SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002
[ ] 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.)
1525 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
(717) 730-6306
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
-------------------- ------------------------------
registered
----------
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which
------------------- ------------------------------
registered Common stock (no par; voting) Not listed
----------
8 1/2% Preferred Stock Series A
(par value $1.00 per share; non-voting) Not listed
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days. Yes xx No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Based on the average of the closing bid and asked prices on June 28, 2002,
the aggregate market value of common stock held by non-affiliates of the
registrant was $322,101.
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the Company) was formed in 1966 as 20th
Century Corporation (a Pennsylvania corporation) and adopted its present name in
1980. The Company was an insurance holding company which, until late 1997, was a
leading provider, through its subsidiaries, of credit life and credit disability
insurance in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and
Virginia. In connection with its credit insurance operations, the Company also
marketed, as an agent, an automobile extended service warranty product. The
Company operated through various wholly-owned subsidiaries since it was formed;
however, as of December 31, 2002, all of these subsidiaries had either been sold
or liquidated and dissolved. From 1992 through 1997, the Company also sold all
of its inforce insurance policies to various third party insurers.
On March 24, 1998, the Company's shareholders 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 if such alternatives were deemed by the Board to be in the best interest
of the Company and its shareholders. It became apparent to the Board during 2001
that the common shareholders would not receive any distribution under the Plan
of Liquidation, and the preferred shareholders would receive less than the full
liquidation value of their shares. Consequently, the Board concluded 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 also 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 (the Option Agreement) which permitted CFC Partners to acquire
a 51.2% interest in the Company's common stock for $108,000, or $.04 per share.
The purchase price was deposited into an escrow account held by the Company in
March 2002.
The option held by CFC Partners was exercisable within 15 business days
following the completion by the Company of a tender offer to its preferred
shareholders. The completion of the 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 that subsidiary and state insurance laws would
not permit the withdrawal of those assets. In June 2002, the Company completed
the sale of the insurance subsidiary, and, in August 2002, the Company
purchased 377,288 shares of preferred stock (83.4% of the total shares
outstanding) from those shareholders who elected to tender their shares.
On August 28, 2002, CFC Partners exercised its option to acquire a majority
of the outstanding common shares of the Company. Accordingly, on that date, the
Board of Directors terminated the Plan of Liquidation and authorized the
issuance of 2,700,000 shares of common stock to CFC Partners. For additional
information regarding the acquisition of the Company by CFC Partners, see Note 4
of the notes to consolidated financial statements appearing elsewhere in this
Form 10-K.
The term "Company", when used herein, refers to Consumers Financial
Corporation and its subsidiary unless the context requires otherwise. The
Company's executive offices are located at 1525 Cedar Cliff Drive, Camp Hill,
Pennsylvania 17011. Its telephone number is (717) 761-4230. The Company also
maintains an office at 132 Spruce Street, Cedarhurst, New York 11516. Its New
York telephone number is (516) 792-0900.
OPERATIONS
Prior to the discontinuation of its previous business operations, as
discussed above, the Company operated in three industry segments: the Automotive
Resource Division, which marketed credit insurance and other products and
services to its automobile dealer customers, the Individual Life Insurance
Division and the Auto Auction Division.
2
At December 31, 2002, the Company had no business operations. CFC Partners
is currently pursuing various business opportunities for the Company, including
strategic alliances as well as the merger or combination of existing businesses
with the Company. In this regard, the Company will initially focus on partnering
with or acquiring companies in the real estate, construction management and
medical technology industries.
With respect to its plans for the real estate business, the Company intends
to acquire garden-type apartment complexes, initially in Illinois and New York
and later in other locations in the northeastern part of the United States. The
Company also expects to become involved in real estate development, initially in
the New York area and ultimately in other parts of the Northeast.
In connection with its construction management business, the Company,
through a to-be-formed subsidiary, intends to manage all of its real estate
development and other real estate activities. In addition, the Company will
pursue the management of outside projects on a select basis.
With regard to its medical technology business, the Company, through a
to-be-formed subsidiary, plans to develop, own and operate positron emission
tomography imaging (P.E.T.) centers initially in the New York area and later on
a regional basis. The Company is currently negotiating the terms of a potential
joint venture with a leading radiologist and operator of multiple radiology
centers. The Company is also exploring the possible acquisition of several full
service radiology centers in New York.
COMPETITION
Each of the industry segments in which the Company is planning to operate
is highly competitive. Many of the Company's potential competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. While the Company believes it can successfully compete in selected
niche markets in each of industry segments described above, there is no
assurance that the Company will be able to develop sufficient revenues and cash
flows from these businesses to operate profitably and compete effectively with
other companies.
REGULATION
Each of the industry segments in which the Company is planning to operate
is regulated by various laws enacted by federal, state and/or local
jurisdictions. The Company intends to develop appropriate internal procedures
and will rely on various external advisors to enable it to maintain compliance
with all existing laws and regulations. However, there is no assurance of
continued compliance if and when current laws and regulations change.
EMPLOYEES AND AGENTS
As of March 15, 2003, the Company had only two employees, who were also
officers of the Company. Neither Donald J. Hommel, the Company's president and
treasurer, nor Shalom S. Maidenbaum, the Company's secretary, currently receives
any compensation from the Company in his capacity as an officer and employee.
Mr. Hommel and Mr. Maidenbaum are also Directors of the Company and do receive
compensation in their capacity as Directors.
The Company maintains insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items. There can be no
assurance that the Company will be able to continue to obtain such coverage in
the future or that it will not experience uninsured losses.
ITEM 2. PROPERTIES
Prior to August 2000, the Company maintained its executive and business
offices in a building located at 1200 Camp Hill By-Pass, Camp Hill,
Pennsylvania. The office building contained approximately 44,000 square feet of
office space (approximately 39,000 square feet of leasable space). The Company
owned a 50% interest in this building and the other 50% interest was owned by a
third-party investor. In August 2000, the Company and its co-owner sold the
office building, and the Company reported a gain of approximately $274,000 on
the sale transaction.
3
From August 2000 until December 2002, the Company leased approximately
1,200 square feet of office space on a month-to-month basis at 1513 Cedar Cliff
Drive, Camp Hill, Pennsylvania. The monthly rent for this facility was $1,300.
The Company now leases approximately 400 square feet of office space on a
month-to-month basis at 1525 Cedar Cliff Drive, Camp Hill, Pennsylvania. The
monthly rent for this space is $400. The Company leases an additional 800 square
feet of office space in Cedarhurst, New York under a lease which expires on
December 31, 2003. The monthly rent for this space is $850 per month. Until
December 2002, the Company also leased approximately 1,100 square feet of
warehouse space for the storage of its records. The monthly rent for this space
was approximately $650. The Company terminated this lease as of December 31,
2002, and effective January 1, 2003, entered into a month-to-month lease for
approximately 550 square feet at a monthly rent of $325. The Company's office
space and warehouse space are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several lawsuits which are ordinary and routine
litigation incidental to the business operations it previously conducted. None
of these lawsuits is expected to have a materially adverse effect on the
Company's financial position or results of operations. See Note 10 of the notes
to consolidated financial statements appearing elsewhere in this Form 10-K for
additional information concerning litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 13, 2002, the Company mailed a proxy statement to its
shareholders in connection with a Special Meeting of Shareholders (the Special
Meeting). At the Special Meeting, which was held on January 9, 2003, the
Company's common shareholders were asked to vote upon a proposal to reinstate
the voting rights of the 2,700,000 shares of common stock of the Company owned
by CFC Partners. Under Pennsylvania law, the shares issued to CFC Partners
were not permitted to vote on any matters unless and until such voting rights
were restored by the holders of a majority of the outstanding common shares of
the Company, excluding the shares owned by CFC Partners. A total of 1,319,491
shares (or 50.99% of the outstanding shares entitled to vote) voted in favor of
the proposal to reinstate the voting rights of the CFC Partners shares, 24,069
shares (.93%) voted against the proposal and 14,633 shares (.57%) voted to
abstain with respect to this proposal. As a result of the Special Meeting, the
shares of common stock held by CFC Partners now have full voting rights.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Consumers Financial Corporation's common stock was traded on the NASDAQ
National Market System with a ticker symbol of CFIN until June 1, 1998 when it
was delisted by NASDAQ for non-compliance with NASDAQ's market value of public
float requirements. The Company's convertible preferred stock, series A, was
also traded on the NASDAQ National Market System until March 16, 1998, when it
was also delisted by NASDAQ for non-compliance with the public float requirement
of a minimum of 750,000 shares. Since the shareholders of the Company approved
the Plan of Liquidation and Dissolution on March 24, 1998, the Company did not
appeal the delisting decision for either the common or preferred stock, nor did
it take any steps to come into compliance with the new rules or attempt to seek
inclusion on the NASDAQ Small Cap Market. As a result of the acquisition of the
Company by CFC Partners, it is the Company's intention to become listed on a
national securities exchange.
