SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
717-730-6306
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 31, 2001
------------------------ -----------------
$.01 Stated Value 2,577,433 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION NUMBER
----------------------------- ------
Item 1. Financial Statements:
Consolidated Statements of Net Assets in Liquidation -
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Changes in Net Assets in Liquidation -
For the Six and Three Months Ended June 30, 2001 and 2000 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 2001 2000
-----------------------------------------------------------------------------------------------
(UNAUDITED)
Assets
------
Investments:
Fixed maturities $ 953 $ 951
Mortgage loans on real estate 35 50
Short-term investments 2,297 2,471
------------ --------------
Total investments 3,285 3,472
Cash 27 7
Accrued investment income 11 27
Reinsurance recoverable 5,327 7,866
Other receivables 307
Prepaid reinsurance premiums 9,049 13,466
Deferred policy acquisition costs 20 40
Other assets 98 120
------------ --------------
Total assets 17,817 25,305
------------ --------------
Liabilities and Redeemable Preferred Stock
------------------------------------------
Liabilities:
Future policy benefits 4,407 6,536
Unearned premiums 9,049 13,466
Other policy claims and benefits payable 920 1,369
Other liabilities 488 614
------------ --------------
14,864 21,985
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 2001, 454,614 shares;
2000, 456,061 shares; net of $1,593 reduction in 2001
and $1,241 in 2000 to reflect estimated liquidation value 2,953 3,320
------------ --------------
Total liabilities and redeemable preferred stock 17,817 25,305
------------ --------------
Net assets in liquidation $ 0 $ 0
============ ==============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q June 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
SIX MONTHS SIX MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30. JUNE 30,
(IN THOUSANDS) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------
Revenues:
Net investment income $ 89 $ 175 $ 42 $ 106
Net fees from sale of customer
accounts 132 78
Joint venture income (loss) (3) 33 26
Miscellaneous 87 46 45 15
------------ ------------ -------------- --------------
173 386 87 225
------------ ------------ -------------- --------------
Benefits and expenses:
Rent and related costs 12 29 6 16
Salaries and employee benefits 88 153 42 76
Professional fees 84 94 49 34
Taxes, licenses and fees 28 35 20 14
Miscellaneous 78 131 49 57
------------ ------------ -------------- --------------
290 442 166 197
------------ ------------ -------------- --------------
Excess of revenues over (under)
benefits and expenses (117) (56) (79) 28
Adjustment of assets to estimated
realizable value (53) (53)
Adjustment of liabilities to estimated
settlement amounts 63 26
Change in unrealized appreciation of
debt securities 2 7 7 3
Preferred stock dividends (193) (196) (96) (98)
Adjustment of preferred stock to
estimated realizable value 352 382 221 255
Increase in liability for under funded
pension plan (225) (225)
Retirement of treasury shares-preferred 9 25 11
------------ ------------ -------------- --------------
Decrease in net assets for the period 0 0 0 0
Net assets at beginning of period 0 0 0 0
------------ ------------ -------------- --------------
Net assets at end of period $ 0 $ 0 $ 0 $ 0
============ ============ ============== ==============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 4
Form 10-Q June 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products
business, which had been its only remaining business operation, following
the sales in 1994 and 1997 of all of its universal life insurance business
and the 1996 sale of its auto auction business. Since the sale of its
credit insurance business, the Company's revenues, benefits and expenses
have consisted principally of (i) fee revenues received from Life of the
South Corporation (LOTS), which acquired the Company's credit insurance
business and its customer accounts, (ii) investment income on remaining
assets and (iii) corporate expenses. However, see Note 4 for information
concerning the discontinuation of the fee revenues .
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution, as discussed in Note 2 below. Accordingly, the
Company adopted a liquidation basis of accounting for periods subsequent to
March 24, 1998. Under the liquidation basis of accounting, assets are
stated at their estimated net realizable values and liabilities are stated
at their anticipated settlement amounts. Prior to March 25, 1998, the
Company reported the results of its operations and its asset and liability
amounts using accounting principles applicable to going concern entities.
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its wholly-owned subsidiary, Consumers Life
Insurance Company (Consumers Life).
