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, 2000
COMMISSION FILE NUMBER: 0-2616
CONSUMERS FINANCIAL CORPORATION
1513 CEDAR CLIFF DRIVE
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 October 31, 2000
$.01 Stated Value 2,578,217 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, 2000 and December 31, 1999
Consolidated Statements of Changes in Net Assets in Liquidation - 4
Nine and Three Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 5 - 9
Item 2. Management s Discussion and Analysis of Results of 10-14
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16-17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION> SEPTEMBER 30,
2000 December 31,
(Dollar amounts in thousands) (UNAUDITED) 1999
<S> <C> <C>
Assets
Investments:
Fixed maturities $927 $896
Mortgage loans on real estate 59 1,552
Short-term investments 3,403 1,146
Total investments 4,389 3,594
Cash 51 274
Accrued investment income 24 19
Reinsurance recoverable 8,916 11,404
Other receivables 541 484
Prepaid reinsurance premiums 16,524 27,644
Property and equipment 1,179
Other assets 148 150
Total assets 30,593 44,748
Liabilities and Redeemable Preferred Stock
Liabilities:
Future policy benefits 7,298 9,078
Unearned premiums 16,524 27,644
Other policy claims and benefits payable 1,657 2,365
Pension plan liability 939 534
Other liabilities 604 795
27,022 40,416
Redeemable preferred stock:
Series A, 8 l/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 2000, 457,961 shares; 1999,
463,461 shares; net of $1,008 reduction in 2000 and $303
1999 to reflect estimated liquidation value 3,571 4,332
Total liabilities and redeemable preferred stock 30,593 44,748
Net assets in liquidation $0 $0
</TABLE>
See Notes to Consolidated Financial Statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(UNAUDITED)
<TABLE>
<CAPTION> Nine Months Nine Months THREE MONTHS Three Months
Ended Ended ENDED Ended
September 30, September 30, SEPTEMBER 30. September 30,
(in thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Earned premiums $320 $119
Net investment income $237 148 $62 39
Net fees from sale of customer
accounts 200 312 68 113
Joint venture income (loss) 36 (50) 3 (50)
Net realized investment gains 98 98
Miscellaneous 139 101 93 20
612 929 226 339
Benefits and expenses:
Policyholder benefits 319 108
Rent and related costs 40 129 11 27
Salaries and employee benefits 196 289 43 107
Professional fees 139 149 45 43
Write-off of fee income receivable 116 116
Taxes, licenses and fees 48 17 13 (6)
Miscellaneous 198 239 67 138
737 1,142 295 417
Excess of benefits and expenses
over revenues (125) (213) (69) (78)
Increase in liability for underfunded
pension plan (405) (180)
Adjustment of liabilities to estimated
settlement amounts 62 207 171
Preferred stock dividends (294) (307) (98) (102)
Adjustment of preferred stock
to estimated realizable value 705 323
Retirement of treasury shares-preferred 35 10
Other increases in net assets 22 31 14 54
Increase (decrease) in net
assets for the period 0 (282) 0 45
Net assets at beginning of period 0 383 0 56
Net assets at end of period $0 $101 $0 $101
</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, 2000 AND 1999
(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 customer accounts,
(ii) investment income on remaining assets, and (iii) corporate expenses.
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.
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 September 30, 2000 and the consolidated changes
in its net assets for the nine and three month periods ended September 30,
2000 and 1999. Certain prior year amounts have been reclassified to conform
with classifications used for 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 1999 Form 10-K.
The changes in net assets for the nine and three month periods ended
September 30, 2000 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, LOTS financial partner in
the transaction, effective January 1, 1998 and (iii) sold one of its
wholly-owned reinsurance subsidiaries to LOTS as of 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
(November 15, 1999 with respect to Pennsylvania premiums). These premiums
and the related insurance risk were also reinsured 100% to American
Republic.
The sale of the inforce block of business referred to in (ii) above was
completed in May 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. Settlement on the sale of the
reinsurance subsidiary referred to (iii) above occurred in September 1998.
