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, 2003, 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.)
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)
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 August 4, 2003
------------------------ ----------------
$.01 Stated Value 5,629,781 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
NUMBER PAGE
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PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Consolidated Financial Statements:
Balance Sheets - June 30, 2003 and December 31, 2002 3
Statements of Operations and Comprehensive Income (Loss) -
For the Six and Three Months Ended June 30, 2003 and 2002 4
Statements of Cash Flows - For the Six Months Ended
June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
CERTIFICATIONS
--------------
Pursuant to Section 302 of Sarbanes-Oxley Act 21-22
Pursuant to Section 906 of Sarbanes-Oxley Act 23-24
Consumers Financial Corporation Page 2
Form 10-Q June 30, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2003 2002
-----------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 716 $ 165,758
Prepaid expenses 2,920 30,420
-----------------------------------------------------------------------------------------
Total current assets 3,636 196,178
Furniture and equipment, net of accumulated depreciation 2,537
Restricted cash held in escrow account 302,667 314,225
Prepaid insurance 64,079 87,363
-----------------------------------------------------------------------------------------
Total assets $ 372,919 $ 597,766
-----------------------------------------------------------------------------------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Accounts payable $ 50,468 $ 32,168
Other 6,664 22,134
-----------------------------------------------------------------------------------------
Total current liabilities 57,132 54,302
-----------------------------------------------------------------------------------------
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued 75,326 shares; outstanding 2003, 72,226
shares, 2002, 75,326 shares; redemption amount 2003,
$722,260, 2002, $753,260; net of treasury stock
of $8,060 in 2003 733,855 739,949
-----------------------------------------------------------------------------------------
Shareholders' equity deficiency:
Common stock, $.01 stated value, authorized 10,000,000
shares; issued and outstanding 5,276,781 shares 52,768 52,768
Capital in excess of stated value 8,938,865 8,938,865
Deficit (9,409,701) (9,188,118)
-----------------------------------------------------------------------------------------
Total shareholders' equity deficiency (418,068) (196,485)
-----------------------------------------------------------------------------------------
Total liabilities, redeemable preferred stock and
shareholders' equity deficiency $ 372,919 $ 597,766
-----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
------------------------------------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------------------------------------------------------------------------------------------------------
(See Note 2) (See Note 2)
Non-operating revenues:
Net investment income $ 1,568 $ 37,975 $ 680 $ 18,337
Net realized investment gains 56,448 56,448
Gain on sale of insurance licenses 178,483 178,483
Miscellaneous 1,447 48,519 1,418 32,716
------------------------------------------------------------------------------------------------------------
3,015 321,425 2,098 285,984
------------------------------------------------------------------------------------------------------------
Non-operating expenses:
Salaries and employee benefits 49,811 89,573 25,989 45,957
Professional fees 71,695 62,133 29,055 22,289
Other fees 18,645 48,673 11,104 40,409
Insurance 23,478 25,807 11,699 13,301
Taxes, other than income 5,352 15,955 2,294 8,320
Provision for loss on loan receivable 27,500
Miscellaneous 26,152 39,284 16,281 20,611
------------------------------------------------------------------------------------------------------------
222,633 281,425 96,422 150,887
------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (219,618) 40,000 (94,324) 135,097
Income taxes -- -- -- --
------------------------------------------------------------------------------------------------------------
Net income (loss) (219,618) 40,000 (94,324) 135,097
Other comprehensive loss, change
in unrealized appreciation of debt
securities (54,702) (39,747)
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) ($219,618) ($14,702) ($94,324) $ 95,350
------------------------------------------------------------------------------------------------------------
Per share data:
Basic and diluted income (loss)
per common share ($0.05) ($0.06) ($0.02) $ 0.01
Weighted average number of
common shares outstanding 5,276,781 2,576,781 5,276,781 2,576,781
Cash dividends declared per
common share None None None None
------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 4
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
-----------------------------------------------------------------------------------------
(See Note 2)
Cash flows from operating activities:
Net income (loss) ($219,618) $ 40,000
-----------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
cash flows used in operating activities:
Provision for loss on loan receivable 27,500
Change in receivables 15,013
