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 MARCH ___, 1998
Dear Shareholders:
A Special Meeting of Shareholders of Consumers Financial
Corporation, a Pennsylvania corporation (the Company ) will be held
on March ___, 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, January 30, 1998 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.
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
February ___, 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 MARCH ___, 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 March ___, 1998 at Corporate
Headquarters, 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania, 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 February ___, 1998. The Company expects to adjourn or
postpone the Special Meeting only in the event a quorum is not
reached in order to allow the Company time to solicit sufficient
votes to insure that a quorum is present.
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.
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. A VOTE IN FAVOR OF THE
PROPOSED SALE OF ASSETS AND THE PLAN OF LIQUIDATION WILL RESULT IN
A TERMINATION OF THE COMPANY S OPERATIONS AND A DISTRIBUTION OF THE
REMAINING ASSETS OF THE COMPANY TO ITS SHAREHOLDERS. THE EXACT
AMOUNT OF SUCH DISTRIBUTION IS NOT CURRENTLY ASCERTAINABLE.
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 inforce 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 March ___, 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, January
30, 1998, 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 invested assets, cash and receivables in an
amount equal to the $52.2 million in liabilities less the Company's
consideration of $13.6 million, or $38.6 million. The $13.6 million
consideration has been fixed by the parties and is not subject to
any further adjustment. 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. The proceeds due
from LOTS from the sale of the Arizona subsidiary will be applied
toward the $38.6 million owed to LOTS or its designee in connection
with the Sale of Assets. The $13.6 million consideration received
from the Sale of Assets, along with other funds which will be
realized from the sale of the Company's other remaining assets,
will be utilized for the payment of the Company's liabilities and
its expenses during the liquidation period, the redemption of all
of the outstanding shares of Preferred Stock and ultimately for the
distributions which will be made to the holders of Common Stock.
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.
The Common Stock and Preferred Stock will continue to be
traded on the NASDAQ National Market until either the Board of
Directors of the Company sets the Final Record Date or the Company
is no longer eligible to have its stock listed on the National
Market, whichever occurs earlier. See The Plan of Liquidation and
Dissolution: Final Record Date. The Company plans to continue to
file all required reports with the Securities and Exchange
Commission (the Commission ) until the Articles of Dissolution are
filed with the Department of State for the Commonwealth of
Pennsylvania and the proceeds are distributed either to the
remaining shareholders of the Company or to a liquidating trust.
See The Plan of Liquidation and Dissolution: Liquidating Trust.
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. <PAGE>
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.
ALTERNATE PLAN IF SALE OF ASSETS IS NOT APPROVED
If, for any reason, the Sale of Assets is not approved by
either the applicable state insurance regulators or the Company's
shareholders, the Company intends to retain its inforce block of
credit insurance business until that business matures or otherwise
terminates (in approximately 4-5 years). In that event, LOTS will
act as the Company's administrator for that business and will
receive a fee for its services. The Company will continue to be
responsible for the claims and policy refunds on the business, as
determined by LOTS, until all policies mature or otherwise
terminate. The Company will receive, over a five-year period, fee
revenues from LOTS from the sale of the Company's credit insurance
accounts, which was effective October 1, 1997. Therefore, if the
Sale of Assets is not approved, the level of policy refunds and
claims paid during the four to five year period will determine the
amount of funds which are available to make distributions to the
holders of Common Stock and Preferred Stock. Further, if the
business is not sold, it is likely that the Company will incur
additional operating expenses during the earn-off period due to
the additional regulatory requirements associated with the block of
credit insurance business.
FEDERAL INCOME TAX CONSEQUENCES OF THE SALE OF ASSETS
The Sale of Assets will have no direct Federal income tax
consequences to the Company's shareholders. It is expected,
however, to create a taxable loss which may result in some Federal
income tax benefit to the Company. It is likely that the Sale of
Assets will also cause the Company's insurance subsidiaries to
incur additional income taxes on their Policyholders' Surplus
Accounts. The extent of the tax benefits or tax obligations
realized or incurred by the Company as a result of the Sale of
Assets will ultimately affect the amounts to be distributed to the
holders of Common Stock. See Asset Purchase Agreement and Sale of
Assets: Federal Income Tax Consequences to the Company .
