From August 2000 until December 2002, the Company leased approximately 1,200 square feet of office space on a month-to-month basis at 1513 Cedar Cliff Drive, Camp Hill, Pennsylvania. The monthly rent for this facility was $1,300. The Company now leases approximately 400 square feet of office space on a month-to-month basis at 1525 Cedar Cliff Drive, Camp Hill, Pennsylvania. The monthly rent for this space is $400. The Company leases an additional 800 square feet of office space in Cedarhurst, New York under a lease which expires on December 31, 2003. The monthly rent for this space is $850 per month. Until December 2002, the Company also leased approximately 1,100 square feet of warehouse space for the storage of its records. The monthly rent for this space was approximately $650. The Company terminated this lease as of December 31, 2002, and effective January 1, 2003, entered into a month-to-month lease for approximately 550 square feet at a monthly rent of $325. The Company's office space and warehouse space are adequate for its current needs.
(a) The per share data presented above has not been adjusted to reflect the effects of a one-for-ten reverse stock split approved by the Company's common shareholders on March 15, 2003 (see Note 13 of the notes to consolidated financial statements appearing elsewhere in this Form 10-K).
At a special meeting of shareholders held on March 24, 1998, the Company's preferred and common shareholders approved the sale of the Company's credit insurance and related products business, which was the Company's only remaining business operation. In connection with the sale of its inforce credit insurance business, the Company also sold its credit insurance customer accounts and one of its life insurance subsidiaries. At the special meeting, the shareholders also approved a Plan of Liquidation and Dissolution (the Plan of Liquidation), pursuant to which the Company would be liquidated and dissolved.
A discussion of the material factors which affected the Company's results of operations for the year ended December 31, 2002 is presented below. Information for 2001 and 2000 is also presented for comparative purposes.
The improved results in 2002 also reflect reductions in salaries and professional fees compared to 2001. Partially offsetting the non-recurring revenues and the reductions in salaries and fees referred to above were (i) a decline in investment income (from $150,301 in 2001 to $45,300 in 2002) due to both a decrease in the Company's invested asset base and a decline in short-term interest rates and (ii) an increase in insurance costs (from $48,066 in 2001 to $78,438 in 2002).
The Company's net loss for the year ended December 31, 2001 was $600,827 ($.39 per share). The Company's results in 2001 were adversely affected by a $216,000 charge related to the settlement of certain litigation matters and an $80,250 write-down of the value of the state licenses and charter of the insurance subsidiary, based on the Company's assessment at that time that the subsidiary would be liquidated rather than sold.
For the year ended December 31, 2002, the Company's cash and cash equivalents decreased by $1,636,507 (from $1,802,265 at the beginning of the year to $165,758 at December 31, 2002). The decrease is principally the result of the Company's tender offer to its preferred shareholders. As discussed more fully below, in August 2002, the Company paid $1,660,067, or $4.40 per share, to acquire the 377,288 shares which were tendered. During 2002, the Company also paid cash dividends in the amount of $335,986 to the preferred shareholders. As a result of the tender offer, the Company's preferred dividend requirement was reduced from $96,180 per quarter to $16,007. Further, in connection with the acquisition of a majority interest in the Company by CFC Partners, the Company deposited cash in the amount of $331,434 into a bank escrow account for the benefit of the preferred shareholders who did not tender their shares. The decreases in unrestricted cash were partially offset by $945,181 in proceeds received from the sale of bonds which were transferred to the buyer of the Company's insurance subsidiary.
The Company's shareholders' equity deficiency improved significantly during 2002. The deficiency totaled $2,079,119 at the end of 2001 compared to a deficiency of $196,485 at December 31, 2002. The reduction in the amount of the deficiency is primarily due to the Company's purchase of 377,288 shares of its preferred stock at $4.40 per share, which was less than the $9.78 per share carrying value of such shares at the end of 2001. Net income of $56,784 further reduced the deficiency, but was more than offset by preferred shareholder dividends declared for the year of $255,813.
Historically, the Company's subsidiaries met most of their cash requirements from funds generated from operations, while the Company generally relied on its principal operating subsidiaries to provide it with sufficient cash funds to maintain an adequate liquidity position. While the Company was in liquidation, its principal sources of cash funds were investment income and proceeds from the sales of non-liquid assets. In connection with the acquisition of the Company by CFC Partners, substantially all of the Company's remaining liquid assets were used to complete a tender offer to the preferred shareholders in August 2002.
At December 31, 2002, the Company had only $165,758 in cash and cash equivalents. Furthermore, as of that date, the Company had no business operations and no sources of operating revenues. As indicated above, CFC Partners is currently pursuing various business opportunities for the Company, including strategic alliances, as well as the merger or combination of existing businesses with the Company. The new management of the Company intends to initially focus on joint ventures with or acquisitions of companies in the real estate, construction management and medical technology businesses. However, there is no assurance that the Company's efforts in this regard will be successful.