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's consolidated net
assets in liquidation as of June 30, 2001 and the consolidated changes in
its net assets for the six and three month periods ended June 30, 2001 and
2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 2000 Form 10-K.
The changes in net assets for the six and three month periods ended June
30, 2001 are not necessarily indicative of the changes to be expected for
the full year.
2. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION:
At a Special Meeting of Shareholders held on March 24, 1998, the Company's
shareholders approved the sale of the Company's in force credit insurance
business as well as a Plan of
Consumers Financial Corporation Page 5
Form 10-Q June 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION (CONTINUED):
Liquidation and Dissolution, pursuant to which the Company is now
liquidating its remaining assets and providing for its liabilities. The
Company eventually intends to distribute its remaining cash to its
preferred shareholders. The Company does not expect to be able to make any
payment to its common shareholders.
3. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At June
30, 2001 and December 31, 2000, the Company had no material deferred tax
liabilities and only one material deferred tax asset relating to net
operating loss carry forwards. This deferred tax asset, which totaled
$1,863,000 and $1,869,000 at June 30, 2001 and December 31, 2000,
respectively, has been fully offset by a valuation allowance.
4. COMMITMENTS AND CONTINGENCIES:
Reinsured risks would give rise to liability to the insurance subsidiary
only in the event that the reinsuring company is unable to meet its
obligations under the reinsurance agreements in force.
In November 1997, the Company and a third party reinsurer were sued by a
former general agency with whom the Company had a partnership agreement.
The partnership agreement provided that the agency would market universal
life insurance business for the Company, pursuant to specific criteria
established by the Company, and would also be entitled to a share of the
profits, if any, which arose from the business produced. The claimant is
seeking monetary damages to compensate it for the Company's alleged failure
to share profits and for other alleged losses resulting from the Company's
rejection of policy applications involving unacceptable risks. While
management believes this claim is without merit and intends to vigorously
defend the Company in this matter, the ultimate outcome of this claim
cannot be determined at this time. The Company has filed two counterclaims
against this agency seeking damages for losses the Company sustained as a
result of the agency's alleged breach of the partnership agreement and to
recover an unpaid loan made to the agency. In December 2000, the trial for
the Company's claim for recovery of the unpaid loan took place, and, in
January 2001, the court awarded a $90,000 judgment in favor of the Company.
During 1999, a dispute arose between the Company and LOTS relating to the
payment of investment income on the assets which were transferred to LOTS
in connection with the sale of the in force credit insurance business.
Subsequent to the closing of the transaction, LOTS claimed that the Company
owed it approximately $1,400,000 for investment earnings on the
Consumers Financial Corporation Page 6
Form 10-Q June 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED):
amount transferred. In October 1999, LOTS informed the Company that it
would begin withholding from the Company the fee revenue payments which
were contractually due to the Company from the sale of the credit insurance
accounts. As of September 30, 2000, fee revenues totaling $421,000 had been
withheld by LOTS. In October 2000, the parties settled this dispute.
Pursuant to the terms of the settlement agreement, LOTS paid the Company
$250,000 in settlement of all prior amounts withheld and in lieu of any
future fee revenue payments. In addition, the Company agreed to permit LOTS
to withdraw $500,000 from a contingency fund established by the parties at
the time of the sale.
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company or its
subsidiary. 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
net assets or changes in net assets of the Company or its subsidiary. The
Company has taken certain income tax positions in previous years that it
believes are appropriate. If such positions were to be successfully
challenged by the Internal Revenue Service, the Company could incur
additional income taxes as well as interest and penalties. Management
believes that the ultimate outcome of any such challenges will not have a
material effect on the Company's financial statements.
5. REINSURANCE:
The sale of the credit insurance business of Consumers Life was completed
pursuant to an indemnity reinsurance agreement with the reinsurer. The
reinsurance transactions through which Consumes Life and its former
subsidiaries sold their individual life insurance business included the use
of both indemnity and assumption agreements. Consumers Life remains
contingently liable for insurance risks ceded under indemnity agreements,
while such risks are legally transferred to the reinsurer when assumption
reinsurance agreements are utilized.
