SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
717-730-6306
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 2001
------------------------ ------------------
$.01 Stated Value 2,577,237 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 -
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Changes in Net Assets in Liquidation -
For the Nine and Three Months Ended September 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II. OTHER INFORMATION
-----------------------------------------------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Consumers Financial Corporation Page 2
Form 10-Q September 30, 2001
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2001 2000
--------------------------------------------------------------------------------------------------
(UNAUDITED)
Assets
------
Investments:
Fixed maturities $ 992 $ 951
Mortgage loans on real estate 26 50
Short-term investments 1,931 2,471
--------------- -------------
Total investments 2,949 3,472
Cash 3 7
Accrued investment income 21 27
Reinsurance recoverable 4,922 7,866
Other receivables 307
Prepaid reinsurance premiums 7,311 13,466
Deferred policy acquisition costs 10 40
Other assets 52 120
--------------- -------------
Total assets 15,268 25,305
--------------- -------------
Liabilities and Redeemable Preferred Stock
------------------------------------------
Liabilities:
Future policy benefits 3,977 6,536
Unearned premiums 7,311 13,466
Other policy claims and benefits payable 945 1,369
Other liabilities 478 614
--------------- -------------
12,711 21,985
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 2001, 452,614 shares;
2000, 456,061 shares; net of $1,969 reduction in 2001
and $1,241 in 2000 to reflect estimated liquidation value 2,557 3,320
--------------- -------------
Total liabilities and redeemable preferred stock 15,268 25,305
--------------- -------------
Net assets in liquidation $ 0 $ 0
=============== =============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
NINE MONTHS NINE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30. SEPTEMBER 30,
(IN THOUSANDS) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------
Revenues:
Net investment income $ 123 $ 237 $ 34 $ 62
Net fees from sale of customer
accounts 200 68
Joint venture income (loss) (3) 36 3
Miscellaneous 94 139 7 93
--------------- --------------- --------------- ---------------
214 612 41 226
--------------- --------------- --------------- ---------------
Expenses:
Rent and related costs 17 40 5 11
Salaries and employee benefits 133 196 45 43
Professional fees 122 139 38 45
Litigation settlement costs 216 216
Provision for uncollectible fee
income receivable 116 116
Taxes, licenses and fees 39 48 11 13
Miscellaneous 109 198 31 67
--------------- --------------- --------------- ---------------
636 737 346 295
--------------- --------------- --------------- ---------------
Excess of expenses over revenues (422) (125) (305) (69)
Adjustment of assets to estimated
realizable value (80) (27)
Adjustment of liabilities to estimated
settlement amounts 62
Change in unrealized appreciation of
debt securities 41 22 39 14
Preferred stock dividends (289) (294) (96) (98)
Adjustment of preferred stock to
estimated realizable value 728 705 376 323
Increase in liability for under funded
pension plan (405) (180)
Increase from retirement of treasury
shares-preferred 22 35 13 10
--------------- --------------- --------------- ---------------
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
=============== =============== =============== ===============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 4
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products
business, which had been its only remaining business operation, following
the sales in 1994 and 1997 of all of its universal life insurance business
and the 1996 sale of its auto auction business. Since the sale of its
credit insurance business, the Company's revenues and expenses have
consisted principally of (i) fee revenues received from Life of the South
Corporation (LOTS), which acquired the Company's credit insurance business
and its customer accounts, (ii) investment income on remaining assets and
(iii) corporate expenses. However, see Note 4 for information concerning
the discontinuation of the fee revenues .
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution, as discussed in Note 2 below. Accordingly, the
Company adopted a liquidation basis of accounting for periods subsequent to
March 24, 1998. Under the liquidation basis of accounting, 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.
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its wholly-owned subsidiary, Consumers Life
Insurance Company (Consumers Life).
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 September 30, 2001 and the consolidated changes
in its net assets for the nine and three month periods ended September 30,
2001 and 2000.
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 2000 Form 10-K.
The changes in net assets for the nine and three month periods ended
September 30, 2001 are not necessarily indicative of the changes to be
expected for the full year.
2. PLAN OF LIQUIDATION AND RELATED MATTERS:
At a Special Meeting of Shareholders held on March 24, 1998, the Company's
shareholders approved the sale of the Company's in force credit insurance
business as well as a Plan of
Consumers Financial Corporation Page 5
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2. PLAN OF LIQUIDATION AND RELATED MATTERS (CONTINUED):
Liquidation and Dissolution, (the Plan of Liquidation) pursuant to which
the Company has been liquidating its remaining assets and providing for its
liabilities. If the Company proceeds with the Plan of Liquidation, it will
eventually distribute its remaining cash to its preferred shareholders. The
Company does not expect to be able to make any payment to its common
shareholders under the Plan of Liquidation.
