN OF LIQUIDATION AND DISSOLUTION
This Plan of Liquidation and Dissolution (the Plan ) is for the purpose
of effecting the liquidation and dissolution of Consumers Financial
Corporation, a Pennsylvania corporation (the Company ), in accordance with
and pursuant to the provisions of the Pennsylvania Business Corporation Law of
1988, as amended PBCL ) and Section 331 of the Internal Revenue Code of 1986,
as amended (the Code ), in substantially the following manner:
1. Effective Date. The Plan shall be effective on the date (the
Effective Date) on which it is adopted by the affirmative vote of the holders
of a majority of the outstanding shares of the Common Stock and Series A 8 1/2%
Preferred Stock of the Company, voting separately as a class and together, at a
special meeting (the Special Meeting ) of the Company s shareholders (the
Shareholders ) called for such purpose pursuant to a Notice and Proxy
Statement dated January ___, 1998 and filed with the Securities and Exchange
Commission.
2. Cessation of Business. After the Effective Date, the Company shall not
engage in any business activities except for the purposes of (i) prosecuting or
defending lawsuits by or against the Company, (ii) enabling the Company to
gradually settle and close its business, dispose of and convey its property,
discharge liabilities and wind up its business affairs and (iii) making the
Liquidation Distribution (as hereinafter defined) and distributing its
remaining assets, if any, in accordance with the Plan. The Board of Directors
of the Company (the Board ) and, at their pleasure, the officers, shall
continue in office solely for these purposes. After Articles of Dissolution are
filed with the Pennsylvania Department of State, the Company will not plan to
hold any further annual meetings of its Shareholders.
3. Dissolution. As promptly as practicable after the Effective Date and
upon the filing of Articles of Dissolution with the Pennsylvania Department of
State, the Company shall be dissolved pursuant to the provisions of Subchapter
F of Chapter 19 of the PBCL ( Subchapter F ), unless prior to such filing of
the Articles of Dissolution the Board of Directors has determined to dissolve
the Company in accordance with Subchapter H of Chapter 19 of the PBCL, at which
time any reference to Subchapter F herein shall mean Subchapter H.
4. Sale of Assets. As part of the overall Plan, the Company has entered
into the Asset Purchase Agreement dated as of December 30, 1997 by and among
the Company, Consumers Life Insurance Company, a wholly-owned subsidiary of the
Company, Investors Fidelity Life Assurance Corp., a wholly-owned subsidiary of
Consumers Life Insurance Company, and Life of the South Corporation, providing
for the sale of the inforce credit insurance and certain related assets of the
Company in exchange for cash (the Sale of Assets ), and its credit insurance
and fee income accounts in exchange for cash to be received over a five-year
period. After the Effective Date, the Company shall have continuing authority
to sell, lease, exchange or otherwise convert all or any part of its assets as
contemplated by the terms and provisions of the Plan, including, if the
requisite approval of the Shareholders is received, the Sale of Assets.
5. Payment of Debts. The Company shall pay or make proper provision for
the payment of all known or ascertainable liabilities of the Company, including
all amounts estimated by the Board to be necessary, appropriate or desirable,
in its absolute discretion, for the payment of estimated expenses, taxes and
contingent liabilities (including expenses of dissolution, liquidation and
termination of existence), all as provided in Subchapter F.
6. Liquidating Distribution. The Company shall (i) redeem and cancel all
of the outstanding shares of Preferred Stock at par value ($10.00 per share),
and (ii) distribute pro rata to the holders of Common Stock, that portion of
cash remaining after making provision for the payment of all debts (the
Liquidating Distribution ). The Liquidating Distribution may be made in a
series of distributions and is intended to be made in cash, in such manner and
at such time or times as the Board, in its absolute discretion, may determine.
7. Cancellation of Common Stock and Preferred Stock. The Liquidating
Distribution shall be in complete redemption and cancellation of all of the
outstanding Common Stock and Preferred Stock of the Company. The Board may
direct that the Company s stock transfer books be closed at the close of
business on the record date fixed by the Board for the first or any subsequent
installment of any Liquidating Distribution as the Board, in its absolute
discretion, may determine (the Final Record Date ) and thereafter certificates
representing Common Stock and Preferred Stock shall not be assignable or
transferable on the books of the Company except by will, intestate succession
or operation of law. The Shareholders shall surrender stock certificates (or,
if so required by the Board in its absolute discretion, furnish indemnity bonds
in case of lost or destroyed certificates) as a condition to their receipt of
any Liquidating Distribution immediately following the Final Record Date.
8. Missing Shareholders. If any Liquidating Distribution to a Shareholder
cannot be made, whether because the Shareholder cannot be located, has not
surrendered a certificate evidencing the Common Stock and Preferred Stock as
required hereunder, or for any other reason, then the distribution to which
such Shareholder is entitled shall (unless transferred to the trust established
pursuant to Section 11 hereof) be transferred to and deposited with the state
official authorized by the laws of the Commonwealth of Pennsylvania to receive
the proceeds of such distribution. The proceeds of such distribution shall
thereafter be held solely for the benefit of and for ultimate distribution to
such Shareholder as the sole equitable owner thereof and shall escheat to the
Commonwealth of Pennsylvania or be treated as abandoned property in accordance
with the laws of the Commonwealth of Pennsylvania. In no event shall the
proceeds of any such distribution revert to or become the property of the
Company.