Change in prepaid expenses 50,784 (25,846)
Gain on sale of investments (56,448)
Gain on sale of insurance licenses (178,483)
Change in other liabilities 2,831 (24,250)
Other (991) (588)
-----------------------------------------------------------------------------------------
Total adjustments 80,124 (270,602)
-----------------------------------------------------------------------------------------
Net cash used in operating activities (139,494) (230,602)
-----------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of investments 945,181
Proceeds from sale of insurance licenses, net of
selling expenses of $44,767 and liability assumed
by buyer of $132,120 73,113
Loan to majority shareholder (27,500)
Cash withdrawn from preferred stock escrow account 12,958
Purchase of furniture and equipment (2,946)
-----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (17,488) 1,018,294
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of redeemable preferred stock (8,060)
Option agreement deposit 108,654
Cash dividends to preferred shareholders (192,361)
-----------------------------------------------------------------------------------------
Net cash used in financing activities (8,060) (83,707)
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash (165,042) 703,985
Cash and cash equivalents at beginning of period 165,758 1,802,265
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 716 $ 2,506,250
-----------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 5
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. OVERVIEW AND BASIS OF PRESENTATION:
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, 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
8).
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 June 30, 2003, the
Company had only $716 in cash, a shareholders' equity deficiency of $418,068 and
was unable to pay its existing creditors. Also, as of that date, the Company
had not paid its payroll taxes for either the first quarter of 2003 (such taxes
were paid in August 2003 using proceeds from a loan from one of the Company's
officers) or for the second quarter of 2003.
As of June 30, 2003, the Company had no significant 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 is initially focusing on joint ventures with or
acquisitions of companies in the real estate, construction management and
medical technology businesses as well as the direct purchase of income-producing
real estate. However, there is no assurance that the Company's efforts in this
regard will be successful. In fact, given the Company's current cash position,
without new revenues and/or immediate financing, the Company's efforts to
develop the above-referenced businesses are not likely to succeed.
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.
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. At June 30, 2003, the Company owned a 51% interest in Spartan Properties
LLC, an Illinois limited liability company formed to manage the Company's real
estate operations (Spartan). The financial statements for the six and three
months ended June 30, 2003 do not include the revenues and expenses of Spartan
because such amounts were not material to the Company's results of operations.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's financial position as
of June 30, 2003 and the results of its operations and its cash flows for the
six months ended June 30, 2003 and 2002.
Consumers Financial Corporation Page 6
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. OVERVIEW AND BASIS OF PRESENTATION (CONTINUED):
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 2002 Form 10-K.
The results of operations for the six and three months ended June 30, 2003
are not necessarily indicative of the results to be expected for the full year.
2. RESTATEMENT OF FINANCIAL STATEMENTS:
In connection with the acquisition of the Company by CFC Partners on August
28, 2002 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 Changes in Net Assets in Liquidation for the six
and three months ended June 30, 2002, as originally prepared on a liquidation
basis of accounting, has been replaced by a Statement of Operations and a
Statement of Cash Flows.
For the six and three months ended June 30, 2002, the Company originally
reported an excess of expenses over revenues of $138,483 and $43,386,
respectively.
3. ACQUISITION OF THE COMPANY:
On August 28, 2002, CFC Partners exercised its option to acquire 2,700,000
shares of the Company's common stock. The option was granted to CFC Partners
through an option agreement dated February 13, 2002. The option price of
$108,000 had previously been deposited by CFC Partners into an escrow account
held by the Company. The newly issued shares represent approximately 51.2% of
the outstanding common stock of the Company.
In connection with the issuance of the new shares to CFC Partners, the
Board of Directors also terminated the Plan of Liquidation. The Board had
previously determined that selling the Company for its value as a "public
company shell" was a better alternative for the shareholders than the Plan of
Liquidation, inasmuch as the common shareholders were not expected to receive
any distribution in a liquidation of the Company. The preferred shareholders
were given an opportunity to exchange their shares for cash in a tender offer
completed by the Company on August 23, 2002 (see Note 8).
