SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 ________
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
132 Spruce Street, Cedarhurst, NY 11516
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(Address of principal executive offices) (Zip Code)
516-792-0900
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(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 January 15, 2004
--------------------- ----------------
$.01 Stated Value 17,667,096
1
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
EXPLANATORY NOTE
This Form 10-Q/A shall amend and restate in its entirety the Form 10-Q filed by
the Company on December 29, 2003.
Number Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets - September 30, 2003 (Unaudited) and December 31, 2002 3
Statements of Operations and Comprehensive Income (Loss) (Unaudited) -
For the Nine and Three Months Ended September 30, 2003 and 2002 4-5
Statements of Cash Flows (Unaudited)- For the Nine Months Ended
September 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-20
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Certifications
Pursuant to Section 302 of Sarbanes-Oxley Act 26-27
Pursuant to Section 906 of Sarbanes-Oxley Act 26-27
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,689 $165,758
Accounts receivable 11,332
Construction escrow 299,218
Prepaid expenses 162,048 30,420
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Total current assets 494,287 196,178
Property, plant and equipment, net of accumulated depreciation of 5,873,231
$111,731
Restricted cash held in escrow account 269,021 314,225
Prepaid Insurance 87,363
Financing costs, net 159,875
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Total assets $6,796,414 $597,766
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $417,868 $32,168
Due to officer 5,000
Notes payable 105,496
Mortgage payable 1,200,000
Other 22,134
Total current liabilities 1,728,364 54,302
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Long term liabilities:
Mortgages payable 4,650,000
Total liabilities 6,378,364 54,302
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500 shares;
issued and 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 711,799 739,949
Minority interest 87,841
Shareholders' deficiency:
Common stock, $.01 stated value, authorized 10,000,000
17,002,096 (includes 9,913,042 shares to be issued) and
5,276,781 shares issued and outstanding respectively 170,021 52,768
Capital in excess of stated value 11,446,311 8,938,865
Deficit (11,969,235) (9,188,118)
Less: Deferred compensation (28,687)
Total shareholders' deficiency (381,590) (196,485)
Total liabilities and shareholders' deficiency $6,796,414 $597,766
See Notes to Condensed Consolidated Financial Statements
3
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating revenues:
Rental Income $220,752 $ $137,335 $
Operating expenses:
Cost of Rental Operations 262,359 181,750
Loss from Rental Operations (41,607) (44,415)
Selling, General and Administrative
Expenses (Including stock based
compensation of $2,326,012 for the)
nine and three months ended
September 30, 2003) 2,674,040 419,078 2,402,812 137,653
Loss from Operations (2,715,647) (419,078) (2,447,227) (137,653)
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Other Income / Expense
Interest income 2,080 512
Interest expense (177,678) (161,193)
Miscellaneous 1,447
Net investment income 44,295 6,320
Net realized investment gains 242,480
Proceeds from settlement of
Litigation 255,000 255,000
Miscellaneous 41,192 222
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Total Other Income/Expense (174,151) 582,967 (160,681) 261,542
Minority interest 112,159 104,979
Net (loss) income (2,777,639) 163,889 (2,502,929) 123,889
Other comprehensive loss, change
in unrealized appreciation of debt
Securities (54,702)
Comprehensive (loss) income ($2,777,639) $109,187 ($2,502,929)
$123,889
Per share data: (See Note 9)
Basic and diluted (loss)
income per common share ($0.42) ($0.05) ($0.26) 0.00
Weighted average number of
common shares outstanding 6,784,517 2,909,419 9,515,637 3,574,636
See Notes to Condensed Consolidated Financial Statements
4
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, September 30, 2002
2003
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(Unaudited) (Unaudited)
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Cash flows from operating activities:
Net (loss) income ($2,777,639) $163,889
Adjustments to reconcile net (loss) income to
cash flows used in operating activities:
Depreciation & amortization 105,536
Provision for forgiveness of loans receivable from majority 27,500
Shareholders
Gain on sale of investments (56,448)
Gain on sale of insurance licenses (178,483)
Minority interest (112,159)
Stock based compensation 2,326,012
Increase (decrease) in cash attributable to changes in
assets and liabilities
Accounts receivable (11,332) 21,431
Prepaid expenses (44,264) (13,317)
Payment of employee severance liability (177,962)
Accrued expenses 373,440
Other current liabilities (16,638) (69,841)
Other (53,439)
Total adjustments 2,648,095 (528,059)
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Net cash used in operating activities (129,544) (364,170)
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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
Cash deposited into preferred stock escrow account (331,434)
Loan to majority shareholder (27,500)