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 is now liquidating its remaining assets and providing
for all of its liabilities. The Company eventually intends to make a cash
distribution to its preferred shareholders and ultimately distribute its
remaining cash, if any, to its common shareholders. Pursuant to the terms
of its agreement with LOTS, the Company would have received payments from
LOTS from the sale of the Company s customer accounts until September 30,
2002. However, as discussed in Note 4, the Company has waived its right to
receive this fee income after September 30, 2000 in order to settle a
dispute with LOTS. In 2002, the Company could also receive a payment from a
contingency fund held by LOTS. The allocation of the contingency fund
balance between the Company and LOTS will be based on the claims experience
on the inforce credit insurance business from October 1, 1997 to September
30, 2002. Based on the Company s review of the claims experience on the
inforce block, as computed by LOTS, it is likely that LOTS will be entitled
to most, if not all, of the assets in the contingency fund. In connection
with the above-referenced settlement, the Company has permitted LOTS to
withdraw $500,000 from the fund, which had a balance at September 30, 2000
of approximately $1,314,000.
The Company has made substantial personnel reductions during the past
several years as a result of the discontinuation of its various businesses.
As of November 8, 2000, two people were employed on a full-time basis by the
Company.
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,
2000 1999
Deferred tax assets:
<S> <C> <C>
Future policy benefits $60
Net operating loss carryforwards $1,288 2,300
Other 303
1,288 2,663
Valuation allowance for deferred tax assets (1,288) (2,663)
0 0
Deferred tax liabilities 0 0
Net deferred tax asset $0 $0
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
From March 1994 until August 2000, the Company owned a 50% interest in its
home office building. The Company leased the portion of the building it did
not own at a rate of $17,000 per month until July 1999 when its lease
expired. The Company also subleased a portion of the unused space in the
building to third party tenants until April 2000. Income from these
subleases totaled $147,924 in the first nine months of 1999, while only
$13,562 was received in 2000. The office building was sold in August 2000
at a price which exceeded the carrying value of the property by
approximately $65,000. The building lease was classified as an operating
lease. The Company has no other significant leases.
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 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 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.
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 inforce 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 amount
transferred for the period 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, LOTS 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. As of September 30,
2000, net fee income totaling $421,000 had been withheld by LOTS compared to
$137,000 which had been withheld through December 31, 1999. In October
2000, the parties settled this dispute. Pursuant to the terms of the
settlement, the Company will receive an immediate cash payment of $250,000
from LOTS in lieu of any future fee income payments. The Company also
agreed to permit LOTS to withdraw $500,000 from the contingency fund
established by the parties at the time of the sale transaction, subject to
the Company s review of the claims experience on the inforce block of
business sold to LOTS. The effects of this settlement have been reflected
in the Company s September 30, 2000 financial statements. The settlement
resulted in a $171,000 write down of the $421,000 receivable from LOTS and
an offsetting $56,000 reduction of the Company s liability to its joint
venture partner, since this obligation represents a percentage of the fee
income received from LOTS.
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 have a significant effect on
the net assets or changes in net assets 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
believes that the ultimate outcome of any such challenges will not 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 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
and 5,500 shares in 2000 further reduced the 1999 deficiency to $179,610.
On July 1, 2000, an additional $550,000 sinking fund payment became due but
was not paid. As a result, the total sinking fund deficiency at September
30, 2000 was $729,610. 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.
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, 2000 and the changes in its net assets in
liquidation for the nine and three month periods ended September 30, 2000 is
presented below. Information relating to 1999 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 1999 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 inforce credit insurance
business, the Company also sold its credit insurance customer accounts and one
of its life insurance subsidiaries. At the Special Meeting, the shareholders
also approved a Plan of Liquidation and Dissolution, pursuant to which the
Company is now liquidating its remaining assets so that it can pay or provide
for all of its liabilities, distribute cash to its preferred shareholders, up
to the liquidation preference of those shares, and distribute the remaining
cash, if any, to its common shareholders.
The agreement with the purchaser of the credit insurance operations 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 arose during 1999 between the Company and the
purchaser regarding the payment of investment income on the assets which were
transferred to the purchaser in connection with the sale of the inforce credit
insurance business. Because of the dispute, the purchaser began withholding
the above-referenced fee income from the Company to offset the investment
income it believed it was due. At September 30, 2000, $421,000 of fee income
had been withheld by the purchaser. In October 2000, the parties settled this
dispute.
As more fully described in Note 4, in connection with the settlement, the
Company will receive a $250,000 immediate cash payment from the purchaser in
lieu of any future fee income payments.