<PAGE>
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 remaining 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 a contingency fund (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 available 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 $.83 per share and $1.79 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 will be
established by the Board of Directors (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 of the Plan of Liquidation
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. In the event the Company transfers its
remaining net assets to a liquidating trust, shareholders will
recognize gain or loss at the time of such transfer based on the
difference between their pro rata share of the fair value of the
net assets transferred to the trust and their adjusted tax basis in
the Company s stock. Thereafter, as holders of beneficial interests
in the liquidating trust, the former shareholders will take into
account, for Federal income tax purposes, their allocable portion
of the items of income, deduction, gain or loss recognized by the
liquidating trust. Actual cash distributions from the liquidating
trust will be treated as reductions in the holders tax bases in
the liquidating trust. See The Plan of Liquidation and
Dissolution: Certain 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 considered 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 approved 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,
indicated that it 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 Common 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
principal 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 regularly 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 unanimously 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 in such capacities for a limited
period of time 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 January 30, 1998, at the close of business
(the Record Date ). At January 30, 1998, 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 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. As a result,
no other financial advisor was considered by the Board of
Directors. 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. On November
6, 1996 the Company sold the auto auction business and related
operating assets of Interstate to ADESA Pennsylvania, Inc. for cash
of $4.85 million. Approximately $1.7 million from the sale of the
auto auction business was used to pay the remaining amount then due
on the Company s bank loans. The sale resulted in a fourth quarter
1996 after-tax gain of approximately $1.8 million. The remaining
after-tax proceeds from this sale were reinvested primarily in
bonds. A significant portion of these proceeds were subsequently
utilized by the Company in its operations. 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 identified over 45
insurance companies, not including the ultimate buyer, LaSalle,
which had active programs to acquire either other insurance
companies or insurance blocks of business. E&Y and the Company
initiated calls and sent letters to each company identified
concerning their interest in acquiring the Company or portions
thereof. Thirty-five companies expressed an interest in acquiring
all or a portion of the Company and signed confidentiality
agreements. Sales memoranda were mailed to each of these companies
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 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. The
LaSalle offer was the only offer received which proposed to
purchase the entire Company and the only offer which would provide
cash in a single payment to the holders of Common Stock at the time
the transaction closed. The other offers received involved only the
purchase of the Company s credit insurance operations for which a
portion of the consideration would be paid over five years. 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. 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 a 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. Beginning on May 16, 1997, the
Company initiated contact with the two companies which had
previously submitted the next highest bids after LaSalle and with
two companies which had expressed a continuing interest in the
Company s credit insurance operations, in the event LaSalle could
not complete its transaction. Each potential bidder appeared to
have sufficient capital resources available to complete its
proposed transaction. By mid-June, three bidders submitted
proposals for the Company s credit insurance business, contingent
upon a due diligence review and an exclusivity provision. The
fourth bidder only submitted a letter of interest involving an
exchange of stock on terms which were unacceptable to the Company.
Since the Company had already identified parties who had
expressed an interest in the Company and/or its credit insurance
operations when it decided to accept the LaSalle merger offer, the
Board did not believe it was necessary to incur the additional
costs to engage another financial advisor in connection with its
second attempt to locate an acquiror. The bidders other than
LaSalle who had previously expressed an interest in the Company
were primarily interested in the credit insurance business of the
Company, the value of which was established by CreditRe Corporation
and was not dependent upon any further valuations or analysis.
Consequently, CreditRe Corporation was retained to update its
valuation of the Company s credit insurance operations. The
valuation report was used by the Company to determine the fairness
of the offers received for its insurance operations. CreditRe
Corporation was paid approximately $19,000 for its updated
valuation report.