The new management of the Company is currently pursuing various business
opportunities for the Company. Management's efforts have initially been focused
on joint ventures with or acquisitions of companies in the real estate,
construction management and medical technology businesses as well as the direct
purchase of income-producing real estate (see Note 4).
Consumers Financial Corporation Page 7
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
4. BUSINESS DEVELOPMENT ACTIVITIES:
With respect to the real estate business, in April 2003, the Company,
through its majority shareholder, entered into agreements to acquire a garden
apartment complex in Springfield, Illinois and a high-rise residential building
in Chicago, Illinois. In June 2003, the Company entered into an agreement to
acquire a 200-unit garden apartment complex in the Tampa, Florida area. In
addition, the Company is negotiating the acquisition of several additional
garden apartment complexes in other locations and is negotiating with a town in
Long Island, New York to acquire property for the purpose of developing
condominiums and townhouses.
In May 2003, Vaughn Partners LLC (Vaughn), an Illinois limited liability
company in which the Company and Spartan each own a 30% interest, acquired the
Springfield, Illinois real estate referred to above. Vaughn acquired this
property with cash contributed by the third party investors who own the
remaining 40% of Vaughn, a $4,050,000 bank loan secured by a first mortgage lien
on the property and a $1,200,000 second mortgage on the property. Vaughn also
obtained but has not yet utilized a $600,000 construction loan from the bank for
the purpose of completing certain renovations to the property. In connection
with the acquisition, Spartan also entered into an agreement with Vaughn to
manage the property for a fee.
Because neither the Company nor Spartan invested any funds in exchange for
their interests in Vaughn and neither has any obligation to fund any operating
or other deficiencies incurred by Vaughn, the accompanying financial statements
do not include any equity in the net loss of Vaughn, which totaled approximately
$97,000. The operating results of Vaughn in May and June were adversely
impacted by reduced rental income due to vacancies associated with the need for
major renovations which are expected to begin in August 2003.
In connection with its construction management business, the Company
intends to manage all of its real estate development and other real estate
activities and will selectively pursue the management of outside projects as
well.
With regard to the medical technology business, in April 2003, CFC Partners
entered into a letter of intent with a leading radiologist and operator of
several radiology centers in the metropolitan New York area to purchase, develop
and operate positron emission tomography (PET) imaging centers, initially in the
New York area. CFC Partners also intends to assign all of its rights and
obligations in this joint venture to the Company.
5. LOAN RECEIVABLE
During the first quarter of 2003, the Company made payments totaling
$27,500 to certain individuals who had previously loaned funds to CFC Partners
so that CFC Partners could purchase its majority interest in the Company's
common stock. Since any obligation to repay these individuals, one of whom is a
director of the Company, is the responsibility of CFC Partners and not the
Company, CFC Partners has agreed to repay this amount to the Company. However,
because CFC Partners currently has no ability to repay the amount borrowed, this
loan has been fully reserved in the Company's consolidated financial statements
through a charge to non-operating expenses.
Consumers Financial Corporation Page 8
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
6. RESTRICTED ASSETS
As required by the terms of the option agreement with CFC Partners, the
Company deposited $331,434 (representing the tender price of $4.40 multiplied by
the 75,326 shares of preferred stock not tendered) into a bank escrow account
for the benefit of the remaining preferred shareholders. The funds in this
account, including any earnings thereon, are restricted in that they may only be
used by the Company to pay dividends or make other distributions to the
preferred shareholders. At June 30, 2003 and December 31, 2002, these assets
consisted entirely of money market funds. However, in June 2003, $12,958 was
withdrawn from the escrow account to purchase 3,100 shares of preferred stock
for $8,060. The remaining $4,898 was deposited into the Company's general cash
account.
7. 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.
