UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 XX No
Indicate the number of shares outstanding of each of the issuer s classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock August 31, 1999
$.01 Stated Value 2,578,295 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements:
Consolidated Statements of Net Assets in Liquidation - 3
September 30, 1999 and December 31, 1998
Consolidated Statements of Changes in Net Assets in Liquidation - 4
For the Nine and Three Months Ended September 30, 1999,
for the Period from March 25, 1998 to September 30, 1998 and
for the Three Months Ended September 30, 1998
Consolidated Statement of Operations - 5
For the Period from January 1, 1998 to March 24, 1998
Consolidated Statement of Cash Flows - 6
For the Period from January 1, 1998 to March 24, 1998
Notes to Consolidated Financial Statements 7 - 12
Item 2. Management s Discussion and Analysis of Results of 13-17
Operations and Financial Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION> SEPTEMBER 30,
1999 December 31,
(in thousands) (UNAUDITED) 1998
<S> <C> <C>
Assets
Investments:
Fixed maturities $368 $1,043
Mortgage loans on real estate 1,558 1,600
Other invested assets 5 75
Short-term investments 1,977 1,732
Total investments 3,908 4,450
Cash 97 172
Accrued investment income 22 36
Receivables 12,595 21,590
Prepaid reinsurance premiums 31,180 34,840
Deferred policy acquisition costs 12 50
Property and equipment 1,082 1,018
Other real estate 187
Other assets 143 345
Total assets 49,039 62,688
Liabilities and Redeemable Preferred Stock
Liabilities:
Future policy benefits 9,162 17,645
Unearned premiums 31,180 35,163
Other policy claims and benefits payable 2,446 2,882
Other liabilities 1,475 1,800
44,263 57,490
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible 4,675 4,815
Total liabilities and redeemable preferred stock 48,938 62,305
Net assets in liquidation $101 $383
</TABLE>
See Notes to Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
<TABLE>
FOR THE PERIOD
<CAPTION> Nine Months Three Months FROM MARCH 25, Three Months
Ended Ended 1998 TO Ended
September 30, September 30, SEPTEMBER 30, September 30,
(in thousands) 1999 1999 1998 1998
<S> <C> <C> <C> <C>
Operating income:
Earned premiums $320 $119 $157 $78
Net investment income 148 39 387 122
Net fees from sale of customer 312 113 215 60
accounts
Joint venture experience refunds (50) (50) 222 44
Net realized investment gains 98 98 (3) (4)
(losses)
Gain (loss) on disposal of
discontinued
business 84 (41)
Miscellaneous 308 191 134 63
1,136 510 1,196 322
Operating expenses:
Policyholder benefits 319 108 157 78
Rent and related costs 129 27 181 109
Salaries, wages and employee 289 107 265 112
benefits
Professional fees 149 43 274 108
Taxes, licenses and fees 17 (6) 160 26
Miscellaneous 267 161 82 35
1,170 440 1,119 468
Operating income (loss) before
income taxes (34) 70 77 (146)
Income tax benefit (expense) 7 4 (143) (30)
Decrease in unrealized appreciation
of debt securities (25) (4) (37) (21)
Preferred stock dividends (307) (102) (204) (102)
Adjustment of preferred stock
to redemption value 77 77 (175)
Other 50
Increase (decrease) in net assets
for the period (282) 45 (432) (299)
Net assets at beginning of period 383 56 1,715 1,582
Net assets at end of period $101 $101 $1,283 $1,283
</TABLE>
See Notes to Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 24, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data)
<S> <C>
Revenues:
Premiums written ($4)
Decrease in unearned premiums 87
Premium income 83
Net investment income 60
Net realized investment gains 24
Fees and other income 181
348
Benefits and expenses:
Death and other benefits 83
Operating expenses 368
451
Loss from continuing operations before income tax benefit (103)
Income tax benefit 15
Loss from continuing operations (88)
Discontinued operations:
Gain on disposal of discontinued business (net of income taxes) 112
Net income $24
Basic and diluted income (loss) per common share:
Loss from continuing operations ($0.08)
Discontinued operations 0.04
Net loss ($0.04)
Weighted average number of shares outstanding 2,596
Cash dividends declared per common share NONE
</TABLE>
See Notes to Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 24, 1998
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash flows from operating activities:
Net income $24
Adjustments to reconcile net income to net cash provided by operating
activities:
Other amortization and depreciation 24
Change in amounts due reinsurers (142)
Income taxes (15)
Change in other receivables 1,497
Change in other liabilities (376)
Other (434)
Total adjustments 554
Net cash provided by operating activities 578
Cash flows from investing activities:
Purchase of investments (3)
Maturity of investments 1,000
Sale of investments 1,829
Net assets transferred in sale of credit insurance business (3,647)
Net cash used in investing activities (821)
Cash flows from financing activities:
Cash dividends to shareholders (109)
Net cash used in financing activities (109)
Net decrease in cash (352)
Cash at beginning of period 641
Cash at end of period $289
</TABLE>
See Notes to Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by Consumers Financial Corporation and its wholly
owned subsidiaries (the Company) over the past five years have significantly
reduced its net worth and liquidity position. As a result, in May 1998, the
Company completed the sale of 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. The Company s income or loss from
operations now consists principally of (i) earned premium and related costs
associated with a small, closed block of extended service contract business,
(ii) fee revenues received from Life of the South Corporation (LOTS), the
company which acquired the Company s credit insurance customer accounts, (iii)
investment income on remaining assets and (iv) corporate expenses.
On March 24, 1998, the Company s preferred and common 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.
Certain information and note 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 1998 Form 10-K.
The changes in net assets for the nine and three month periods ended September
30, 1999 are not necessarily indicative of the changes to be expected for the
full year.
2. DISCONTINUED OPERATIONS AND PLAN OF LIQUIDATION:
On December 30, 1997, the Company entered into agreements with LOTS and
American Republic Insurance Company (American Republic), pursuant to which the
Company (i) sold its credit insurance and fee income accounts to LOTS
effective October 1, 1997, (ii) sold its September 30, 1997 inforce block of
credit insurance business to American Republic effective January 1, 1998 and
(iii) sold one of its wholly-owned reinsurance subsidiaries to LOTS effective
August 31, 1998.
LOTS and the Company also agreed that, with respect to the Company s principal
insurance subsidiary, new credit insurance business produced by that
subsidiary s former customer accounts, which were transferred to LOTS, would
continue to be written on the policy or certificate forms of the subsidiary
until September 30, 1999, or an earlier date which may be agreed to by the
parties. This premium and the related insurance risk are also reinsured 100% to
American Republic. The parties subsequently modified their agreement to extend
the September 30, 1999 date to November 15, 1999 with respect to Pennsylvania
premiums only.
The sale of the inforce block of business referred to in (ii) above was
completed on May 13, 1998 after the required approvals of the Company s
preferred and common shareholders and state insurance regulators in the states
of Delaware and Ohio were received. The sale of the reinsurance subsidiary was
approved by the insurance regulators in the State of Arizona in August 1998 and
closing on the sale occurred in September 1998.
The sale of the inforce block of business resulted in an after-tax loss of
approximately $3,665,000, of which $3,919,000 was reflected in the Company s
fourth quarter 1997 financial statements through a writedown of deferred policy
acquisition costs. An offsetting gain on disposal of $254,000, which resulted
from adjustments to certain estimates made in 1997, was included in the
Company s 1998 financial statements.
In addition to approving the sale of the inforce credit insurance business, at
the Special Meeting of Shareholders held on March 24, 1998, the Company s
shareholders also approved a Plan of Liquidation and Dissolution, pursuant to
which the Company intends to liquidate its remaining assets, provide for all of
its liabilities, redeem its preferred stock and distribute all remaining cash
to its common shareholders. Pursuant to the terms of its agreement with LOTS,
the Company is receiving and will receive payments from LOTS until
September 30, 2002 based on the amount of credit insurance premiums produced
by the customer accounts sold by the Company to LOTS. The Company may also
receive a payment from a contingency fund established by the parties based on
the claims experience on the inforce credit insurance business from
October 1, 1997 to September 30, 2002 (see Note 4). As a result, the
distribution, if any, to the Company s common shareholders will not be made
until late in 2002 when the amounts due from LOTS have been received. The
Company has made substantial personnel reductions during the past several
years as a result of the discontinuation of its various businesses.