Cash withdrawn from preferred stock escrow account 45,204
Escrow - construction and real estate tax (299,218)
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Purchase of property, equipment and leasehold improvements (5,671,873)
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Net cash (used in) provided by investing activities (5,953,387) 686,860
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Cash flows from financing activities:
Mortgage Proceeds 5,850,000
Proceeds from Note Payable 100,000
Proceeds from Officer 5,000
Payment of financing costs (196,769)
Purchase of redeemable preferred stock (19,369) (1,660,067)
Proceeds from issuance of common stock 108,000
Contributed capital 200,000
Cash dividends to preferred shareholders (335,986)
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Net cash provided by (used) in financing activities 5,938,862 (1,888,053)
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Net decrease in cash (144,069) (1,565,363)
Cash and cash equivalents at beginning of period 165,758 1,802,265
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Cash and cash equivalents at end of period $21,689 $236,902
================= ==================
Supplemental disclosures of non-cash financing activity:
Due to preferred stockholders for redemption of shares $ 12,260
==================
Issuance of stock for brokers fees in connection with purchase
of property $ 270,000
==================
See Notes to Condensed Consolidated Financial Statements
5
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
1. Overview and Basis of Presentation:
The condensed consolidated balance sheet of Consumers Financial Corporation and
Subsidiary as of September 30, 2003, the related condensed consolidated
statements of operations for the three and nine months ended September 30, 2003
and 2002 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 2003 and 2002, included in Item 1 have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC" or "Commission"). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying condensed consolidated financial
statements include all adjustments (consisting of normal, recurring adjustments)
necessary in order to make the financial statements not misleading. The results
of operations for the nine months ended September 30, 2003 are not necessarily
indicative of the results of operations for the full year or any other interim
period. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 and filed with the Commission.
From 1998 until the acquisition by the Company of its interest in
Vaughn Partners, LLC (described below), 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 7).
Going Concern
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, as a result
of the events discussed above, at September 30, 2003, the Company had only
$21,689 in cash, a shareholders' deficiency of $293,749 and was unable to pay
its existing creditors. Vaughn Partners, LLC is currently in default on a
$1,200,000 second mortgage on its property and on a $100,000 loan made to it by
a private individual. Also, as of September 30, 2003, the Company had not paid
its payroll taxes for either the second quarter of 2003 or for the third quarter
of 2003.
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.
6
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
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.
Basis of Consolidation
The consolidated financial statements include the accounts of Consumers
Financial Corporation, its 47.5% owned subsidiary Vaughn Partners, LLC
("Vaughn") (see Note 3) and its former wholly-owned subsidiary, Consumers Life
Insurance Company (Consumers Life) until June 19, 2002 when Consumers Life was
sold. All significant intercompany balances and transactions herein have been
eliminated in the consolidation.
Consumers Financial Corporation also has a wholly owned subsidiary Consumers
Management Group and a 55% owned subsidiary P.E.T. Centers of America LLC. Since
inception, these subsidiaries have had no operations.
Revenue Recognition
The Company recognized rental income when earned based on the occupancy of the
property.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to be
cash equivalents
Income Taxes
The Company accounts for income taxes using the liability method, which requires
the determination of deferred tax assets and liabilities based on the
differences between the financial and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which differences are expected to
reverse. Deferred tax assets are adjusted by a valuation allowance, if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred; costs of major additions and betterments are
capitalized. When property and equipment is sold or otherwise disposed of, the
cost and related accumulated depreciation are eliminated from the accounts and
any resulting gain or loss is reflected in income.
Depreciation and Amortization
Depreciation and amortization of Building, equipment and furniture, fixtures is
computed on the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
7
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Reclassifications
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.
2. 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 represented 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, in as much 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 7).
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 3).
