SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
717-730-6306
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 9, 2002
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$.01 Stated Value 2,576,810 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
--------------------------------
NUMBER
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Item 1. Financial Statements:
Consolidated Statements of Net Assets in Liquidation-
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Changes in Net Assets in
Liquidation - For the Six and Three Months Ended
June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
CERTIFICATIONS
--------------
Chief Executive Officer 18
Chief Financial Officer 19
Consumers Financial Corporation Page 2
Form 10-Q June 30, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
JUNE 30, DECEMBER 31,
(in thousands) 2002 2001
(Unaudited)
Assets
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Investments:
Fixed maturities $ 930
Mortgage loans on real estate 13
Short-term investments $ 2,392 1,795
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Total investments 2,392 2,738
Cash 114 7
Accrued investment income 9
Other receivables 8 14
Other assets 64 253
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Total assets 2,578 3,021
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Liabilities and Redeemable Preferred Stock
------------------------------------------
Liabilities:
Unclaimed property 159
Severance pay 178 178
Preferred dividends payable 96 96
Other liabilities 162 50
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436 483
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 452,614 shares; net of a
reduction to reflect estimated liquidation value (2002, $2,384;
2001, $1,989) 2,142 2,538
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Total liabilities and redeemable preferred stock 2,578 3,021
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Net assets in liquidation $ 0 $ 0
============ =============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q June 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30. JUNE 30,
(IN THOUSANDS) 2002 2001 2002 2001
Revenues:
Net investment income $ 38 $ 89 $ 18 $ 42
Net realized investment gains 64 64
Miscellaneous 41 84 26 45
------------ ------------ -------------- --------------
143 173 108 87
------------ ------------ -------------- --------------
Expenses:
Rent and related costs 12 12 6 6
Salaries and employee benefits 90 88 47 42
Professional fees 62 84 22 49
Taxes, licenses and fees 16 28 8 20
Miscellaneous 101 78 68 49
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281 290 151 166
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Excess of expenses over revenues (138) (117) (43) (79)
Adjustment of assets to estimated
realizable value (10) (53) (10) (53)
Increase (decrease) in unrealized
appreciation of debt securities (55) 2 (40) 7
Preferred stock dividends (192) (193) (96) (96)
Adjustment of preferred stock to
estimated liquidation value 395 352 189 221
Retirement of treasury shares-preferred 9
------------ ------------ -------------- --------------
Decrease in net assets for the period 0 0 0 0
Net assets at beginning of period 0 0 0 0
------------ ------------ -------------- --------------
Net assets at end of period $ 0 $ 0 $ 0 $ 0
============ ============ ============== ==============
Consumers Financial Corporation Page 4
Form 10-Q June 30, 2002
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products
business, which had been its only remaining business operation, following
the sales in 1994 and 1997 of all of its universal life insurance business
and the 1996 sale of its auto auction business. The Company's revenues and
expenses now consist principally of investment income on remaining assets
and corporate expenses.
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution (the Plan of Liquidation) pursuant to which the
Company has been liquidating its remaining assets and paying or providing
for all of its liabilities. However, as discussed more fully in Note 3, in
February 2002, the Company entered into an option agreement with an
investor group, pursuant to which the investor group may obtain a
controlling interest in the Company's common stock. If the option is
exercised, the liquidation of the Company would be discontinued.
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its former wholly-owned subsidiary, Consumers
Life Insurance Company (Consumers Life). Consumers Life was sold in June
2002 (see Note 2).
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's consolidated net
assets in liquidation as of June 30, 2002 and the consolidated changes in
its net assets for the six and three months ended June 30, 2002 and 2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 2001 Form 10-K.
The changes in net assets for the six and three months ended June 30, 2002
are not necessarily indicative of the changes to be expected for the full
year.
Consumers Financial Corporation Page 5
Form 10-Q June 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2. SALE OF STOCK OF CONSUMERS LIFE:
On June 19, 2002, the Company completed the sale of Consumers Life, its
only remaining subsidiary, to Black Diamond Insurance Group, Inc., a
Delaware corporation. The purchaser paid the Company $1,549,000 in cash and
assumed a $132,000 liability in connection with its acquisition of the
Consumers Life stock. The cash proceeds consisted of $1,299,000 for the
value of the underlying net assets of the subsidiary plus $250,000 for its
state insurance licenses. The sale transaction was approved by the Delaware
Insurance Department on June 5, 2002. The completion of this sale allowed
the Company to proceed with a tender offer to its preferred shareholders
(see Note 7).
