SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
717-730-6306
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 14, 2002
------------------------ -------------------
$.01 Stated Value 5,276,810 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION NUMBER
-------------------------------- ------
Item 1. Consolidated Financial Statements:
Balance Sheets - September 30, 2002 and
December 31, 2001 3
Statements of Operations and Comprehensive Income
- For the Nine and Three Months Ended September
30, 2002 and 2001 4
Statements of Cash Flows - For the Nine Months
Ended September 30, 2002 and 2001 5
Notes to Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
CERTIFICATIONS
--------------
Pursuant to Section 302 of Sarbanes-Oxley Act 20-21
Pursuant to Section 906 of Sarbanes-Oxley Act 22-23
Consumers Financial Corporation Page 2
Form 10-Q September 30, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER DECEMBER
30, 31,
2002 2001
-------------------------------------------------------------------------------------------------------
(Unaudited) (See Note 2)
ASSETS
Current assets:
Cash and cash equivalents $ 236,902 $ 1,802,265
Marketable securities, at fair value (cost, $874,867) 929,569
Receivables 1,070 14,104
Prepaid expenses 51,605 38,288
Other 21,675
------------ -------------
Total current assets 289,577 2,805,901
Restricted cash held in escrow account 331,434
Prepaid insurance 52,851
Value of insurance licenses and charter 26,750
------------ -------------
Total assets $ 673,862 $ 2,832,651
============ =============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Accounts payable $ 5,515 $ 48,545
Unclaimed property 159,477
Severance pay 177,962
Preferred dividends payable 96,181
Other 1,771 1,224
------------ -------------
Total liabilities 7,286 483,389
------------ -------------
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 2002, 75,326 shares, 2001, 452,614
shares; redemption amount 2002, $753,260, 2001, $4,526,140 739,209 4,428,381
------------ -------------
Shareholders' equity deficiency:
Common stock, $.01 stated value, authorized 10,000,000
shares; issued and outstanding, 2002, 5,276,810 shares,
2001, 2,576,810 shares 52,768 25,768
Capital in excess of stated value 8,938,865 6,745,052
Deficit (9,064,266) (8,904,641)
Accumulated other comprehensive income, net unrealized
appreciation of debt securities 54,702
------------ -------------
Total shareholders' equity deficiency (72,633) (2,079,119)
------------ -------------
Total liabilities, redeemable preferred stock and shareholders'
equity deficiency $ 673,862 $ 2,832,651
============ =============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------
(See Note 2) (See Note 2)
Non-operating revenues:
Net investment income $ 44,295 $ 122,705 $ 6,320 $ 33,243
Net realized investment gains 242,480
Other income:
Proceeds from settlement of litigation 255,000 255,000
Miscellaneous 41,192 91,255 222 7,124
--------------- --------------- --------------- --------------
582,967 213,960 261,542 40,367
--------------- --------------- --------------- --------------
Non-operating expenses:
Salaries and employee benefits 123,080 132,616 33,507 44,514
96,920
Professional fees 121,632 34,787 37,325
Other fees 55,817 17,950 7,144 6,981
Insurance 64,537 34,176 38,730 12,050
Litigation settlement costs 216,000 216,000
Write-down of value of insurance licenses 80,250 27,250
Taxes, other than income 22,114 38,727 6,159 10,329
Miscellaneous 56,610 74,578 17,326 18,143
--------------- --------------- --------------- --------------
419,078 715,929 137,653 372,592
--------------- --------------- --------------- --------------
Income (loss) before income taxes 163,889 (501,969) 123,889 (332,225)
Income taxes
--------------- --------------- --------------- --------------
Net income (loss) 163,889 (501,969) 123,889 (332,225)
Other comprehensive income, change in
unrealized appreciation of debt securities (54,702) 40,692 38,473
--------------- --------------- --------------- --------------
Comprehensive income (loss) $ 109,187 ($461,277) $ 123,889 ($293,752)
=============== =============== =============== ==============
Per share data:
Basic and diluted loss per common share ($0.05) ($0.31) ---- ($0.17)
=============== =============== =============== ==============
Weighted average number of common
shares outstanding 2,909,419 2,577,883 3,574,636 2,577,291
=============== =============== =============== ==============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 4
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
----------------------------------------------------------------------------------------------------
(See Note 2)
Cash flows from operating activities:
Net income (loss) $ 163,889 ($501,969)
--------------- ---------------
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Collection of receivable from joint venture partner 287,441
Change in receivables 21,431 25,529
Change in prepaid expenses (13,317) (11,637)