3. Business Development Activities:
In May 2003, Vaughn Partners LLC, an Illinois limited liability company
in which the Company owned a 47.5% interest, acquired the Springfield, Illinois
real estate referred to above. Vaughn acquired this property for a purchase
price of $5,440,940, comprised of a $4,650,000 interest only bank loan secured
by a first mortgage lien on the property payable in two years, a $1,200,000
second mortgage on the property, with principal amounts of $500,000 due six
months from acquisition and $700,000 due twelve months from acquisition, as well
as a $100,000 loan made by a private investor and $200,000 in cash which was
contributed by third party investors. Vaughn is currently in default on the
second mortgage and on the $100,000 loan made by the private individual. The
mortgages carry interest rates of 7.25% and 13% respectively. As a result of the
default under the second mortgage, the second mortgagee has the right to, among
other rights, sell the property, collect all rental income from the property and
exclude Vaughn therefrom. As a result of the default under the $100,000 loan,
Vaughn is liable for accrued interest from June 15, 2003 at an annual rate of
18% plus all costs and fees incurred by the lender in collecting the amounts due
under the note. Vaughn also obtained and has not used approximately $299,000 of
a $600,000 construction loan from the bank for the purpose of completing certain
renovations to the property. The property is recorded net of depreciation which
is recognized on a straight-line basis for a period of 40 years.
8
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
In May 2003, the Company had a 47.5% equity interest in Vaughn (which
was the equity interest owned by the Company at the formation of Vaughn) and an
informal agreement to acquire an indirect interest in Vaughn of 24.225% (through
the acquisition of a 51% interest in Spartan Properties). The transaction
wherein the Company was to acquire its interest in Spartan was never
consummated. Effective as of October 31, 2003, the Company approved an amended
operating agreement whereby Spartan would transfer to the Company its 24.225%
interest in Vaughn in consideration for the issuance by the Company of 250,000
shares of common stock. Accordingly, as of October 31, 2003, the Company would
have a direct interest in Vaughn Properties of 71.725%. This amended operating
agreement memorializing this arrangement has not yet been executed by the
members of Vaughn Partners holding 5% of the membership interests thereof.
The 47.5% equity interest in Vaughn is being consolidated into these
financial statements based on the significant control that the Company has over
Vaughn at September 30, 2003.
On September 4, 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 1,227,273 shares of the
Company's common stock in connection with the acquisition of the Springfield
real estate. 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 has capitalized this amount as part of the cost of the building.
On September 10, 2003, the Company entered into an agreement with
Hudson Valley Home Builders & Developers Corp. pursuant to which Hudson would
use its commercially reasonable efforts to introduce funding sources to provide
the Company with financing to consummate real estate transactions. Hudson agreed
to provide the Company with financing between $2,000,000 and $4,000,000 for 36
months from the date of the agreement. The Company agreed to use commercially
reasonable efforts to consummate a maximum of 10 real estate transactions each
12-month period. Pursuant to the terms of the agreement, Hudson would notify the
Company within 21 days of receipt of an executed contract on a real estate
project that it would fund such project. The investors would have the right to
designate a portion of their funding to be used to purchase shares of the
Company at a premium above market.
Pursuant to the agreement, Hudson and its investors would be entitled
to 60% of the equity of a deal, as well as a cash payment equal to 10% of the
consideration received by the Company from Hudson and its investors. Upon
financing a real estate deal the Company would issue to Hudson and its investors
a warrant to purchase shares of the Company. The Company agreed to file a
registration statement for the shares of Hudson and its investors within 24
months and granted them piggyback registration rights after 18 months.
Either party has the right to terminate the agreement by written notice
to the other.
To date, no funds have been generated by Hudson.
4. Stock Issuances to Consultants
9
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
On July 1, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register an aggregate of 353,000
shares of its common stock, which the Company 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 $74,470. The Company
recorded these expenses as deferred compensation in the amount of $4,473
and consulting expenses for $69,997.
On September 19, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 92,000 shares of common stock
which was issued to a consultant pursuant to a consultancy agreement entered
into between the Company and the consultant on said date. In exchange for
receipt of the shares of common stock, the consultant will provide various
services to the Company, principally relating to the identification of suitable
merger or acquisition partners for the Company. The cost of his services,
measured by the market value of the shares at the time of issue, is
approximately $21,160. The Company recorded these expenses as deferred
compensation in the amount of $15,114 and consulting expenses for $6,046.
On November 7, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 140,000 shares of common stock
which was issued to a consultant pursuant to a consultancy agreement entered
into between the Company and the consultant on July 2, 2003. In exchange for
receipt of the shares of common stock, the consultant will provide various
services to the Company, principally relating to the identification of suitable
merger or acquisition partners for the Company. The cost of his services,
measured by the market value of the shares at the time of issue, is
approximately $18,200. The Company recorded these expenses as deferred
compensation in the amount of $9,100 and consulting expense of $9,100.