Effective December 31, 2000, Consumers Life converted one of its four
remaining indemnity agreements to assumption reinsurance, thereby
eliminating the contingent risk on that block of reinsured business. As of
January 1, 2001, a similar conversion to assumption reinsurance was
completed on another indemnity agreement. The conversion of the remaining
two indemnity agreements is currently in process. The elimination of these
indemnity agreements is expected to facilitate the sale of Consumers Life,
and will also permit the dissolution of Consumers Life in the event a sale
of the subsidiary cannot be completed.
6. REDEEMABLE PREFERRED STOCK:
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment
was due in July 1998. The preferred
Consumers Financial Corporation Page 7
Form 10-Q June 30, 2001
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
6. REDEEMABLE PREFERRED STOCK (CONTINUED):
stock terms also provide that any purchase of preferred shares by the
Company will reduce the sinking fund requirements by the redemption value
of the shares acquired. As a result of the Company's purchases of preferred
stock prior to 1998, no sinking fund payment was due in 1998, and the
required payment due for 1999 was reduced from $550,000 to $414,610. The
purchase of 18,000 preferred shares in 1999, 7,400 shares in 2000, and
1,447 shares in 2001 has further reduced the 1999 sinking fund deficiency
to $146,140. On July 1, 2000, an additional $550,000 sinking fund payment
became due but was not paid. Consequently, at June 30, 2001, the total
sinking fund deficiency was $696,140. On July 1, 2001, another $550,000
sinking fund payment became due but was also not paid. Because of the
Company's inability to make the sinking fund payments, it may not pay any
dividends to common shareholders and may not purchase, redeem or otherwise
acquire any common shares.
Consumers Financial Corporation Page 8
Form 10-Q June 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A review of the significant factors which affected the Company's net assets
in liquidation at June 30, 2001 and the changes in its net assets in liquidation
for the six and three month periods ended June 30, 2001 is presented below.
Information relating to 2000 is also presented for comparative purposes. This
analysis should be read in conjunction with the Consolidated Financial
Statements and the related Notes appearing elsewhere in this Form 10-Q and in
the Company's 2000 Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's preferred and common shareholders approved the sale of the Company's
credit insurance and related products business, which was the Company's only
remaining business operation. In connection with the sale of its in force
credit insurance business, the Company also sold its credit insurance customer
accounts and one of its life insurance subsidiaries. At the Special Meeting,
the shareholders also approved a Plan of Liquidation and Dissolution, pursuant
to which the Company is now liquidating its remaining assets so that it can pay
or provide for all of its liabilities and distribute its remaining cash to its
preferred shareholders. It is unlikely that any cash will be available for
distribution to the common shareholders.
As a result of the approval of the Plan of Liquidation and Dissolution, the
Company adopted a liquidation basis of accounting in its financial statements
for periods subsequent to March 24, 1998. Under liquidation accounting rules,
assets are stated at their estimated net realizable values and liabilities are
stated at their anticipated settlement amounts. Prior to March 25, 1998, the
Company reported the results of its operations and its asset and liability
amounts using accounting principles applicable to going concern entities.
As discussed below, the Company's net assets in liquidation, which
represent the amount available for distribution to common shareholders, were
reduced to zero in 1999. All decreases in the Company's net assets since that
time have reduced the estimated liquidation value of the preferred stock.
Similarly, any future decreases during the remainder of the liquidation period
will continue to reduce the amount available for distribution to the preferred
shareholders. During the first six months of 2001, this reduction totaled
$352,000 compared to a reduction in the same period of 2000 of
Consumers Financial Corporation Page 9
Form 10-Q June 30, 2001
$382,000. The declines in both periods were, in part, the result of preferred
shareholder dividends,
which totaled $193,000 and $196,000 in 2001 and 2000, respectively, and an
excess of benefits and expenses over revenues. For the six months ended June
30, 2001, the Company's excess of benefits and expenses over revenues was
$117,000 compared to excess benefits and expenses of $56,000 in the first half
of 2000. In addition, in the first half of 2000, the estimated liability for
the Company's under funded Pension Plan (which was terminated later in the year)
was increased by $225,000.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
Since the sale of its remaining insurance business and the adoption of the
Plan of Liquidation, the Company's revenues, benefits and expenses have
consisted principally of ( i) fee revenues from the sale of the Company's
customer accounts, (ii) investment income on existing assets and (iii) corporate
expenses, primarily salaries, pension expense and professional fees. A
discussion of the material factors which affected the Company's changes in net
assets in liquidation for the six and three month periods ended June 30, 2001
and 2000 is presented below.