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 to date, as provided by the purchaser, the
Company would not be entitled to any portion of the contingency fund. Based on
the Company s determination that the purchaser will probably be entitled to
most, if not all, of the assets in the contingency fund, the Company has
permitted the purchaser to withdraw $500,000 from the fund as a part of the
above referenced settlement. The contingency fund had a balance of approxi-
mately $1,314,000 at September 30, 2000.
As a result of the approval of the Plan of Liquidation, 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 assets and liability amounts
using accounting principles applicable to going concern entities.
The Company s net assets in liquidation, which represent the amount
available for distribution to common shareholders, were reduced to zero during
the fourth quarter of 1999. Therefore, all subsequent decreases in net assets
represent reductions in the estimated liquidation value of the Company s
preferred stock. In the first nine months of 2000, the Company reduced the
estimated liquidation value of the preferred stock by $705,000. This decline is
primarily attributable to a $405,000 increase in the liability for the
Company s underfunded pension plan and preferred stock dividends of $294,000.
The increase in the estimated liability to the pension plan is principally the
result of a decline in long-term interest rates during the first nine months of
2000.
For the first nine months of 1999, net assets in liquidation decreased
$282,000 principally as a result of preferred stock dividends of $307,000 and
an excess of benefits and expenses over revenues of $213,000.
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 income from the sale of the Company s customer
accounts, (ii) investment income on existing assets and (iii) corporate
expenses, primarily salaries and professional fees. 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, 2000 and
1999 is presented below.
As indicated above, since the Company s net assets were reduced to zero in
the fourth quarter of 1999, any further decreases in value are being deducted
from the estimated liquidation value of the Company s preferred stock. At
December 31, 1999, the estimated liquidation value of the preferred stock was
$4,332,000 ($9.35 per preferred share), a $303,000 reduction from its stated
liquidation preference of $4,635,000 ($10 per share). In the first nine months
of 2000, the estimated liquidation value declined by an additional $705,000,
primarily due to a $405,000 increase in the estimated liability for the
Company s underfunded pension plan and $294,000 in preferred stock dividends.
The Company also incurred an excess of benefits and expenses over revenues for
the period of $125,000, but this excess was substantially offset by various
miscellaneous increases in net assets. At September 30, 2000, the estimated
liquidation value of the preferred stock was $3,571,000 ($7.80 per share).
In the first nine months of 1999, net assets in liquidation declined by
$282,000, from $383,000 at the beginning of the year to $101,000 at September
30, 1999. This decrease in net assets was primarily the result of preferred
stock dividends of $307,000, an excess of benefits and expenses over revenues
of $213,000, and offset, in part, by a $207,000 adjustment of liabilities to
their estimated settlement amounts.
As stated above, the excess of benefits and expenses over revenues decreased
from $213,000 in the first nine months of 1999 to $125,000 in 2000. This
improvement is due, in part, to reductions in both rent expense (because of the
expiration in July 1999 of the Company s lease on its home office space) and
personnel costs. Fee revenues from the sale of the Company s credit insurance
accounts declined from $312,000 in the first nine months of 1999 to only
$200,000 in 2000. This decrease reflects a reduction in the premiums produced
by the accounts which were transferred as well as some reduction in the number
of accounts. Investment income increased by $89,000 in the first nine months of
2000 due primarily to the collection of $52,000 in interest on a non-performing
mortgage loan which was repaid in full and to higher interest rates on short-
term investments.
The estimated liability for the Company s underfunded pension plan, which is
in the process of being terminated as part of the Company s Plan of Liquida-
tion, was increased by $180,000 in the third quarter of 2000 as a result of a
determination that the interest rate required to be used in computing lump
sum distributions to participants would be less than originally estimated. A
decrease in the rate increases the amount due to participants when a plan
terminates. Because all but one of the factors necessary to compute the final
liability of the plan are now known, management believes the Company s
liability for the unfunded portion of the plan, in the amount of $939,000,
will not differ materially from the ultimate amount which will be required in
order to terminate the plan in December 2000.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS
DURING LIQUIDATION PERIOD
The liquidation of the Company was originally expected to be completed on
or about December 31, 2002 when all of the fee income payments and the
potential distribution from the contingency fund, as discussed in the Overview
section above, would have been received. However, since the Company has
agreed to accept a $250,000 single payment in lieu on any future fee income as
part of the settlement of the dispute referred to above, and because it now
appears unlikely that the Company will receive any distribution from the
contingency fund, the liquidation process is now expected to be completed
within the next twelve to fifteen months. Until that time, certain corporate
expenses will continue to be incurred and investment income will continue to
earn on existing invested funds. In addition, dividends will continue to be
payable to the preferred shareholders until those shares are redeemed.