Quarterly high and low bid prices for the Company's common and preferred
stock, based on information provided by The National Association of Securities
Dealers through the NASD OTC Bulletin Board, are presented below. Such prices do
not reflect prices in actual transactions and exclude retail mark-ups and
mark-downs and broker commissions.
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
2002 2002 2002 2002 2001 2001 2001 2001
Common Stock
------------
High 0.09 0.22 0.28 0.65 0.02 0.01 0.10 0.08
Low 0.03 0.07 0.09 0.15 0.01 0.01 0.01 0.04
Preferred Stock, Series A
-------------------------
High 3.70 3.86 4.20 4.00 3.75 3.75 3.00 3.40
Low 2.26 3.30 3.86 2.00 3.75 1.62 1.62 2.05
As of March 14, 2003, there were approximately 6,500 shareholders of record
who collectively held 5,276,781 common shares and 35 shareholders of record of
the preferred stock who held 75,326 shares. The number of record holders
presented above excludes individual participants in securities positions
listings.
Dividends on both the Company's common stock and preferred stock are
declared by the Board of Directors. No common stock dividends have been paid
since 1994. The payment of dividends on the common stock in the future, if any,
will be subordinate to the preferred stock, must comply with the provisions of
the Pennsylvania Business Corporation Law and will be determined by the Board of
Directors. In addition, the payment of such dividends will depend on the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant. See Note 11 of the
Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K
for a description of the restrictions on the Company's ability to pay dividends
to common shareholders. Dividends on the preferred stock are paid quarterly on
the first day of January, April, July and October at an annual rate of $.85 per
share. In January 2003, the Company announced that the Board of Directors had
not declared the quarterly dividend due January 1, 2003, and that such dividend
would not be paid when due so that the Company could conserve its cash
resources.
On August 28, 2002, the Company issued 2,700,000 new shares of its common
stock in connection with the purchase by CFC Partners of a 51.2% interest in the
Company. The Company received $108,000, or $.04 per share, as consideration for
the issuance of the new shares. The shares issued to CFC Partners have not been
registered pursuant to the Securities Act of 1933 (the Act) or any applicable
state securities laws, and, consequently, cannot be sold, transferred or
otherwise disposed of unless such shares are subsequently registered under the
Act or an exemption from registration is available at the time of any sale or
transfer.
5
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or derived
from the consolidated financial statements and the notes thereto.
(NOT COVERED BY INDEPENDENT AUDITOR'S REPORT)
Years Ended December 31,
2002 2001 2000 1999 1998
Non-operating revenues $ 584,589 $ 268,369 $ 949,066 $ 1,288,147 $ 2,323,447
Non-operating expenses 527,805 869,196 2,501,146 1,451,183 1,989,372
Income (loss) before income taxes 56,784 (600,827) (1,552,080) (163,036) 334,075
Income taxes --- --- --- --- 511,794
Net income (loss) 56,784 (600,827) (1,552,080) (163,036) (177,719)
Other comprehensive income (loss) (54,702) 27,539 44,015 (42,656) (28,218)
Comprehensive income (loss) $ 2,082 ($573,288) ($1,508,065) ($205,692) ($205,937)
Per share data: (a)
Basic and diluted loss per
common share: ($0.08) ($0.39) ($0.76) ($0.20) ($0.24)
Weighted average number of common
shares outstanding 3,501,238 2,577,701 2,578,231 2,942,847 2,587,668
December 31,
2002 2001 2000 1999 1998
Total assets $ 597,766 $ 2,832,651 $ 25,304,782 $44,539,301 $62,687,602
Total debt --- --- --- --- ---
Redeemable preferred stock 739,949 4,428,381 4,444,197 4,498,107 4,653,899
Shareholders' equity (deficiency) (196,485) (2,079,119) (1,124,157) (375,129) 543,306
Cash dividends declared per common
share NONE NONE NONE NONE NONE
(a) The per share data presented above has not been adjusted to reflect
the effects of a one-for-ten reverse stock split approved by the
Company's common shareholders on March 15, 2003 (see Note 13 of the
notes to consolidated financial statements appearing elsewhere in this
Form 10-K).
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's financial
condition at December 31, 2002 and its results of operations for the year then
ended is presented below. Information relating to 2001 and 2000 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-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K 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 inforce 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
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., a New York investor group (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.
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.
7
On October 17, 2002, the Board of Directors appointed Shalom S. Maidenbaum,
Esq. as a 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. On March 13, 2003, the
Board of Directors appointed William T. Konczynin as an additional Director to
fill an existing vacancy.
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 3 of the notes to consolidated financial
statements appearing elsewhere in this Form 10-K, the Company has restated its
liquidation-basis financial statements for prior periods to conform such
statements to the current presentation.
At December 31, 2002, the Company had no business operations, and its
revenues and expenses during the past five years have been non-operating in
nature. CFC Partners intends to pursue strategic alliances, as well as a merger
or combination of existing businesses with the Company. The Company is
initially focusing on joint ventures with or the acquisition of companies in the
real estate, construction management and medical technology businesses.
At December 31, 2002, the Company's shareholders' equity deficiency totaled
$196,485 compared to a shareholders' equity deficiency of $2,079,119 at December
31, 2001. For the year ended December 31, 2002, the Company's net income was
$56,784 compared to net losses in 2001 and 2000 of $600,827 and $1,552,080,
respectively. Dividends to preferred shareholders totaled $255,813, $385,572
and $390,669 in 2002, 2001 and 2000, respectively.
RESULTS OF OPERATIONS
A discussion of the material factors which affected the Company's results
of operations for the year ended December 31, 2002 is presented below.
Information for 2001 and 2000 is also presented for comparative purposes.
YEAR ENDED DECEMBER 31, 2002
For the year ended December 31, 2002, the Company reported net income of
$56,784, which translates into a loss of $.08 per share after deducting the
preferred dividend requirement. 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 its insurance licenses and charter, a $56,448
gain from the transfer to the buyer of appreciated bonds held by the subsidiary
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 not
only the amounts which the Company might be entitled to receive, as determined
by the courts or as a result of a settlement between the parties, but also the
collectability of such amounts.
The improved results in 2002 also reflect reductions in salaries and
professional fees compared to 2001. Partially offsetting the non-recurring
revenues and the reductions in salaries and fees referred to above were (i) a
decline in investment income (from $150,301 in 2001 to $45,300 in 2002) due to
both a decrease in the Company's invested asset base and a decline in short-term
interest rates and (ii) an increase in insurance costs (from $48,066 in 2001 to
$78,438 in 2002).
YEAR ENDED DECEMBER 31, 2001
The Company's net loss for the year ended December 31, 2001 was $600,827
($.39 per share). 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.
8
For 2001, the Company originally reported an excess of expenses over
revenues of $520,577 under the liquidation basis of accounting. This amount
differs from the $600,827 net loss 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.
Year Ended December 31, 2000
For the year ended December 31, 2000, the Company's net loss totaled
$1,552,080 ($.76 per share). The loss in 2000 was principally the result of a
$1,554,378 charge for pension expense in connection with the termination of the
Company's defined benefit pension plan. Of this amount, $1,122,227 had been
established as a liability in prior years through a direct charge to a
shareholders' equity account. Consequently, the termination of the pension plan
reduced the Company's shareholders' equity in 2000 by only $432,151. The Company
also reported approximately $188,000 in charges for the write-down of various
receivables. A $273,564 gain from the sale of the Company's home office building
and $199,876 in fee revenues from the sale by the Company of its credit
insurance customer accounts partially offset the charges discussed above.
For 2000, the Company originally reported an excess of expenses over
revenues of $1,823,225 under the liquidation basis of accounting. This amount
differs from the $1,552,080 of net loss being reported in the accompanying
consolidated financial statements by $271,145, a large portion of which
($208,782) represents an adjustment to the gain originally reported on the sale
of the Company's home office building in 2000. Under liquidation accounting, the
carrying value of the building had been increased by $208,782 in 1999 to reflect
the estimated net realizable value of the building.