SIX AND THREE MONTHS ENDED JUNE 30, 2001
As indicated above, since the Company has no net assets available for
common shareholders, all decreases in net assets must be deducted from the
estimated liquidation value of the Company's preferred stock. In the first six
months of 2001, the estimated liquidation value of the preferred stock declined
by $352,000. As a result, at June 30, 2001, the 454,614 shares of preferred
stock outstanding had an estimated liquidation value of $2,953,000, or $6.50 per
share.
The decrease in the liquidation value of the preferred stock in the first
six months of 2001 was primarily due to $193,000 in dividends to the preferred
shareholders, a $53,000 reduction in the estimated realizable value of certain
assets and an excess of benefits and expenses over revenues of $117,000. The
excess of benefits and expenses over revenues is partially attributable to the
fact that the Company is no longer receiving any fee revenues from the sale of
its credit insurance customer accounts, as discussed below. In the first half
of 2000, the Company reported $132,000 in fee revenues. In addition, the
Company incurred approximately $37,000 in legal fees during the period in
connection with several ongoing litigation matters.
For the three months ended June 30, 2001, the estimated liquidation value
of the preferred stock declined by $221,000. All of the factors which affected
the liquidation value during the first six months of the year were also factors
in the decrease which occurred in the second quarter. Preferred shareholder
dividends totaled $96,000, the reduction in the estimated realizable value of
certain assets was $53,000 and benefits and expenses exceeded revenues by
$79,000.
The Company is no longer receiving any fee revenues from the purchaser of
its credit insurance customer accounts. In order to settle a dispute with the
purchaser regarding the payment of investment income on the assets transferred
to the purchaser in the sale of the Company's in force insurance business, in
October 2000, the Company agreed to accept a $250,000 cash payment in settlement
of all prior amounts due from the purchaser and in lieu of any future fee
revenue payments. In the six and three month periods ended June 30, 2000, the
Company reported fee revenues of $132,000 and $78,000, respectively.
Consumers Financial Corporation Page 10
Form 10-Q June 30, 2001
SIX AND THREE MONTHS ENDED JUNE 30, 2000
In the first six months of 2000, the estimated liquidation value of the
preferred stock decreased by $382,000 as a result of (i) a $225,000 increase in
the estimated liability for the Company's under funded pension plan, (ii)
$196,000 in preferred shareholder dividends and (iii) an excess of benefits and
expenses over revenues of $56,000. Expenses in the first half of the year
included approximately $94,000 in audit, legal and actuarial fees and $50,000 in
pension expense. A significant portion of the legal fees during this period
related to the now-settled fee revenue dispute referred to earlier. The
Company's investment income benefitted from the collection of about $40,000 in
past due and unaccrued interest on a non performing mortgage loan, which was
repaid in full following the sale of the property. Partially offsetting the
reductions listed above were increases attributable to the reduction of certain
liabilities to their estimated settlement amounts and other miscellaneous
increases.
The estimated liquidation value of the preferred stock decreased by
$255,000 in the second quarter of 2000. This decline was due to the $225,000
increase in the pension plan liability described above and to preferred
shareholder dividends of $98,000. These decreases were offset, in part, by an
excess of revenues over benefits and expenses for the quarter of $28,000.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD
The time frame for completing the liquidation of the Company is dependent
upon a number of factors, the most significant of which is the sale or
liquidation of the Company's life insurance subsidiary. Most of the assets
which will be available for distribution to the preferred shareholders are held
by the subsidiary and are restricted as to their use by state insurance
regulations. Furthermore, additional shareholder value could be generated from
the sale of the subsidiary because of the value of its 25 state insurance
licenses. The Company is also a defendant in several lawsuits which must be
settled or resolved in court. While management believes the plaintiffs' claims
in these cases are without merit, the ultimate outcome of these maters cannot be
determined at this time. The Company may also be entitled to all or a portion
of the assets in a contingency fund established by the Company and the purchaser
of its credit insurance business based on the claims experience of the in force
credit insurance business from October 1, 1997 to September 30, 2002. However,
based on the claims experience to date, as provided by the purchaser, it does
not appear likely that the Company will receive any portion of the contingency
fund.