5. Stock Issuances to Officers and Execution of Employment Agreements
At a Board meeting September 4, 2003, the Board approved bonuses for Donald
J. Hommel, President and Chief Executive Officer and Jack I. Ehrenhaus,
Chairman and Chief Operating Officer, of the Company. Each of said
individuals was issued 1,956,521 shares of common stock valued at an
aggregate of $860,870.
On September 1, 2003, the Company entered into employment agreements with
each of Donald J. Hommel, President and Chief Executive Officer and Jack I.
Ehrenhaus, Chairman and Chief Operating Officer, of the Company. Each
agreement provides for annual compensation of $225,000 in base salary with
annual increases of 10%, and annual bonuses as determined by the Board,
which can range from twice the amount of the base salary, but in no event
will the bonus be less than 50% of the salary. Each officer is also
entitled to an automobile allowance of $750 per month and reimbursement of
all business expenses. The term of each employment agreement is ten years.
If the Company terminates either officer without cause prior to the term,
the officer is entitled to a severance payment equal to his salary for the
remainder of the 10-year term or two years', whichever is greater. If there
is a material change in the Company which causes a substantial reduction of
the officer's duties, or a liquidation, transfer of assets or merger and
the Company is not the surviving entity, the officer is entitled to a
severance payment. The employment agreements also provide for the issuance
of 3,000,000 shares of the Company's common stock to each of the officers
which were valued at an aggregate of $1,380,000. Each officer also agreed
that if the Company has a cash flow shortfall, the officer will take stock
in lieu of cash at a 20% discount to the stock price at the payment date.
10
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
6. 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.
7. 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 September 30, 2003 and December 31, 2002, these
assets consisted entirely of money market funds. However, during 2003, $47,088
was withdrawn from the escrow account to purchase 12,165 shares of preferred
stock for $31,629. The remaining $15,459 was deposited into the Company's
general cash account. Included in accounts payable and accrued expenses at
September 30, 2003 is $12,260 due to preferred shareholders.
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 then 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, when
and as appropriated by the Board out of funds legally available for that
purpose, 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).
11
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
The redeemable preferred stock is redeemable at the option of the
Company at any time, as a whole or in part, for a redemption price of $10 per
share plus all unpaid accrued dividends.
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, July 1, and October 1, 2003 have not been declared or paid
by the Company. Dividends in arrears for the four quarters total $60,783. 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. Since 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 are
entitled, only while such arrearage exists, to elect two additional members to
the then existing Board of Directors.
In the event of a liquidation of the Company, the holders of the
preferred stock are entitled to receive $10 per share plus all unpaid and
accrued dividends prior to any distribution to be made to the holders of common
stock.
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 $3,479 and $9,627 in the first nine months of 2003 and 2002,
respectively.
9. Per Share Information:
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss) ($2,777,639) $163,889 ($2,502,929) $123,889
Preferred stock dividend requirement (44,777) (239,806) (13,422) (47,445)
Accretion of carrying value of preferred
stock (3,479) (83,708) (1,513) (74,821)
Numerator for basic income (loss) per share -
income (loss) attributable to common shareholders (2,825,895) (159,625) (2,517,864) 1,623
Effect of dilutive securities 0 0 0 0
Numerator for diluted income (loss) per share ($2,825,895) ($159,625) ($2,517,864) $1,623
Denominator for basic income (loss) per share -
weighted average shares outstanding 6,784,517 2,909,419 9,515,637 3,574,636
Effect of dilutive securities 0 0 0 0
Denominator for diluted income (loss) per share 6,784,517 2,909,419 9,515,637 3,574,636
Basic and diluted income (loss) per common share ($0.42) ($0.05) ($0.26) $0.00
12
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
10. Significant Accounting Pronouncements
New Accounting Pronouncements
In May 2003, the FASB issued SFAS NO. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatory
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
numbers of shares. SFAS No. 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003. The
effect of the adoption of SFAS No. 150 did not have an effect on the condensed
consolidated financial statements.