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. Significant components
of the Company's deferred tax liabilities and assets were as follows
(in 000's):
<TABLE>
<CAPTION> September 30, December 31,
1999 1998
<S> <C> <C>
Deferred tax liabilities:
Fixed maturities $9
Deferred policy acquisition costs $4 17
Other - 41
4 67
Deferred tax assets:
Future policy benefits and financial reinsurance 65 64
Net operating loss carryforwards 2,299 2,175
Other 228 259
2,592 2,498
Valuation allowance for deferred tax assets (2,588) (2,431)
4 67
Net deferred tax asset $0 $0
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows (in 000's):
<TABLE>
<CAPTION> FOR THE PERIOD
Nine Months Three Months FROM MARCH 25, Three Months
Ended Ended 1998 TO ended
September 30, September 30, SEPTEMBER 30, September 30,
1999 1999 1998 1998
<S> <C> <C> <C> <C>
Current ($7) ($4) $44 $19
Deferred - - 99 11
Total income tax
expense (benefit) ($7) ($4) $143 $30
</TABLE>
The reconciliation of the provision (benefit) for income taxes and the amount
which would have been provided at statutory rates is as follows (in 000's):
<TABLE>
<CAPTION> For the Period
from
January 1, 1998
to March 24,
1998
<S> <C>
Loss from continuing operations before income tax benefit ($103)
Income tax benefit at 34% statutory rate on pre-tax loss ($35)
Dividends received deduction (4)
State income taxes 2
Items not includable for tax purposes 79
Other, net (57)
Actual income tax benefit ($15)
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
In 1989, the Company entered into an agreement for the lease of office space.
The facility contains approximately 44,500 square feet of office space. The
term of the lease is ten years with an option to renew for one additional term
of five years. Until March 1994, monthly lease payments were $35,000. In March
1994, the Company exercised its option to acquire a 50% interest in this
property at a price of $1,750,000. The Company continued to lease the portion
of the building it does not own for $17,000 per month through July 1999 when
its lease expired. Prior to the expiration of the lease, the Company
subleased a portion of the office space to various third party tenants.
Effective August 1, 1999, the Company and its co-owner share equally in the
rent from these tenants. The building lease was classified as an operating
lease. The Company has no other significant leases.
In connection with the cancellation of a joint venture agreement in 1996, the
Company agreed to pay its former joint venture partner a pro rata share of the
proceeds it receives from the sale of its credit insurance accounts.
Accordingly, over the next three and one-half years, the Company will pay its
former partner approximately 19% of any gross fee revenues received from LOTS
for the sale of its customer accounts.
Reinsured risks would give rise to liability to the insurance subsidiaries
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 which 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 completely without merit and intends to vigorously defend itself 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.
A dispute has arisen between the Company and the purchaser of its credit
insurance business relating to the payment of investment income on the assets
which were transferred to the purchaser. Subsequent to the closing of the
transaction, the purchaser claimed that the Company owes it approximately $1,
400,000 for investment earnings on the amount transferred
from October 1, 1997, the effective date of the agreement, to May 13, 1998,
the date of settlement on the sale transaction. In October 1999, the purchaser
informed the Company that it would begin withholding from the Company the fee
income payments which are contractually due to the Company from the sale of
the credit insurance accounts. For the nine months ended September 30, 1999,
fee income totaled $312,000. The Company believes the purchaser s claim
for investment income is without merit and intends to take all actions
necessary to collect the fee income amounts to which it is contractually
entitled. However, the ultimate outcome of this matter cannot be determined
at this time.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company or its subsidiaries. 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 result in a significant effect on the financial
condition or future operating results of the Company or its subsidiaries. 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 does not believe that the
ultimate outcome of any such challenges will have a material effect on the
Company s financial statements.