In August 2001, the Company announced that is was requesting proposals from
several investor groups that had expressed an interest in acquiring a
controlling interest in the Company's common stock. Following a review of
the proposals which were received, the Company selected one investor group
with whom it is now negotiating the terms of an option agreement. The
option agreement would permit the investors to obtain a 51% interest in the
Company's common stock through the issuance of authorized but unissued
shares. The option would be exercisable only after the Company's preferred
shareholders were given the opportunity either to receive a cash payment in
exchange for their shares or to continue as shareholders of the Company.
The Company is considering a transaction of this type in lieu of 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. Since there is
no assurance that this acquisition transaction will be completed, the
Company continues to proceed with the Plan of Liquidation while it attempts
to finalize the option agreement.
3. 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
September 30, 2001 and December 31, 2000, the Company had no material
deferred tax liabilities and only one material deferred tax asset relating
to net operating loss carry forwards. This deferred tax asset, which
totaled $1,963,000 and $1,869,000 at September 30, 2001 and December 31,
2000, respectively, has been fully offset by a valuation allowance.
4. COMMITMENTS AND CONTINGENCIES:
Reinsured risks would give rise to liability to the insurance subsidiary
only in the event that the reinsuring companies are unable to meet their
obligations under the indemnity reinsurance agreements which are in effect.
In November 1997, the Company and a third party reinsurer were sued by a
former general agency with whom the Company had a partnership agreement.
The partnership agreement
Consumers Financial Corporation Page 6
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED):
provided that the agency would market universal life insurance business for
the Company, pursuant to specific criteria established by the Company, and
would also be entitled to a share of the profits, if any, which arose from
the business produced. The claimant was seeking monetary damages to
compensate it for the Company's alleged failure to share profits and for
other alleged losses resulting from the Company's rejection of policy
applications involving unacceptable risks. The Company filed two
counterclaims against this agency seeking damages for losses the Company
sustained as a result of the agency's alleged breach of the partnership
agreement and to recover an unpaid loan made to the agency. In December
2000, the trial for the Company's claim for recovery of the unpaid loan
took place, and, in January 2001, the court awarded a $90,000 judgment in
favor of the Company. In August 2001, the parties settled this matter
through mediation. As a result of this settlement, the Company agreed to
pay the agency $210,000 in cash and to mark as satisfied the $90,000
judgment the Company had previously been awarded. The $90,000 receivable
had been fully reserved in the Company's financial statements.
During 1999, a dispute arose between the Company and LOTS relating to the
payment of investment income on the assets which were transferred to LOTS
in connection with the sale of the in force credit insurance business.
Subsequent to the closing of the transaction, LOTS claimed that the Company
owed it approximately $1,400,000 for investment earnings on the amount
transferred. In October 1999, LOTS informed the Company that it would begin
withholding from the Company the fee revenue payments which were
contractually due to the Company from the sale of the credit insurance
accounts. As of September 30, 2000, fee revenues totaling $421,000 had been
withheld by LOTS. In October 2000, the parties settled this dispute.
Pursuant to the terms of the settlement agreement, LOTS paid the Company
$250,000 in settlement of all prior amounts withheld and in lieu of any
future fee revenue payments. In addition, the Company agreed to permit LOTS
to withdraw $500,000 from a contingency fund established by the parties at
the time of the sale.
In connection with both the Plan of Liquidation and the potential sale of
the Company, as discussed in Note 2, the Company intends to either sell
Consumers Life and its insurance licenses or dissolve the subsidiary if a
sale transaction cannot be completed. If the Company ultimately determines
that it will dissolve Consumers Life, the subsidiary will incur a Phase III
tax of approximately $149,000 for Federal income tax purposes This tax
cannot be offset by Consumers Life's tax loss carry forwards, and will
therefore require a cash payment to the Internal Revenue Service. The
Company expects to decide by December 2001 whether it can sell the
subsidiary or whether it must dissolve it.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company and its
subsidiary. In the opinion of management, based on
Consumers Financial Corporation Page 7
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 and its subsidiary. 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.
5. REINSURANCE:
The sale of the credit insurance business of Consumers Life was completed
pursuant to an indemnity reinsurance agreement with the reinsurer. The
reinsurance transactions through which Consumes Life and its former
subsidiaries sold their individual life insurance business included the use
of both indemnity and assumption agreements. Consumers Life remains
contingently liable for insurance risks ceded under indemnity agreements,
while such risks are legally transferred to the reinsurer when assumption
reinsurance agreements are utilized.