On May 27, 1997, the Company met with LOTS to discuss LOTS'
interest in resubmitting a bid for the Company's inforce credit
insurance business and its credit insurance and fee income
accounts. At that meeting, discussions took place concerning the
status of the LaSalle transaction, and LOTS indicated its interest
in purchasing the Company's inforce block of business and the
credit insurance and fee income accounts in the event the
transaction with LaSalle did not close. Several telephone meetings
with LOTS and the other bidders were held during June and early
July of 1997. The meetings with LOTS focused on the general
structure of the transaction which LOTS would be proposing, LOTS'
preliminary offer regarding the fee which it would pay to the
Company for the credit insurance and fee income accounts and LOTS'
proposed purchase price for two of the Company's insurance
subsidiaries (as indicated below, the purchase of one of the
subsidiaries was subsequently eliminated from the transaction). On
September 17, 1997, the Company and LOTS met in person to discuss
the results of LOTS' due diligence review and its proposed
adjustment to the purchase price for the inforce credit insurance
business. The adjustment to which the parties agreed is described
below.
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 principal 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 purchase price adjustment which was agreed to by the
parties following LOTS' due diligence review related to a
significant increase in the level of disability claims incurred in
1997 compared to previous years. LOTS proposed to reduce the
consideration it had initally offered by approximately $1.2
million. The Company maintained that the 1997 increase was not
necessarily indicative of any future trend or of the claims levels
which LOTS would experience following the Sale of Assets
transaction. The parties subsequently agreed that the $1.2 million
would be deposited into a Contingency Fund to be held in trust by
LOTS and distributed with interest to one or both parties at the
end of five years based on the level of actual claims incurred on
the inforce block of credit insurance business during that period.
See Asset Purchase Agreement and Sale of Assets: Consideration
Received. In addition to returning the entire Contingency Fund to
the Company if future claims equal a pre-determined level, LOTS
also agreed to share 50% of any additional profits earned on the
inforce block if future claims are less than the pre-determined
level.
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 insurance 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 for the Company to become
profitable in the near future for a number of reasons, including
(i) the erosion of the Company's credit insurance premium base due
to the dramatic rise in automobile leasing (for which credit
insurance is generally not sold) and the increasing emphasis being
placed by auto dealers on other after-market products (such as
extended service contracts) which have greater profit margins for
the dealer, (ii) shrinking profit margins from credit insurance
business produced in certain states as a result of regulatory
actions to reduce premium rates and otherwise diminish credit
insurance profits and (iii) the Company's poor ratings from the
various industry rating agencies which essentially prevented the
Company from attracting new accounts or expanding into new market
territories. The declining profit margins referred to in (ii) above
also contributed to the decrease in the revenue base described in
(i) above since the Company was forced to cancel many of its credit
insurance accounts in those states over the past three years
because of the unprofitable results. Of perhaps greater concern to
the Board of Directors was the possibility that the Company would
become insolvent and/or its insurance subsidiaries 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 Liquidation 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 redeem the
Preferred Stock at par value while maximizing the value
to be received by the holders of Common Stock.
(b) The determination by the Board of Directors that the
alternative of continuing to operate the Company and
returning it to profitability in the near future was not
feasible for a number of reasons, primarily (i) the
erosion of the Company s credit insurance premium base,
(ii) shrinking profit margins from credit insurance due
to regulatory actions and (iii) the Company s inability
to compete due to its poor ratings from industry rating
agencies.
(c) 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 matured or
otherwise terminated. While the Board of Directors
considered the possibility that retaining the credit
insurance business could produce a greater ultimate value
for shareholders if the claims experience on that
business was more favorable than expected, the risk of
adverse claims experience and the resulting negative
impact on shareholder value outweighed any potential
additional benefit relating to retaining the credit
insurance business.
(d) The possibility, on which the Board of Directors placed
significant emphasis, that the Company could become
insolvent and/or its insurance subsidiaries could become
subject to regulatory supervision by various state
insurance departments, which would in effect reduce the
ultimate amount of funds available for distribution to
the Company s shareholders.
(e) The conclusion by the Board of Directors that the most
favorable alternative available at this time for
maximizing value to the Company s shareholders is to
complete the Sale of Assets to LOTS and liquidate the
Company. The Sale of Assets will provide the Company with
the opportunity to benefit from more favorable than
expected claims experience, if realized, while
eliminating the risk of adverse claims experience, which
will be the responsibility of LOTS.