At June 30, 2003 and December 31, 2002, the Company's only deferred tax
assets consisted of (i) $100,000 and $2,038,000, respectively, arising from net
operating loss carry forwards and (ii) $4,457,000 arising from a capital loss
carry forward related to the sale of the stock of Consumers Life. These
deferred tax assets have been fully offset by a valuation allowance. The
Company's deferred tax assets at June 30, 2003 do not include any net operating
losses generated by Consumers Life since that subsidiary was sold in June 2002
and its prior losses are no longer available to offset future taxable income of
the Company. At June 30, 2003 and December 31, 2002, the Company had no
material deferred tax liabilities.
No provision for income taxes has been made in the consolidated financial
statements because of the above-referenced operating loss and capital loss carry
forwards, which have been fully offset by a valuation allowance.
Consumers Financial Corporation Page 9
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
8. REDEEMABLE PREFERRED STOCK:
On August 23, 2002, the Company completed a tender offer to all of its
preferred shareholders, pursuant to which it purchased 377,288 shares
(approximately 83.4% of the shares outstanding) at $4.40 per share plus accrued
dividends. The tender offer was completed in conjunction with and was a
condition to the exercise of the option by CFC Partners. Since all of the
Company's remaining assets would have been distributed to the preferred
shareholders if the Company had been liquidated, the Board of Directors believed
that the exercise of the option (and the related termination of the Plan of
Liquidation) should not take place until the preferred shareholders had been
given a chance to exchange their shares for cash.
The terms of the redeemable preferred stock require the Company to make
annual payments to a sinking fund. Such payments were to have commenced on July
1, 1998. The preferred stock terms also provide that any purchase of preferred
shares by the Company will reduce the sinking fund requirements by an amount
equal to the redemption value ($10 per share) of the shares acquired. As a
result of the Company's purchases of preferred stock in the open market and in
the tender offer described above, no sinking fund payment for the preferred
stock is due until July 1, 2006. However, in connection with the exercise of
the option by CFC Partners, the Company deposited $331,434 into a bank escrow
account for the benefit of the remaining preferred shareholders (see Note 6).
In June 2003, $12,958 was withdrawn from the escrow account, of which $8,060 was
used to purchase 3,100 shares of preferred stock in the open market.
Dividends at an annual rate of $.85 per share are cumulative from the
original issue date of the preferred stock. Dividends are payable quarterly on
the first day of January, April, July and October. The dividends payable on
January 1, April 1 and July 1, 2003 have not been declared or paid by the
Company. When the Company is in arrears as to 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
$1,966 and $8,887 in the first six months of 2003 and 2002, respectively.
Consumers Financial Corporation Page 10
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
9. PER SHARE INFORMATION:
--------------------------------------------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
Net income (loss) ($219,618) $ 40,000 ($94,324) $ 135,097
Preferred stock dividend requirement (32,014) (192,361) (16,007) (96,181)
Accretion of carrying value of preferred stock (1,966) (8,887) (1,227) (4,443)
--------------------------------------------------------------------------------------------------------------------
Numerator for basic income (loss) per share -
income (loss) attributable to common
shareholders (253,598) (161,248) (111,558) 34,473
Effect of dilutive securities 0 0 0 0
--------------------------------------------------------------------------------------------------------------------
Numerator for diluted income (loss) per share ($253,598) ($161,248) ($111,558) $ 34,473
--------------------------------------------------------------------------------------------------------------------
Denominator for basic income (loss) per share -
weighted average shares outstanding 5,276,781 2,576,781 5,276,781 2,576,781
Effect of dilutive securities 0 0 0 0
--------------------------------------------------------------------------------------------------------------------
Denominator for diluted income (loss) per share 5,276,781 2,576,781 5,276,781 2,576,781
--------------------------------------------------------------------------------------------------------------------
Basic and diluted income (loss) per common
share ($0.05) ($0.06) ($0.02) $ 0.01
--------------------------------------------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS:
On July 1, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 353,000 shares of its common
stock, which the Company subsequently issued to three consultants pursuant to
certain agreements entered into between the Company and the respective
consultants. Each of these agreements terminates on December 31, 2003. In
exchange for receipt of the shares of common stock, such consultants will
provide various services to the Company, principally relating to the
identification of suitable merger or acquisition partners for the Company. The
cost of these services, measured by the market value of the shares at the time
of issue, is approximately $105,900. This cost will be amortized on a
straight-line basis over the term of the agreements.