Based on management s estimates, the Company believes that its 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 $400,000 to $500,000. Actual revenues and expenses and
other net asset changes could vary significantly from the present estimates
due to uncertainties regarding ( i) when certain assets will be liquidated,
(ii) when the distribution to the preferred shareholders occurs, (iii) the
level of actual expenses which will be incurred and (iv) the ultimate
resolution of any future contingencies which may arise.
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 nine months ended September 30, 2000, the
Company s cash and invested assets increased by $572,000, from $3,868,000 at
the beginning of the year to $4,440,000 at September 30, 2000. This increase
is entirely attributable to the sale of the Company s 50% interest in its
former home office building in August 2000. That sale provided approximately
$1,150,000 in additional invested assets. The increase arising from the sale of
the office building was partially offset by a reduction in invested assets
resulting from the payment of $294,000 in preferred dividends.
Invested assets at December 31, 1999 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) three mortgage loans secured by commercial real estate,
including one loan granted to the co-owner of the Company s former home office
building and secured by the co-owner s one-half interest in the building and
(iii) short-term investments, principally money market funds. The mortgage
loan granted to the co-owner of the former home office building, which had a
principal balance at December 31, 1999 of $1,176,000, was repaid in full on
August 10, 2000 when the building was sold. Another loan, with a balance of
$295,000 at the end of 1999, was also repaid in June 2000 when the mortgaged
property was sold and refinanced. At September 30, 2000, 78% of the Company s
$4,389,000 of investments was invested in money market funds because of the
minimal market risk and the liquidity provided by these investments. Virtually
all of the Company s remaining investments were U.S. Treasury Notes on deposit
with state insurance departments..
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 will be 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 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 in the future will be
principally dependent on its ability to sell 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 position is also
dependent on its ability to sell its wholly-owned subsidiary, Consumers Life
Insurance Company, in that dividends and other distributions to the Company
from that subsidiary are limited by state insurance laws. As a result of
its operating losses in recent years, Consumers Life is not permitted to make
any distributions to the Company without approval of 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 and 5,500 shares in
2000 further reduced the 1999 sinking fund deficiency to $179,610. On
July 1, 2000, an additional $550,000 sinking fund payment became due but was
not paid. As a result, the total sinking fund deficiency at September 30,
2000 was $729,610. 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
Due to 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 twelve to fifteen months, the effects of inflation on
the Company are minimal.
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, 2000 and December 31 1999, 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.
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, 2000.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2000, 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 5
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 September 30, 2000, 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 5 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 September 30, 2000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(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)
(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)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(19) Report furnished to security holders (ii)
(22) Published report regarding matters submitted to a vote of
security holders (ii)
(23) Consents of experts and counsel (ii)
(24) Power of attorney (ii)
(27) Financial data schedule (iii)
(99) Additional exhibits (ii)
( i) Information or document provided in previous filing
with the Commission
( ii) Information or document not applicable to registrant
(iii) Information or document included as exhibit to this
Form 10-Q
(b) Reports on Form 8-K:
On July 5, 2000, the registrant filed a Form 8-K in which it
reported that it did not have sufficient liquid assets to pay the
July 1, 2000 quarterly dividend on its 8 l/2% cumulative
convertible preferred stock. The registrant further disclosed
that while its wholly-owned subsidiary had sufficient liquid funds
to cover the dividend, the transfer of such funds is subject to
the approval of the Delaware Department of Insurance, which
approval had not yet been received. On August 23, 2000, the
Insurance Department approved the transfer, and the July 1
dividend was paid on September 1, 2000.
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 10 , 2000 By /S/
James C. Robertson, President
(Chief Executive Officer)
Date November 10, 2000 By /S/
R. Fredric Zullinger
Senior Vice President,
Chief Financial Officer
and Treasurer
