Prior to August 2000, the Company maintained its executive and business offices in a building located at 1200 Camp Hill By-Pass, Camp Hill, Pennsylvania. The office building contained approximately 44,000 square feet of office space (approximately 39,000 square feet of leasable space). The Company owned a 50% interest in this building and the other 50% interest was owned by a third-party investor. In August 2000, the Company and its co-owner sold the office building, and the Company reported a gain of approximately $274,000 on the sale transaction.
A review of the significant factors which affected the Company's financial condition at December 31, 2002 and its results of operations for the year then ended is presented below. Information relating to 2001 and 2000 is also presented for comparative purposes. This analysis should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
The Plan of Liquidation permitted the Board of Directors to continue to consider other alternatives to liquidating the Company. Because the common shareholders would not receive a distribution under the Plan of Liquidation, and the preferred shareholders would receive less than the full liquidation value of their shares, the Board of Directors determined that selling the Company for its value as a "public company shell" was a better alternative for the common and preferred shareholders than liquidating the Company. Accordingly, in August 2001, the Company sent request for proposal letters to several investor groups that had expressed an interest in acquiring the Company and issued a press release soliciting similar offers. In October 2001, the Board of Directors met to consider three offers which were received, one of which was from CFC Partners, Ltd., a New York investor group (CFC Partners). Following its review of each offer, the Board determined that the offer from CFC Partners was the best offer. In February 2002, the Company and CFC Partners entered into an option agreement which permitted CFC Partners to acquire a 51.2% interest in the Company at $.04 per share. The option held by CFC Partners was exercisable within 15 business days following the completion by the Company of a tender offer to the preferred shareholders. The completion of this tender offer was, in turn, dependent on the sale of the Company's remaining insurance subsidiary, since substantially all of the Company's assets were held by the subsidiary and state insurance laws would not permit the withdrawal of those assets.
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.
As a result of the approval of the Plan of Liquidation, the Company adopted a liquidation basis of accounting for the period from March 25, 1998 to August 28, 2002. Under this basis of accounting, assets were stated at their estimated net realizable values and liabilities were stated at their anticipated settlement amounts. As a result of the transaction with CFC Partners and the related termination of the Plan of Liquidation, effective August 29, 2002, the Company re-adopted accounting principles applicable to going concern entities. Furthermore, as discussed in Note 3 of the notes to consolidated financial statements appearing elsewhere in this Form 10-K, the Company has restated its liquidation-basis financial statements for prior periods to conform such statements to the current presentation.
At December 31, 2002, the Company had no business operations, and its revenues and expenses during the past five years have been non-operating in nature. CFC Partners intends to pursue strategic alliances, as well as a merger or combination of existing businesses with the Company. The Company is initially focusing on joint ventures with or the acquisition of companies in the real estate, construction management and medical technology businesses.
At December 31, 2002, the Company's shareholders' equity deficiency totaled $196,485 compared to a shareholders' equity deficiency of $2,079,119 at December 31, 2001. For the year ended December 31, 2002, the Company's net income was $56,784 compared to net losses in 2001 and 2000 of $600,827 and $1,552,080, respectively. Dividends to preferred shareholders totaled $255,813, $385,572 and $390,669 in 2002, 2001 and 2000, respectively.
For the year ended December 31, 2002, the Company reported net income of $56,784, which translates into a loss of $.08 per share after deducting the preferred dividend requirement. The 2002 results were positively impacted by a $242,480 gain on the sale of the Company's life insurance subsidiary and $255,000 in proceeds received from the settlement of litigation and other disputes. The gain from the sale of the insurance subsidiary includes a $178,483 gain from the sale of its insurance licenses and charter, a $56,448 gain from the transfer to the buyer of appreciated bonds held by the subsidiary and $7,549 in other gains. Prior to the collection of the $255,000 in settlement proceeds, the Company had not reflected any amounts due from the other parties in its financial statements because of the uncertainty as to not only the amounts which the Company might be entitled to receive, as determined by the courts or as a result of a settlement between the parties, but also the collectability of such amounts.
For 2001, the Company originally reported an excess of expenses over revenues of $520,577 under the liquidation basis of accounting. This amount differs from the $600,827 net loss being reported in the accompanying consolidated financial statements by $80,250, which is the amount of the write-down of the value of the insurance licenses and charter referred to above. Under liquidation accounting, this amount was treated as an adjustment of assets to estimated net realizable value and was not included in the determination of the excess of expenses over revenues.