Gain on sale of investments (56,448)
Gain on sale of insurance licenses (178,483)
Write-down of value of insurance licenses 80,250
Payment of employee severance liability (177,962)
Change in other liabilities (69,841) (135,980)
Other (53,439) (10,813)
--------------- ---------------
Total adjustments (528,059) 234,790
--------------- ---------------
Net cash used in operating activities (364,170) (267,179)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of investments 945,181 24,600
Proceeds from sale of insurance licenses, net of
selling expenses of $44,767 and liability assumed
by buyer of $132,120 73,113
Cash deposited into preferred stock escrow account (331,434)
--------------- ---------------
Net cash provided by investing activities 686,860 24,600
--------------- ---------------
Cash flows from financing activities:
Purchase of redeemable preferred stock (1,660,067) (11,896)
Cash dividends to preferred shareholders (335,986) (289,392)
Proceeds from issuance of common stock 108,000
--------------- ---------------
Net cash used in financing activities (1,888,053) (301,288)
--------------- ---------------
Net decrease in cash (1,565,363) (543,867)
Cash at beginning of period 1,802,265 2,478,716
--------------- ---------------
Cash at end of period $ 236,902 $ 1,934,849
=============== ===============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 5
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products
business, which had been its only remaining business operation, following
the sales in 1994 and 1997 of all of its universal life insurance business
and the 1996 sale of its auto auction business. Since 1998, the Company has
had no business operations and its revenues and expenses have consisted
principally of investment income on remaining assets and corporate and
other administrative expenses.
In March 1998, the Company's shareholders approved a Plan of Liquidation
and Dissolution (the Plan of Liquidation) pursuant to which the Company
began liquidating its remaining assets and paying or providing for all of
its liabilities. However, as discussed more fully in Note 3, in February
2002, the Company entered into an option agreement with CFC Partners, Ltd.,
a New York investor group (CFC Partners), pursuant to which CFC Partners
could obtain a majority interest in the Company's common stock. In August
2002, the option was exercised and 2,700,000 new common shares
(approximately 51.2% of the outstanding shares) were issued by the Company
to CFC Partners. As a result of the acquisition of the Company, the Plan of
Liquidation was discontinued.
As a result of the approval of the Plan of Liquidation, the Company adopted
a liquidation basis of accounting for the period from March 25, 1998 to
August 28, 2002. Under this basis of accounting, assets were stated at
their estimated net realizable values and liabilities were stated at their
anticipated settlement amounts. As a result of the acquisition of the
Company by CFC Partners and the related termination of the Plan of
Liquidation, effective August 29, 2002, the Company re-adopted accounting
principles applicable to going concern entities. Furthermore, as discussed
in Note 2, the Company has restated its liquidation-basis financial
statements for prior periods to conform such statements to the current
presentation.
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its former wholly-owned subsidiary, Consumers
Life Insurance Company (Consumers Life) until June 19, 2002 when Consumers
Life was sold.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's financial
position as of September 30, 2002, the results of its operations for the
nine and three months ended September 30, 2002 and 2001 and the changes in
its cash flows for the nine months ended September 30, 2002 and 2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial
Consumers Financial Corporation Page 6
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING (CONTINUED):
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's 2001 Form 10-K.
The results of operations for the nine and three months ended September 30,
2002 are not necessarily indicative of the results to be expected for the
full year.
2. RESTATEMENT OF FINANCIAL STATEMENTS:
In connection with the acquisition of the Company by CFC Partners on August
28, 2002, as described in Note 3, and the related termination of the Plan
of Liquidation, the Company re-adopted accounting principles applicable to
going-concern entities as of that date. The Company's consolidated
financial statements had been prepared using a liquidation basis of
accounting since March 25, 1998 when the Plan of Liquidation was approved
by the Company's shareholders. In order to provide comparative financial
information, the Company has restated its liquidation-basis financial
statements for prior periods to conform to the current presentation which
utilizes accounting principles applicable to going-concern entities.