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 year ended December 31, 2002, the Company's cash and cash
equivalents decreased by $1,636,507 (from $1,802,265 at the beginning of the
year to $165,758 at December 31, 2002). The decrease is principally the result
of the Company's tender offer to its preferred shareholders. As discussed more
fully below, in August 2002, the Company paid $1,660,067, or $4.40 per share, to
acquire the 377,288 shares which were tendered. During 2002, the Company also
paid cash dividends in the amount of $335,986 to the preferred shareholders. As
a result of the tender offer, the Company's preferred dividend requirement was
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. The
decreases in unrestricted 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 improved significantly during
2002. The deficiency totaled $2,079,119 at the end of 2001 compared to a
deficiency of $196,485 at December 31, 2002. The reduction in the amount of the
deficiency is primarily due to the Company's purchase of 377,288 shares of its
preferred stock 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 $56,784 further
reduced the deficiency, but was more than offset by preferred shareholder
dividends declared for the year of $255,813.
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.
9
At December 31, 2002, the Company had only $165,758 in cash and cash
equivalents. Furthermore, as of that date, the Company had no business
operations and no sources of operating revenues. As indicated above, CFC
Partners is currently pursuing various business opportunities for the Company,
including strategic alliances, as well as the merger or combination of existing
businesses with the Company. The new management of the Company intends to
initially focus on joint ventures with or acquisitions of companies in the real
estate, construction management and medical technology businesses. However,
there is no assurance that the Company's efforts in this regard will be
successful.
The adequacy of the Company's liquidity position and its ability to
continue as a going concern are dependent on the Company's success in developing
new cash revenue sources or, alternatively, in obtaining short-term financing
while its new businesses are being developed.
REDEEMABLE PREFERRED STOCK
As indicated above, 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 5 of the notes to
consolidated financial statements appearing elsewhere in this Form 10-K).
CRITICAL ACCOUNTING POLICIES
Management has reviewed the Company's accounting policies that are now in
effect and has determined that, based on the Company's current non-operating
status, there are no accounting policies which are deemed to be highly
subjective or require complex judgments.
INFLATION
Since the Company had no business operations at December 31, 2002, the
effects of inflation on the Company are currently minimal. If the Company is
successful in its plans to enter the real estate development, construction
management and medical technology businesses, the impact of inflation on the
Company's future operating results may change.
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at December 31, 2002, 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.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the preparation, integrity
and objectivity of the financial information contained in this Form 10-K. The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Such statements include informed estimates and judgments of management for those
transactions that are not yet complete or for which the ultimate effects cannot
be precisely determined. Financial information presented in this annual report
is consistent with that in the financial statements.
Accounting procedures and related systems of internal control have been
established to provide reasonable assurance that the books and records reflect
the transactions of the Company and that established policies and procedures are
properly implemented by qualified personnel. Such systems are evaluated
regularly to determine their effectiveness.
The consolidated financial statements for the years ended December 31,
2002, 2001 and 2000 have been audited by Stambaugh Ness, PC, independent
auditors. Such audits were conducted in accordance with auditing standards
generally accepted in the United States of America, and included a review of our
internal accounting control structure for the purpose of determining the nature,
timing and extent of audit procedures to be performed.
The Board of Directors monitors the financial and accounting operations of
the Company. The Board meets periodically with representatives of its
independent auditing firm to discuss the scope of the audit and related reports.
The Company's independent auditors have at all times full and free access to
the Board of Directors and its Audit Committee, without management present, to
discuss any matter that they believe should be brought to the attention of the
Board.
Donald J. Hommel
Chairman, Chief Executive Officer
and Chief Financial Officer
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance sheets of Consumers
Financial Corporation and subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity deficiency and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and the significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully described in Note 3 to the consolidated financial statements,
the Company has restated its liquidation-basis financial statements for periods
prior to December 31, 2002 to conform to the current presentation using
generally accepted accounting principles applicable to going-concern entities.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Financial
Corporation and subsidiary as of December 31, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has a shareholders'
equity deficiency at December 31, 2002 and has no operating revenues. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 15(a) are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. The amounts included in these schedules
have been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
STAMBAUGH NESS, PC
York, Pennsylvania
April 11, 2003
13
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
(See Note 3)
ASSETS
Current assets:
Cash and cash equivalents $ 165,758 $ 1,802,265
Marketable securities, at fair value (cost, $874,867) 929,569
Receivables 14,104
Prepaid expenses 30,420 38,288
Other 21,675
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 196,178 2,805,901
-----------------------------------------------------------------------------------------------------------------------------
Restricted cash held in escrow account 314,225
Prepaid insurance 87,363
Value of insurance licenses and charter 26,750
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ 597,766 $ 2,832,651
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Accounts payable $ 32,168 $ 48,545
Unclaimed property 159,477
Severance pay 177,962
Preferred dividends payable 96,181
Other 22,134 1,224
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 54,302 483,389
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, $4,526,140 739,949 4,428,381
---------------------------
Shareholders' equity deficiency:
Common stock, $.01 stated value, authorized 10,000,000 shares; issued and
outstanding 2002, 5,276,781 shares, 2001, 2,576,781 shares 52,768 25,768
Capital in excess of stated value 8,938,865 6,745,052
Deficit (9,188,118) (8,904,641)
Accumulated other comprehensive income, net unrealized appreciation
of debt securities 54,702
-----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity deficiency (196,485) (2,079,119)
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities, redeemable preferred stock and shareholders' equity deficiency $ 597,766 $ 2,832,651
=============================================================================================================================
See notes to consolidated financial statements.
14
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
(See Note 3) (See Note 3)
Non-operating revenues:
Net investment income $ 45,300 $ 150,301 $ 301,002
Net realized investment gains 56,448
Gain on sale of insurance licenses 178,483
Net fees from sale of customer accounts 199,876
Gain on sale of office building 273,564
Other income:
Joint venture fee income 35,307
Proceeds from settlement of litigation and other disputes 255,000
Miscellaneous 49,358 118,068 139,317
584,589 268,369 949,066
Non-operating expenses:
Salaries and employee benefits 148,661 195,816 214,682
Professional fees 114,624 146,964 253,903
Other fees 64,291 48,153 66,353
Litigation settlement costs 216,000
Write-down of value of insurance licenses 80,250
Pension expense 1,554,378
Write-down of fee income receivable 115,694
Write-off of other receivable 72,531
Insurance 78,438 48,066 48,447
Taxes, other than income 23,520 32,268 60,726
Miscellaneous 98,271 101,679 114,432
527,805 869,196 2,501,146
Income (loss) before income taxes 56,784 (600,827) (1,552,080)
Income taxes --- --- ---
Net income (loss) 56,784 (600,827) (1,552,080)
Other comprehensive income (loss), change in unrealized
appreciation/depreciation of debt securities (54,702) 27,539 44,015
Comprehensive income (loss) $ 2,082 ($573,288) ($1,508,065)
Per share data (see Note 13):
Basic and diluted loss per common share ($0.08) ($0.39) ($0.76)
Weighted average number of common shares outstanding 3,501,238 2,577,701 2,578,231
See notes to consolidated financial statements.