5. REDEEMABLE PREFERRED STOCK:
The terms of the Company s 8.5% redeemable preferred stock require the Company
to make annual payments into a sinking fund. The first such payment was due
in July 1999 in the amount of $414,610. However, the Company was unable to
make this payment because of an insufficient level of liquid assets. As a
result of its inability to make the sinking fund payment, the Company may not
pay any dividends to common shareholders and may not purchase, redeem or
otherwise acquire any common shares. The terms of the preferred stock also
state that any purchase of preferred shares by the Company will reduce the
sinking fund requirements by the redemption value of the shares purchased.
Accordingly, the purchase of 14,000 preferred shares in September 1999
resulted in a $140,000 reduction in the amount due to the fund. At
September 30, 1999, the sinking fund deficiency was $274,610.
6. PER SHARE INFORMATION:
The following table sets forth the computation of basic and diluted per common
share data for continuing operations for the period prior to the adoption of
the liquidation basis of accounting:
<TABLE>
<CAPTION> For the Period
from
(in thousands, except per share amounts) January 1, 1998
to March 24,
1998
<S> <C>
Loss from continuing operations ($88)
Preferred stock dividends (109)
Accretion of carrying value of preferred stock (9)
Numerator for basic loss per share - loss attributable to
common shareholders (206)
Effect of dilutive securities 0
Numerator for diluted loss per share ($206)
Denominator for basic loss per share - weighted average shares 2,596
Effect of dilutive securities 0
Denominator for diluted loss per share 2,596
Basic and diluted loss per common share ($0.08)
</TABLE>
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
A review of the significant factors which affected the Company s net assets in
liquidation at September 30, 1999 and the changes in its net assets in
liquidation for the nine and three month periods ended September 30, 1999 is
presented below. 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 1998 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
The Company s shareholders approved a Plan of Liquidation and Dissolution at a
Special Meeting held on March 24, 1998. Accordingly, 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.
The agreement with the purchaser of the Company s credit insurance business
provides that the proceeds from the sale of the customer accounts are to be
received as fee income on a quarterly basis until September 2002, based on the
amount of credit insurance premiums produced by those accounts. However, as
discussed in Note 4 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-Q, a dispute has arisen between the Company and the
purchaser regarding the payment of investment income on the assets which were
transferred in connection with the sale of the Company s inforce credit
insurance business to the purchaser. The purchaser has recently informed the
Company that it would begin withholding the above-referenced fee income
payments to offset the investment income it claims it is due. For the nine
months ended September 30, 1999, fee income totaled $312,000. The Company
believes the purchaser s claim for investment income is without merit and
intends to take all actions necessary to collect the fee income amounts to
which it is contractually entitled. However, the ultimate outcome of these
matters cannot presently be determined.
The Company may also receive a payment from a contingency fund established by
the Company and the purchaser based on the claims experience on the inforce
credit insurance business from October 1, 1997 to September 30, 2002. However,
based on the claims experience from October 1, 1997 through December 31, 1998,
as provided by the purchaser, the Company would not be entitled to any portion
of the contingency fund. Because of the fee income payments and the potential
payment from the contingency fund, the distribution, if any, to the Company s
common shareholders will not be made until late in 2002, when all amounts due
from the purchaser have been received.
The Company s net assets in liquidation declined during the first nine months
of 1999 from $383,000 to $101,000 primarily because of the preferred
shareholder dividends of $307,000. Operating expenses for the period exceeded
operating income by $33,000. However, the Company purchased 14,000 shares of
its preferred
<PAGE>
stock for $77,000 less than the redemption value of those
shares, resulting in a corresponding increase in the Company s net assets. The
Company also benefitted from the settlement and revaluation of certain
liability amounts, the effects of which have been included in miscellaneous
income. This income was partially offset by a $119,000 write-off of the
remaining value of the insurance charter and state licenses of one of the
Company s subsidiaries. This write-off is included in miscellaneous expenses.
In the third quarter of 1999, net assets increased by $45,000 (from $56,000 to
$101,000). A substantial portion of the liability settlement and revaluation
referred to above and the $77,000 increase resulting from the purchase of the
preferred shares both occurred during the third quarter. These gains more than
offset the $102,000 preferred dividend for the quarter.