3. PROPOSED ACQUISITION OF THE COMPANY:
On February 13, 2002, the Company entered into an option agreement (the
Option Agreement) with CFC Partners, Ltd., an unrelated investor group
based in New York (CFC Partners). The execution of the Option Agreement
with CFC Partners followed a review by the Board of Directors of various
proposals to acquire a controlling interest in the Company. The Option
Agreement permits CFC Partners to acquire a 51% interest in the Company's
common stock through the issuance of 2,700,000 authorized but unissued
shares. The option price of $108,000 was deposited into an escrow account
in March 2002. The option is exercisable within 15 business days following
the completion of the Company's tender offer to its preferred shareholders.
As discussed in Note 7, the tender offer commenced on July 19, 2002 and
will expire on August 16, 2002. Under Pennsylvania laws, the newly issued
common shares will have no voting rights until CFC Partners obtains the
required approval from the common shareholders.
The Board of Directors considered this alternative to the Plan of
Liquidation because it has the potential to produce future value for the
common shareholders (who are not expected to receive any distribution under
the Plan of Liquidation) while protecting the rights of the preferred
shareholders by giving them the opportunity to exchange their shares for
cash.
If CFC Partners exercises its option to acquire control of the Company, it
has indicated that it intends to merge or otherwise combine certain
existing and start-up businesses into the Company. CFC Partners has further
indicated that these businesses initially may include (i) a company that
will provide long distance telephone services at discounted rates, (ii) a
company which provides services that enable its customers to deploy and
migrate to E-business portals and E-marketplaces and (iii) a company that
will offer business to business online financial services.
Consumers Financial Corporation Page 6
Form 10-Q June 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
4. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At June
30, 2002 and December 31, 2001, the Company had no material deferred tax
liabilities. At June 30, 2002, the Company's only deferred tax assets
consisted of (i) $2,043,000 arising from net operating loss carry forwards
and (ii) $4,457,000 arising from capital loss carry forwards which are the
result of the sale of the stock of Consumers Life in June 2002. These
deferred tax assets, which totaled $6,500,000, 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, has also been fully offset by
a valuation allowance.
5. COMMITMENTS AND CONTINGENCIES:
Certain claims have been filed or are pending against the Company. In the
opinion of management, based on opinions of legal counsel, adequate
reserves, if deemed necessary, have been established for these matters, and
their outcome will not have a significant effect on the net assets or
changes in net assets of the Company. The Company has taken certain income
tax positions in previous years that it believes are appropriate. If such
positions were to be successfully challenged by the Internal Revenue
Service, the Company could incur additional income taxes as well as
interest and penalties. Management believes that the ultimate outcome of
any such challenges will not have a material effect on the Company's
financial statements.
6. REDEEMABLE PREFERRED STOCK:
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment
was due on July 1, 1998. However, as of June 30, 2002, the Company has made
no payments to the sinking fund, and as of that date, the total sinking
fund deficiency was $1,226,000. On July 1, 2002, an additional $550,000
sinking fund payment became due but was not paid. Because the Company has
not made the required sinking fund payments, it may not pay any dividends
to common shareholders and may not purchase, redeem or otherwise acquire
any common shares.
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 indicated in Note 7, the Company has commenced a tender offer
for all of the outstanding shares of its preferred stock. If at least
178,000 shares of
Consumers Financial Corporation Page 7
Form 10-Q June 30, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
6. REDEEMABLE PREFERRED STOCK (CONTINUED):
preferred stock are tendered pursuant to the offer, the entire sinking fund
deficiency will be eliminated. Furthermore, if the Company is acquired by
CFC Partners, any funds remaining in the Company which are attributable to
shares of preferred stock that were not tendered (i.e., the number of
shares not tendered multiplied by the per share offer price of $4.40) will
be deposited by the Company into a bank account at the time of the change
in control. The trust agreement relating to this account will specify that
the balance in the account can only be utilized by the Company for the
payment of quarterly dividends or for other distributions to the remaining
preferred stockholders.
7. SUBSEQUENT EVENTS:
On July 12, 2002, the Company resolved a long-standing dispute with an
unaffiliated reinsurer involving certain commissions due to its former
subsidiary, Consumers Life. In connection with this settlement, the Company
received a lump-sum cash payment of $200,000. Prior to the collection of
the settlement amount, the Company did not reflect any amount due from the
reinsurer in its financial statements because of the uncertainty as to both
the amount which might be received and the collectibility of such amount.