As a result of the foregoing, a final distribution cannot be made to the
preferred shareholders until (i) the life subsidiary is either sold (and the
time period of any required indemnifications given to the purchaser has expired)
or liquidated, (ii) the Company has resolved all remaining litigation matters
and (iii) a determination is made regarding the amount of any contingency fund
distribution which might be payable to the Company.
Based on current estimates, management believes that the Company's future
expenses and other changes in net assets, including preferred shareholder
dividends, will exceed its revenues during the remainder of the liquidation
period by approximately $800,000 to $900,000. Actual revenues and expenses and
Consumers Financial Corporation Page 11
Form 10-Q June 30, 2001
other net asset changes could vary significantly from the present estimates
due to uncertainties regarding ( i) when the remaining non liquid assets,
particularly the stock of the life insurance subsidiary, will be liquidated,
(ii) when the distribution to the preferred shareholders will
be made, (iii) the level of actual expenses which will be incurred and (iv) the
ultimate resolution of all current contingencies and any contingencies which may
arise in the future.
FINANCIAL CONDITION
CAPITAL RESOURCES
Given its plans to liquidate and eventually dissolve, the Company has made
no commitments for capital expenditures and does not intend to make any such
commitments in the future. For the six months ended June 30, 2001, the
Company's cash and invested assets decreased by $167,000, from $3,479,000 at the
beginning of the year to $3,312,000 at June 30, 2001. As indicated above, the
decrease is principally the result of the preferred shareholder dividends and
the excess of benefits and expenses over revenues.
Invested assets at June 30, 2001 consisted principally of ( i) U.S.
Treasury Notes, owned by the Company's insurance subsidiary, which are on
deposit with numerous state insurance departments in connection with licensing
requirements, (ii) one mortgage loan, which is scheduled to be paid in full by
June 2002 and (iii) short-term investments, principally money market funds.
As discussed in Note 5 of the Notes to Consolidated Financial Statements
appearing elsewhere in this Form 10-Q, as of January 1, 2001, the Company's
insurance subsidiary converted one of its remaining indemnity reinsurance
agreements to assumption reinsurance, thereby eliminating the contingent
insurance risk on this block of reinsured business. As a result, the
Reinsurance Recoverable asset and the corresponding liability for Future Policy
Benefits relating to this block of business were eliminated from the June 30,
2001 amounts appearing on the Consolidated Statements of Net Assets in
Liquidation. At December 31, 2000, the asset and liability amounts for this
block of business totaled approximately $1,023,000.
LIQUIDITY
Historically, the Company's subsidiaries met most of their cash
requirements from funds generated from operations, while the Company generally
relied on its principal operating subsidiaries to provide it with sufficient
cash funds to maintain an adequate liquidity position. As a result of the
Company's decision to sell its remaining operations, liquidate all of its net
assets and distribute cash to its shareholders, the Company's principal sources
of cash funds are investment income and proceeds from the sales of non liquid
assets. These funds must be used to settle remaining liabilities as they become
due, to pay expenses until the Company is dissolved and to pay dividends on the
preferred stock until a final distribution is made to the preferred
shareholders.
The adequacy of the Company's liquidity position during the remainder of
the liquidation period will be principally dependent on its ability to sell its
remaining non liquid assets and the timing of such sales, as well as on the
level of expenses the Company must incur during the liquidation period. The
Company's liquidity is particularly dependent on its ability to sell its life
Consumers Financial Corporation Page 12
Form 10-Q June 30, 2001
insurance subsidiary, since all dividends and other distributions to the Company
from that subsidiary must be approved by the Delaware Insurance Department.