For the year ended December 31, 2000, the Company's net loss totaled $1,552,080 ($.76 per share). The loss in 2000 was principally the result of a $1,554,378 charge for pension expense in connection with the termination of the Company's defined benefit pension plan. Of this amount, $1,122,227 had been established as a liability in prior years through a direct charge to a shareholders' equity account. Consequently, the termination of the pension plan reduced the Company's shareholders' equity in 2000 by only $432,151. The Company also reported approximately $188,000 in charges for the write-down of various receivables. A $273,564 gain from the sale of the Company's home office building and $199,876 in fee revenues from the sale by the Company of its credit insurance customer accounts partially offset the charges discussed above.
For 2000, the Company originally reported an excess of expenses over revenues of $1,823,225 under the liquidation basis of accounting. This amount differs from the $1,552,080 of net loss being reported in the accompanying consolidated financial statements by $271,145, a large portion of which ($208,782) represents an adjustment to the gain originally reported on the sale of the Company's home office building in 2000. Under liquidation accounting, the carrying value of the building had been increased by $208,782 in 1999 to reflect the estimated net realizable value of the building.
Since the Company had no business operations at December 31, 2002, the effects of inflation on the Company are currently minimal. If the Company is successful in its plans to enter the real estate development, construction management and medical technology businesses, the impact of inflation on the Company's future operating results may change.
The consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 have been audited by Stambaugh Ness, PC, independent auditors. Such audits were conducted in accordance with auditing standards generally accepted in the United States of America, and included a review of our internal accounting control structure for the purpose of determining the nature, timing and extent of audit procedures to be performed.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Consumers Financial Corporation and subsidiary as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The operating losses incurred by Consumers Financial Corporation and its subsidiaries (the Company) from 1993 to 1997 significantly reduced the net worth and liquidity position of the Company. As a result, in 1998, the Company sold its core credit insurance and related products business, which had been its only remaining business operation, following the sales in 1994 and 1997 of all of its universal life insurance business and the 1996 sale of its auto auction business. Since 1998, the Company has had no business operations, and its revenues and expenses have consisted principally of investment income on remaining assets and corporate and other administrative expenses.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, as a result of the cumulative effect of the events discussed above, at December 31, 2002, the Company had only $165,758 in cash and cash equivalents and a shareholders' equity deficiency of $196,485. Furthermore, as of that date, the Company had no business operations and no sources of operating revenues. CFC Partners is currently pursuing various business opportunities for the Company, including strategic alliances, as well as the merger or combination of existing businesses with the Company. The new management of the Company intends to initially focus on joint ventures with or acquisitions of companies in the real estate, construction management and medical technology businesses. However, there is no assurance that the Company's efforts in this regard will be successful.
The Company's ability to continue as a going concern is dependent on its success in developing new cash revenue sources or, alternatively, in obtaining short-term financing while its new businesses are being developed. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Marketable securities consist of U.S. Treasury Notes. Management determines the appropriate classification of these notes at the time of purchase and reevaluates such designation as of each financial statement date. All of these securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized appreciation and depreciation, net of income taxes, if applicable, reported as a separate component of shareholders' equity deficiency.
Marketable securities: Fair values for U.S. Treasury securities are based on quoted market prices.
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.
In connection with the acquisition of the Company by CFC Partners on August 28, 2002, as described in Note 4, and the related termination of the Plan of Liquidation, the Company re-adopted accounting principles applicable to going-concern entities as of that date. The Company's consolidated financial statements had been prepared using a liquidation basis of accounting since March 25, 1998 when the Plan of Liquidation was approved by the Company's shareholders. In order to provide comparative financial information, the Company has restated its liquidation-basis financial statements for prior periods to conform to the current presentation which utilizes accounting principles applicable to going-concern entities. Accordingly, in the accompanying consolidated financial statements, the statement of net assets in liquidation as of December 31, 2001 and the statements of changes in net assets in liquidation for the years ended December 31, 2001 and 2000, as originally prepared on a liquidation basis of accounting, have been replaced by a balance sheet, statements of operations and comprehensive income, statements of shareholders' equity deficiency and statements of cash flows.