Effective December 31, 2000, Consumers Life converted one of its four
remaining indemnity agreements to assumption reinsurance, thereby
eliminating the contingent risk on that block of reinsured business. As of
January 1, 2001, a similar conversion to assumption reinsurance was
completed on another indemnity agreement. In October 2001, Consumers Life
and its reinsurers executed agreements to convert the remaining two
indemnity agreements to assumption reinsurance. These two transactions are
subject to the approval of various state insurance regulators before they
can become effective. The replacement of these indemnity agreements should
not only facilitate the sale of the Consumers Life charter, but it will
also permit the dissolution of Consumers Life in the event a sale of the
subsidiary cannot be completed.
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 in July 1998. The preferred stock terms also provide that any
purchase of preferred shares by the Company will reduce the sinking fund
requirements by the redemption value of the shares acquired. As a result of
the Company's purchases of preferred stock prior to 1998, no sinking fund
payment was due in 1998, and the requiConsumers Financial Corporation Page
Form 10-Q September 30, 2001 red payment due for 1999 was reduced from
$550,000 to $414,610. The purchase of 18,000 preferred shares in 1999,
7,400 shares in 2000, and 3,447 shares in 2001 has further reduced the 1999
sinking fund deficiency to $126,140. On July 1, 2000, an additional
$550,000 sinking fund payment became due but was not paid. On July 1, 2001,
another $550,000 sinking fund payment became due but was also not paid.
Consequently, at
Consumers Financial Corporation Page 8
Form 10-Q September 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
6. REDEEMABLE PREFERRED STOCK (CONTINUED):
September 30, 2001, the total sinking fund deficiency was $1,226,140.
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.
Consumers Financial Corporation Page 9
Form 10-Q September 30, 2001
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 September 30, 2001 and the changes in its net assets in
liquidation for the nine and three month periods ended September 30, 2001 is
presented below. Information relating to 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-Q
and in the Company's 2000 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 so that it can pay or provide
for all of its liabilities. If the Company proceeds with the Plan of
Liquidation, it will eventually distribute its remaining cash to its preferred
shareholders. It is unlikely that any cash will be available for distribution
to the common shareholders under the Plan of Liquidation.
In August 2001, the Company announced that is was requesting proposals from
several investor groups that had expressed an interest in acquiring a
controlling interest in the Company's common stock. Following a review of the
proposals which were received, the Company selected one investor group with whom
it is now negotiating the terms of an option agreement. The option agreement
would permit the investors to obtain a 51% interest in the Company's common
stock through the issuance of authorized but unissued shares. The option would
be exercisable only after the Company's preferred shareholders were given the
Consumers Financial Corporation Page 10
Form 10-Q September 30, 2001
opportunity either to receive a cash payment in exchange for their shares or to
continue as shareholders of the Company. The Company is considering a
transaction of this type in lieu of 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. Since there is no assurance that this acquisition transaction will
be completed, the Company continues to proceed with the Plan of Liquidation
while it attempts to finalize the option agreement.
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.
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.
Similarly, any future decreases during the remainder of the liquidation period
will continue to reduce the amount available for distribution to the preferred
shareholders. During the first nine months of 2001, this reduction totaled
$728,000 compared to a reduction in the same period of 2000 of $705,000. The
decline in the current year was principally due to preferred shareholder
dividends, which totaled $289,000, and an excess of expenses over revenues of
$422,000. For the nine months ended September 30, 2000, preferred dividends
totaled $294,000 and the excess of expenses over revenues was $125,000. In
addition, in the first nine months of 2000, the estimated liability for the
Company's under funded Pension Plan (which was terminated later in the year) was
increased by $405,000.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
Since the sale of its remaining insurance business and the adoption of the
Plan of Liquidation, the Company's revenues and expenses have consisted
principally of ( i) fee revenues from the sale of the Company's customer
accounts, (ii) investment income on existing assets and (iii) corporate
expenses, primarily salaries, pension expense and professional fees. A
discussion of the material factors which affected the Company's changes in net
assets in liquidation for the nine and three month periods ended September 30,
2001 and 2000 is presented below.
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001
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 nine
months of 2001, the estimated liquidation value of the preferred stock declined
by $728,000. As a result, at September 30, 2001, the 452,614 shares of
preferred stock outstanding had an estimated liquidation value of $2,557,000, or
$5.65 per share.