Accordingly, in the accompanying consolidated financial statements, the
Statement of Net Assets in Liquidation as of December 31, 2001 and the
Statement of Changes in Net Assets in Liquidation for the nine and three
months ended September 30, 2001, as originally prepared on a liquidation
basis of accounting, have been replaced by a Balance Sheet, Statement of
Operations and Statement of Cash Flows.
At December 31, 2001, the Company's net assets in liquidation, as
originally reported, were zero. For the nine and three months ended
September 30, 2001, the Company originally reported an excess of expenses
over revenues of $422,000 and $305,000, respectively.
3. ACQUISITION OF THE COMPANY:
On August 28, 2002, CFC Partners exercised its option to acquire 2,700,000
shares of the Company's common stock. The option was granted to CFC
Partners through an option agreement dated February 13, 2002. The option
price of $108,000 had previously been deposited by CFC Partners into an
escrow account held by the Company. The newly issued shares represent
approximately 51.2% of the outstanding common stock of the Company. Under
Pennsylvania laws, these new shares have no voting rights until CFC
Partners obtains the required approval from the remaining common
shareholders (see Note 10).
At an August 28 meeting of the Board of Directors, Donald J. Hommel, the
President of CFC Partners, was appointed as a Director of the Company to
fill an existing vacancy on the Board. Following such appointment, the
Company's officers resigned and the Board elected Mr. Hommel as the
Company's President and Chief Executive Officer. In addition, the Company's
two Directors, other than Mr. Hommel,
Consumers Financial Corporation Page 7
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
3. ACQUISITION OF THE COMPANY (CONTINUED):
also resigned as planned. At a subsequent meeting of the Board of
Directors, an additional Director was appointed to fill an existing vacancy
and additional officers were elected.
In connection with the issuance of the new shares to CFC Partners, the
Board of Directors also terminated the Plan of Liquidation. The Board had
previously determined that selling the Company for its value as a "public
company shell" was a better alternative for the shareholders than the Plan
of Liquidation, inasmuch as the common shareholders were not expected to
receive any distribution in a liquidation of the Company. The preferred
shareholders were given an opportunity to exchange their shares for cash in
a tender offer completed by the Company on August 23, 2002 (see Note 8).
CFC Partners has indicated that it intends to pursue strategic alliances as
well as a merger or combination of existing businesses with the Company. In
connection with strategic alliances, the Company will initially focus on
partnering with companies specializing in construction management and real
estate development. In furtherance of its plans for the construction
management business, CFC Partners is planning to establish, through the
Company or a to-be-formed subsidiary of the Company, a dealer network for
the sale of residential and commercial conservatories manufactured in the
United Kingdom. With respect to the real estate development business, which
would also be operated through a to-be-formed subsidiary of the Company,
CFC Partners initially intends to acquire residential apartment and
commercial office buildings in the states of Illinois and New York. These
properties would be upgraded as necessary to enhance their value and, where
possible, converted into either co-op or condominium units. This plan would
be expanded to other metropolitan locations in the future.
4. RESTRICTED ASSETS
As required by the terms of the option agreement with CFC Partners, the
Company deposited $331,434 (representing the tender price of $4.40
multiplied by the 75,326 shares of preferred stock not tendered) into a
bank escrow account for the benefit of the remaining preferred
shareholders. The funds in this account, including any earnings thereon,
are restricted in that they may only be used by the Company to pay
dividends or make other distributions to the preferred shareholders. At
September 30, 2002, these assets consisted entirely of cash.
5. SALE OF STOCK OF CONSUMERS LIFE:
On June 19, 2002, the Company completed the sale of Consumers Life, its
only remaining subsidiary, to Black Diamond Insurance Group, Inc., a
Delaware corporation. The purchaser paid the Company $1,549,000 in cash and
assumed a $132,000 liability in connection with its acquisition of the
Consumers Life stock. The cash proceeds consisted of $1,299,000 for the
value of the underlying net assets of the
Consumers Financial Corporation Page 8
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
5. SALE OF STOCK OF CONSUMERS LIFE (CONTINUED):
subsidiary plus $250,000 for its state insurance licenses. The sale
transaction was approved by the Delaware Insurance Department on June 5,
2002.