9. Amendments. Notwithstanding the adoption of the Plan by the Company s
Shareholders, the Board may modify or amend the Plan (including, without
limitation, proceeding under the provisions of Subchapter H of the PBCL in lieu
of proceeding under Subchapter F and, prior to the filing of Articles of
Dissolution with the Department of State of the Commonwealth of Pennsylvania,
may abandon the Plan, without further action by the Shareholders to the extent
permitted by Pennsylvania law.
10. Indemnification. The Company shall continue to indemnify its
officers, directors, employees and agents in accordance with applicable law,
its articles and bylaws and any contractual arrangements for actions taken in
connection with the Plan and the winding up of the affairs of the Company and
shall indemnify any liquidating trustees and their agents on similar terms. The
Company s obligation to indemnify such persons may be satisfied out of the
assets of the Liquidating Trust (as defined below). The Board and the trustees,
in their absolute discretion, are authorized to obtain and maintain insurance
for the benefit of such officers, directors, employees, agents and trustees to
the extent permitted by law.
11. Liquidating Trust. If necessary for any reason to complete the
liquidation and distribution of the Company s assets to the Shareholders, the
Board may at any time transfer to a liquidating trust (the Liquidating Trust)
under a Liquidating Trust Agreement substantially in the form attached hereto
as Exhibit 1, any remaining assets of the Company. The Liquidating Trust, if
any, will succeed to all of the then remaining assets of the Company, including
such reserve, and any liabilities of the Company. The sole purpose of the
Liquidating Trust will be to liquidate on terms satisfactory to the liquidating
trustee(s) and to distribute the assets formerly owned by the Company, if any,
after paying any remaining liabilities of the Company to the Shareholders.
Notwithstanding the foregoing, to the extent that distribution of any assets of
the Company cannot be effectuated without the consent of a governmental
authority, no such distribution shall be effected without such consent.
12. Power of Board of Directors. The Board and, if authorized by the
Board, the officers, shall have authority to do or authorize any and all acts
and things as provided for in the Plan and any and all such further acts and
things as they may consider desirable to carry out the purposes of the Plan,
including the execution and filing of all such certificates, documents,
information returns, tax returns, and other documents which may be necessary or
appropriate to implement the Plan. The Board may authorize such variations from
or amendments to the provisions of the Plan as may be necessary or appropriate
to effectuate the complete liquidation and dissolution of the Company and the
distribution of its assets to its Shareholders in accordance with the PBCL and
the Code. The death, resignation, or other disability of any director or
officer of the Company shall not impair the authority of the surviving or
remaining director(s) or officer(s) to exercise any of the powers provided for
in the Plan. Upon such death, resignation or other disability, the surviving or
remaining director(s), or, if there be none, to the extent permitted by law the
surviving or remaining officer(s) shall have authority to fill the vacancy or
vacancies so created, but the failure to fill such vacancy or vacancies shall
not impair the authority of the surviving or remaining director(s) or
officer(s) to exercise any of the powers provided for in the Plan. In
connection with and for the purpose of implementing and assuring completion of
the Plan, the Company may, in the absolute discretion of the Board, pay to the
Company s officers, directors and employees, or any of them, compensation or
additional compensation above their regular compensation, in money or property,
in recognition of the extraordinary efforts they, or any of them, will be
required to undertake or actually undertake, in successful implementation of
the Plan. Adoption of the Plan by the Shareholders shall constitute the
approval of the Shareholders of the payment of any such compensation. The
dissolution of the Company shall not subject its directors or officers to
standards of conduct different from those prescribed by or pursuant to Chapter
17 of the PBCL.
EXHIBIT 1
LIQUIDATING TRUST AGREEMENT
This AGREEMENT AND DECLARATION OF TRUST is made by and between CONSUMERS
FINANCIAL CORPORATION, a Pennsylvania corporation (the "Company"), and
and (the "Trustees").
WHEREAS, the Company is in the process of a voluntary liquidation and
dissolution pursuant to a Plan of Liquidation and Dissolution (the "Plan")
adopted by the shareolders of the Company at a Special Meeting of Shareholders
held on January ___, 1998 (the Special Meeting ); and
WHEREAS, pursuant to the Plan, the Company shall not engage in any
business activities except to the extent necessary for preserving the values of
its assets, winding up its business affairs and distributing its assets in
accordance with the Plan; and
WHEREAS, pursuant to the terms of an Asset Purchase Agreement (the
"Agreement") dated as of December 30, 1997 by and among the Company, Consumers
Life Insurance Company, a wholly-owned subsidiary of the Company, Investors
Fidelity Life Assurance Corp., a wholly-owned subsidiary of Consumers Life
Insurance Company, and Life of the South Corporation ("LOTS"), the Company has
transferred to LOTS effective October 1, 1997, its inforce credit insurance
business and certain related assets in exchange for cash (the Sale of Assets),
and its credit insurance and fee income accounts, in exchange for cash to be
received over a five-year period; and
WHEREAS, the shareholders of the Company have approved the Sale of Assets
this Liquidating Trust Agreement at the Special Meeting and have authorized the
Company to make distributions, on behalf of the shareholders, to the Trustees,
subject to the limitations of this Trust;
NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Company hereby grants, releases, assigns, transfers, conveys and delivers
to the Trustees all of the Company's right, title and interest in and to all
assets it currently owns, holds or in which it otherwise possesses any
interest, subject to the assumption by the Trustees of all of the Company's
liabilities and obligations, whether ascertained, unascertained or contingent,
in trust for the uses and purposes stated herein and subject to the terms and
provisions set forth below, and the Trustees hereby accept such assets and
such Trust and hereby assume such liabilities and obligations of the Company
subject to the terms and provisions set forth below.