On July 19, 2002, the Company commenced a tender offer to purchase all of
the outstanding shares of its 8.5 % preferred stock, series A at a price of
$4.40 per share, plus accrued dividends on such shares. The offer, if
accepted by all of the preferred shareholders, will result in the payment
to those shareholders of substantially all of the Company's remaining net
assets. The offer expires at midnight on August 16, 2002, unless it is
extended by the Company. The tender offer documents were also filed with
the Securities and Exchange Commission (the SEC) on July 19, 2002. The
Company subsequently filed amended documents with the SEC on August 1, 2002
in response to a comment letter received from the SEC. The Company expects
to pay those shareholders who elect to tender their shares before the end
of August 2002, at which time the 15-day exercise period of the option
granted to CFC Partners will commence.
On August 12, 2002, the Company settled a claim it had against a former
tenant for unpaid rent and other losses incurred by the Company as a result
of the tenant's alleged breach of the lease agreement. This settlement also
resolved a counterclaim the defendant had filed against the Company for
nominal damages. The settlement resulted in the receipt by the Company of
$55,000. Prior to the collection of this amount, the Company did not
reflect any amount due from the former tenant in its financial statements
because of the uncertainty as to both the amount which might be received
and the collectibility of such amount.
Consumers Financial Corporation Page 8
Form 10-Q June 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A review of the significant factors which affected the Company's net assets
in liquidation at June 30, 2002 and the changes in its net assets in liquidation
for the six and three months then ended is presented below. Information
relating to 2001 is also presented for comparative purposes. This analysis
should be read in conjunction with the Consolidated Financial Statements and the
related Notes appearing elsewhere in this Form 10-Q and in the Company's 2001
Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's preferred and common shareholders approved the sale of the Company's
credit insurance and related products business, which was the Company's only
remaining business operation. In connection with the sale of its in force
credit insurance business, the Company also sold its credit insurance customer
accounts and one of its life insurance subsidiaries. At the Special Meeting,
the shareholders also approved a Plan of Liquidation and Dissolution (the Plan
of Liquidation), pursuant to which the Company has been liquidating its
remaining assets and paying or providing for all of its liabilities. If the
Company proceeds with the Plan of Liquidation, it is unlikely that any cash will
be available for distribution to the common shareholders.
The Plan of Liquidation permits the Board of Directors to consider other
alternatives to liquidating the Company, if such alternatives are deemed by the
Board to be in the best interest of the Company and its shareholders. In that
regard, in August 2001, the Board solicited proposals to acquire control of the
Company and received proposals from several investor groups. Following a review
of the proposals which were received, in February 2002, the Company entered into
an option agreement (the Option Agreement) with CFC Partners, Ltd., an unrelated
New York-based investor group (CFC Partners). The Option Agreement permits CFC
Partners to acquire a 51% interest in the Company's common stock for $108,000.
The option is exercisable within 15 business days following the completion of
the Company's tender offer to its preferred shareholders. As discussed more
fully below, the tender offer commenced on July 19, 2002 and will expire on
August 16, 2002. If the offer is accepted by all of the preferred shareholders,
it will result in the payment to those shareholders of substantially all of the
Company's remaining net assets. If CFC Partners exercises its option, it intends
to merge or otherwise combine certain existing and start-up businesses into the
Company.
Consumers Financial Corporation Page 9
Form 10-Q June 30, 2002
The Board of Directors favored the acquisition of the Company by an
investor group over the Plan of Liquidation because it has the potential to
produce future value for the common shareholders while protecting the rights of
the preferred shareholders. As indicated above, the common shareholders are not
expected to receive any distribution under the Plan of Liquidation. If the
option held by CFC Partners is exercised, the liquidation of the Company will be
discontinued. However, since there is no assurance at this time that the option
will be exercised, the Company continues to proceed with the Plan of
Liquidation.
As a result of the approval of the Plan of Liquidation, the Company adopted
a liquidation basis of accounting in its financial statements for periods
subsequent to March 24, 1998. Under liquidation accounting rules, assets are
stated at their estimated net realizable values and liabilities are stated at
their anticipated settlement amounts. Prior to March 25, 1998, the Company
reported the results of its operations and its asset and liability amounts using
accounting principles applicable to going concern entities. If the option
discussed above is exercised, and the Company resumes business operations, it
would again adopt accounting principles applicable to going concern entities.