On August 7, 2003, the Company mailed an Information Statement to its
shareholders in connection with a special meeting of shareholders to be held on
August 27, 2003 (the Special Meeting). At the Special Meeting, the shareholders
will be asked to consider and vote upon a proposal to amend the Company's
Articles of Incorporation (i) to effect a one-for-10 reverse stock split of the
Company's common stock by reducing the number of issued and outstanding shares
of common stock from 5,276,781 to approximately 527,678, (ii) to authorize 50
million shares of capital stock of the Company, of which 40 million shares will
relate to common stock and 10 million shares will relate to preferred stock and
(iii) to permit action upon the written consent of less than all shareholders of
the Company, pursuant to section 2524 of the Pennsylvania Business Corporation
Law of 1988. CFC Partners owns a majority of the Company's issued and
outstanding shares of common stock and intends to vote to approve the proposal
presented above, thereby assuring the approval of such proposal.
Consumers Financial Corporation Page 11
Form 10-Q June 30, 2003
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
10. SUBSEQUENT EVENTS (CONTINUED):
On August 11, 2003, the Company's Board of Directors approved the payment
of broker's fees to the Company's majority shareholder, CFC Partners, for real
estate and other contracts obtained by CFC Partners and assigned to the Company.
The Board agreed to pay CFC Partners an amount equal to 5% of the contract price
following the completion of each transaction. Such payments may be in the form
of cash or common stock of the Company. In that regard, the Board authorized
the issuance to CFC Partners of approximately 1,227,000 shares of the Company's
common stock in connection with the acquisition of the Springfield real estate
referred to in Note 4. The cost of this transaction to the Company, as measured
by the market value of the shares at the time of issuance, is approximately
$270,000. The Company will report this charge in its third quarter operating
results
Consumers Financial Corporation Page 12
Form 10-Q June 30, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A review of the significant factors which affected the Company's financial
condition at June 30, 2003 and its results of operations for the six and three
month periods then ended is presented below. Information relating to the same
periods in 2002 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 2002
Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At a special meeting of shareholders held on March 24, 1998, the Company's
preferred and common shareholders approved a Plan of Liquidation and Dissolution
(the Plan of Liquidation), pursuant to which the Company would be liquidated and
dissolved. The Plan of Liquidation permitted the Board of Directors to continue
to consider other alternatives to liquidating the Company. Because the common
shareholders would not receive a distribution under the plan of liquidation and
dissolution, and the preferred shareholders would receive less than the full
liquidation value of their shares, the Board of Directors subsequently
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.
In October 2001, the Board of Directors met to consider three offers which
were received regarding the potential purchase of the Company. One of the three
offers was from CFC Partners, Ltd. (CFC Partners). Following its review of each
offer, the Board determined that the offer from CFC Partners was the best offer.
In February 2002, the Company and CFC Partners entered into an option agreement
which permitted CFC Partners to acquire a 51.2% interest in the Company at $.04
per share. The option held by CFC Partners was exercisable following the
completion by the Company of a tender offer to its 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.
Consumers Financial Corporation Page 13
Form 10-Q June 30, 2003
In October 2002, the Board of Directors appointed Shalom S. Maidenbaum,
Esq. as an additional Director of the Company to fill an existing vacancy on the
Board. In addition, the Directors elected Mr. Hommel as the Company's Treasurer
and Mr. Maidenbaum as the Company's Vice President and Secretary. In March
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 2 of the notes to consolidated financial
statements appearing elsewhere in this Form 10-Q, the Company has restated its
liquidation-basis financial statements for prior periods to conform such
statements to the current presentation.
At June 30, 2003, the Company had no significant business operations;
however, the Company's new management is currently pursuing various business
ventures. Their initial focus is on joint ventures with or acquisitions of
companies in the real estate, construction management and medical technology
businesses. As discussed in Note 4 of the notes to consolidated financial
statements appearing elsewhere in this Form 10-Q, in April 2003, the Company,
through its majority shareholder, entered into agreements to acquire a garden
apartment complex in Springfield, Illinois and a high-rise residential building
in Chicago, Illinois. In June 2003, the Company entered into an agreement to
acquire a 200-unit garden apartment complex in the Tampa, Florida area. In
addition, the Company is negotiating the acquisition of several additional
garden apartment complexes in other locations and is negotiating with a town in
Long Island, New York to acquire property for the purpose of developing
condominiums and townhouses.