ARTICLE 1
NAMES AND DEFINITIONS
1.1 Name. This Trust shall be known as the CFC Liquidating Trust (the
"Trust")
1.2 Definitions.
(a) Agreement or Agreement of Trust shall mean this instrument as
originally executed or as it may from time to time hereafter be
amended pursuant to the terms hereof.
(b) Beneficiaries shall mean the shareholders of the Company as
they appear in the records of the Company at the close of business
on the record date fixed by the Board of Directors for the
liquidation of the Company (the Final Record Date).
(c) Trust Corpus shall mean the property held from time to time in
the Trust by the Trustees, subject to all of the liabilities and
obligations assumed by the Trustees, under this Agreement.
ARTICLE 2
NATURE OF TRANSFER
2.1 Nature and Purpose of Trust, The Trust exists solely for the purposes
of holding, liquidating and disposing of any assets received by it and paying
or settling the ascertained, unascertained and contingent liabilities and
obligations of the Company and thereafter distributing the remaining Trust
Corpus to the Beneficiaries. In connection with such purposes, it is intended
that the Trust serve as a vehicle for the preservation and maintenance of the
Trust Corpus, with a view to its liquidation and not the conduct of a
continuing business. This Agreement is intended to create a trust, and to be
governed and construed in all respects as a trust. The Trust is not intended
to be, shall not be deemed to be and shall not be treated as a general
partnership, limited partnership, joint venture, corporation, joint stock
company or association, nor shall the Trustees or the Beneficiaries, or any of
them, for any purposes be, or be deemed to be or treated in any way whatsoever
to be, liable or responsible hereunder as partners or joint venturers. The
relationship of the Beneficiaries to the Trustees shall be solely that of
beneficiaries of a trust, and their rights shall be limited to those conferred
upon them by this Agreement. In no event shall any part of the Trust Corpus
revert or be distributed to the Company. Notwithstanding any other provision
hereof, the Trustees are authorized and empowered to take only such action as
is necessary or advisable to preserve the Trust Corpus pending its
distribution to the Beneficiaries, and the Trustees shall have no power or
authority to enter into or engage in the conduct of any trade or business in
respect of the Trust Corpus.
2.2 Instruments of Further Assurance. The Company and such persons as
shall have the right and power after the dissolution of the Company will, upon
request of the Trustees, execute, acknowledge, and deliver such further
instruments and do such further acts as may be necessary or proper to
effectively carry out the purposes of this Agreement, to confirm the transfer
to the Trustees of any property covered or intended to be covered hereby and
the assumption of all liabilities pertaining thereto, and to vest in the
Trustees, their successors and assigns, the estate, powers, instruments or
funds in trust hereunder.
2.3 Unknown Property and Liabilities. The Trustee shall be responsible for
only the property delivered to them or registered in their names and shall have
no duty to make, nor incur any liability for failing to make, any search for
unknown property. The Trustees shall be responsible for only those liabilities
and obligations of which they are informed and shall have no duty to make, nor
any liability for failing to make, any search for unknown liabilities.
2.4 Transferee Liability. In the event that any liability is asserted
against the Trustees as recipients of the property transferred to the Trustees
hereunder, on account of any claimed liability of or through the Company, the
Trustees may use such part of the Trust Corpus as may be reasonable for
contesting any such liability and in payment thereof, including reasonable
attorneys' fees incurred in connection therewith.
2.5 Limitation of Liability. No personal liability shall attach to the
Trustees or the Beneficiaries with respect to any liabilities or obligations
arising under this Agreement, and all persons dealing with the Trust must look
solely to the Trust Corpus for the enforcement of any claims against the Trust.
2.6 Assignment for Benefit of Beneficiaries. The Trustees hereby assign
tothe Beneficiaries the beneficial interest in all the Trust Corpus, and retain
only such incidents of ownership therein as are necessary to undertake the
actions and transactions authorized herein.
ARTICLE 3
BENEFICIARIES
3.1 Beneficial Interests. The beneficial interests of the Beneficiaries
shall be recorded by the Trustees or their agent on the books of the Trust. The
beneficial interests of the Beneficiaries will be evidenced only by the Trust's
records and there will be no certificates or other tangible evidence of such
interests. The beneficial interests of the Beneficiaries will not be
transferable expect pursuant to the laws of descent and distribution or by
operation of law.
If any conflicting claims or demands are made or asserted with respect to
beneficial interests herein, or if there should be any disagreement among the
transferees, assignees, heirs, representatives or legatees succeeding to all or
a part of the interest on any Beneficiary resulting in adverse claims or
demands being made in connection with such interest, then, in any of such
events, the Trustee shall be entitled, at their sole election, to refuse to
comply with any such conflicting claims or demands. In so refusing, the
Trustees may elect to make no payment or distribution in respect of the
beneficial interest involved, and in so doing the Trustees shall not be or
become liable to any of the parties for their failure or refusal to comply
with any of such or demands, nor shall the Trustees be liable for interest on
any funds which they may so withhold. The Trustees shall be entitled to
refrain and refuse to act until (i) the rights of
the adverse claimants have been adjudicated by a final judgment of a court of
competent jurisdiction from which there is no appeal pending and the applicable
appeal period shall have expired, (ii) all differences have been adjusted by
valid written agreement between all of such parties, and the Trustees shall
have been furnished with an executed counterpart of such agreement, or (iii)
there is furnished to the Trustees a surety bond or other security
satisfactory to the Trustees, as they shall deem appropriate, to fully
indemnify them as between all conflicting claims or demands.