Consumers Financial Corporation Page 11
Form 10-Q September 30, 2001
The decrease in the liquidation value of the preferred stock in the first
nine months of 2001 was primarily due to $289,000 in dividends to the preferred
shareholders, an $80,000 reduction in the estimated realizable value of certain
assets and an excess of expenses over revenues of $422,000. The excess of
expenses over revenues in the current year was significantly impacted by
litigation settlement expenses totaling $216,000, which more than doubled the
excess of expenses over revenues which would otherwise have been reported for
the period. In addition, revenues for the period were adversely affected by the
fact that the Company is no longer receiving any fee revenues from the sale of
its credit insurance customer accounts, as discussed below. The Company also
incurred approximately $66,000 in legal fees during the first nine months of
2001 in connection with various corporate matters as well as litigation.
For the three months ended September 30, 2001, the estimated liquidation
value of the preferred stock declined by $376,000. All of the factors which
affected the liquidation value during the first nine months of the year were
also factors in the decrease which occurred in the third quarter. Preferred
shareholder dividends totaled $96,000, the reduction in the estimated realizable
value of certain assets was $27,000 and expenses exceeded revenues by $305,000,
largely due to the $216,000 in litigation settlement costs referred to above.
As indicated above, the Company is no longer receiving any fee revenues
from the purchaser of its credit insurance customer accounts. In order to
settle a dispute with the purchaser regarding the payment of investment income
on the assets transferred to the purchaser in the sale of the Company's in
force insurance business, in October 2000, the Company agreed to accept a
$250,000 cash payment in settlement of all prior amounts due from the purchaser
and in lieu of any future fee revenue payments. In the nine and three month
periods ended September 30, 2000, the Company reported fee revenues of $200,000
and $68,000, respectively.
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2000
In the first nine months of 2000, the estimated liquidation value of the
preferred stock decreased by $705,000 as a result of (i) a $405,000 increase in
the estimated liability for the Company's under funded pension plan, (ii)
$294,000 in preferred shareholder dividends and (iii) an excess of expenses over
revenues of $125,000. Expenses in the first nine months of the year included
approximately $67,000 in legal fees and $50,000 in pension expense. A
significant portion of the legal fees during this period related to the
now-settled fee revenue dispute referred to earlier. The Company's investment
income benefitted from the collection of about $52,000 in past due and unaccrued
interest on a non performing mortgage loan, which was repaid in full following
the sale of the property. Partially offsetting the decreases in the preferred
stock liquidation value listed above were increases attributable to the
reduction of certain liabilities to their estimated settlement amounts and other
miscellaneous increases.
The estimated liquidation value of the preferred stock decreased by
$323,000 in the third quarter of 2000. This decline was due to an additional
$180,000 increase in the pension plan liability described above, preferred
shareholder dividends of $98,000 and in excess of expenses over revenues of
$69,000.
Consumers Financial Corporation Page 12
Form 10-Q September 30, 2001
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD
If the Company is not sold pursuant to the option agreement currently being
negotiated, the time frame for completing the liquidation of the Company is
dependent upon a number of factors, the most significant of which is the sale or
dissolution of the Company's life insurance subsidiary. Most of the assets which
will be available for distribution to the preferred shareholders are held by the
subsidiary and are restricted as to their use by state insurance regulations.
Additional shareholder value could also be generated from the sale of the
subsidiary because of the value of its 25 state insurance licenses. Furthermore,
if the Company determines that it must dissolve Consumers Life because a
suitable buyer cannot be found, Consumers Life will incur a $149,000 Phase III
tax for Federal income tax purposes. This tax cannot be offset by Consumers
Life's tax loss carry forwards, and will therefore require a cash payment to the
Internal Revenue Service. The Company expects to decide by December 2001 whether
it can sell the subsidiary or whether it must dissolve it. The Company is also a
defendant in several small lawsuits which must be settled by the parties or
resolved in court. The Company may also 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 preferred shareholders until (i) the life
subsidiary is either sold (and the time period of any required indemnifications
given to the purchaser has expired) or dissolved, (ii) the Company has resolved
its remaining litigation and (iii) a determination is made regarding the amount
of any contingency fund distribution which might be payable to the Company.
Based on current estimates, management believes 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 $600,000 to $650,000. Actual revenues and expenses and
other net asset changes could vary significantly from the present estimates
due to uncertainties regarding ( i) when the remaining non liquid assets,
particularly the stock of the life insurance subsidiary, will be liquidated,
(ii) when the distribution to the preferred shareholders will be made, (iii) the
level of actual expenses which will be incurred and (iv) the ultimate resolution
of all current contingencies and any contingencies which may arise in the
future.