6. INCOME TAXES:
Deferred income taxes represent the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
At September 30, 2002 and December 31, 2001, the Company had no material
deferred tax liabilities. At September 30, 2002, the Company's only
deferred tax assets consisted of (i) $2,001,000 arising from net operating
loss carry forwards and (ii) $4,457,000 arising from capital loss carry
forwards which are the result of the sale of the stock of Consumers Life.
These deferred tax assets, which totaled $6,458,000, have been fully offset
by a valuation allowance. At December 31, 2001, the Company's only material
deferred tax asset related to net operating loss carry forwards. This
deferred tax asset, which totaled $2,013,000, was also fully offset by a
valuation allowance.
No provision has been made in the consolidated financial statements for
income taxes on pre-tax income or on net unrealized appreciation of debt
securities because of the above referenced operating loss and capital loss
carry forwards, which have been fully offset by a valuation allowance.
7. COMMITMENTS AND CONTINGENCIES:
Certain claims have been filed or are pending against the Company. In the
opinion of management, based on opinions of legal counsel, adequate
reserves, if deemed necessary, have been established for these matters, and
their outcome will not have a significant effect on the financial condition
or future operating results of the Company. The Company has taken certain
income tax positions in previous years that it believes are appropriate. If
such positions were to be successfully challenged by the Internal Revenue
Service, the Company could incur additional income taxes as well as
interest and penalties. Management believes that the ultimate outcome of
any such challenges will not have a material effect on the Company's
financial statements.
In August 2002, the Company settled a claim it had against a former tenant
for unpaid rent and other losses incurred by the Company as a result of the
tenant's alleged breach of the lease agreement. This settlement also
resolved an immaterial counterclaim the defendant had filed against the
Company. The settlement resulted in the receipt by the Company of $55,000.
Prior to the collection of this amount, the Company did not reflect any
amount due from the former tenant in its financial statements because of
the uncertainty as to both the amount which might be received and the
collectability of such amount.
Consumers Financial Corporation Page 9
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
8. REDEEMABLE PREFERRED STOCK:
On August 23, 2002, the Company completed a tender offer to all of its
preferred shareholders, pursuant to which it purchased 377,288 shares
(approximately 83.4% of the shares outstanding) at $4.40 per share plus
accrued dividends. The tender offer was completed in conjunction with and
was a condition to the exercise of the option by CFC Partners. Since all of
the Company's remaining assets would have been distributed to the preferred
shareholders if the Company had been liquidated, the Board of Directors
believed that the exercise of the option (and the related termination of
the Plan of Liquidation) should not take place until the preferred
shareholders had been given a chance to exchange their shares for cash.
The terms of the redeemable preferred stock require the Company to make
annual payments to a sinking fund. Such payments were to have commenced on
July 1, 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements
by an amount equal to the redemption value ($10 per share) of the shares
acquired. As a result of the Company's purchases of preferred stock in the
open market and in the tender offer described above, no sinking fund
payment for the preferred stock is due until July 1, 2006. However, in
connection with the exercise of the option by CFC Partners, the Company
deposited $331,434 into a bank trust account for the benefit of the
remaining preferred shareholders (see Note 4).