15
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY DEFICIENCY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Capital in
Common stock excess of Pension
-------------------- stated plan
Shares Amount value liability Deficit
------------------------------------------------------ ---------- -------- ----------- ------------- ------------
BALANCE, JANUARY 1, 2000 (SEE NOTE 3) 2,578,295 $25,783 $6,674,916 ($1,122,227) ($5,936,750)
Change in net unrealized depreciation of debt
securities for the year
Preferred stock dividends (390,669)
Provision for under funded pension plan 1,122,227
Accretion of difference between carrying value and (20,089)
mandatory redemption value of preferred stock
Purchase of common stock
Retirement of treasury shares, common (107) (1) (4)
Retirement of treasury shares, preferred 47,573
Net loss for the year (1,552,080)
------------------------------------------------------ ---------- -------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 2000 2,578,188 25,782 6,722,485 0 (7,899,588)
Change in net unrealized appreciation of debt
securities for the year
Preferred stock dividends (385,572)
Accretion of difference between carrying value and (18,654)
mandatory redemption value of preferred stock
Purchase of common stock
Retirement of treasury shares, common (1,407) (14) (46)
Retirement of treasury shares, preferred 22,613
Net loss for the year (600,827)
------------------------------------------------------ ---------- -------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 2001 2,576,781 25,768 6,745,052 0 (8,904,641)
Change in net unrealized appreciation of debt
securities for the year, net of reclassification
adjustment
Preferred stock dividends (255,813)
Accretion of difference between carrying value and (84,448)
mandatory redemption value of preferred stock
Issuance of common stock 2,700,000 27,000 81,000
Retirement of treasury shares, preferred 2,112,813
Net income for the year 56,784
------------------------------------------------------ ---------- -------- ----------- ------------- ------------
BALANCE, DECEMBER 31, 2002 5,276,781 $52,768 $8,938,865 $ 0 ($9,188,118)
------------------------------------------------------ ---------- -------- ----------- ------------- ------------
Accumulated
other
comprehensive
income Treasury stock, common Total
(loss) Shares Amount amount
------------------------------------------------------ --------------- ------- -------- -----------
BALANCE, JANUARY 1, 2000 (SEE NOTE 3) ($16,852) ($375,130)
Change in net unrealized depreciation of debt 44,015
securities for the year 44,015
Preferred stock dividends (390,669)
Provision for under funded pension plan 1,122,227
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (20,089)
Purchase of common stock (107) $ (5) (5)
Retirement of treasury shares, common 107 5 0
Retirement of treasury shares, preferred 47,573
Net loss for the year (1,552,080)
------------------------------------------------------ --------------- ------- -------- -----------
BALANCE, DECEMBER 31, 2000 27,163 0 0 (1,124,158)
Change in net unrealized appreciation of debt
securities for the year 27,539 27,539
Preferred stock dividends (385,572)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (18,654)
Purchase of common stock (980) (39) (39)
Retirement of treasury shares, common 980 39 (21)
Retirement of treasury shares, preferred 22,613
Net loss for the year (600,827)
------------------------------------------------------ --------------- ------- -------- -----------
BALANCE, DECEMBER 31, 2001 54,702 0 0 (2,079,119)
Change in net unrealized appreciation of debt
securities for the year, net of reclassification
adjustment (54,702) (54,702)
Preferred stock dividends (255,813)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (84,448)
Issuance of common stock 108,000
Retirement of treasury shares, preferred 2,112,813
Net income for the year 56,784
------------------------------------------------------ --------------- ------- -------- -----------
BALANCE, DECEMBER 31, 2002 $ 0 0 $ 0 ($196,485)
------------------------------------------------------ --------------- ------- -------- -----------
See notes to consolidated financial statements.
16
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
(See Note 3) (See Note 3)
Cash flows from operating activities:
Net income (loss) $ 56,784 ($600,827) ($1,552,080)
Adjustments to reconcile net income (loss) to cash flows
used in operating activities:
Collection of receivable from joint venture partner 287,441 168,674
Change in receivables 22,501 23,823 1,468
Change in prepaid expenses (31,882) (25,093) 30,193
Gain on sale of investments (56,448)
Gain on sale of insurance licenses (178,483)
Write-down of value of insurance licenses 80,250
Gain on sale of office building (273,564)
Change in employee severance liability (177,962) 587,934
Change in other liabilities (22,825) (130,326) (181,716)
Other (48,201) 48,835 (25,517)
Total adjustments (493,300) 284,930 307,472
Net cash used in operating activities (436,516) (315,897) (1,244,608)
Cash flows from investing activities:
Purchase of investments (9,278)
Proceeds from sale of investments 945,181 36,935 1,501,615
Proceeds from sale of office building 1,228,726
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,
net of withdrawal (314,225)
Net cash provided by investing activities 704,069 36,935 2,721,063
Cash flows from financing activities:
Purchase of redeemable preferred stock (1,660,067) (11,917) (26,432)
Cash dividends to preferred shareholders (351,993) (385,572) (390,669)
Proceeds from issuance of common stock 108,000
Net cash used in financing activities (1,904,060) (397,489) (417,101)
Net increase (decrease) in cash and cash equivalents (1,636,507) (676,451) 1,059,354
Cash and cash equivalents at beginning of year 1,802,265 2,478,716 1,419,362
Cash and cash equivalents at end of year $ 165,758 $ 1,802,265 $ 2,478,716
See notes to consolidated financial statements.
17
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. OVERVIEW AND BASIS OF PRESENTATION
The operating losses incurred by Consumers Financial Corporation and its
subsidiaries (the Company) from 1993 to 1997 significantly reduced the net worth
and liquidity position of the Company. 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 4, 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 total
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.
Immediately prior to the transaction with CFC Partners, the Company paid a
substantial portion of its remaining assets to its preferred shareholders in
connection with a tender offer to those shareholders (see Note 11).
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, as a result
of the cumulative effect of the events discussed above, at December 31, 2002,
the Company had only $165,758 in cash and cash equivalents and a shareholders'
equity deficiency of $196,485. Furthermore, as of that date, the Company had no
business operations and no sources of operating revenues. CFC Partners is
currently pursuing various business opportunities for the Company, including
strategic alliances, as well as the merger or combination of existing businesses
with the Company. The new management of the Company intends to initially focus
on joint ventures with or acquisitions of companies in the real estate,
construction management and medical technology businesses. However, there is no
assurance that the Company's efforts in this regard will be successful.
The Company's ability to continue as a going concern is dependent on its
success in developing new cash revenue sources or, alternatively, in obtaining
short-term financing while its new businesses are being developed. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
-----------------------------
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. Consumers Financial Corporation itself is also sometimes referred to
herein as the Company. All material intercompany accounts and transactions have
been eliminated.
Cash and cash equivalents
----------------------------
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Marketable securities
----------------------
Marketable securities consist of U.S. Treasury Notes. Management determines
the appropriate classification of these notes at the time of purchase and
reevaluates such designation as of each financial statement date. All of these
securities are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized appreciation and depreciation,
net of income taxes, if applicable, reported as a separate component of
shareholders' equity deficiency.
18
Interest on U.S. Treasury Notes is credited to income as it accrues on the
principal amounts outstanding, adjusted for amortization of premiums and
discounts computed by the interest method. Realized gains and losses and
provisions for permanent losses on investments are included in the determination
of results of operations. The "specific identification" method is used in
determining the cost of investments sold.
Fair values of financial instruments
------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Marketable securities: Fair values for U.S. Treasury securities are based
on quoted market prices.
Income taxes
------------
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Valuation allowances are established, if necessary, to
reduce the deferred income tax asset account to the amount that will more likely
than not be realized.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
3. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the acquisition of the Company by CFC Partners on August
28, 2002, as described in Note 4, 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 statements of changes in net assets
in liquidation for the years ended December 31, 2001 and 2000, as originally
prepared on a liquidation basis of accounting, have been replaced by a balance
sheet, statements of operations and comprehensive income, statements of
shareholders' equity deficiency and statements of cash flows.
At December 31, 2001, the Company's net assets in liquidation, as
originally reported, were zero. For the years ended December 31, 2001 and 2000,
the Company originally reported an excess of expenses over revenues of $520,577
and $1,823,225, respectively.
4. 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 represented approximately 51.2% of
the total outstanding common stock of the Company. Under Pennsylvania laws,
these new shares had no voting rights until the Company obtained the required
approval to reinstate such voting rights from the remaining common shareholders.
As more fully described in Note 14, a special meeting of shareholders was held
on January 9, 2003 (the Special Meeting), at which time the voting rights of the
shares of common stock held by CFC Partners were reinstated.
19
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, 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 March 2003, a third director was
appointed to the Board.
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 11).
5. RESTRICTED ASSETS
As required by the terms of the option agreement with CFC Partners, in
October 2002, the Company deposited $331,434 (representing the tender offer
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 holders of the preferred stock. At December 31,
2002, these assets consisted of $314,225 in money market funds.
Insurance laws required Consumers Life to deposit certain amounts with
various state insurance departments in order to maintain its licenses. The
approximate carrying amount of such deposits at December 31, 2001 was
$1,421,000.
6. SALE OF STOCK OF INSURANCE SUBSIDIARY
On June 19, 2002, the Company completed the sale of Consumers Life to Black
Diamond Insurance Group, Inc., a Delaware corporation. The Delaware Insurance
Department approved this transaction on June 5, 2002. The purchaser paid the
Company $1,548,846 in cash and assumed a $132,120 liability in connection with
its acquisition of the Consumers Life stock. The cash proceeds were based on the
following:
Value of underlying net assets of subsidiary:
Cash and cash equivalents $ 491,399
Marketable securities (U.S. Treasury Notes) 931,903
Other assets 7,664
Unclaimed property liability (132,120)
1,298,846
Value of state insurance licenses 250,000
Total consideration received $1,548,846
The sale of Consumers Life resulted in a gain to the Company of $242,480.
Prior to the sale of Consumers Life, dividends and other distributions to the
Company from the subsidiary were limited in that Consumers Life was required to
maintain minimum capital and surplus in each of the states in which it was
licensed, as determined in accordance with regulatory accounting practices.