In the first quarter of 1998, prior to the adoption of the liquidation basis of
accounting, the Company s net income was $24,000, which included a $112,000
gain representing an adjustment, net of tax, to the $3,100,000 loss reported
in 1997 from the disposal of the Company s credit insurance business.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
As a result of the sale of its remaining insurance business and the
adoption of the Plan of Liquidation, the Company s income and expenses
now consist principally of (i) fee income from the sale of the Company s
customer accounts,
(ii) investment income on existing assets and (iii) corporate expenses,
primarily salaries, professional fees and home office and related real estate
costs. A small, closed block of extended service contract business assumed from
another insurer continues to generate earned premiums and policyholder benefits
but has no impact on the Company s changes in net assets. A discussion of the
material factors which affected the changes in the Company s net assets in
liquidation for the nine and three month periods ended September 30, 1999 and
for the comparable periods in 1998 is presented below.
For the first nine months of 1999, the Company s operating expenses exceeded
its operating income by $33,000. For the same period in 1998, including the
period prior to the adoption of the liquidation basis of accounting, the
Company reported operating income in excess of operating expenses of $86,000.
As referred to above, during 1999, the Company settled certain liability
amounts and revalued certain other liabilities, resulting in a reduction in
those liabilities. In addition, the Company purchased 14,000 shares of its
preferred stock for $77,000 less than the redemption value of those shares,
resulting in a corresponding increase in the Company s net assets in
liquidation. These increases were partially offset by a $119,000 write-off
of the remaining value of the insurance charter and state licenses of one of
the Company s subsidiaries. The write-off resulted from the surrender of
the subsidiary s certificate of authority as a life insurance company based
on management s determination that the charter and licenses could not be
readily sold. The Company also reported a $50,000 loss from a now terminated
joint venture in 1999 compared to unusually high profits of $222,000 from that
venture for the same period in 1998. In 1998, the Company also reflected a
$196,000 gain from the sale of its credit insurance business, which
represented an adjustment to certain estimates made in 1997 when the loss on
the sale was initially reported.
The Company continues to incur costs for (i) professional fees, primarily
accounting and legal fees, (ii) employee expenses related to its three
remaining full-time employees and (iii) rent and other costs related to the
Company s home office building. With respect to the home office building, in
which it owns a one-half interest, the Company s lease on the half of the
building which it does not own expired on July 31, 1999. In accordance with
the terms of the lease agreement, the Company paid all taxes, insurance,
utilities and repairs in addition to its base rent. The Company is now only
responsible for a minimal amount of rent for the limited space it occupies and
for one-half of the operating costs. In September 1999, the Company and its
co-owner signed an agreement to sell the property for an amount which, net of
closing costs, exceeds the September 30, 1999 carrying value. Pursuant to the
terms of the agreement, the sale is contingent upon the buyer s ability to
secure financing by December 15, 1999. If the buyer obtains the necessary
financing, closing is scheduled for February 1, 2000.
The $45,000 increase in net assets which occurred in the third quarter of 1999
represents a significant improvement over the $299,000 decline reported for the
third quarter of last year. The improvement in 1999 compared to 1998 is
primarily the result of the settlement and revaluation of certain liability
amounts referred to earlier, most of which occurred in the third quarter, the
purchase of preferred shares for less than the redemption value of the shares
and reductions in rent expense (due to the termination of the Company s
building lease in July) and professional fees. The decrease in net assets in
the third quarter of 1998 is primarily attributable to higher expenses.
ESTIMATED NET EXPENSES DURING LIQUIDATION PERIOD
As indicated above, the liquidation of the Company is expected to continue
until late in 2002 when all fee payments and other potential distributions
will have been received from the purchaser of the credit insurance business.
Until that time, certain corporate expenses will continue to be incurred and
investment income will continue to be earned on existing invested assets. The
Board of Directors may determine during this period that the amount of funds
available for ultimate distribution to shareholders may be increased by
transferring all of the Company s remaining net assets into a liquidating
trust, in which case the trustees of such trust would be responsible for
liquidating all remaining assets, paying all liabilities and making any
distributions to the preferred and common shareholders.