11. Subsequent Events:
On October 15, 2003, the Company entered into a term sheet with an
equity funding company to provide the Company with a two million dollar equity
line of credit to be used for general corporate purposes. The term sheet
provides that the market price of the Company's stock for the 5 consecutive days
prior to the put date can not be below 75% of the closing bid price for the 10
trading days prior to the put date. The put date is the date that the Company
submits notice to the investor that it desires to draw down a portion of the
line. The purchase price for the shares to be paid to the investor is a discount
to the lowest closing bid price of the stock during the 5 trading days
immediately after a put date.
The funds will be available to the Company upon an effective
registration of the Company's stock. The Company is currently in the process of
commenting on a draft of the agreements provided by the proposed investor.
On October 27, 2003, the Company entered into an agreement with an
investment banking firm to arrange financing for the Company's operations and
expansion, provide financial advisory services on mergers and acquisitions, and
represent the Company with regard to introductions to accredited investors,
financial institutions, strategic partners, and potential clients. The Company
views this relationship as an investment banking source for corporate
acquisitions. The investment banker is to receive a percentage based on the
amount of equity or debt raised for the Company, as well as a retainer of $3,750
plus 85,000 shares of common stock of the Company with demand and piggyback
registration rights. In addition, the banker is entitled to warrants equal to 3%
of the equity of the Company upon the successful completion of any financing or
merger and acquisition transaction. The banker is also entitled to registration
rights, tag along rights, a put option, anti-dilution protection and a right of
first refusal. If the Company fails or refuses to close a transaction after
funds have been placed in escrow or a commitment letter accepted and approved,
the Company is liable for all direct and consequential damages incurred by the
banker.
13
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
On October 31, 2003, the Company filed a Registration Statement with
the Securities and Exchange Commission to register 330,000 shares of common
stock issued to a consultant, Pinchus Gold.
In November 2003, an investor executed a subscription agreement to
purchase 1,000,000 shares of the Company's common stock for ten cents ($0.10)
per share. As of January 13, 2004, the investor has only paid $20,000 toward the
aggregate purchase price of $100,000.
At the Special Meeting of the shareholders of the Company held August
27, 2003, the shareholders were 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, (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.
Although the meeting occurred and the three actions were approved by the
shareholders, at this time the Company's management has only effected two out of
three of such authorized actions. On January 29, 2004, an amendment to the
Company's Articles of Incorporation was filed with the Pennsylvania Department
of State Corporation Bureau which (i) increased the authorized share capital of
the Company to 50,000,000 shares, divided into 40,000,000 shares of common stock
and 10,000,000 shares of preferred, and (ii) authorized the Company to take
action upon the written consent of stockholders holding the minimum number of
votes that would be necessary to authorize the action at a meeting at which all
stockholders entitled to vote thereon were present and voting. The Company is
currently awaiting confirmation from the Pennsylvania Department of State
Corporation Bureau confirming this filing.
14
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 September 30, 2003 and its results of operations for the
nine 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.
15
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. In April 2003, Mr. Jack Ehrenhaus was appointed as
an additional Director to the Board.
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.
At September 30, 2003, other than its interest in Vaughn Partners, LLC,
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. In April 2003, the
Company, through its majority shareholder, entered into agreements to acquire
garden apartment complexes in Springfield, Illinois. The Company also had
agreements to purchase garden apartment complexes in Marietta, Georgia and a
high-rise residential building in Chicago, Illinois; however, neither
transaction was consummated. In June 2003, the Company entered into an agreement
to acquire a 200-unit garden apartment complex in the Tampa, Florida area; this
transaction was also never consummated.
In May 2003, Vaughn Partners LLC (Vaughn), an Illinois limited
liability company in which the Company currently owns a 47.5% interest, acquired
the Springfield, Illinois garden apartment complexes. Vaughn acquired this
property with cash contributed by the third party investors who own 5% of
Vaughn, a $4,650,000 bank loan secured by a first mortgage lien on the property
and a $1,200,000 second mortgage on the property. Vaughn is currently in default
on the second mortgage. As a result of the default under the second mortgage,
the second mortgagee has the right to, among other rights, sell the property,
collect all rental income from the property and exclude Vaughn therefrom. An
individual lent Vaughn $100,000 to close on the acquisition, and Vaughn is
currently in default on said loan. As a result of the default under the $100,000
loan, Vaughn is liable for accrued interest from June 15, 2003 at an annual rate
of 18% plus all costs and fees incurred by the lender in collecting the amounts
due under the note. Vaughn is currently in discussions with both the second
mortgagee and the individual lender regarding terms of re-payment on the
defaulted notes. Vaughn also obtained and used $301,000 of 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, also entered into an agreement with Vaughn to manage the
property for a fee.