As discussed below, the Company's net assets in liquidation, which
represent the amount available for distribution to common shareholders, were
reduced to zero in 1999. All decreases in the Company's net assets since that
time have reduced the estimated liquidation value of the preferred stock. During
the first six months of 2002, this reduction totaled $395,000 compared to a
reduction in the same period of 2001 of $352,000. The decline in the current
year was principally due to an excess of expenses over revenues of $138,000 and
preferred dividends of $192,000. For the six months ended June 30, 2001, the
excess of expenses over revenues was $117,000 and preferred dividends totaled
$193,000.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
A discussion of the material factors which affected the Company's changes
in net assets in liquidation for the six and three months ended June 30, 2002
and 2001 is presented below.
SIX AND THREE MONTHS ENDED JUNE 30, 2002
As indicated above, since the Company has no net assets available for
common shareholders, all decreases in net assets must be deducted from the
estimated liquidation value of the Company's preferred stock. In the first six
months of 2002, the estimated liquidation value of the preferred stock declined
by $395,000. As a result, at June 30, 2002, the 452,614 shares of preferred
stock outstanding had an estimated liquidation value of $2,142,000.
The decrease in the liquidation value of the preferred stock in the first
six months of 2002 was due to an excess of expenses over revenues of $138,000
and to preferred dividends of $192,000. The Company continues to incur
professional fees, primarily legal fees, in connection with both the liquidation
process and the potential sale of the Company to CFC Partners. The Company also
incurred approximately $17,000 in legal fees and other costs relating to the
tender offer to the preferred shareholders. In addition, audit fees in
Consumers Financial Corporation Page 10
Form 10-Q June 30, 2002
connection with year-end 2001 financial reporting totaled $26,000. At June 30,
2002, the Company also established a $29,000 liability for a fee due to the
custodian of the Company's retirement plan in connection with the termination of
a guaranteed investment contract held by the plan. The Company's investment
income declined sharply (from $89,000 in the first six months of 2001 to $38,000
in 2002) because of a continuing decline in invested assets (due to negative
cash flows) and a further drop in short-term interest rates. The Company also
reported a $64,000 gain on the sale of bonds which were held by Consumers Life
when it was sold in June 2002.
During the second quarter of 2002, the estimated liquidation value of the
preferred stock declined by $189,000, due principally to an excess of expenses
over revenues of $43,000 and preferred shareholder dividends of $96,000. The
tender offer costs and the termination fee due to the retirement plan custodian,
which were both referred to above, were significant factors in the amount of
excess expenses reported in the second quarter. However, the gain on the sale
of the Consumers Life bonds more than offset these costs.
SIX AND THREE MONTHS ENDED JUNE 30, 2001
In the first six months of 2001, the estimated liquidation value of the
preferred stock decreased by $352,000 to $2,953,000. This decrease in the
liquidation value was primarily due to $193,000 in dividends paid to the
preferred shareholders and an excess of expenses over revenues of $117,000. The
excess of expenses over revenues during the first six months of 2001 is
partially attributable to the fact that the Company was no longer receiving fee
revenues from the sale of its credit insurance customer accounts as the result
of a settlement of a dispute with the purchaser of the accounts in late 2000.
The Company incurred $84,000 in audit, legal and actuarial fees during the
period in connection with year-end financial reporting matters and ongoing
litigation.
In the second quarter of 2001, the estimated liquidation value of the
preferred stock decreased by $221,000. All of the factors which affected the
liquidation value during the first six months of the year were also factors in
the decline which occurred during the second quarter.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD
If the option discussed previously is not exercised by CFC Partners, the
Board of Directors intends to continue with the liquidation of the Company. The
option to acquire control of the Company is not exercisable by CFC Partners
until after the Company completes the tender offer to its preferred
shareholders. The Company believes that most of the preferred shareholders will
elect to surrender their shares in the tender offer. Therefore, if the investor
group does not exercise its option, the Company would use the assets remaining
in the Company (comprised of cash which had been allocated to the preferred
shares not tendered plus a cash reserve) to cover its operating expenses during
the remainder of the liquidation period, to pay any remaining liabilities and to
make a final distribution to the preferred shareholders who did not previously
tender their shares.