As indicated above, on August 23, 2002, the Company completed a tender offer to all of its preferred shareholders, pursuant to which it purchased 377,288 shares (approximately 83.4% of the shares outstanding) at $4.40 per share plus $47,445 in accrued dividends. The tender offer was completed in conjunction with and was a condition to the exercise of the option by CFC Partners. Since all of the Company's remaining assets would have been distributed to the preferred shareholders if the Company had been liquidated, the Board of Directors believed that the exercise of the option (and the related termination of the Plan of Liquidation) should not take place until the preferred shareholders had been given a chance to exchange their shares for cash.
The terms of the redeemable preferred stock require the Company to make annual payments to a sinking fund. Such payments were to have commenced on July 1, 1998. The preferred stock terms also provide that any purchase of preferred shares by the Company will reduce the sinking fund requirements by an amount equal to the redemption value ($10 per share) of the shares acquired. As a result of the Company's purchases of preferred stock in the open market and in the tender offer, no sinking fund payment for the preferred stock is due until July 1, 2006. However, in connection with the exercise of the option by CFC Partners, the Company deposited $331,434 into a bank trust account for the benefit of the remaining preferred shareholders (see Note 5 of the notes to consolidated financial statements appearing elsewhere in this Form 10-K).
Management has reviewed the Company's accounting policies that are now in effect and has determined that, based on the Company's current non-operating status, there are no accounting policies which are deemed to be highly subjective or require complex judgments.
The management of the Company is responsible for the preparation, integrity and objectivity of the financial information contained in this Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Such statements include informed estimates and judgments of management for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Financial information presented in this annual report is consistent with that in the financial statements.
The Board of Directors monitors the financial and accounting operations of the Company. The Board meets periodically with representatives of its independent auditing firm to discuss the scope of the audit and related reports. The Company's independent auditors have at all times full and free access to the Board of Directors and its Audit Committee, without management present, to discuss any matter that they believe should be brought to the attention of the Board.
Donald J. Hommel Chairman, Chief Executive Officer and Chief Financial Officer
We have audited the accompanying consolidated balance sheets of Consumers Financial Corporation and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive income, shareholders' equity deficiency and cash flows for each of the three years in the period ended December 31, 2002. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a shareholders' equity deficiency at December 31, 2002 and has no operating revenues. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statement schedules at Item 15(a) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The amounts included in these schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
In March 1998, the Company's shareholders approved a Plan of Liquidation and Dissolution (the Plan of Liquidation) pursuant to which the Company began liquidating its remaining assets and paying or providing for all of its liabilities. However, as discussed more fully in Note 4, in February 2002, the Company entered into an option agreement with CFC Partners, Ltd., a New York investor group (CFC Partners), pursuant to which CFC Partners could obtain a majority interest in the Company's common stock. In August 2002, the option was exercised and 2,700,000 new common shares (approximately 51.2% of the total outstanding shares) were issued by the Company to CFC Partners. As a result of the acquisition of the Company, the Plan of Liquidation was discontinued. Immediately prior to the transaction with CFC Partners, the Company paid a substantial portion of its remaining assets to its preferred shareholders in connection with a tender offer to those shareholders (see Note 11).
The consolidated financial statements include the accounts of Consumers Financial Corporation and its former wholly-owned subsidiary, Consumers Life Insurance Company (Consumers Life) until June 19, 2002 when Consumers Life was sold. Consumers Financial Corporation itself is also sometimes referred to herein as the Company. All material intercompany accounts and transactions have been eliminated.
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
Interest on U.S. Treasury Notes is credited to income as it accrues on the principal amounts outstanding, adjusted for amortization of premiums and discounts computed by the interest method. Realized gains and losses and provisions for permanent losses on investments are included in the determination of results of operations. The "specific identification" method is used in determining the cost of investments sold.
Cash and cash equivalents: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
As required by the terms of the option agreement with CFC Partners, in October 2002, the Company deposited $331,434 (representing the tender offer price of $4.40 multiplied by the 75,326 shares of preferred stock not tendered) into a bank escrow account for the benefit of the remaining preferred shareholders. The funds in this account, including any earnings thereon, are restricted in that they may only be used by the Company to pay dividends or make other distributions to the holders of the preferred stock. At December 31, 2002, these assets consisted of $314,225 in money market funds.
Cash and cash equivalents $ 491,399 Marketable securities (U.S. Treasury Notes) 931,903 Other assets 7,664 Unclaimed property liability (132,120) 1,298,846 Value of state insurance licenses 250,000
The sale of Consumers Life resulted in a gain to the Company of $242,480. Prior to the sale of Consumers Life, dividends and other distributions to the Company from the subsidiary were limited in that Consumers Life was required to maintain minimum capital and surplus in each of the states in which it was licensed, as determined in accordance with regulatory accounting practices. Under Delaware insurance laws, distributions to the Company were subject to further restrictions relating to capital and surplus and operating earnings. Because of its prior operating losses and its capital and surplus position, Consumers Life was not permitted to pay any dividends without prior approval from the Delaware Insurance Department. Also, any loans or advances to the Company were required to be reported to and approved by the Delaware Department. During 2002, 2001 and 2000, the Delaware Insurance Department approved the payment by Consumers Life of dividends totaling $1,481,510, $212,500 and $160,000, respectively. Substantially all of the 2002 dividend was approved in connection with the sale transaction.