In May 2003, the Company had a 47.5% equity interest in Vaughn (which
was the equity interest owned by the company at the formation of Vaughn) and an
informal agreement to acquire an indirect interest in Vaughn of 24.225% (through
the acquisition of a 51% interest in Spartan Properties). The transaction
wherein the Company was to acquire its interest in Spartan was never
consummated. Effective as of October 31, 2003, the Company approved an amended
operating agreement whereby Spartan would transfer to the Company its 24.225%
interest in Vaughn in consideration for the issuance by the Company of 250,000
shares of common stock. Accordingly, as of October 31, 2003, the Company would
have a direct interest in Vaughn Properties of 71.725%. This amended operating
agreement memorializing this arrangement has not yet been executed by the
members of Vaughn Partners holding 5% of the membership interests thereof.
The 47.5% equity interest in Vaughn is being consolidated into these
financial statements based on the significant control that the Company has over
Vaughn at September 30, 2003.
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, but this
letter of intent has terminated. On September 10, 2003, the Company, through its
subsidiary, P.E.T. Centers of America, signed a lease for 3,450 square feet of
16
medical space and will begin to design and build its first PET imaging center in
Suffolk County, New York, but subsequently the lease terminated. The Company
received a letter from the landlord dated November 11, 2003 claiming that the
Company and PET Centers are liable to the landlord for all costs and expenses
incurred in connection with enforcing the provisions of the lease as well as the
liquidated damages provided for in the lease (the present value of the lease
payments discounted at 6%). The Company has received no further communications
from the landlord in connection with its demand.
At September 30, 2003, the Company's shareholders' deficiency totaled
$293,749 compared to a shareholders' equity deficiency of $196,485 at December
31, 2002. The Company's net loss for the nine months ended September 30, 2003
totaled $2,777,639 compared to net income of $109,187 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 nine and three months ended September 30, 2003 and
2002 is presented below.
Nine Months Ended September 30, 2003 and 2002
For the nine months ended September 30, 2003, the Company reported a net
loss of $2,777,639 ($.42 per share) compared to net income of $109,187 in the
first nine months of 2002. 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.
For the nine months ended September 30, 2003, the Company had only a
nominal amount of revenues, so the current year net loss is primarily the result
of expenses incurred while the Company is attempting to develop new businesses.
During the first nine months of 2003, these costs consisted principally of
salaries to two individuals, the expense of $2,326,012 related to the issuance
of an aggregate of 11,725,315 shares issued during 2003, audit, legal and
consulting fees, insurance and a $27,500 provision for loss on a receivable from
the Company's majority shareholder.
Three Months Ended September 30, 2003 and 2002
The Company's net loss for the third quarter of 2003 was $2,502,929
($.26 per share). Since the Company only had $137,335 in revenues for the
quarter, the net loss is attributable to ongoing expenses incurred in connection
with developing new business operations. During the quarter, the Company
incurred $2,326,012 of stock based compensation expenses in connection with the
issuances of an aggregate of 11,725,315 shares, $181,750 of operating expenses
in connection with the garden apartment complex in Springfield, Illinois and
$76,800 of additional selling, general and administrative expenses. The majority
of these expenses consists of officer salaries and consulting fees.
For the three months ended September 30, 2002, the Company reported net
income of $123,889 ($.01 per share) as a result of the gains arising from the
sale of Consumers Life. During the quarter, the Company incurred approximately
$33,500 in salaries and related benefits as well as professional and other fees
of $42,000.
17
FINANCIAL CONDITION
Capital Resources
Other than as described below, 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 nine months ended September 30, 2003, the Company's cash and
cash equivalents decreased by $144,069 to $21,689 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. The Company
currently has no ability to pay any additional expenses until it either develops
new revenue sources or obtains financing.
Hudson Valley
On September 10, 2003, the Company entered into an agreement with
Hudson Valley Home Builders & Developers Corp. pursuant to which Hudson would
use its commercially reasonable efforts to introduce funding sources to provide
the Company with financing to consummate real estate transactions. Hudson agreed
to provide the Company with financing between $2,000,000 and $4,000,000 for 36
months from the date of the agreement. The Company agreed to use commercially
reasonable efforts to consummate a maximum of 10 real estate transactions each
12-month period. Pursuant to the terms of the agreement, Hudson would notify the
Company within 21 days of receipt of an executed contract on a real estate
project that it would fund such project. The investors would have the right to
designate a portion of their funding to be used to purchase shares of the
Company at a premium above market.