If CFC Partners does not exercise its option, the time frame for completing
the liquidation is dependent upon a number of factors. The Company must
terminate its remaining qualified retirement plan, and in connection therewith,
must file certain documents with the Internal Revenue Service in order to obtain
a favorable determination letter with respect to the plan. The Company is also a
defendant in several minor lawsuits which must be settled or resolved in court.
While management believes the plaintiffs' claims in these cases are without
merit, the
Consumers Financial Corporation Page 11
Form 10-Q June 30, 2002
ultimate outcome of these matters cannot be determined at this time.
Furthermore, the Company may be entitled to all or a portion of the assets in a
contingency fund established by the Company and the purchaser of its credit
insurance business based on the claims experience of the in force credit
insurance business from October 1, 1997 to September 30, 2002. However, based on
the claims experience to date, as provided by the purchaser, it does not appear
likely that the Company will receive any portion of the contingency fund.
As a result of the foregoing, a final distribution under the Plan of
Liquidation cannot be made to the remaining preferred shareholders until (i) the
retirement plan has been terminated, (ii) the Company has resolved its remaining
litigation matters and (iii) a determination is made regarding the amount of any
contingency fund distribution which might be payable to the Company.
If the Company proceeds with the Plan of Liquidation, management believes,
based on its current estimates, that the Company's future expenses and other
changes in net assets, including preferred shareholder dividends, will exceed
its revenues during the remainder of the liquidation period by approximately
$90,000 to $125,000. This estimate assumes that all of the Company's preferred
shareholders tender their shares pursuant to the July 19, 2002 offer. Actual
revenues and expenses and other net asset changes could vary significantly from
the present estimates due to uncertainties regarding ( i) the level of actual
expenses which will be incurred and (ii) the ultimate resolution of all current
contingencies and any contingencies which may arise in the future.
FINANCIAL CONDITION
CAPITAL RESOURCES
Since adopting the Plan of Liquidation, the Company has made no commitments
for capital expenditures and, if the Company proceeds with the liquidation
process, it does not intend to make any such commitments in the future.
However, if the Company is sold pursuant to the Option Agreement discussed
above, the Company's plans regarding capital expenditures and related
commitments could change.
For the six months ended June 30, 2002, the Company's cash and invested
assets decreased by $239,000, from $2,745,000 at the beginning of the year to
$2,506,000 at June 30, 2002. As indicated above, the decrease is principally
the result of both an excess of expenses over revenues and preferred dividends
paid. In addition, the purchaser of the Company's insurance subsidiary assumed a
$132,000 liability in connection with the sale, which reduced the net proceeds
received from that transaction by the amount of the liability assumed. The
$250,000 payment received from the buyer for the value of the subsidiary's state
insurance licenses partially offset the other reductions in cash and invested
assets during the period. Invested assets at June 30, 2002 consisted entirely
of short-term money market funds.
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. As a result of the
Company's decision to sell its remaining operations, liquidate its non-liquid
Consumers Financial Corporation Page 12
Form 10-Q June 30, 2002
assets and distribute cash to its shareholders, the Company's principal sources
of cash funds are investment income and proceeds from the sales of non-liquid
assets. If the Company proceeds with the Plan of Liquidation, these funds must
be used to settle all remaining liabilities as they become due, to pay expenses
until the Company is dissolved and to pay dividends on the preferred stock until
a final distribution is made to the remaining preferred shareholders.
Alternatively, if the Company is acquired in connection with the Option
Agreement discussed above, substantially all of the Company's remaining liquid
assets will be used to complete the tender offer to the preferred shareholders.
The adequacy of the Company's liquidity position under the Plan of
Liquidation will be principally dependent on the level of expenses the Company
must incur during the liquidation period. Prior to the sale of Consumers Life,
the Company's liquidity had been particularly affected by the fact that
virtually all of its assets were held by Consumers Life and were not available
for distribution to the Company without the approval of the Delaware Insurance
Department.
REDEEMABLE PREFERRED STOCK
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment was
due on July 1, 1998. However, as of June 30, 2002, the Company has made no
payments to the sinking fund, and as of that date, the total sinking fund
deficiency was $1,226,000. On July 1, 2002, an additional $550,000 sinking fund
payment became due but was not paid. Because of the Company's inability to make
the sinking fund payments, it may not pay any dividends to common shareholders
and may not purchase, redeem or otherwise acquire any common shares.