SINKING FUND FOR REDEEMABLE PREFERRED STOCK
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment was
due in July 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by the
redemption value of the shares acquired. As a result of the Company's purchases
of preferred stock prior to 1998, no sinking fund payment was due in 1998, and
the required payment due for 1999 was reduced from $550,000 to $414,610. The
purchase of 18,000 preferred shares in
1999, 7,400 shares in 2000, and 1,447 shares in 2001 has further reduced the
1999 sinking fund deficiency to $146,140. On July 1, 2000, an additional
$550,000 sinking fund payment became due but was not paid. Consequently, at
June 30, 2001, the total sinking fund deficiency was $696,140. On July 1, 2001,
another $550,000 sinking fund payment became due but was also not paid. Because
of the Company's inability to make the sinking fund payments, it may not pay any
dividends to common shareholders and may not purchase, redeem or otherwise
acquire any common shares.
INFLATION
Because of the Company's current plans to liquidate its assets, pay all of
its liabilities, distribute any remaining cash to its shareholders and
ultimately dissolve within the next 12 to 18 months, the effects of inflation on
the Company are not material.
Consumers Financial Corporation Page 13
Form 10-Q June 30, 2001
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at June 30, 2001 and December 31, 2000, the Company
qualifies as a "small business issuer" under Regulation S-B of the Federal
Securities Laws. A small business issuer is defined as any United States or
Canadian issuer with revenues or public float of less than $25 million.
Consumers Financial Corporation Page 14
Form 10-Q June 30, 2001
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters discussed in Note 4 of the Notes to
Consolidated Financial Statements included elsewhere in this Form
10-Q, neither the registrant nor its subsidiary are involved in any
pending legal proceedings other than routine litigation incidental to
the normal conduct of its business nor have any such proceedings been
terminated during the three months ended June 30, 2001.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2001, there have been no
limitations or qualifications, through charter documents, loan
agreements or otherwise, placed upon the holders of the registrant's
common or preferred stock to receive dividends. As discussed in Note 6
of the Notes to Consolidated Financial Statements appearing elsewhere
in this Form 10-Q, the registrant is prohibited from paying dividends
on its common stock so long as the deficiency in the sinking fund for
the preferred stock exists.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2001, the registrant was not in default in the payment
of principal, interest or in any other manner on any indebtedness and
was current with all its accounts. In addition, there was no arrearage
in the payment of dividends on its preferred stock. However, see Note
6 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-Q for information regarding the
deficiency in the sinking fund for the preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the
registrant during the three months ended June 30, 2001.
ITEM 5. OTHER INFORMATION
On August 3, 2001, the registrant sent a request for proposal letter
to several investor groups which have expressed an interest in
acquiring a controlling interest in the registrant's common stock.
Although the registrant is in the process of completing a plan of
liquidation and dissolution previously approved by its shareholders,
the registrant's Board of Directors is willing to consider a
transaction of this type in lieu of the planned liquidation and
dissolution because it has the potential to produce future value for
the common shareholders, who are projected to receive nothing under
the planned liquidation. Any such transaction, however, must offer
some protection for the preferred shareholders. The Board also expects
to receive and will review proposals from other interested parties in
addition to those who received the initial request for proposal
letter.
Consumers Financial Corporation Page 15
Form 10-Q June 30, 2001
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Part I
------
(11) Statement re computation of per share earnings (ii)
(15) Letter re unaudited interim financial information (ii)
(18) Letter re change in accounting principles (ii)
(19) Report furnished to security holders (ii)
(23) Consents of accountants (ii)
Part II
-------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (i)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders,
including indentures (i)
(10) Material contracts (ii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (excluding accountants) (ii)
(24) Power of attorney (ii)
(99) Additional exhibits (ii)
(i) Information or document provided in previous filing
with the Commission
(ii) Information or document not applicable to registrant
(b) No reports on Form 8-K were filed by the Company during the three
months ended June 30, 2001.
Consumers Financial Corporation Page 16
Form 10-Q June 30, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
-----------------------------------------
Registrant
Date August 9, 2001 By /S/
-------------- ------------------------------------------
James C. Robertson
President and Chief Executive Officer
Date August 9, 2001 By /S/
-------------- ------------------------------------------
R. Fredric Zullinger
Senior Vice President
and Chief Financial Officer
Consumers Financial Corporation Page 17
Form 10-Q June 30, 2001