Based on management s estimates, which exclude the potential savings, if any,
from the use of a liquidating trust, the Company believes that its future
operating expenses and other costs, including preferred shareholder dividends,
will exceed fee income and other revenues during the remaining liquidation
period by approximately $700,000 to $900,000. Actual income and expenses could
vary significantly from the present estimates due to uncertainties as to when
certain assets will be liquidated, when the distribution to preferred
shareholders occurs, the outcome of the fee income dispute referred to above,
the level of actual expenses which will be incurred and the ultimate resolution
of various contingencies which exist and which may arise in the future. Based
on the above estimates and because of the uncertainties described above, there
is no assurance that the Company s common shareholders will receive any
distribution or that the distribution to preferred shareholders will be equal
to the full redemption value of those shares.
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. The Company s net assets in liquidation were
$383,000 at the beginning of 1999 compared to $101,000 at September 30, 1999.
Net assets declined principally as a result of $307,000 in preferred share-
holder dividends. The Company s total invested assets (consisting of bonds,
mortgage loans and short-term investments) decreased from $4,450,000
to $3,908,000 during the first nine months of 1999. Most of the reduction
is attributable to the preferred dividend payments referred to above.
LIQUIDITY
The Company s subsidiaries have historically met most of their cash
requirements from funds generated from operations, while the Company has
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 the fee income from LOTS, investment
income on existing assets and proceeds from the sale of non-liquid assets.
These funds must be used to settle all remaining liabilities as they become
due, to pay operating expenses until the Company is dissolved and to pay
dividends to preferred shareholders until the Company s preferred stock is
redeemed. The adequacy of the Company s liquidity position in the future will
be principally dependent on its ability to sell its real estate
investments and other non-liquid assets and the timing of such sales, as well
as on the outcome of the fee income dispute referred to above and the level of
operating expenses the Company must incur during the liquidation period
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 three years, the effects of inflation on the Company
are minimal.
YEAR 2000 COMPLIANCE
Because the Company is no longer conducting any business operations and is in
the process of liquidating its remaining assets, it is therefore relying, both
directly and indirectly, on fewer computer systems than in the past to maintain
all of its financial and other records and to file all required financial
reports with state insurance departments and other regulators. In fulfilling
its continuing, although limited, responsibilities, the Company directly
utilizes only two computer systems, one for its general ledger accounting and
one for maintenance of its shareholder records (since the Company continues to
perform its own stock transfer agent functions). The Company has received
written assurances from both software vendors that their respective systems
have been tested and will operate problem free during and after the year 2000.
The Company also receives certain computer generated information from the
purchaser of its credit insurance business, and has obtained a year 2000
certification from the purchaser stating that all of its hardware and software
systems have been tested and are year 2000 compliant. Based on the above,
management does not believe that its very limited operations will be adversely
impacted by year 2000 computer problems.
SINKING FUND FOR REDEEMABLE PREFERRED STOCK
The terms of the Company s 8.5% redeemable preferred stock require the Company
to make annual payments into a sinking fund. The first such payment was due in
July 1999 in the amount of $414,610. However, the Company was unable to make
this payment because of an insufficient level of liquid assets. As a result
of its inability to make the sinking fund payment, the Company may not pay any
dividends to common shareholders and may not purchase, redeem or otherwise
acquire any common shares. The terms of the preferred stock also state that
any purchase of preferred shares by the Company will reduce the sinking fund
requirements by the redemption value of the shares purchased. Accordingly, the
purchase of 14,000 preferred shares in September 1999 resulted in a $140,000
reduction in the amount due to the fund. At September 30, 1999, the sinking
fund deficiency was $274,610.
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 subsidiaries 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
September 30, 1999.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 1999, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The registrant has not defaulted in the payment of principal, interest or in
any other manner on any indebtedness and is current with all its accounts.
There is no arrearage in the payment of dividends on the registrant's
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 September 30, 1999.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
None
(b) No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999.
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 November 12, 1999 By /S/
James C. Robertson, President
(Chief Executive Officer)
Date November 12, 1999 By /S/
R. Fredric Zullinger
Senior Vice President,
Chief Financial Officer
and Treasurer
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