Under Delaware insurance laws, distributions to the Company were subject to
further restrictions relating to capital and surplus and operating earnings.
Because of its prior operating losses and its capital and surplus position,
Consumers Life was not permitted to pay any dividends without prior approval
from the Delaware Insurance Department. Also, any loans or advances to the
Company were required to be reported to and approved by the Delaware Department.
During 2002, 2001 and 2000, the Delaware Insurance Department approved the
payment by Consumers Life of dividends totaling $1,481,510, $212,500 and
$160,000, respectively. Substantially all of the 2002 dividend was approved in
connection with the sale transaction.
20
7. MARKETABLE SECURITIES
Investments in marketable securities at December 31, 2001 were as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------------------------------
U.S. Treasury Notes $ 874,867 $ 54,702 $ 0 $ 929,569
======================================================================
The above securities were held by Consumers Life and were transferred to
the purchaser when Consumers Life was sold (see Note 6).
Net investment income consists of interest on the following investments:
Years ended December 31,
2002 2001 2000
--------------------------------------------------
Cash equivalents $20,638 $ 94,980 $127,083
Marketable securities 24,324 52,230 54,618
Mortgage loans 338 3,091 119,301
--------------------------------------------------
Total $45,300 $150,301 $301,002
==================================================
8. PROPERTY AND EQUIPMENT
December 31,
2002 2001
-------------------------------------------------------------------
Property and equipment:
Data processing equipment and software $ 25,725 $ 25,725
Furniture and equipment 17,365 21,344
-------------------------------------------------------------------
43,090 47,069
Less accumulated depreciation (43,090) (47,069)
-------------------------------------------------------------------
Balance $ 0 $ 0
===================================================================
9. PENSION AND OTHER RETIREMENT PLANS
As of March 22, 2000, the Company terminated its defined benefit pension
plan, and, following approval from the Pension Benefit Guaranty Corporation and
receipt of a favorable determination letter from the Internal Revenue Service,
distributed all benefits due under the plan in November and December 2000.
Benefits under this plan had been frozen as of July 31, 1996. The Company
contributed approximately $966,000 to the plan during 2000 so that the plan
could pay the required benefits to the participants.
Effective October 1, 1999, the Company also terminated its employee stock
ownership plan. In October 2000, following the receipt of a favorable
determination letter from the Internal Revenue Service, that plan's assets,
consisting principally of common stock of the Company, were also distributed to
the plan participants.
The Company's remaining defined contribution plan is designed to cover
substantially all full-time employees and provides for annual contributions by
the Company in amounts determined by the Board of Directors. Such contributions
are based upon the annual compensation of each employee. No contributions were
made in 2002. Company contributions were approximately $4,400 in 2001 and
$10,500 in 2000.
21
Net periodic pension cost for the year ended December 31, 2000 consisted of
the following:
Interest cost on projected benefit obligation $ 218,756
Expected return on plan assets (188,665)
Amortization of prior year losses 1,594,060
Other amortization and deferral (69,773)
----------------------------------------------------------
Net periodic pension cost $1,554,378
==========================================================
Rates used in determining pension expense for the year ended December 31,
2000 were as follows:
Discount rate (pre-retirement period) 6.35%
Discount rate (post-retirement period) 6.35%
Annual rate of return on plan assets 6.35%
Annual rate of increase in compensation N/A
10. CONTINGENCIES
In August 2001, the Company settled a claim made by a former general agency
with whom the Company had a partnership agreement. As a result of this
settlement, the Company agreed to pay the agency $210,000 in cash and to mark as
satisfied a $90,000 judgment the Company had previously been awarded against the
agency. The $90,000 receivable had been fully reserved in the Company's
financial statements.
In October 2000, the Company settled a dispute with the purchaser of its
credit insurance business. The purchaser claimed that the Company owed it
approximately $1,400,000 for investment earnings on the assets which were
transferred to the purchaser. In October 1999, the purchaser began withholding
from the Company the fee revenue payments which were contractually due to the
Company from the sale of the credit insurance accounts to partially offset the
amounts the purchaser believed were due from the Company. At September 30, 2000,
fee revenues totaling $421,000 had been withheld by the purchaser. Pursuant to
the terms of the settlement agreement, the purchaser paid the Company $250,000
in settlement of all prior amounts withheld and in lieu of any future fee
revenue payments.
Certain claims, suits and complaints arising in the ordinary course of
business 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 Company's financial position or results of
operations.
11. REDEEMABLE PREFERRED STOCK
The redeemable preferred stock has a liquidation preference of $10.00 per
share and is convertible at any time, unless previously redeemed, into shares of
common stock at the rate of 1.482 shares of common stock for each share of
preferred stock (equivalent to a conversion price of $6.75 per share). The
preferred stock is redeemable at the option of the Company at a redemption
price of $10.00 per share. Except in certain limited instances, the holders of
the preferred stock have no voting rights.
On August 23, 2003, the Company completed a tender offer to all of the
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 (see Note 4). Since all
of the Company's remaining assets would have been distributed to the holders of
the preferred stock 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.
22
The terms of the 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 5).
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. At December 31, 2002, the Company was not in arrears with
respect to the payment of dividends on the preferred stock. However, in January
2003, the Company announced that the Board of Directors had not declared the
quarterly dividend due January 1, 2003 and that such dividend would not be paid
when due so that the Company could conserve its cash resources.
When the Company is in arrears as to preferred dividends or sinking fund
appropriations for the preferred stock, dividends to holders of the Company's
common stock as well as purchases, redemptions or acquisitions by the Company of
shares of the Company's common stock are restricted. If the Company is in
default with respect to the payment of preferred dividends and the aggregate
amount of the deficiency is equal to four quarterly dividends, the holders of
the preferred stock shall be entitled, only while such arrearage exists, to
elect two additional members to the then existing Board of Directors.
The difference between the fair value of the preferred stock at the date of
issue and the mandatory redemption value is being recorded through periodic
accretions with an offsetting charge to the deficit. Such accretions totaled
$84,448, $18,654 and $20,089 in 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, 111,594 and 670,539 shares of common stock,
respectively, were reserved for the conversion of the preferred stock.
12. INCOME TAXES
At December 31, 2002 and 2001, the Company had no material deferred tax
liabilities. At December 31, 2002, the Company's only deferred tax assets
consisted of (i) $2,038,000 arising from net operating loss carry forwards and
(ii) $4,457,000 arising from capital loss carry forwards resulting from the sale
of the stock of Consumers Life. These deferred tax assets, which totaled
$6,495,000, 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.
For the year ended December 31, 2002, the Company intends to file a
consolidated Federal income tax return with Consumers Life, which will include
applicable income and deduction amounts through the date Consumers Life was
sold.
13. PER SHARE INFORMATION
Basic income (loss) per common share has been computed based upon the
weighted average number of common shares outstanding. Diluted per share
information is equivalent to basic per share information because the Company has
no potential common shares which are dilutive for any period presented in the
accompanying financial statements.
23
The following table sets forth the computation of basic and diluted per
share data.
Years ended December 31,
2002 2001 2000
Net income (loss) $ 56,784 ($600,827) ($1,552,080)
Preferred stock dividends (255,813) (385,572) (390,669)
Accretion of carrying value of preferred stock (84,448) (18,654) (20,089)
------------------------------------------------------------------------------------------------
Numerator for basic loss per share - loss attributable
to common shareholders (283,477) (1,005,053) (1,962,838)
Effect of dilutive securities 0 0 0
------------------------------------------------------------------------------------------------
Numerator for diluted loss per share ($283,477) ($1,005,053) ($1,962,838)
================================================================================================
Denominator for basic loss per share -
weighted average shares 3,501,238 2,577,701 2,578,231
Effect of dilutive securities 0 0 0
------------------------------------------------------------------------------------------------
Denominator for diluted loss per share 3,501,238 2,577,701 2,578,231
================================================================================================
Basic and diluted loss per common share ($0.08) ($0.39) ($0.76)
================================================================================================
The preferred stock is convertible into 111,594 shares of common stock (see
Note 11). None of the common shares contingently issuable upon the conversion
of the preferred stock have been included in the computation of diluted per
share information because the effect would be antidilutive.