Consumers Financial Corporation Page 10
Form 10-Q September 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
9. PER SHARE INFORMATION:
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
--------------- -------------- --------------- --------------
Net income (loss) $ 163,889 ($501,969) $ 123,889 ($332,225)
Preferred stock dividends (239,806) (289,391) (47,445) (96,180)
Accretion of carrying value of preferred stock (83,708) (14,210) (74,821) (4,915)
--------------- -------------- --------------- --------------
Numerator for basic loss per share - income
(loss) attributable to common shareholders (159,625) (805,570) 1,623 (433,320)
Effect of dilutive securities 0 0 0 0
--------------- -------------- --------------- --------------
Numerator for diluted loss per share ($159,625) ($805,570) $ 1,623 ($433,320)
=============== ============== =============== ==============
Denominator for basic loss per share -
weighted average shares outstanding 2,909,419 2,577,883 3,574,636 2,577,291
Effect of dilutive securities 0 0 0 0
--------------- -------------- --------------- --------------
Denominator for diluted loss per share 2,909,419 2,577,883 3,574,636 2,577,291
=============== ============== =============== ==============
Basic and diluted loss per common share ($0.05) ($0.31) ---- ($0.17)
=============== ============== =============== ==============
10. SUBSEQUENT EVENT:
On November 18, 2002, the Company filed preliminary proxy solicitation
materials with the Securities and Exchange Commission in connection with a
Special Meeting of shareholders to be held January 9, 2003. At the Special
Meeting, the Company's common shareholders will be asked to consider and
vote upon a proposal to reinstate the voting rights of the 2,700,000 shares
of common stock owned by CFC Partners. Because these shares represent more
than 20% of the total outstanding shares of the Company, under Pennsylvania
law, CFC Partners is not entitled to vote the shares with respect to any
matters unless and until the voting rights of the shares are reinstated by
the affirmative vote of the majority of the Company's outstanding common
shares (excluding the shares held by CFC Partners).
Consumers Financial Corporation Page 11
Form 10-Q September 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's financial
condition at September 30, 2002 and its results of operations for the nine and
three months ended September 30, 2002 is presented below. Information relating
to the nine and three months ended September 30, 2001 is also presented for
comparative purposes. This analysis should be read in conjunction with the
Consolidated Financial Statements and the related Notes appearing elsewhere in
this Form 10-Q and in the Company's 2001 Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At a special meeting of shareholders held on March 24, 1998, the Company's
preferred and common shareholders approved the sale of the Company's credit
insurance and related products business, which was the Company's only remaining
business operation. In connection with the sale of its in force credit
insurance business, the Company also sold its credit insurance customer accounts
and one of its life insurance subsidiaries. At the special meeting, the
shareholders also approved a Plan of Liquidation and Dissolution (the Plan of
Liquidation), pursuant to which the Company would be liquidated and dissolved.
The Plan of Liquidation permitted the Board of Directors to continue to
consider other alternatives to liquidating the Company. Because the common
shareholders would not receive a distribution under the plan of liquidation and
dissolution, and the preferred shareholders would receive less than the full
liquidation value of their shares, the Board of Directors determined that
selling the Company for its value as a "public company shell" was a better
alternative for the common and preferred shareholders than liquidating the
Company. Accordingly, in August 2001, the Company sent request for proposal
letters to several investor groups that had expressed an interest in acquiring
the Company and issued a press release soliciting similar offers. In October
2001, the Board of Directors met to consider three offers which were received,
one of which was from CFC Partners, Ltd. (CFC Partners). Following its review
of each offer, the Board determined that the offer from CFC Partners was the
best offer. In February 2002, the Company and CFC Partners entered into an
option agreement which permitted CFC Partners to acquire a 51.2% interest in the
Company at $.04 per share. The option held by CFC Partners was exercisable
within 15 business days following the completion by the Company of a tender
offer to the preferred shareholders. The completion of this tender offer was,
in turn, dependent on the sale of the Company's remaining insurance subsidiary,
since substantially all of the Company's assets were held by the subsidiary and
state insurance laws would not permit the withdrawal of those assets.
Consumers Financial Corporation Page 12
Form 10-Q September 30, 2002
In June 2002, the Company completed the sale of the insurance subsidiary.
In July 2002, the Board of Directors approved a tender offer to the Company's
preferred shareholders at a price of $4.40 per share, and on July 19, 2002,
tender offer materials were mailed to the holders of the preferred stock. On
August 23, 2002, the Company purchased 377,288 shares of preferred stock, or
83.4% of the total preferred shares outstanding, from those shareholders who
elected to tender their shares.
On August 28, 2002, the Board of Directors terminated the Plan of
Liquidation and authorized the issuance of 2,700,000 shares of common stock to
CFC Partners. Donald J. Hommel, the president of CFC Partners, was also
appointed as a Director of the Company to fill an existing vacancy on the Board.
Following such appointment, the Company's officers resigned and the Board
elected Mr. Hommel as the Company's President and Chief Executive Officer. In
addition, James C. Robertson and John E. Groninger, who had been Directors of
the Company for more than 30 years, also resigned.