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 26 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. Since the on-going business
operations of the Company will essentially cease upon the Closing
of the Sale of Assets to LOTS, the Company does not expect any
material costs, problems or uncertainties associated with the Year
2000 issues.
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 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 efficiency 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 regulation varies from state to state, but, in general,
each state has statutory restrictions and a supervisory agency
which has broad discretionary administrative powers. Such
regulation is designed primarily to protect policyholders and
relates to the licensing of insurers and their agents, the approval
of policy forms, the methods of computing financial statement
reserves, the form and content of financial reports and the type
and concentration of permitted investments. The Company's insurance
subsidiaries are subject to periodic examination by the insurance
departments in the states of their formation and are also subject
to joint regulatory agency examination and market conduct
examinations in the other states in which they are authorized to do
business.<PAGE>
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 LOTSIC, 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 in such capacities for a limited
period of time 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 Mr. Robertson are expected to serve
in their current capacities until the liquidation is substantially
complete or, if the Board of Directors elects to transfer the
Company's net assets to a Liquidating Trust, until such transfer
occurs, at which time certain of those individuals may be appointed
as trustees of the Liquidating Trust. Mr. Zullinger is expected to
serve in his current capacity until approximately July 1, 1998.
The Directors will receive a quarterly retainer equal to $375
and fees of $300 for each Board of Directors' meeting they attend
and $150 for each committee meeting they attend, provided the
committee meeting is held on the same day as the Board meeting. A
$300 fee will be paid for each committee meeting held on a day
other than the day of a Board meeting. Beginning in 1998, total
compensation to the Directors will not only be reduced as a result
of the reduction in the number of Directors but will also decline
because Board of Directors' meetings will be held quarterly instead
of monthly. Mr. Robertson will only receive compensation as a
Director. Mr. Zullinger will receive compensation based on an
annual salary of $99,500.
Neither Mr. Robertson nor any of the Directors of either the
Company or its 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 equal to his annual salary, as
approved by the Board of Directors. In addition, the Company's
other remaining officers and employees will receive severance
payments from the Company, based generally on years of service and
compensation level, as also approved by the Board of Directors.
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 contract 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 material provisions 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.
<PAGE>
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 portion 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 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 the
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 incurred 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
writing 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
IX 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 does not intend to waive
any material conditions, representations and covenants without a
resolicitation of its shareholders.
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. 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) 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 the Company or if any of the conditions
precedent to LOTS' obligations shall not have been satisfied on or
before the Closing, (iii) by the Company, if there has been a
material misrepresentation or breach of a warranty, covenant or
other agreement by LOTS or if any of the conditions precedent to
the Company's obligations shall not have been satisfied on or
before the Closing, or (iv) if the transactions contemplated are
not consummated on or before January 31, 1998, provided, however,
the Asset Purchase Agreement shall not terminate if the Closing has
not occurred due to a delay in receiving either the required
regulatory or shareholder approvals 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. The parties have
agreed to extend the Closing until May 31, 1998 in order to receive
the required regulatory and shareholder approvals.
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 shareholders, consent to any
amendment or grant any waiver which reduces the consideration 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 or can be carried forward
and utilized to offset any future 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
transfer 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 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. 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 liquidating 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 remaining 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>
<CAPTION>
Estimated Range
Proforma of Liquidating
Amount Distributions
at to holders of
(in thousands, except per share amounts) September 30, Common Stock
1997 Low High
<C> <S> <S> <S>
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 2,599 2,599
Amount per share $0.83 $1.79
</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. The high
range amount is 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 and 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.
Both amounts are net of income taxes.
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.
The estimated range of liquidating distributions presented
above assumes that a liquidating trust was not utilized to complete
the liquidation and shareholder distribution process. If, after
further review, the Board of Directors determines that the use of a
liquidating trust is appropriate under the circumstances and
represents the best alternative for liquidating the Company, a
trust wwill be formed and the Company s net assets will be
transferred into the trust. The use of a liquidating trust is
expected to increase the amounts otherwise distributable to the
holders of Common Stock because it should reduce the amount of
income taxes incurred by the Company during the liquidation period.