As discussed in Note 14, on March 15, 2003, the Company's shareholders
approved a proposal to amend the Articles of Incorporation to effect a
one-for-ten reverse stock split. The stock split is expected to become effective
during the second quarter of 2003. Basic and diluted loss per share calculations
included in the consolidated financial statements and elsewhere in this Form
10-K have not been restated to reflect this transaction. The proforma effects of
the anticipated stock split are presented below:
Years ended December 31,
2002 2001 2000
Weighted average number of common shares
outstanding, as reported herein 3,501,238 2,577,701 2,578,231
Reduction in weighted average number of common
shares outstanding as a result of reverse stock split (3,151,114) (2,319,931) (2,320,408)
Proforma weighted average number of common
shares outstanding, giving retroactive effect to
reverse stock split 350,124 257,770 257,823
-------------------------------------------------------------------------------------------------
Basic and diluted loss per common share, as
reported herein ($0.08) ($0.39) ($0.76)
Proforma basic and diluted loss per common share,
giving retroactive effect to reverse stock split ($0.81) ($3.90) ($7.61)
=================================================================================================
14. SUBSEQUENT EVENTS
At a special meeting of shareholders held on January 9, 2003, the Company's
common shareholders voted in favor of a proposal to reinstate the voting rights
of the 2,700,000 shares of the Company's common stock owned by CFC Partners.
Under Pennsylvania laws, these shares were not permitted to vote on any matters
unless and until such voting rights were restored by the holders of a majority
of the outstanding common shares of the Company, excluding the shares owned by
CFC Partners. A total of 1,319,491 shares (or 50.99% of the outstanding shares
entitled to vote) voted in favor of the proposal to reinstate the voting rights
of the CFC Partners shares. As a result, CFC Partners' common shares now have
full voting rights.
24
At a special meeting of shareholders held on March 15, 2003, the Company's
common shareholders voted to approve proposals to amend the Company's Articles
of Incorporation to (i) effect a one-for-ten reverse stock split, (ii) increase
the Company's authorized shares to 50 million and (iii) permit action upon the
written consent of less than all shareholders of the Company, pursuant to the
Pennsylvania Business Corporation Law. CFC Partners, which owns 51.2% of the
outstanding common shares of the Company, voted its shares in favor of each of
the above proposals. As a result of the March 15, 2003 shareholder vote, the
number of issued and outstanding shares of the Company will be reduced from
5,276,810 to approximately 527,681. The reverse stock split is expected to
become effective during the second quarter of 2003.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Stambaugh Ness, PC serves as the Company's independent auditors
and has served in that capacity since November 29, 1999. No information relating
to this Item is required to be included in the Company's Form 10-K for the year
ended December 31, 2002.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Historically, the Board of Directors of the Company was divided into three
(3) groups, with the directors in each group serving terms of three (3) years.
However, due to (i) the Directors' decision in 1996 to merge, sell or otherwise
dispose of the Company or its assets, (ii) the eventual approval by the
shareholders of the Plan of Liquidation in 1998 and (iii) the acquisition of a
51% interest in the Company by CFC Partners on August 28, 2002, a slate of
Directors has not been submitted to shareholders since 1995. On August 28, 2002,
the Board of Directors appointed Donald J. Hommel, the president of CFC
Partners, as a Director of the Company to fill an existing vacancy on the Board.
Following such appointment, James C. Robertson and John E. Groninger, who had
been Directors of the Company for more than 30 years, resigned as planned.
On October 17, 2002, the Board of Directors appointed Shalom S. Maidenbaum,
Esq. as a Director of the Company to fill an existing vacancy on the Board, and
on March 13, 2003, the Board of Directors appointed William T. Konczynin as an
additional Director to fill an existing vacancy.
The table below sets forth the period for which the current Directors have
served as Directors of the Company, their principal occupation or employment for
the last five(5) years, and their other major affiliations and age as of March
15, 2003.
NAME PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS, OFFICE (IF ANY) DIRECTOR
(AGE) HELD IN THE COMPANY AND OTHER INFORMATION SINCE
==========================================================================================================================
Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer
and Treasurer of the Company; President and founder of Gracemoor & Co., a
Donald J. Hommel registered commodities trading advisor; business consultant in the construction
(43) management industry 2002
Shalom S. Maidenbaum Principal in the law firm of Rosenfeld and Maidenbaum, Cedarhurst, NY 2002
(44)
William T. Konczynin, M.D. President, Port Jefferson Emergency Medical Care, PC, Port Jefferson, NY; 2003
(50) Director, Emergency Department, St. Charles Hospital, Port Jefferson, NY
The following information is provided as of March 15, 2003 for each
executive officer of the Company. The executive officers are appointed annually
by the Board of Directors and serve at the discretion of the Board.
NAME AGE OFFICE
====================================================================
Donald J. Hommel 43 President, Chief Executive Officer, Chief
Financial Officer and Treasurer
Shalom S. Maidenbaum 44 Vice President and Secretary
Mr. Hommel was appointed President, Chief Executive Officer and Chief
Financial Officer of the Company in August 2002 and was named as Treasurer of
the Company in October 2002. Mr. Maidenbaum was appointed Vice President and
Secretary of the Company in October 2002.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the years ended
December 31, 2002, 2001 and 2000 of the Chief Executive Officer and any
executive officers whose annual compensation exceeded $100,000 (hereinafter
referred to as "named executive officers").
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Other
Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
---- ----------- ----- ------------------ ------------
Donald J. Hommel, 2002 - 0 - (1) - 0 - $ 1,115 (2) - 0 -
Chairman, President and - 0 -
Chief Executive Officer - 0 -
James C. Robertson, 2002 - 0 - (3) - 0 - $ 3,092 (4) - 0 -
Chairman, President and 2001 - 0 - (3) - 0 - $ 3,300 (4)
Chief Executive Officer 2000 - 0 - (3) - 0 - $ 3,300 (4)
(1) Mr. Hommel was named as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company on August 28, 2002. Mr.
Hommel received no compensation for his services as CEO in 2002.
(2) Represents retainer and board fees earned by Mr. Hommel as Chairman of
the Board of the Company.
(3) Mr. Robertson's status as a salaried employee of the Company
terminated effective July 19, 1996. Mr. Robertson was not compensated
for any services performed in his capacity as President and CEO of the
Company in either 2002, 2001 or 2000.
(4) Represents retainer and board fees earned by Mr. Robertson as Chairman
of the Board of the Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted by the Company
to the named executive officers in 2002.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
At December 31, 2002, the Company had no stock options or stock
appreciation rights outstanding.
28
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
IN COMPENSATION DECISIONS
The members of the Personnel Committee of the Company's Board of Directors
(the Committee) have historically been independent, non-employee directors.
However, as a result of the acquisition of the Company by CFC Partners in August
2002, and the appointment of new directors to replace the previous directors who
resigned, the current chairman of the Committee is Shalom S. Maidenbaum, who is
also an officer of the Company. The Company plans to appoint additional
independent directors to the Board of Directors in the future, at which time,
the composition of the Committee will likely be limited to such independent
directors. Neither of the two individuals who served in the capacity of Chief
Executive Officer (CEO) during 2002, 2001 and 2000 received any compensation for
his services as CEO. In addition, none of the other current officers, including
Mr. Maidenbaum, received any compensation in their capacity as officers during
2002.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee has historically administered and approved all forms of
compensation for the CEO, the executive officers and other officers of the
Company. The members of the Committee annually reviewed with the remainder of
the Board all aspects of compensation, management succession and the
implementation and administration of the Company's various incentive plans.
COMPENSATION PHILOSOPHY
Historically, the compensation policy of the Company was based upon the
philosophy that an important portion of the annual compensation of each officer
should relate to and be contingent upon the performance of the Company, as well
as the individual contribution of each officer. In the past, the Company relied
to a large degree on the annual and longer term incentive compensation plans to
attract and retain corporate officers of outstanding abilities and to motivate
them to perform to the full extent of their abilities. However, with the
adoption of the Plan of Liquidation in 1998, the Committee implemented a
compensation policy to allow an orderly and timely reduction of the officers and
employees of the Company. As a result of the acquisition of the Company by CFC
Partners and the appointment of new directors and officers to replace the
previous directors and officers who resigned, the Company currently has no
executive officers or other officers who receive compensation for their
services.
CEO COMPENSATION
Mr. Robertson served as Chairman of the Board, President and CEO of the
Company until August 28, 2002. However, his status as a salaried employee of the
Company terminated effective July 19, 1996. During the three-year period ended
December 31, 2002, Mr. Robertson did not receive any compensation in his
capacity as President and CEO, although he did continue to receive the standard
retainer and board meeting fees in his role as Chairman of the Board.
Mr. Hommel became Chairman of the Board, President and CEO of the Company
effective August 28, 2002 but did not receive any compensation during 2002 for
his services as CEO. However, he did receive the standard retainer and board
meeting fees in his role as Chairman of the Board.