On October 17, 2002, the Board of Directors appointed Shalom S. Maidenbaum,
Esq. as an additional Director of the Company to fill an existing vacancy on the
Board. In addition, the Directors elected Mr. Hommel as the Company's Treasurer
and Mr. Maidenbaum as the Company's Vice President and Secretary.
As a result of the approval of the Plan of Liquidation, the Company adopted
a liquidation basis of accounting for the period from March 25, 1998 to August
28, 2002. Under this basis of accounting, assets were stated at their estimated
net realizable values and liabilities were stated at their anticipated
settlement amounts. As a result of the transaction with CFC Partners and the
related termination of the Plan of Liquidation, effective August 29, 2002, the
Company re-adopted accounting principles applicable to going concern entities.
Furthermore, as discussed in Note 2 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Form 10-Q, the Company has restated its
liquidation-basis financial statements for prior periods to conform such
statements to the current presentation.
At September 30, 2002, the Company had no business operations. CFC
Partners intends to pursue strategic alliances, as well as a merger or
combination of existing businesses with the Company. With respect to its plans
for strategic alliances, the Company will initially focus on partnering with
companies specializing in construction management and real estate development.
At September 30, 2002, the Company's shareholders' equity deficiency
totaled $72,633 compared to a shareholders' equity deficiency of $2,079,119 at
December 31, 2001. For the first nine months of 2002, the Company's net income
was $163,889 and dividends to preferred shareholders totaled $239,806.
RESULTS OF OPERATIONS
A discussion of the material factors which affected the Company's results
of operations for the nine and three months ended September 30, 2002 and 2001 is
presented below.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
For the nine months ended September 30, 2002, the Company reported net
income of $163,889 (a loss of $.05 per share because of preferred dividends)
compared to a net loss of $501,969 ($.31 per share) in the same period of 2001.
Consumers Financial Corporation Page 13
Form 10-Q September 30, 2002
The 2002 results were positively impacted by a $242,480 gain on the sale of the
Company's life insurance subsidiary and $255,000 in proceeds received from the
settlement of litigation and other disputes. The gain from the sale of the
insurance subsidiary includes a $178,483 gain from the sale of the insurance
licenses and the charter, a $56,448 gain from the transfer of appreciated bonds
to the buyer and $7,549 in other gains. Prior to the collection of the $255,000
in settlement proceeds, the Company had not reflected any amounts due from the
other parties in its financial statements because of the uncertainty as to both
the amounts which might be received and the collectability of such amounts.
Offsetting these non-recurring revenues were (i) a decline in investment income
(from $122,705 last year to $44,295 in 2002) due to both a decrease in the
Company's invested asset base and a decline in short-term interest rates, (ii)
an increase in insurance costs (from $34,176 in 2001 to $64,537 in 2002) and a
$37,867 increase in other fees, primarily due to a $29,117 fee paid to the
custodian of the Company's retirement plan in connection with the termination of
a guaranteed investment contract held by the plan.
The Company's results in 2001 were adversely affected by a $216,000 charge
related to the settlement of certain litigation matters and an $80,250
write-down of the value of the state licenses and charter of the insurance
subsidiary, based on the Company's assessment at that time that the subsidiary
would be liquidated rather than sold.
For the nine months ended September 30, 2001, the Company originally
reported an excess of expenses over revenues of $421,719 under the liquidation
basis of accounting. This amount differs from the $501,969 of net income being
reported in the accompanying consolidated financial statements by $80,250, which
is the amount of the write-down of the value of the insurance licenses and
charter referred to above. Under liquidation accounting, this amount was
treated as an adjustment of assets to estimated net realizable value and was not
included in the determination of the excess of expenses over revenues.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
The Company's net income for the third quarter of 2002 was $123,889 (less
than $.01 per share) compared to a net loss of $332,225 ($.17 per share) in the
third quarter of 2001. The $255,000 in settlement proceeds, as discussed above,
was a significant factor in the level of net income reported for the third
quarter of 2002. For the same period in 2001, the Company reported a $216,000
charge in connection with the settlement of certain litigation matters, as well
as a $27,250 write-down of the value of the state insurance licenses and
charter.