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
indicated above, in connection with the proposed acquisition of the Company by
CFC Partners, on July 19, 2002, the Company commenced a tender offer to purchase
all of the outstanding shares of its preferred stock at a price of $4.40 per
share, plus accrued dividends on the shares. If at least 178,000 shares of
preferred stock are tendered pursuant to the offer, the entire sinking fund
deficiency will be eliminated.
The tender offer documents were also filed with the Securities and Exchange
Commission (SEC) on July 19, 2002. The Company subsequently filed amended
documents with the SEC on August 1, 2002 in response to a comment letter
received from the SEC. The offer expires on August 16, 2002, unless it is
extended by the Company. The Company expects to pay those shareholders who elect
to tender their shares before the end of August 2002, at which time the 15-day
exercise period of the option granted to CFC Partners will commence.
INFLATION
If the Company proceeds with the Plan of Liquidation, it intends to
liquidate its assets, pay all of its liabilities, distribute any remaining cash
to its preferred shareholders and ultimately dissolve within the next year.
Consumers Financial Corporation Page 13
Form 10-Q June 30, 2002
Under those circumstances, the effects of inflation on the Company are not
material. If the Company is acquired pursuant to the Option Agreement, the
effects of inflation on the Company may change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at June 30, 2002 and December 31, 2001, the Company
qualifies as a "small business issuer" under Regulation S-B of the Federal
Securities Laws. A small business issuer is defined as any United States or
Canadian issuer with revenues or public float of less than $25 million.
Consumers Financial Corporation Page 14
Form 10-Q June 30, 2002
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters discussed in Note 5 of the Notes to
Consolidated Financial Statements included elsewhere in this Form
10-Q, the registrant is not involved in any pending legal proceedings
other than routine litigation incidental to the normal conduct of its
business nor have any such proceedings been terminated during the
three months ended June 30, 2002. As discussed in Note 7 of the Notes
to Consolidated Financial Statements appearing elsewhere in this Form
10-Q, in August 2002, the registrant settled certain litigation
involving a claim against a former tenant. The settlement also
resolved a counterclaim the defendant had filed against the
registrant.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2002, there have been no
limitations or qualifications, through charter documents, loan
agreements or otherwise, placed upon the holders of the registrant's
common or preferred stock to receive dividends. As discussed in Note 6
of the Notes to Consolidated Financial Statements appearing elsewhere
in this Form 10-Q, the registrant is prohibited from paying dividends
on its common stock so long as the deficiency in the sinking fund for
the preferred stock exists.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2002, the registrant was not in default in the payment
of principal, interest or in any other manner on any indebtedness and
was current with all its accounts. In addition, there was no arrearage
in the payment of dividends on its preferred stock. However, see Note
6 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-Q for information regarding the deficiency
in the sinking fund for the preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the
registrant during the three months ended June 30, 2002.
ITEM 5. OTHER INFORMATION
None
Consumers Financial Corporation Page 15
Form 10-Q June 30, 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Part I
------
(11) Statement re computation of per share earnings (ii)
(15) Letter re unaudited interim financial information (ii)
(18) Letter re change in accounting principles (ii)
(19) Report furnished to security holders (ii)
(23) Consents of accountants (ii)
Part II
-------
( 2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (i)
( 3) Articles of incorporation and by-laws (i)
( 4) Instruments defining the rights of security holders,
including indentures (i)
(10) Material contracts (ii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (excluding accountants)(ii)
(24) Power of attorney (ii)
(99.1) Certificate of Chief Executive Officer (iii)
(99.2) Certificate of Chief Financial Officer (iii)
(i) Information or document provided in previous filing
with the Commission
(ii) Information or document not applicable to registrant
(iii) Information or document included as exhibit to this
Form 10-Q. Any exhibits to such information or
document are not included herein.
(b) On June 25, 2002, the Company filed a Form 8-K disclosing the
sale of the Company's wholly-owned subsidiary, Consumers Life
Insurance Company, for cash in the amount of $1,549,000 and the
assumption by the buyer of a $132,000 liability.
Consumers Financial Corporation Page 16
Form 10-Q June 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
---------------------------------
Registrant
Date August 13, 2002 By /S/ James C. Robertson
----------------- ---------------------------------------------
James C. Robertson
President and Chief Executive Officer
Date August 13, 2002 By /S/ R. Fredric Zullinger
------------- ---------------------------------------------
R. Fredric Zullinger
Senior Vice President and
Chief Financial Officer
Consumers Financial Corporation Page 17
Form 10-Q June 30, 2002