FINANCIAL CONDITION
CAPITAL RESOURCES
As a result of the Plan of Liquidation, the Company has made no commitments
for capital expenditures and does not intend to make any such commitments in the
future. However, if the Company is sold pursuant to the option agreement which
is now being negotiated, the Company's future plans regarding capital
expenditures and other matters could change. For the nine months ended
September 30, 2001, the Company's cash and invested assets decreased by
$527,000, from $3,479,000 at the beginning of the year to $2,952,000 at
September 30, 2001. As indicated above, the decrease is principally the result
of the preferred shareholder dividends and the excess of expenses over revenues.
Consumers Financial Corporation Page 13
Form 10-Q September 30, 2001
Invested assets at September 30, 2001 consisted principally of ( i) U.S.
Treasury Notes, owned by the Company's insurance subsidiary, which are on
deposit with four state insurance departments in connection with licensing
requirements, (ii) one mortgage loan, which is scheduled to be paid in full by
June 2002 and (iii) short-term investments, principally money market funds.
As discussed in Note 5 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-Q, as of January 1, 2001, the Company's
insurance subsidiary converted one of its remaining indemnity reinsurance
agreements to assumption reinsurance, thereby eliminating the contingent
insurance risk on this block of reinsured business. As a result, the
reinsurance recoverable asset and the corresponding liability for future policy
benefits relating to this block of business have been eliminated from the
September 30, 2001 amounts appearing on the Consolidated Statements of Net
Assets in Liquidation. At December 31, 2000, the asset and liability amounts
for this block of business totaled approximately $1,023,000. Following the
anticipated receipt in the fourth quarter of 2001 of the insurance regulatory
approvals for the conversion of the remaining indemnity reinsurance agreements
into assumption reinsurance, the balances of the reinsurance recoverable and the
prepaid reinsurance premiums accounts and the corresponding balances of the
future policy benefits, unearned premiums and other claims and benefits payable
accounts will be eliminated.
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. Following the approval of
the Plan of Liquidation, the Company's principal sources of cash funds have been
investment income and proceeds from the sales of non liquid assets. Under the
Plan of Liquidation, these funds must be used to settle 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
preferred shareholders.
If the Company proceeds with the Plan of Liquidation, the adequacy of the
Company's liquidity position during the remainder of the liquidation period will
be principally dependent on its ability to sell its remaining non liquid assets
and the timing of such sales, as well as on the level of expenses the Company
must incur during the liquidation period. The Company's liquidity is
particularly dependent on its ability to sell or, alternatively, to liquidate
and dissolve its life insurance subsidiary, since all dividends and other
distributions to the Company from that subsidiary must be approved by the
Delaware Insurance Department.
SINKING FUND FOR 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 in July 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by the
redemption value of the shares acquired. As a result of the Company's purchases
of preferred stock prior to 1998, no sinking fund payment was due in 1998, and
the required payment due for 1999 was reduced from $550,000 to $414,610. The
Consumers Financial Corporation Page 14
Form 10-Q September 30, 2001
purchase of 18,000 preferred shares in 1999, 7,400 shares in 2000, and 3,447
shares in 2001 has further reduced the 1999 sinking fund deficiency to $126,140.
On July 1, 2000, an additional $550,000 sinking fund payment became due but was
not paid. On July 1, 2001, another $550,000 sinking fund payment became due but
was also not paid. Consequently, at September 30, 2001, the total sinking fund
deficiency was $1,226,140. 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.
INFLATION
Under the Plan of Liquidation, the effects of inflation on the Company are
not material because the Company intends to wind up its affairs within the next
12 to 15 months. However, if the Company is sold, inflation may have an effect
on the Company's new business or businesses in the future.
Consumers Financial Corporation Page 15
Form 10-Q September 30, 2001
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at September 30, 2001 and December 31, 2000, 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 16
Form 10-Q September 30, 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters discussed in Note 4 of the Notes to
Consolidated Financial Statements included elsewhere in this Form
10-Q, neither the registrant nor its subsidiary are 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 September 30, 2001.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2001, 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 5
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 September 30, 2001, 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 September 30, 2001.
ITEM 5. OTHER INFORMATION
None
Consumers Financial Corporation Page 17
Form 10-Q September 30, 2001
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) Additional exhibits (ii)
(i) Information or document provided in previous filing
with the Commission
(ii) Information or document not applicable to registrant
(b) No reports on Form 8-K were filed by the Company during the three
months ended September 30, 2001.
Consumers Financial Corporation Page 18
Form 10-Q September 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
--------------------------------
Registrant
Date November 9, 2001 By /S/
------------------- ------------------------------------------
James C. Robertson
President and Chief Executive Officer
Date November 9, 2001 By /S/
------------------- ------------------------------------------
R. Fredric Zullinger
Senior Vice President and Chief Financial
Officer
Consumers Financial Corporation Page 19
Form 10-Q September 30, 2001