At December 31, 2001, the Company's net assets in liquidation, as originally reported, were zero. For the years ended December 31, 2001 and 2000, the Company originally reported an excess of expenses over revenues of $520,577 and $1,823,225, respectively.
On August 28, 2002, CFC Partners exercised its option to acquire 2,700,000 shares of the Company's common stock. The option was granted to CFC Partners through an option agreement dated February 13, 2002. The option price of $108,000 had previously been deposited by CFC Partners into an escrow account held by the Company. The newly issued shares represented approximately 51.2% of the total outstanding common stock of the Company. Under Pennsylvania laws, these new shares had no voting rights until the Company obtained the required approval to reinstate such voting rights from the remaining common shareholders. As more fully described in Note 14, a special meeting of shareholders was held on January 9, 2003 (the Special Meeting), at which time the voting rights of the shares of common stock held by CFC Partners were reinstated.
At an August 28 meeting of the Board of Directors, Donald J. Hommel, the President of CFC Partners, was appointed as a Director of the Company to fill an existing vacancy on the Board. Following such appointment, the Company's officers resigned and the Board elected Mr. Hommel as the Company's President and Chief Executive Officer. In addition, the Company's two Directors, other than Mr. Hommel, also resigned as planned. At a subsequent meeting of the Board of Directors, an additional Director was appointed to fill an existing vacancy and additional officers were elected. In March 2003, a third director was appointed to the Board.
In connection with the issuance of the new shares to CFC Partners, the Board of Directors also terminated the Plan of Liquidation. The Board had previously determined that selling the Company for its value as a "public company shell" was a better alternative for the shareholders than the Plan of Liquidation, inasmuch as the common shareholders were not expected to receive any distribution in a liquidation of the Company. The preferred shareholders were given an opportunity to exchange their shares for cash in a tender offer completed by the Company on August 23, 2002 (see Note 11).
Investments in marketable securities at December 31, 2001 were as follows:
Effective October 1, 1999, the Company also terminated its employee stock ownership plan. In October 2000, following the receipt of a favorable determination letter from the Internal Revenue Service, that plan's assets, consisting principally of common stock of the Company, were also distributed to the plan participants.
Interest cost on projected benefit obligation $ 218,756 Expected return on plan assets (188,665) Amortization of prior year losses 1,594,060 Other amortization and deferral (69,773) - ---------------------------------------------------------- Net periodic pension cost $1,554,378 ==========================================================
In August 2001, the Company settled a claim made by a former general agency with whom the Company had a partnership agreement. As a result of this settlement, the Company agreed to pay the agency $210,000 in cash and to mark as satisfied a $90,000 judgment the Company had previously been awarded against the agency. The $90,000 receivable had been fully reserved in the Company's financial statements.
The terms of the preferred stock require the Company to make annual payments to a sinking fund. Such payments were to have commenced on July 1, 1998. The preferred stock terms also provide that any purchase of preferred shares by the Company will reduce the sinking fund requirements by an amount equal to the redemption value ($10 per share) of the shares acquired. As a result of the Company's purchases of preferred stock in the open market and in the tender offer described above, no sinking fund payment for the preferred stock is due until July 1, 2006. However, in connection with the exercise of the option by CFC Partners, the Company deposited $331,434 into a bank trust account for the benefit of the remaining preferred shareholders (see Note 5).
Annual dividends at the rate of $.85 per share are cumulative from the date of original issue and are payable quarterly on the first day of January, April, July and October. At December 31, 2002, the Company was not in arrears with respect to the payment of dividends on the preferred stock. However, in January 2003, the Company announced that the Board of Directors had not declared the quarterly dividend due January 1, 2003 and that such dividend would not be paid when due so that the Company could conserve its cash resources.
At a special meeting of shareholders held on January 9, 2003, the Company's common shareholders voted in favor of a proposal to reinstate the voting rights of the 2,700,000 shares of the Company's common stock owned by CFC Partners. Under Pennsylvania laws, these shares were not permitted to vote on any matters unless and until such voting rights were restored by the holders of a majority of the outstanding common shares of the Company, excluding the shares owned by CFC Partners. A total of 1,319,491 shares (or 50.99% of the outstanding shares entitled to vote) voted in favor of the proposal to reinstate the voting rights of the CFC Partners shares. As a result, CFC Partners' common shares now have full voting rights.