3.2 Rights of Beneficiaries. The Beneficiaries shall take and hold their
beneficial interests subject to all the terms and provisions of this Agreement
of Trust. The interest of the Beneficiaries is hereby declared to, and shall be
in all respects, personal property. The Beneficiaries shall have no title to,
possession of, management of, or control of, the Trust Corpus except as herein
expressly provided. The whole title to all the Trust Corpus shall be vested in
the Trustees and the sole interest of the Beneficiaries shall be the rights and
benefits given to them under this Agreement of Trust.
3.3 Applicable Law. As to matters affecting the title, ownership,
transferability, or attachment of the interest of the Beneficiaries in the
Trust, the laws from time to time in force in the Commonwealth of Pennsylvania
shall govern except as otherwise herein specifically provided.
ARTICLE 4
DURATION AND TERMINATION OF TRUST
4.1 Duration. The existence of this Trust shall extend for such period as
is reasonably necessary to collect and distribute all of the assets of the
Trust Corpus; provided that the Trustees will make continuing efforts to
dispose of the Trust Corpus, make timely distributions, and not unduly prolong
the duration of the Trust.
4.2 Continuance of Trust for Winding Up. After the termination of the
Trust and for the purpose of liquidating and winding up the affairs of the
Trust, the Trustees shall continue to act as such until their duties have been
fully performed. Upon distribution of all the Trust Corpus, the Trustees shall
retain the books, records, shareholder lists, Beneficiary lists, and
certificates and other documents and files which shall have been delivered to
or created by the Trustees. At the Trustees' discretion, all of such records
and documents may, but need not, be destroyed at any time after three years
from the completion and winding up of the affairs of the Trust. Except as
otherwise specifically<PAGE>
provided herein, upon the discharge of all liabilities
of the Trust and final distribution of all of the Trust Corpus, the Trustees
shall have no further duties or obligations hereunder except to account as
provided in Section 5.3 hereof.
ARTICLE 5
ADMINISTRATION OF TRUST ESTATE
5.1 Payment of Claims, Expenses and Liabilities. The Trustees shall pay
from the Trust Corpus all claims, expenses, charges, liabilities, and
obligations of the Trust and all liabilities and obligations which the Trustees
specifically assume and agree to pay pursuant to this Agreement and such
transferee liabilities as the Trustees may be obligated to pay as transferees
of the assets comprising the Trust Corpus, and the costs, charges, and expenses
connected with or growing out of the execution or administration of the Trust
and such other payments and disbursements as are provided in this Agreement or
as may be determined to be a proper charge against the Trust Corpus by the
Trustees.
5.2 Interim Distributions. The Trust shall distribute at least annually
to the Beneficiaries its net income plus all net proceeds from the sale of
assets, except that the Trust may retain an amount of net income or net
proceeds reasonably necessary to maintain the value of the Trust Corpus or
to meet claims and contingent liabilities, including but not limited to tax
liabilities.
5.3 Final Distribution. If the Trustees determine that all claims, debts,
liabilities, and obligations of the Trust have been paid or discharged and that
the remaining assets of the Trust may be conveniently sold and the proceeds
distributed, or if the existence of the Trust shall terminate pursuant to
Section 4.1 hereof, the Trustees shall, as expeditiously as is consistent with
the conservation and protection of the Trust Corpus, sell the Trust Corpus and
distribute the proceeds to the Beneficiaries of record on the Final Record
Date.
5.4 Reports to Beneficiaries. As soon as practicable after the end of each
fiscal year of the Trust and after termination of the Trust, the Trustees shall
submit a written report to the Beneficiaries (which report shall constitute the
accounting of the Trust for such period) showing (i) the assets and liabilities
of the Trust at the end of such fiscal year or upon termination and the
receipts and disbursements of the Trustees for such fiscal year or period,
(ii) any changes in the Trust Corpus which have not been previously reported,
and (iii) any action taken by the Trustees in the performance of their duties
under this Agreement of Trust which they have not previously reported and
which, in their opinion, materially affects the Trust Corpus. The fiscal year
of the Trust shall end on December 31 of each year unless the Trustees deem it
advisable to establish some other date as the date on which the fiscal year of
the Trust shall end.
5.5 Federal Income Tax Information. As soon as practicable after the close
of each fiscal year, the Trustees shall mail to the Beneficiaries a statement
showing the dates and amounts of all distributions made by the Trustees, if
any, and such other information as is reasonably available to the Trustees
which may be helpful in determining the amount and character of items of
income, deductions and credits of the Trust that the Beneficiaries should
include in their federal income tax returns for the preceding year.
ARTICLE 6
POWERS OF AND LIMITATIONS UPON THE TRUSTEES
6.1 General Powers of and Limitations upon Trustees. The Trustees, subject
only to the specific limitations contained in this Agreement, shall have,
without further or other authorization, and free from any power or control on
the part of the Beneficiaries, full, absolute and exclusive power, control and
authority over the Trust Corpus and over the affairs of the Trust to the same
extent as if the Trustees were the sole owners thereof in their own right,
provided, however, that such power, control and authority shall only be
exercised to do such acts and things as in their sole judgment and discretion
are necessary or incidental to, or desirable for, the carrying out of any of
the purposes of the Trust. Any determination made in good faith by the
Trustees of the prrposes of the Trust or the existence of any power or
authority hereunder shall be conclusive and binding upon the Beneficiaries. In
construing the provisions of this Agreement, presumption shall be in favor of
the grant of powers and authority to the Trustees, except insofar as the
existence or exercise of any such power or authority would jeopardize the
status of the Trust as a grantor trust for federal income tax purposes. The
enumeration of any specific power or authority herein shall not be construed
as limiting the general powers or authority or any other specified power or
authority conferred herein upon the Trustees. As set forth in Section 2.1
hereof, the Trustees shall not at any time, on behalf of the Trust or the
Beneficiaries, enter into or engage in any trade or business, and no part of
the Trust Corpus shall be used or disposed of by the Trustees in furtherance
of any trade or business. This liquidation shall apply irrespective of whether
the conduct of any such business activities is deemed by the Trustees to be
necessary or proper for the conservation and protection of the Trust Corpus.