FINANCIAL CONDITION
CAPITAL RESOURCES
The Company currently has no commitments for any capital expenditures.
However, if the Company develops certain planned strategic alliances or
identifies a target company to be merged or otherwise combined with the Company,
the Company's plans regarding capital expenditures and related commitments are
likely to change.
For the nine months ended September 30, 2002, the Company's cash and cash
equivalents decreased by $1,565,363 (from $1,802,265 at the beginning of the
year to $236,902 at September 30, 2002. The decrease is principally the result
of the Company's tender offer to its preferred shareholders. In August 2002,
the Company paid $1,660,067 to acquire the 377,288 shares which were tendered.
Consumers Financial Corporation Page 14
Form 10-Q September 30, 2002
The Company also paid $335,986 in dividends to the preferred shareholders. (As
a result of the tender offer, the Company's current preferred dividend
requirement has been reduced from $96,180 per quarter to $16,007). Further, in
connection with the acquisition of a majority interest in the Company by CFC
Partners, the Company deposited cash in the amount of $331,434 into a bank
escrow account for the benefit of the preferred shareholders who did not tender
their shares. These decreases in available cash were partially offset by
$945,181 in proceeds received from the sale of bonds which were transferred to
the buyer of the Company's insurance subsidiary.
The Company's shareholders' equity deficiency decreased significantly
during the nine months ended September 30, 2002. The deficiency totaled
$2,079,119 at the end of 2001 compared to a deficiency of $72,633 at September
30, 2002. The reduction in the amount of the deficiency is principally due to
the Company's purchase of 377,288 shares of its preferred stock in August 2002
at $4.40 per share, which was less than the $9.78 per share carrying value of
such shares at the end of 2001. Net income of $163,889 further reduced the
deficiency, but was more than offset by preferred shareholder dividends for the
period of $239,806.
LIQUIDITY
Historically, the Company's subsidiaries met most of their cash
requirements from funds generated from operations, while the Company generally
relied on its principal operating subsidiaries to provide it with sufficient
cash funds to maintain an adequate liquidity position. While the Company was in
liquidation, its principal sources of cash funds were investment income and
proceeds from the sales of non-liquid assets. In connection with the
acquisition of the Company by CFC Partners, substantially all of the Company's
remaining liquid assets were used to complete a tender offer to the preferred
shareholders in August 2002.
Because the Company currently has no business operations, the adequacy of
the Company's liquidity position in the future will be dependent on its ability
to form strategic alliances with existing businesses or to acquire and/or
develop businesses with meaningful revenues and positive cash flows. The
Company currently has minimal cash resources. However, management believes that
new cash revenue sources will be developed before the Company's current cash
funds have been depleted.
REDEEMABLE PREFERRED STOCK
On August 23, 2002, the Company completed a tender offer to all of its
preferred shareholders, pursuant to which it purchased 377,288 shares
(approximately 83.4% of the shares outstanding) at $4.40 per share plus $47,445
in accrued dividends. The tender offer was completed in conjunction with and
was a condition to the exercise of the option by CFC Partners. Since all of the
Company's remaining assets would have been distributed to the preferred
shareholders if the Company had been liquidated, the Board of Directors
believed that the exercise of the option (and the related termination of the
Plan of Liquidation) should not take place until the preferred shareholders had
been given a chance to exchange their shares for cash.
The terms of the redeemable preferred stock require the Company to make
annual payments to a sinking fund. Such payments were to have commenced on July
1, 1998. The preferred stock terms also provide that any purchase of preferred
shares by the Company will reduce the sinking fund requirements by an amount
equal to the redemption value ($10 per share) of the shares acquired. As a
result of the Company's purchases of preferred stock in the open market and in
the tender offer, no sinking fund payment for the preferred stock is due until
July 1, 2006. However, in connection with the exercise of the option by CFC
Partners, the Company deposited $331,434 into a bank trust account for the
benefit of the remaining preferred shareholders (see Note 4 of the Notes to
Consolidated Financial Statements appearing elsewhere in this Form 10-Q).