Pursuant to the agreement, Hudson and its investors would be entitled
to 60% of the equity of a deal, as well as a cash payment equal to 10% of the
consideration received by the Company from Hudson and its investors. Upon
financing a real estate deal the Company would issue to Hudson and its investors
a warrant to purchase shares of the Company. The Company agreed to file a
registration statement for the shares of Hudson and its investors within 24
months and granted them piggyback registration rights after 18 months.
Either party has the right to terminate the agreement by written notice
to the other.
To date, no funds have been generated by Hudson.
Equity Credit Line
On October 15, 2003, the Company entered into a term sheet with an
equity funding company to provide the Company with a two million dollar equity
line of credit to be used for general corporate purposes. The term sheet
provides that the market price of the Company's stock for the 5 consecutive days
prior to the put date can not be below 75% of the closing bid price for the 10
trading days prior to the put date. The put date is the date that the Company
submits notice to the investor that it desires to draw down a portion of the
line. The purchase price for the shares to be paid to the investor is a discount
to the lowest closing bid price of the stock during the 5 trading days
immediately after a put date.
The funds will be available to the Company upon an effective
registration of the Company's stock. The Company is currently in the process of
commenting on a draft of the agreements provided by the proposed investor.
Investment Banking Agreement
On October 27, 2003, the Company entered into an agreement with an
investment banking firm to arrange financing for the Company's operations and
expansion, provide financial advisory services on mergers and acquisitions, and
represent the Company with regard to introductions to accredited investors,
financial institutions, strategic partners, and potential clients. The
investment banker is to receive a percentage based on the amount of equity or
debt raised for the Company, as well as a retainer of $3,750 plus 85,000 shares
of common stock of the Company with demand and piggyback registration rights. In
addition, the banker is entitled to warrants equal to 3% of the equity of the
Company upon the successful completion of any financing or m&a transaction. The
banker is also entitled to registration rights, tag along rights, a put option,
anti-dilution protection and a right of first refusal. If the Company fails or
refuses to close a transaction after funds have been placed in escrow or a
commitment letter accepted and approved, the Company is liable for all direct
and consequential damages incurred by the banker.
18
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 September 30,
2003, the Company had $21,689 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.
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 then 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, when
and as appropriated by the Board out of funds legally available for that
purpose, 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.
The redeemable preferred stock is redeemable at the option of the
Company at any time, as a whole or in part, for a redemption price of $10 per
share plus all unpaid accrued dividends.
19
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, July 1, and October 1, 2003 have not been declared or paid
by the Company. Dividends in arrears for the four quarters total $60,783. 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. Since 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 are
entitled, only while such arrearage exists, to elect two additional members to
the then existing Board of Directors.
In the event of a liquidation of the Company, the holders of the
preferred stock are entitled to receive $10 per share plus all unpaid and
accrued dividends prior to any distribution to be made to the holders of common
stock.
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 $3,479 and $9,627 in the first nine months of 2003 and 2002,
respectively.
20
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The requirements for certain market risk disclosures are not applicable
to the Company because, at September 30, 2003 and December 31, 2002, the Company
qualifies as a "small business issuer" under Regulation S-B of the Federal
Securities Laws.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the 'Exchange Act')). Based on this
evaluation, the principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission's rules and forms. There have been no changes in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The registrant is not involved in any existing or pending legal
proceedings
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 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.
At a Board meeting September 4, 2003, the Board approved bonuses for
Donald J. Hommel, President and Chief Executive Officer and Jack I. Ehrenhaus,
Chairman and Chief Operating Officer, of the Company. Each of said individuals
were issued 1,956,521 shares of common stock. These issuances were exempt from
the registration requirements of the Securities Act of 1933, as amended.
On September 1, 2003, the Company entered into employment agreements
with each of Donald J. Hommel, President and Chief Executive Officer and Jack I.
Ehrenhaus, Chairman and Chief Operating Officer, of the Company pursuant to
which, among other things, the Company issued 3,000,000 shares to each of said
individuals. The issuances were pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended.