The Trustees shall invest the funds of the Trust Corpus in demand and time
deposits in banks or savings institutions, or temporary investments such as
short-term certificates of deposit or Treasury bills. The sole purpose of the
Trust shall be to collect all outstanding assets of the Company and to
liquidate the Trust Corpus and discharge the liabilities transferred to it
with no objective to continue or engage in the conduct of any trade or
business. In no event shall the Trustees receive any property, make any
distribution, satisfy or discharge any obligation, claim, liability, or
expense or otherwise take any action which is inconsistent with a complete
liquidation of the Company as that term is used and interpreted by Section 331
of the Code, the Treasury Regulations promulgated thereunder, and rulings,
decisions and determinations of the Internal Revenue Service or any court of
competent jurisdiction, or take any action that would jeopardize the status of
the Trust as a liquidating trust for federal income tax purposes within the
meaning of Treasury Regulation Section 301.7701-4(d). The Trust does not, and
will not, receive or retain cash in excess of a reasonable amount to meet
contingent liabilities. In addition, the Trust does not, and will not, receive
transfers of any unlisted stock of a single issuer that represents 80 percent
or more of the stock of such issuer, and the Trust does not, and will not,
receive transfers of any general partnership interests.
6.2 Specific Powers of Trustees. Subject to the provisions of Section 6.1
hereof, the Trustees shall have the following specific powers in addition to
any powers conferred upon them by any other Section or provision of this
Agreement of Trust or by virtue of any present or future statute or rule of
law, in all instances without any action or consent required by the
Beneficiaries; provided, however, that the enumeration of the following powers
shall not be considered in any way to limit or control the power of the
Trustees to act as specifically authorized by any other Section or provision
of this Agreement and to act in such a manner as the Trustees may deem
necessary or appropriate, in their sole discretion, to conserve, protect,
and administer the Trust Corpus or otherwise to confer upon the Beneficiaries
the benefits intended to be conferred upon them by this Agreement:
(a) To retain and set aside such funds out of the Trust Corpus as
the Trustees shall deem necessary or expedient to pay, or provide
for the payment of, (i) unpaid claims, liabilities, debts or
obligations of the Trust, (ii) contingencies, and (iii) the
expenses of administering the Trust Corpus;
(b) To do and perform any acts or things necessary or appropriate
for the conservation and protection of the Trust Corpus, and in
connection therewith to employ any agents or representatives as the
Trustees deem expedient and to pay reasonable compensation
therefor;
(c) To sell, transfer, assign, borrow against, pledge, hypothecate
or deal in any other manner with any of the Trust Corpus, in such
manner as the Trustees may deem advisable for any Trust purpose;
(d) To engage in, intervene in, prosecute, join, defend, compound,
settle, compromise, abandon or adjust by arbitration or otherwise,
any actions, suits, proceedings, disputes, claims, controversies,
demands or other litigation to enforce any instruments, contracts,
agreements, claims or causes of action relating to the Trust, the
Trust Corpus or the Trust's affairs, to enter into agreements
relating to the foregoing, whether or not any suit is commenced or
claim has accrued or been asserted and, in advance of any
controversy, to enter into agreements regarding arbitration,
adjudication or settlement thereof, all in the name of the Trust or
of the Company if otherwise required;
(e) To file any and all documents and take any and all such other
action as the Trustees, in their sole judgment, may deem necessary
in order that the Trust may lawfully carry out its purposes in any
jurisdiction:
(f) To change the name of the Trust; and
(g) To prepare and file, or assist in the preparation and filing of
federal and state tax returns and reports required to be filed on
behalf of the Trust or the Trustees.
ARTICLE 7
LIABILITY OF TRUSTEES AND BENEFICIARIES AND OTHER MATTERS
7.1 Generally. No Trustee shall be liable to the Trust or to any Trustee
or Beneficiary for any act or omission of any other Trustee, Beneficiary, or
agent of the Trust, or be held to any personal liability whatsoever in tort,
contract, or otherwise in connection with the affairs of the Trust, except only
that arising from his or her own bad faith, wilful misfeasance, gross
negligence, or reckless disregard of duty. No Trustee shall be liable except
for the performance of such duties and obligations as are specifically set
forth in this agreement, and no implied covenants or obligations shall be read
into this agreement against the Trustee. No Trustee shall be liable with
respect to any action taken or omitted to be taken by him or her in good
faith, in accordance with the direction of Beneficiaries having an aggregate
beneficial interest of more than 50% of the total beneficial interests in the
Trust. In addition to, and not in limitation of, the foregoing, no successor
Trustee shall be in any way liable for the acts or omissions of any Trustee or
agent of the Trust occurring prior to the date on which he or she became
Trustee.