This report is submitted by the Personnel Committee of the Company's Board
of Directors.
Shalom S. Maidenbaum, Chairman
29
STOCK PRICE PERFORMANCE COMPARISON
Cumulative Total Return (1)
--------------------------------------------------------------
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- --------- --------- --------- ---------
(2) (2) (2) (2)
Consumers Financial Corp. (CFIN) 100.00 12.30 N/A N/A N/A N/A
Peer Group (3) 100.00 79.31 N/A N/A N/A N/A
NASDAQ Stock Market (U.S.) 100.00 141.03 N/A N/A N/A N/A
(1) Assumes $100 invested on December 31, 1997 in the Company's common
stock, the Peer Group's common stock and the NASDAQ Stock Index. Total
shareholder returns assume reinvestment of dividends.
(2) As discussed in Item 5 of this Form 10-K, the Company's common stock
was delisted by NASDAQ on June 1, 1998 for noncompliance with NASDAQ's
market value of public float requirements. The Company's shareholders
also approved a Plan of Liquidation and Dissolution in March 1998, and
the Company ceased operations during that year. Therefore, any stock
price comparisons after 1998 are not considered meaningful. If the
Company is successful in developing new business operations,
appropriate stock price comparisons will be made in the future.
(3) The peer group companies were primarily in the same segment of the
insurance industry as the Company when it conducted its insurance
operations. While none of the companies offered all of the products
and services that the Company offered, each was considered a
competitor of the Company during the periods presented. The members of
the peer group are as follows: ACCEL International Corporation, CNL
Financial Corporation, American Bankers Insurance Group and US Life
Corporation.
PENSION PLAN BENEFITS
Effective March 22, 2000, the pension plan was terminated, and, following
approval from the Pension Benefit Guaranty Corporation and receipt of a
favorable determination letter from the Internal Revenue Service, all benefits
due under the plan were distributed to the plan participants in November and
December 2000. Participants, including retirees already receiving benefits,
could elect to receive their termination benefits either in a lump sum payment
or in the form of an annuity purchased from a third party insurer. Benefits
under this plan had been frozen since July 31, 1996. The Company contributed
approximately $966,000 to the plan during 2000 so that the plan could pay the
required benefits to the participants.
In connection with the termination of the pension plan, Mr. Robertson
elected a lump sum payment and received a distribution of approximately $427,000
from the plan.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of March 15, 2003, the beneficial
ownership of the Company's common stock, the only class of voting securities
outstanding, (i) by any person or group known by the Company to beneficially own
more than 5% of the outstanding common stock, (ii) by each Director and
executive officer and (iii) by all Directors and executive officers as a group.
Unless otherwise indicated, the holders of the shares shown in the table have
sole voting and investment power with respect to such shares.
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
============== ================================================ ========== ========
Principal Shareholders:
Common CFC Partners, Ltd. 2,700,000 (1) 51.17%
132 Spruce Street, Cedarhurst, NY 11516
Common Stephen J. Burns 323,000 6.12%
3922 Wrexham Court, Bensalem, PA 19020
Common Michael P. Ehrenhaus, M.D. 0 (1) ----
132 Spruce Street, Cedarhurst, NY 11516
Common Directors and Executive Officers: 0 (1) ----
Donald J. Hommel (2)
132 Spruce Street, Cedarhurst, NY 11516
Common Shalom S. Maidenbaum (2) 0 (1) ----
132 Spruce Street, Cedarhurst, NY 11516
Common William T. Konczynin, M.D. 0 ----
132 Spruce Street, Cedarhurst, NY 11516
Common All Directors and Executive Officers as a group 0 (1) ----
(3 persons)
(1) Mr. Hommel, Mr. Maidenbaum and Dr. Ehrenhaus each own one-third of the
outstanding common stock of CFC Partners. These individuals may each
be deemed to be beneficial owners of the 2,700,000 shares pursuant to
Rule 13d-3 of the Securities and Exchange Act of 1934, as amended.
These individuals have shared voting and investment power with respect
to the 2,700,000 shares of common stock.
(2) Mr. Hommel and Mr. Maidenbaum are also deemed to be principal
shareholders due to their beneficial ownership of the 2,700,000 shares
owned by CFC Partners.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2002, the Company did not enter into any
transactions in which the amount involved exceeded $60,000, with any of its
Directors, executive officers, security holders known to the Company to own more
than 5% of the Company's common stock or any member of the immediate family of
any of the foregoing persons.
32
ITEM 14. CONTROLS AND PROCEDURES
The Company has not conducted any business operations since 1997 and was in
the process of completing a plan of liquidation until August 2002, when CFC
Partners acquired a majority interest in the Company. As discussed in Item 1 of
this Form 10-K, CFC Partners is pursuing various business opportunities for the
Company. However, at December 31, 2002, the Company did not yet have any
business operations. Further, for the year ended December 31, 2002, the Company
had a very limited number of transactions to record in its financial records.
The Company's management is responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company. To the extent applicable to the Company's current
non-operating status, appropriate disclosure controls and procedures are in
place to ensure that material information relating to the Company is available
and provided to the Company's management, including its chief executive officer
and chief financial officer, particularly during the period in which the
Company's periodic reports on Form 10-K and 10-Q are being prepared. Management,
with the participation of the Company's chief executive officer and chief
financial officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this Form 10-K and believes, as a result of that
evaluation, that such controls and procedures are effective in timely alerting
the chief executive officer and chief financial officer of material information
relating to the Company and required to be included in the Company's periodic
Securities and Exchange Commission filings.
The Company's chief executive officer and chief financial officer are not
aware of any significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data, nor are they aware of any fraud, whether or
not material, that involves management or other employees who have a significant
role in the Company's internal controls. Furthermore, there have not been any
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation
referred to above.
33
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
a) Listing of Documents filed:
1. Financial Statements (included in Part II of this report):
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations and Comprehensive Income - For
the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Shareholders' Equity Deficiency - For the
years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - For the years ended December
31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (included in Part IV of this report):
(I) Condensed Financial Information of Registrant
(II) Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because they are
not required, not applicable or the required information is set forth in the
financial statements or notes thereto.
3. Exhibits:
(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)
(9) Voting trust agreement (ii)
(10) Material contracts (ii)
(11) Statement re computation of per share earnings (ii)
(12) Statement re computation of ratios (ii)
(13) Annual report to security holders (ii)
(16) Letter re change in certifying accountant (ii)
(18) Letter re change in accounting principles (ii)
(21) Subsidiaries of the registrant (iii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (ii)
(24) Power of attorney (ii)
(99.1) Certification of Chief Executive Officer (Section 906 of
Sarbanes-Oxley Act) (iii)
(99.2) 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-K.
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2002. However, on January 21, 2003, the Company filed a Form 8-K to
report that the common shareholders of the Company had voted in favor of a
proposal to reinstate the voting rights of the 2,700,000 shares of common stock
of the Company owned by CFC Partners. The special meeting of shareholders was
held on January 9, 2003. In addition, on April 7, 2003, the Company filed a Form
8-K to report that, at a special meeting of shareholders held on March 15, 2003,
the Company's common shareholders had voted to approve proposals which would
amend the Company's Articles of Incorporation to (i) effect a one for 10 reverse
stock split, (ii) increase the Company's authorized shares to 50 million and
(iii) permit action upon the written consent of less than all shareholders of
the Company, pursuant to the Pennsylvania Business Corporation Law.