On October 27, 2003, the Company entered into an investment banking
agreement with David Sassoon & Co. Plc. Pursuant to which, among other things,
the Company issued 85,000 shares to its investment banker. The issuance was
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
The January 1, 2003, April 1, 2003, July 1, 2003, and October 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
$60,783. 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. Since 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 are entitled, only while such arrearage exists, to elect two
additional members to the then existing Board of Directors.
Vaughn Partners, LLC is currently in default under the $1,200,000
second mortgage loan and a $100,000 note payable to a private individual. As a
result of the default under the second mortgage, the second mortgagee has the
right to, among other rights, sell the property, collect all rental income from
the property and exclude Vaughn therefrom. As a result of the default under the
$100,000 loan, Vaughn is liable for accrued interest from June 15, 2003 at an
annual rate of 18% plus all costs and fees incurred by the lender in collecting
the amounts due under the note. Vaughn is currently in discussions with both the
second mortgagee and the individual lender regarding terms of re-payment on the
defaulted notes.
Item 4. Submission of Matters to a Vote of Security Holders
22
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
were 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 has voted to approve the proposal presented above.
Although the meeting occurred and the three actions were approved by the
shareholders, at this time the Company's management has only effected two out of
three of such authorized actions. On January 29, 2004, an amendment to the
Company's Articles of Incorporation was filed with the Pennsylvania Department
of State Corporation Bureau which (i) increased the authorized share capital of
the Company to 50,000,000 shares, divided into 40,000,000 shares of common stock
and 10,000,000 shares of preferred, and (ii) authorized the Company to take
action upon the written consent of stockholders holding the minimum number of
votes that would be necessary to authorize the action at a meeting at which all
stockholders entitled to vote thereon were present and voting.
Item 5. Other Information
In May 2003, the Company had a 47.5% equity interest in Vaughn (which
was the equity interest owned by the company at the formation of Vaughn) and an
informal agreement to acquire an indirect interest in Vaughn of 24.225% (through
the acquisition of a 51% interest in Spartan Properties). The transaction
wherein the Company was to acquire its interest in Spartan was never
consummated. Effective as of October 31, 2003, the Company approved an amended
operating agreement whereby Spartan would transfer to the Company its 24.225%
interest in Vaughn in consideration for the issuance by the Company of 250,000
shares of common stock. Accordingly, as of October 31, 2003, the Company would
have a direct interest in Vaughn Properties of 71.725%. This amended operating
agreement memorializing this arrangement has not yet been executed by the
members of Vaughn Partners holding 5% of the membership interests thereof.
The 47.5% equity interest in Vaughn is being consolidated into these
financial statements based on the significant control that the Company has over
Vaughn at September 30, 2003.
In November, 2003, an investor executed a subscription agreement to
purchase 1,000,000 shares of common stock for ten cents a share, or an aggregate
of $100,000. Said investor was granted piggy-back registration rights with
respect to its shares for a period of two years. As of December 24, 2003, the
investor has only paid $20,000 of its purchase price.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Employment Agreement effective September 1, 2003, by and
between Consumers Financial Corporation and Donald J. Hommel
4.2 Employment Agreement effective September 1, 2003, by and
between Consumers Financial Corporation and Jack Ehrenhaus
4.3 Agreement dated October 27, 2003 between Consumers Financial
Corporation and David Sassoon & Co. PLC
4.4 Agreement dated as of September 10, 2003 by and between Hudson
Valley Home Builders & Developers Corp. and Consumers
Financial Corp.
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Section 302 certification by Chief Executive Officer
31.2 Section 302 certification by Chief Financial Officer
32 Section 1350 Certifications
32.1 Section 906 certification by Chief Executive Officer
32.2 Section 906 certification by Chief Financial Officer
(b) Reports on Form 8-K
On September 25, 2003, the Company filed a Current Report on Form
8-K under Item 4 to announce the resignation of Stambaugh Ness, PC as the
Company's independent accountants and the engagement of Marcum & Kliegman LLP
engaged as the new principal independent accountants, commencing with the
interim financial statement review for the third quarter ending September 30,
2003, and the audit for the year ending December 31, 2003.
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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 January , 2004 By /s/ Donald J. Hommel
--------------- ------------------------------------
Donald J. Hommel
President and Chief Executive Officer
Date January __, 2004 By /s/ Donald J. Hommel
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Donald J. Hommel
Chief Financial Officer