7.2 Reliance by Trustees. The Trustees may consult with counsel, auditors
or other experts, and the advice or opinion of such counsel, auditors, or other
experts shall be full and complete personal protection to the Trustees in
respect of any action taken or suffered by them in good faith and in reliance
or in accordance with such advice or opinion. In discharging their duties,
Trustees may rely upon financial statements of the Trust represented to the
Trustees to be correct by the person or persons having charge of the Trust s
of account. The Trustees shall and be personally protected in acting, upon
any instrument or document of any sort whatsoever reasonably believed by them
to be genuine.
7.3 Limitation of Liability of Trustees and Beneficiaries. The Trustees,
in incurring any debts, liabilities, or obligations, or in taking or omitting
any other actions for or in connection with the Trust, are, and shall be deemed
to be, acting as Trustees of the Trust and not in their own individual
capacities. Except to the extent provided in Section 7.1 hereof, no Trustee
shall, nor shall any Beneficiary, be liable for any debt, claim, demand,
judgment, decree, liability, or obligation of any kind of, against, or with
respect to the Trust, arising out of any action taken or omitted for or on
behalf of the Trust, and the Trust shall be solely liable therefor, and resort
shall be had solely to the Trust Corpus for the payment or performance thereof.
A Beneficiary shall be entitled to pro rata indemnity from the Trust Corpus,
if, contrary to the provisions hereof, the Beneficiary shall be held to any
such personal liability.
7.4 Express Exculpatory Clauses in Instruments. As far as practicable, the
Trustees shall cause any written instrument creating an obligation of the Trust
to include a reference to this Agreement and to provide that neither the
Beneficiaries nor the Trustees shall be liable thereunder and that the other
parties to such instrument shall look solely to the Trust Corpus for the
payment of any claim thereunder or the performance thereof; provided, however,
that the omission of such provision from any such instrument shall not render
the Beneficiaries or any Trustee liable nor shall the Trustees be liable to
anyone for such omission.
7.5 Indemnification of Trustees.
(a) Each Trustee shall be indemnified from the Trust Corpus
against any loss, liability, expense (including attorney's fees and
costs), or damage which such Trustee may incur or sustain by reason of
being or having been a Trustee of the Trust or for performing any
functions incidental to such service; provided, however, that the
foregoing shall not relieve such person of liability for bad faith,
willful misfeasance, gross negligence, or reckless disregard of duty.
(b) Indemnification under paragraph (a) of this Section 7.5 shall
be made by the Trust as authorized in the specific case unless a
determination has been mde that indemnification of the Trustee is
improper in the circumstances because he or she has not met the
applicable standards of conduct. Such determination shall be made by
independent legal counsel (who may be counsel to the Trust) in a
written opinion.
(c) Expenses incurred in connection with a civil, criminal,
administrative, or investigative action, suit, or proceeding, or threat
thereof, may be paid by the Trust in advance of the final disposition of
such action, suit, or proceeding upon receipt of an undertaking by or on
behalf of the Trustee to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the Trust
as authorized herein.
(d) The indemnification provided in this Section 7.5 shall not be
deemed exclusive of any other rights to which those indemnified may be
entitled under any other agreement or otherwise, both as to action as
Trustee and as to action in another capacity while holding such office,
and shall continue as to a person who has ceased to be a Trustee and
shall inure to the benefit of the heirs, executors, and administrators
of such person.
(e) The Trust shall have the power to purchase and maintain at the
expense of the Trust insurance on behalf and for the benefit of any
person who is or was a Trustee of the Trust against such person as
Trustee, whether or not the Trust should have the power to indemnify
such person against such liability under the provisions of this
Section 7.5.
ARTICLE 8
PROTECTION OF PERSONS DEALING WITH THE TRUSTEES
8.1 Reliance upon Acts of Trustees. Any act of a Trustee purporting to be
done in his or her capacity as such shall, as to any persons dealing with such
Trustee, be conclusively deemed to be within the purpose of this Trust and
within the powers of the Trustee. As to any matter requiring or involving
action by the Beneficiaries, any person dealing with a Trustee shall be fully
protected in relying upon the Trustee's certificate setting forth the facts
concerning the calling of any meeting of the Beneficiaries, the giving of
notice thereof, and the action taken at such meeting, including the aggregate
beneficial interests of the Beneficiaries taking such action.
ARTICLE 9
COMPENSATION OF TRUSTEES
9.1 Amount of Compensation. In lieu of commissions or other compensation
fixed by law for trustees, the Trustees shall be entitled to receive reasonable
fees as compensation for their services as Trustees.
9.2 Dates of Payment. The compensation payable to the Trustees pursuant to
the provisions of Section 9.1 hereof shall be paid monthly or at such other
times as the Trustees may determine.
9.3 Expenses. The Trustees shall be reimbursed from the Trust Corpus for
all expenses reasonably incurred in accordance with this Agreement.
ARTICLE 10
CONCERNING THE TRUSTEES
10.1 Number and Qualification. Subject to the provisions of Section 10.3
hereof relating to the period pending the appointment of a successor Trustee,
there shall be at least one Trustee of the Trust.
10.2 Resignation and Removal. Any Trustee may resign and be discharged
from the Trust hereby created by giving written notice thereof to the
Beneficiaries. Such resignation shall become effective on the day specified in
such notice or the appointment of such Trustee's successor and such successor's
acceptance of such appointment, whichever is earlier, without need for prior
accounting. Any Trustee may be removed at any time, with or without cause, by
vote of Beneficiaries holding more than 50% of the total beneficial interests
in the Trust.