34
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
(See Note 2)
ASSETS
Current assets:
Cash and cash equivalents $ 165,758 $ 108,928
Receivables 14,104
Prepaid expenses 30,420 6,106
Other assets 600
-----------------------------------------------------------------------------------------------------------------------------
Total current assets 196,178 129,738
Restricted cash held in escrow account 314,225
Investment in subsidiary 2,716,489
Prepaid insurance 87,363
Total assets $ 597,766 $ 2,846,227
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Indebtedness to affiliate $ 395,144
Preferred dividends payable 96,181
Other liabilities $ 54,302 5,640
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 54,302 496,965
-----------------------------------------------------------------------------------------------------------------------------
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, $4,526,140 739,949 4,428,381
-----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity deficiency:
Common stock, $.01 stated value, authorized 10,000,000 shares; issued and
outstanding 2002, 5,276,781 shares, 2001, 2,576,781 shares 52,768 25,768
Capital in excess of stated value 8,938,865 6,745,052
Deficit (9,188,118) (8,904,641)
Accumulated other comprehensive income, equity in net unrealized
appreciation of debt securities of unconsolidated subsidiary 54,702
Total shareholders' equity deficiency (196,485) (2,079,119))
Total liabilities, redeemable preferred stock and shareholders' equity deficiency $ 597,766 $ 2,846,227
=============================================================================================================================
See notes to condensed financial statements
35
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ------------- ------------
(See Note 2) (See Note 2)
Non-operating revenues:
Net investment income $ 8,360 $ 6,371 $ 5,022
Net realized investment gains 242,480
Proceeds from settlement of litigation and other disputes 255,000
Fees from sale of customer accounts 116,465
Joint venture income 11,433
Miscellaneous 6,744 19,917 10,184
512,584 26,288 143,104
Non-operating expenses:
Salaries and employee benefits 60,374 (162,962)
Professional fees 88,398 43,403 23,938
Other fees 51,575
Write-down of value of insurance licenses 80,250
Write-down of fee income receivable 66,053
Insurance 56,386 10,420
Taxes, other than income 12,495 (13,439) 4,828
Miscellaneous 67,895 21,075 14,868
337,123 (21,253) 109,687
Income before income taxes 175,461 47,541 33,417
Income taxes
Income before equity in loss of unconsolidated subsidiary 175,461 47,541 33,417
Equity in loss of unconsolidated subsidiary (118,677) (648,368) (1,585,497)
Net income (loss) 56,784 (600,827) (1,552,080)
Other comprehensive income (loss), equity in change in unrealized
appreciation/depreciation of debt securities of unconsolidated subsidiary (54,702) 27,539 44,015
Comprehensive income (loss) $ 2,082 ($573,288) ($1,508,065)
==========================================================================================================================
Per share data (see Note 5):
Basic and diluted loss per common share ($0.08) ($0.39) ($0.76)
Weighted average number of common shares outstanding 3,501,238 2,577,701 2,578,231
See notes to condensed financial statements
36
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------- -------------
(See Note 2) (See Note 2)
Cash flows from operating activities:
Net income (loss) $ 56,784 ($600,827) ($1,552,080)
Adjustments to reconcile net income (loss) to cash flows
provided by/used in operating activities:
Collection of receivable from joint venture partner 264,084 34,505
Change in receivables 14,103 (13,808) 1,415
Change in prepaid expenses (63,464) 4,611 (1,288)
Gain on sale of subsidiary (242,480)
Equity in loss of unconsolidated subsidiary 118,677 648,368 1,585,497
Write-down of value of insurance licenses 80,250
Change in other liabilities (546,482) (188,676) (184,362)
Prepaid pension cost 200,000
Other (47,613)
Total adjustments (767,259) 794,829 1,635,767
Net cash provided by (used in) operating activities (710,475) 194,002 83,687
Cash flows from investing activities:
Proceeds from sale of affiliate 1,504,080
Dividends from affiliate 1,481,510 212,500 160,000
Cash deposited into preferred stock escrow account,
net of withdrawal (314,225)
Net cash provided by investing activities 2,671,365 212,500 160,000
Cash flows from financing activities:
Purchase of redeemable preferred stock (1,660,067) (11,917) (26,432)
Cash dividends to preferred shareholders (351,993) (385,572) (390,669)
Proceeds from issuance of common stock 108,000
-------------
Net cash used in financing activities (1,904,060) (397,489) (417,101)
Net increase (decrease) in cash and cash equivalents 56,830 9,013 (173,414)
Cash and cash equivalents at beginning of year 108,928 99,915 273,329
Cash and cash equivalents at end of year $ 165,758 $ 108,928 $ 99,915
See notes to condensed financial statements.
37
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSUMERS FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Consumers Financial Corporation (the Company) and subsidiary. The
consolidated financial statements are included elsewhere in this Form 10-K.
2. In connection with the acquisition of the Company by CFC Partners on August
28, 2002 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 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
financial statements, the statement of net assets in liquidation as of
December 31, 2001 and the statements of changes in net assets in
liquidation for the years ended December 31, 2001 and 2000, as originally
prepared on a liquidation basis of accounting, have been replaced by a
balance sheet, statements of operations and comprehensive income and
statements of cash flows.
At December 31, 2001, the Company's net assets in liquidation, as
originally reported, were zero. For the years ended December 31, 2001 and
2000, The Company originally reported an excess of expenses over revenues
of $35,171 for the year ended December 31, 2001 and an excess of revenues
over expenses of $33,426 for the year ended December 31, 2000.
3. In 2002, 2001 and 2000, the Company received dividends in the amount of
$1,481,510, $212,500 and $160,000, respectively, from its subsidiary,
Consumers Life Insurance Company (Consumers Life). Substantially all
($1,361,510) of the 2002 dividend was received immediately prior to the
sale of Consumers Life in June 2002.
4. For the year ended December 31, 2002, the Company intends to file a
consolidated Federal income tax return with Consumers Life, which will
include applicable income and deduction amounts through the date Consumers
Life was sold.
38
5. On March 15, 2003, the Company's shareholders approved a proposal to amend
the Articles of Incorporation to effect a one-for-ten reverse stock split.
The stock split is expected to become effective during the second quarter
of 2003. Basic and diluted loss per share calculations included in the
condensed financial statements and elsewhere in this Form 10-K have not
been restated to reflect this transaction. The proforma effects of the
anticipated stock split are presented below:
Years ended December 31,
2002 2001 2000
Weighted average number of common shares
outstanding, as reported herein 3,501,238 2,577,701 2,578,231
Reduction in weighted average number of common
shares outstanding as a result of reverse stock split (3,151,114) (2,319,931) (2,320,408)
Proforma weighted average number of common
shares outstanding, giving retroactive effect to
reverse stock split 350,124 257,770 257,823
-------------------------------------------------------------------------------------------------
Basic and diluted loss per common share, as
reported herein ($0.08) ($0.39) ($0.76)
Proforma basic and diluted loss per common share,
giving retroactive effect to reverse stock split ($0.81) ($3.90) ($7.61)
39
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
Additions
----------------------
Charged to
Balance at Charged to other Balance at
beginning costs and accounts, Deductions, end of
Description of period expenses describe describe period
---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
----------------------------
---------------------------------------------------------------------------------------------------------------------
$ 0 $ 0
Year ended December 31, 2001
----------------------------
Provision for uncollectible receivables $ 105,668 $ 105,668 (a
---------------------------------------------------------------------------------------------------------------------
$ 105,668 $ 105,668 $ 0
Year ended December 31, 2000
----------------------------
Provision for permanent decrease in market value of
Property and equipment $ 752,948 $ 752,948 (b
Provision for uncollectible receivables 105,668 $ 105,668
---------------------------------------------------------------------------------------------------------------------
$ 858,616 $ 752,948 $ 105,668
(a) Collection of receivable ($15,668) and write-off of asset against
valuation allowance ($90,000)
(b) Write-off of valuation allowance for assets sold.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
By: /S/ Donald J. Hommel
---------------------
Donald J. Hommel
Chairman of the Board and President
Date: April 11, 2003
41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
Signature Title Date
------------------------------- ------------------------------- --------------
/S/ Donald J. Hommel Director, President, Treasurer April 11, 2003
------------------------------- and Chairman of the
Donald J. Hommel Board(Chief Executive Officer
and Chief Financial Officer)
/S/ Shalom S. Maidenbaum Director, Vice President April 11, 2003
------------------------------- and Secretary
Shalom S. Maidenbaum
/s/ William T. Konczynin, M.D. Director April 11, 2003
-------------------------------
William T. Konczynin, M.D.
42
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald J. Hommel, certify that:
1. I have reviewed this annual report on Form 10-K of Consumers Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. In my capacity as Chief Executive Officer, I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by
others, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report the conclusions about the
effectiveness of the disclosure controls and procedures based on an
evaluation as of the Evaluation Date;
5. In my capacity as Chief Executive Officer, I have disclosed, based on
the most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant''s auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. In my capacity as Chief Executive Officer, I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date April 11, 2003 By /S/ Donald J. Hommel
----------------- ---------------------
Chief Executive Officer
43
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald J. Hommel, certify that:
1. I have reviewed this annual report on Form 10-K of Consumers Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. In my capacity as Chief Financial Officer, I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to me by
others, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report the conclusions about the
effectiveness of the disclosure controls and procedures based on an
evaluation as of the Evaluation Date;
5. In my capacity as Chief Financial Officer, I have disclosed, based on
the most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant''s auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. In my capacity as Chief Financial Officer, I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date April 11, 2003 By /S/ Donald J. Hommel
----------------- ---------------------
Chief Financial Officer
44