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 February
9, 1998, 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 March 31, 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
dissolution 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 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 Liquidating 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 distribution 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, approval of the trustees would be
required to take any action and the trust would be irrevocable and
would terminate after the trust property has been fully distributed
to the shareholders of the Company.
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 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 shareholders 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 shareholder. 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 or loss recognized by a shareholder will be
capital gain or loss provided the shares are held as capital
assets. 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.
CONSEQUENCES ATTRIBUTABLE TO THE LIQUIDATING TRUST
If the Company transfers its remaining net assets (assets less
liabilities) to a liquidating trust, for Federal income tax
purposes, such net assets will be deemed to have been distributed,
on a pro rata basis, to each of the Company s shareholders and
simultaneously contributed by such shareholders to the liquidating
trust in exchange for a beneficial interest in the liquidating
trust which is proportionate to each shareholder s ownership
interest in the Company. The liquidating trust itself will not be
subject to tax; instead, each holder of a beneficial interest in
the liquidating trust will be treated as owning a pro rata share of
the net assets of the liquidating trust, and will be required to
take into account, for Federal income tax purposes, his or her
allocable portion of the items of income, deduction, gain or loss
recognized by the liquidating trust. Actual cash distributions from
the liquidating trust will be treated as reductions in such
holder s tax basis in the liquidating trust. As a result of the
transfer of net assets to the liquidating trust and the liquidating
trust s ongoing operations, shareholders should be aware that they
may be subject to tax, whether or not they have received any actual
distributions from the liquidating trust.
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 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, 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 January 30, 1998, 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 January 30, 1998, 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 or 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 dividends 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 Company 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
h a ve 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
P r e f erred 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,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
Total revenues (before reinsurance ceded) $23,251 $26,818 $33,602 $37,430 $38,534 $37,169 $34,864
Premiums written
(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. It 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 forma 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> <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
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(UNAUDITED)
(a) T o 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) T o r eflect 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)<PAGE>
<TABLE>
<CAPTION> 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)
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)<TABLE>
<CAPTION> Pro Forma Adjustments
Automotive
Resource
(IN THOUSANDS, EXCEPT PER SHARE DATA) Historical Division Other Pro Forma
<S> <C> <C> <C> <C>
Income (loss) per common and common
equivalent share:
Loss from continuing operations ($1.20) ($0.83)
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
</TABLE>
(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 continuing overhead and other corporate costs
allocated to the Automotive Resource Division's operating
results. Such costs will not be eliminated as a result of
the Sale of Assets.
(d) To reflect the after-tax cost of severance payments to
terminated employees.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Adjustments
(in thousands, Automotive
except per share 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
continuing operations (1,081) 1,186 (199) (94)
</TABLE>
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION> 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)
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
</TABLE>
(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 continuing overhead and other corporate costs
allocated to the Automotive Resource Division's operating
results. Such costs will not be 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.
<TABLE>
<CAPTION>
Amount and
Title Nature of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
<S> <C> <C>
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
</TABLE>
(1) The Company's Employee Stock Ownership Plan is an employee
benefit plan which is subject to the Employee Retirement
I n c o m e 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.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
TITLE OF Name of Beneficial of
CLASS Beneficial Owner Ownership (1) Class
<S> <C> <C> <C>
(a)
Common Groninger, John E. 57,521 (2) 1.9
Preferred 22,410 (3) 4.4
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 365,408 (10) 11.8
Preferred Executive 29,263 5.7
Officers as a Group
(9 individuals)
</TABLE>
* Denotes less than 1%
(1) Except where otherwise indicated, the beneficial owner of the
shares exercises sole voting and investment power.
(2) Includes 42,542 shares owned by Mr. Groninger's wife.
(3) Includes 1,000 shares owned by Mr. Groninger's wife.
(4) Shared investment and voting power with their 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 appreciation 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) 730-6320.
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 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
c o n solidated 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
i n c orporated 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
i n f o rmation 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.<PAGE>
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) 730-6320.
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.<PAGE>
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
t h e 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 November 1996, 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: February ___, 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 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
S h a reholders to be held on March ___, 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 the 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
the 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
S h areholders to be held on March ____, 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 the 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
the 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.