10.3 Appointment of Successor. Should at any time a Trustee resign or be
removed, or die or become incapable of action, or be adjudged bankrupt or
insolvent, a vacancy shall be deemed to exist and a successor shall be
appointed by any remaining Trustee. If any vacancy is not filled by any
remaining Trustee within 90 days, or if there is no remaining Trustee, the
Beneficiaries may, pursuant to Article 12 hereof, appoint a successor Trustee
or Trustees. If the Beneficiaries have not filled all vacancies to be filled
by them within 60 days after they have the authority to do so pursuant to this
Section 10.3, a Beneficiary may apply to a court of competent jurisdiction in
accordance with Pennsylvania law to fill such vacancies.
10.4 Acceptance of Appointments by Successor Trustee. Any successor
Trustee appointed hereunder shall execute an instrument accepting such
appointment hereunder and shall deliver one counterpart thereof to each other
Trustee and, in the case of a resignation, to the retiring Trustee.
Thereupon such successor Trustee shall, without any further act, become vested
with all the estates, properties, rights, powers, trusts, and duties of his or
her predecessor in the Trust hereunder with like effect as if originally named
herein.
10.5 Bonds. Unless a bond is required by law, no bond shall be required of
the original Trustees hereunder. Unless required by a Trustee prior to a
successor Trustee's acceptance of an appointment as such pursuant to Section
10.4 hereof, or unless a bond is required by law, no bond shall be required of
any successor Trustee hereunder. If a bond is required by law, no surety or
security with respect to such bond shall be required unless required by law or
unless required by a Trustee in the case of a successor Trustee.
ARTICLE 11
CONCERNING THE BENEFICIARIES
11.1 Evidence of Action by Beneficiaries. Whenever in this Agreement it is
provided that a Beneficiary may take any action (including the making of any
demand or request, the giving of any notice, consent, or waiver, the removal of
a Trustee, the appointment of a successor Trustee, or the taking of any other
action), the fact that at the time of taking any such action such Beneficiary
having joined therein may be evidenced (i) by any instrument or any number of
instruments of similar tenor executed by a Beneficiary in person or by agent or
attorney appointed in writing, or (ii) by the record of the Beneficiary voting
in favor thereof at any meeting of Beneficiaries duly called and held in
accordance with the provisions of Article 12 hereof.
11.2 Limitation upon Suits by Beneficiaries. No Beneficiary shall have any
right by virtue of any provision of this Agreement to institute any action or
proceeding at law or in equity against any party other than the Trustees upon
or with respect to the Trust Corpus or the assets relating to or forming part
of the Trust Corpus and the Beneficiaries do hereby waive any such right,
unless Beneficiaries having an aggregate beneficial interest of more than 50%
of the total beneficial interests in the Trust shall have made written request
upon the Trustees to institute such action or proceeding in their own names
as Trustees hereunder and shall have offered to the Trustees reasonable
indemnity against the costs and expenses to be incurred therein or thereby,
and the Trustees for 30 days after their receipt of such notice, request, and
offer of indemnity shall have failed to institute any such action or
proceeding.
11.3 Requirement of Undertaking. The Trustees may request any court to
require, and any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Agreement, or in any suit against
the Trustees for any action taken or omitted by them as Trustees, the filing by
any party litigant in such suit of an undertaking to pay the costs of such
suit, and such court may in its discretion assess reasonable costs, including
reasonable attorney's fees, against any party litigant in such suit, having
due regard to the merits and good faith of the claims or defenses made by such
party litigant; provided, that the provisions of this Section 11.3 shall not
apply to any suit by the Trustees and such undertaking shall not be requested
by the Trustees or otherwise required in any suit by any Beneficiary or group
of Beneficiaries having an aggregate beneficial interest of more than 25% of
the total beneficial interests of the Trust.
ARTICLE 12
MEETING OF BENEFICIARIES
12.1 Purpose of Meetings. A meeting of the Beneficiaries may be called at
any time and from time to time pursuant to the provisions of this Article 12
for taking any action which the terms of this Agreement permit having a
specified aggregate beneficial interest to take either alone or with the
Trustees or with any other Beneficiary or Beneficiaries.
12.2 Meeting Called by Trustees. The Trustees may at any time call a
meeting of the Beneficiaries to be held at such time and at such place within
the Commonwealth of Pennsylvania (or elsewhere if so determined by the
Trustees) as the Trustees shall determine. Written notice of every meeting of
the Beneficiaries shall be given by the Trustees (except as provided in Section
12.3 hereof), which written notice shall set forth the time and place of such
meeting and in general terms the action proposed to be taken at such meeting,
and shall be mailed not more than 60 days nor less than ten days before such
meeting is to be held to all of the Beneficiaries of record not more than 60
days before the date of such meeting, such record date to be fixed by the
Trustees. The notice shall be directed to the Beneficiaries at their
respective addresses as they appear in the records of the Trust.