In May 2003, Vaughn Partners LLC (Vaughn), an Illinois limited liability
company in which the Company and a subsidiary each own a 30% interest, acquired
the Springfield, Illinois real estate referred to above. Vaughn acquired this
property with cash contributed by the third party investors who own the
remaining 40% of Vaughn, a $4,050,000 bank loan secured by a first mortgage lien
on the property and a $1,200,000 second mortgage on the property. Vaughn also
obtained but has not yet utilized a $600,000 construction loan from the bank for
the purpose of completing certain renovations to the property. In connection
with the acquisition, Spartan Properties LLC, a newly acquired 51%-owned
subsidiary of the Company, also entered into an agreement with Vaughn to manage
the property for a fee.
At June 30, 2003, the Company's shareholders' equity deficiency totaled
$418,068 compared to a shareholders' equity deficiency of $196,485 at December
31, 2002. The Company's net loss for the six months ended June 30, 2003 totaled
$219,618 compared to net income of $40,000 for the same period in 2002.
RESULTS OF OPERATIONS
A discussion of the material factors which affected the Company's results
of operations for the six and three months ended June 30, 2003 and 2002 is
presented below.
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
For the six months ended June 30, 2003, the Company reported a net loss of
$219,618 ($.05 per share) compared to net income of $40,000 (which translates
into a loss of $.06 per share after deducting the preferred dividend
requirement) in the first half of 2002. The 2,700,000 new shares of common
stock issued to CFC Partners in August 2002 has significantly impacted the
comparison of per share amounts between 2003 and 2002. Since the Company now
has only a nominal amount of revenues, the current year net loss is primarily
the result of expenses incurred while the Company is developing new businesses.
During the first six months of 2003, these costs consisted principally of
salaries to two individuals, audit, legal and consulting fees, insurance and a
$27,500 provision for loss on a receivable from the Company's majority
shareholder.
Consumers Financial Corporation Page 14
Form 10-Q June 30, 2003
In 2002, the Company's net income was the result of a $179,000 gain from
the sale of the state insurance licenses of Consumers Life, as part of the sale
of that subsidiary, and a $56,000 gain on the sale of certain bonds held by the
subsidiary. During this period, the Company incurred approximately $62,000 in
professional fees, principally legal and accounting fees, including $17,000 in
legal fees related to the tender offer to the Company's preferred shareholders.
The Company also incurred a $29,000 fee in connection with the termination of a
guaranteed investment contract held by the Company's retirement plan custodian.
THREE MONTHS ENDED JUNE 30, 2003 AND 2002
The Company's net loss for the second quarter of 2003 was $94,324 ($.02 per
share). Since the Company only had $2,098 in revenues for the quarter, the net
loss is attributable to ongoing expenses incurred in connection with developing
new business operations. These costs consisted primarily of salaries,
professional fees and insurance.
For the three months ended June 30, 2002, the Company reported net income
of $135,097 ($.01 per share) as a result of the gains arising from the sale of
Consumers Life. During the quarter, the Company incurred approximately $46,000
in salaries and related benefits as well as professional and other fees of
$63,000.
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 six months ended June 30, 2003, the Company's cash and cash
equivalents decreased by $165,042 to only $716 at the end of the period. The
decrease is principally the result of the cash expenses paid by the Company
during the period and the $27,500 loan made to CFC Partners, as discussed in
Note 4 of the notes to consolidated financial statements appearing elsewhere in
this Form 10-Q. The Company currently has no ability to pay any additional
expenses until it either develops new revenue sources or obtains financing.