Consumers Financial Corporation Page 15
Form 10-Q September 30, 2002
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at September 30, 2002 and December 31, 2001, the Company
qualifies as a "small business issuer" under Regulation S-B of the Federal
Securities Laws. A small business issuer is defined as any United States or
Canadian issuer with revenues or public float of less than $25 million.
ITEM 4. CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer/Chief Financial Officer
evaluated the Company's disclosure controls and procedures within 90 days of the
filing date of this quarterly report. Based upon this evaluation, the Company's
President and Chief Executive Officer/Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that it
files with the Securities and Exchange Commission.
There were no significant changes in the Company's internal controls or, to
the knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.
Consumers Financial Corporation Page 16
Form 10-Q September 30, 2002
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters discussed in Note 7 of the Notes to
Consolidated Financial Statements included elsewhere in this Form
10-Q, the registrant is not involved in any pending legal
proceedings other than routine litigation incidental to the
conduct of its previous business, nor have any such proceedings
been terminated during the three months ended September 30, 2002.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2002, there have been
no limitations or qualifications, through charter documents, loan
agreements or otherwise, placed upon the holders of the
registrant's common or preferred stock to receive dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2002, the registrant was not in default in
the payment of principal, interest or in any other manner on any
indebtedness and was current with all its accounts. In addition,
there was no arrearage in the payment of dividends on the
registrant's preferred stock. The quarterly dividend payable to
the registrant's preferred shareholders on October 1, 2002 was
declared by the Board of Directors on October 17, 2002 and paid
November 7.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the
registrant during the three months ended September 30, 2002. See
Note 10 of the Notes to Consolidated Financial Statements
regarding a planned special meeting of shareholders for the
purpose of considering and voting upon a proposal to reinstate
the voting rights of the 2,700,000 shares of Company's common
stock held by CFC Partners.
ITEM 5. OTHER INFORMATION
None
Consumers Financial Corporation Page 17
Form 10-Q September 30, 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Part I
------
(11) Statement re computation of per share earnings (iv)
(15) Letter re unaudited interim financial information (ii)
(18) Letter re change in accounting principles (ii)
(19) Report furnished to security holders (ii)
(23) Consents of accountants (ii)
Part II
--------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (i)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders,
including indentures (i)
(10) Material contracts (ii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (excluding accountants) (ii)
(24) Power of attorney (ii)
(99.1) Certification of Chief Executive Officer (Section 302 of
Sarbanes-Oxley Act) (iii)
(99.2) Certification of Chief Financial Officer (Section 302 of
Sarbanes-Oxley Act) (iii)
(99.3) Certification of Chief Executive Officer (Section 906 of
Sarbanes-Oxley Act) (iii)
(99.4) Certification of Chief Financial Officer (Section 906 of
Sarbanes-Oxley Act) (iii)
(i) Information or document provided in previous filing
with the Commission
(ii) Information or document not applicable to registrant
(iii) Information or document included as exhibit to this
Form 10-Q. Any exhibits to such information or
document are not included herein.
(iv) Information contained in consolidated financial
statements or related notes
(b) On September 4, 2002, the Company filed a Form 8-K announcing
that CFC Partners, Ltd. had acquired a 51.2% interest in the
common stock of the Company on August 28, 2002 through the
issuance of 2,700,000 authorized but previously unissued shares.
The Form 8-K further disclosed that at a meeting of the Company's
Board of Directors held on August 28, 2002, the following actions
were taken in connection with the issuance of the new shares: (i)
Donald J. Hommel, the president of CFC Partners, was appointed as
a Director of the Company to fill an existing vacancy on the
Board, (ii) the Board accepted the resignations of the Company's
officers, (iii) Mr. Hommel was named as the Company's president
and chief executive officer and (iv) James C. Robertson and John
E. Groninger resigned as Directors of the Company.
Consumers Financial Corporation Page 18
Form 10-Q September 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
---------------------------------
Registrant
Date November 18, 2002 By /S/ Donald J. Hommel
----------------- -------------------------------------
Donald J. Hommel
President and Chief Executive Officer
Date November 18, 2002 By /S/ Donald J. Hommel
----------------- -------------------------------------
Donald J. Hommel
Chief Financial Officer
Consumers Financial Corporation Page 19
Form 10-Q September 30, 2002