12.3 Meeting Called Upon Request of Beneficiary. Except as hereinafter
provided in this section 12.3, within 30 days after written request to the
Trustees by Beneficiaries having an aggregate beneficial interest of more than
50% of the total beneficial interests in the Trust to call a meeting of all the
Beneficiaries, which written request shall specify in reasonable detail the
action proposed to be taken, the Trustees shall proceed under the provisions of
Section 12.2 hereof to call a meeting of the Beneficiaries, and if the Trustees
fail to call such a meeting within such 30 day period then such meeting may be
called by Beneficiaries having an aggregate beneficial interest of more than
50% of the total beneficial interests in the Trust or by their designated
representative or representatives. If the purpose of the meeting is to fill one
or more vacancies in accordance with Section 10.3 hereof, any Beneficiary may
make written request to the Trustees to call such meeting and the Trustees
shall do so forthwith; if there are no Trustees, any Beneficiary may call such
a meeting. If the purpose of the meeting is other than to fill one or more
vacancies and if there are no Trustees, Beneficiaries having an aggregate
beneficial interest of more than 50% of the total beneficial interests in the
Trust, or their designated representative or representatives, may call such
meeting without first applying to the Trustees or waiting the 30-day period
provided for in the first sentence of this Section 12.3. Any meeting called by
one or more Beneficiaries shall be subject to the same notice requirements as
are set forth in Section 12.2 hereof, and the Beneficiary or Beneficiaries
calling the meeting shall fix the record date therefor.
12.4 Persons Entitled to Vote at Meeting of Beneficiaries. Each
Beneficiary on the record date shall be entitled to vote at a meeting of the
Beneficiaries either in person or by proxy duly authorized in writing and shall
have one vote for each share of Common Stock of the Company previously
registered on the books of the Trust in the name of such Beneficiary. The
signature of the Beneficiary on such written authorization need not be
witnessed or notarized.
12.5 Quorum. At any meeting of Beneficiaries, the presence of
Beneficiaries having an aggregate beneficial interest sufficient to take action
on any matter for which such meeting was called shall be necessary to consti-
tute a quorum.
12.6 Conduct of Meetings. The Trustees shall appoint the Chairman and the
Secretary of the meeting. The vote upon any resolution submitted to any meeting
of Beneficiaries shall be by written ballot.
12.7 Record of Meeting. A record of the proceedings of each meeting of
Beneficiaries shall be prepared by the Secretary of the meeting. The record
will be signed and verified by the Secretary of the meeting and shall be
delivered to the Trustees to be preserved by them. Any record so signed and
verified shall be conclusive evidence of all the matters therein stated.
ARTICLE 13
AMENDMENTS
13.1 With Consent of Beneficiaries. At the direction or with the consent
(evidenced in the manner provided in Section 11.1 hereof) of Beneficiaries
having an aggregate beneficial interest of more than 50% of the total
beneficial interests in the Trust, the Trustees shall promptly make and
execute a declaration amending this Agreement for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of this Agreement or amendments hereto: provided, however, that no such
amendment shall permit the Trustees hereunder to engage in any activity
prohibited by Section 2.1 or 6.1 hereof, or adversely affect the
Beneficiaries' right to receive their pro rata shares of the Trust Corpus at
the time of distribution.
13.2 Without Consent of Beneficiaries. The Trustees may from time to time
and at any time make or execute a declaration amending this Agreement without
the consent of the Beneficiaries pursuant to Section 13.1 hereof for the pur-
pose of (a) curing any ambiguity or correcting or supplementing any provision
contained herein or in any amendment to this Agreement which may be defective or
inconsistent with any other provision contained herein or in any amendment to
this Agreement, (b) making such other provisions or modifications in regard to
matters or questions relating to this Agreement or any amendment hereto,
provided the same shall not adversely affect the interests of the Benefi-
ciaries, or (c) having the Trust continue to qualify as a "liquidating
trust" for federal income tax purposes.
13.3 Notice and Effect of Amendment. Promptly after the execution by the
Trustees of any such declaration of amendment, the Trustees shall send a
summary or copy of the amendment to each Beneficiary. Upon the execution of
any such declaration of amendment by the Trustees, this Agreement shall be
deemed to be modified and amended in accordance therewith.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 Filing Documents. This Agreement shall be filed in such governmental
office or offices, if any, and in such other office or offices as the Trustees
way determine to be necessary or desirable. A copy of this Agreement and all
amendments thereof shall be filed in the office of the Trustees and shall be
available during regular business hours upon reasonable notice for inspection
by any beneficiary or his or her duly authorized representative. The Trustees
shall file each amendment to this Agreement in the same place where the
Original Agreement is filed or recorded. The Trustees shall file or record any
instrumeent which relates to any change in the office of Trustee in the same
places where the original Agreement is filed or recorded.
14.2 Laws as to Construction. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
14.3 Separability. In the event any provision of this Agreement or the
application thereof to any person or circumstances shall be finally determined
a court of competent jurisdiction to be invalid or unenforceable to any extent,
the remainder of this Agreement, or the application of such provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each provision of this
Agreement shall be valid and enforced to the fullest extent permitted by law.
14.4 Notices. Any notice or other communication by the Trustees to any
Beneficiary shall be deemed to have been sufficiently given, for all purposes,
if given by being deposited, postage prepaid, in a post office or letter box
and being addressed to such Beneficiary at its address as shown in the records
of the Trust.
14.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
14.6 Headings for Reference Only. The Article and Section headings
contained herein have been inserted for convenience and reference only and
shall not be construed to affect the meaning, construction or effect of this
Agreement.
14.7 No Court Supervision. The Trust shall not be administered under the
direction or jurisdiction of any court except as provided in Section 10.3
hereof, nor shall there be any duty of the Trustees to account to any court
with respect to their administration of the Trust or the Trust Corpus.
14.8 Irrevocable Trust. This Trust is irrevocable except to the extent
contemplated by Article 13 hereof.
IN WITNESS WHEREOF, Consumers Financial Corporation has caused this
Agreement to be signed by its duly authorized officer and the Trustees have
signed this Agreement, effective this ___ day of ____________, 1998.
CONSUMERS FINANCIAL CORPORATION
By
Its
Trustee
Trustee