LIQUIDITY
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. At June 30, 2003,
the Company had only $716 in cash. Furthermore, as of that date, the Company
had no significant business operations and no sources of operating revenues and
cash flows. As indicated above, the Company is currently pursuing various
business opportunities, including strategic alliances, as well as the merger or
combination of existing businesses with the Company. The Company's management
is initially focusing on joint ventures with or acquisitions of companies in the
real estate, construction management and medical technology business segments.
However, there is no assurance that the Company's efforts in this regard will be
successful.
As indicated above, the Company currently has no ability to pay any
additional expenses until it either develops new revenue sources or obtains
financing. Without new revenues and/or immediate financing, management's
efforts to develop the Company's real estate, construction management and
medical technology businesses are not likely to succeed.
Consumers Financial Corporation Page 15
Form 10-Q June 30, 2003
REDEEMABLE PREFERRED STOCK
As previously indicated, 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 escrow account for the
benefit of the remaining preferred shareholders (see Note 6 of the notes to
consolidated financial statements appearing elsewhere in this Form 10-Q).
The January 1, April 1 and July 1, 2003 dividends payable on the Company's
redeemable preferred stock have not been declared or paid by the Company. When
the Company is in arrears as to 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.
Consumers Financial Corporation Page 16
Form 10-Q June 30, 2003
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, 2003 and 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer and
the Chief Financial Officer of the Company, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13-a14. Based upon that evaluation, the principal executive
officers and chief financial officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Subsequent to the evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Consumers Financial Corporation Page 17
Form 10-Q June 30, 2003
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The registrant is not involved in any pending legal proceedings other than
routine litigation incidental to the conduct of its previous business.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2003, 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, except as described in Item 3 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The January 1, 2003, April 1, 2003 and July 1, 2003 dividends payable on
the registrant's redeemable preferred stock have not been declared or paid by
the registrant. The amount of these dividends totals $48,021. When the
registrant is in arrears as to dividends or sinking fund appropriations for the
preferred stock, dividends to holders of the registrant's common stock as well
as purchases, redemptions or acquisitions by the registrant of shares of its
common stock are restricted. If the registrant 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the registrant
during the three months ended June 30, 2003.
A special meeting of shareholders was held on March 15, 2003, at which time
the registrant's common shareholders were asked to approve proposals to amend
the registrant's Articles of Incorporation to (i) effect a one-for-ten reverse
stock split, (ii) increase the registrant's authorized shares to 50 million and
(iii) permit action upon the written consent of less than all shareholders of
the registrant, pursuant to the Pennsylvania Business Corporation Law. However,
no action was taken at the March 15 meeting because the registrant had not fully
complied with Regulation 14C of the Securities Exchange Act of 1934 as it
relates to the dissemination of information required by Schedule 14C. The March
15 meeting will be reconvened on August 27, 2003.
ITEM 5. OTHER INFORMATION
None
Consumers Financial Corporation Page 18
Form 10-Q June 30, 2003
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer (Section 302 of
Sarbanes-Oxley Act)
31.2 Certification of Chief Financial Officer (Section 302 of
Sarbanes-Oxley Act)
32 Certification of Chief Executive Officer and Chief
Financial Officer (Section 906 of Sarbanes-Oxley Act)
(b) Reports on Form 8-K
On April 28, 2003, the registrant filed a Form 8-K to report (i)
that the registrant's majority shareholder had entered into certain
agreements to acquire two residential apartment complexes in Illinois
and that the majority shareholder intends to assign its rights and
obligations to the registrant, (ii) that the registrant was
negotiating the acquisition of additional apartment complexes as well
as the purchase of a parcel of land in New York for development
purposes and (iii) that the registrant had entered into a letter of
intent with a New York radiologist who operates several radiology
centers to purchase, develop and operate positron emission tomography
imaging (P.E.T.) centers in the New York area.
Consumers Financial Corporation Page 19
Form 10-Q June 30, 2003
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 18, 2003 By /S/ Donald J. Hommel
--------------- --------------------
Donald J. Hommel
President and Chief Executive Officer
Date August 18, 2003 By /S/ Donald J. Hommel
--------------- --------------------
Donald J. Hommel
Chief Financial Officer