The above securities were held by Consumers Life and were transferred to the purchaser when Consumers Life was sold (see Note 6).
Years ended December 31, 2002 2001 2000 - -------------------------------------------------- Cash equivalents $20,638 $ 94,980 $127,083 Marketable securities 24,324 52,230 54,618 Mortgage loans 338 3,091 119,301 - -------------------------------------------------- Total $45,300 $150,301 $301,002 ==================================================
As of March 22, 2000, the Company terminated its defined benefit pension plan, and, following approval from the Pension Benefit Guaranty Corporation and receipt of a favorable determination letter from the Internal Revenue Service, distributed all benefits due under the plan in November and December 2000. Benefits under this plan had been frozen as of July 31, 1996. The Company contributed approximately $966,000 to the plan during 2000 so that the plan could pay the required benefits to the participants.
The Company's remaining defined contribution plan is designed to cover substantially all full-time employees and provides for annual contributions by the Company in amounts determined by the Board of Directors. Such contributions are based upon the annual compensation of each employee. No contributions were made in 2002. Company contributions were approximately $4,400 in 2001 and $10,500 in 2000.
Net periodic pension cost for the year ended December 31, 2000 consisted of the following:
Rates used in determining pension expense for the year ended December 31, 2000 were as follows:
Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management, based on opinions of legal counsel, adequate reserves, if deemed necessary, have been established for these matters and their outcome will not have a significant effect on the Company's financial position or results of operations.
The redeemable preferred stock has a liquidation preference of $10.00 per share and is convertible at any time, unless previously redeemed, into shares of common stock at the rate of 1.482 shares of common stock for each share of preferred stock (equivalent to a conversion price of $6.75 per share). The preferred stock is redeemable at the option of the Company at a redemption price of $10.00 per share. Except in certain limited instances, the holders of the preferred stock have no voting rights.
On August 23, 2003, the Company completed a tender offer to all of the preferred shareholders, pursuant to which it purchased 377,288 shares (approximately 83.4% of the shares outstanding) at $4.40 per share plus accrued dividends. The tender offer was completed in conjunction with and was a condition to the exercise of the option by CFC Partners (see Note 4). Since all of the Company's remaining assets would have been distributed to the holders of the preferred stock if the Company had been liquidated, the Board of Directors believed that the exercise of the option (and the related termination of the Plan of Liquidation) should not take place until the preferred shareholders had been given a chance to exchange their shares for cash.
When the Company is in arrears as to preferred dividends or sinking fund appropriations for the preferred stock, dividends to holders of the Company's common stock as well as purchases, redemptions or acquisitions by the Company of shares of the Company's common stock are restricted. If the Company is in default with respect to the payment of preferred dividends and the aggregate amount of the deficiency is equal to four quarterly dividends, the holders of the preferred stock shall be entitled, only while such arrearage exists, to elect two additional members to the then existing Board of Directors.
At December 31, 2002 and 2001, 111,594 and 670,539 shares of common stock, respectively, were reserved for the conversion of the preferred stock.
At December 31, 2002 and 2001, the Company had no material deferred tax liabilities. At December 31, 2002, the Company's only deferred tax assets consisted of (i) $2,038,000 arising from net operating loss carry forwards and (ii) $4,457,000 arising from capital loss carry forwards resulting from the sale of the stock of Consumers Life. These deferred tax assets, which totaled $6,495,000, have been fully offset by a valuation allowance. At December 31, 2001, the Company's only material deferred tax asset related to net operating loss carry forwards. This deferred tax asset, which totaled $2,013,000, was also fully offset by a valuation allowance.
For the year ended December 31, 2002, the Company intends to file a consolidated Federal income tax return with Consumers Life, which will include applicable income and deduction amounts through the date Consumers Life was sold.
The preferred stock is convertible into 111,594 shares of common stock (see Note 11). None of the common shares contingently issuable upon the conversion of the preferred stock have been included in the computation of diluted per share information because the effect would be antidilutive.
As discussed in Note 14, on March 15, 2003, the Company's shareholders approved a proposal to amend the Articles of Incorporation to effect a one-for-ten reverse stock split. The stock split is expected to become effective during the second quarter of 2003. Basic and diluted loss per share calculations included in the consolidated financial statements and elsewhere in this Form 10-K have not been restated to reflect this transaction. The proforma effects of the anticipated stock split are presented below:
At a special meeting of shareholders held on March 15, 2003, the Company's common shareholders voted to approve proposals to amend the Company's Articles of Incorporation to (i) effect a one-for-ten reverse stock split, (ii) increase the Company's authorized shares to 50 million and (iii) permit action upon the written consent of less than all shareholders of the Company, pursuant to the Pennsylvania Business Corporation Law. CFC Partners, which owns 51.2% of the outstanding common shares of the Company, voted its shares in favor of each of the above proposals. As a result of the March 15, 2003 shareholder vote, the number of issued and outstanding shares of the Company will be reduced from 5,276,810 to approximately 527,681. The reverse stock split is expected to become effective during the second quarter of 2003.