SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2003
|_| 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 Identification No.)
incorporation or organization)
132 Spruce Street, Cedarhurst, NY 11516
(Address of principal executive offices) (Zip Code)
516-792-0900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not listed
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock (no par; voting) Not listed
8 1/2% Preferred Stock Series A
(par value $1.00 per share; non-voting) Not listed
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The number of outstanding common shares of the registrant as of May 5,
2004 was 21,506,696. Based on the closing price on May 5, 2004, the aggregate
market value of common stock held by non-affiliates of the registrant was
$275,087.
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Finacial Condition and
Results of Operations
Item 7A. Qunatitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
This Annual Report on Form 10-K includes forward-looking statements which
are subject to "safe harbors" created by the Private Securities Litigation
Reform Act of 1995. We have based these forward-looking statements on our
current expectations and projections about future events. These forward-looking
statements can be identified by use of such terms and phrases as "may", "will",
"intend", "goal", "estimate", "could", "expect", "project", "predict",
"potential", "plans", "anticipate", "should", "continue", "might", "believe",
"scheduled" or the negative of such terms or other comparable terminology.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date the statement was made. These risks,
uncertainties and other factors include those identified under "Risk Factors" in
this Annual Report on Form 10-K. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this Annual Report on Form
10-K might not occur.
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, after the date of this Annual Report on Form 10-K. In
addition, we make no representation with respect to any materials available on
the Internet including materials available on our website.
PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") was formed in 1966 as 20th
Century Corporation (a Pennsylvania corporation) and adopted its present name in
1980. The Company was an insurance holding company which, until late 1997, was a
leading provider, through its subsidiaries, of credit life and credit disability
insurance in the states of Pennsylvania, Delaware, Maryland, Nebraska, Ohio and
Virginia. In connection with its credit insurance operations, the Company also
marketed, as an agent, an automobile extended service warranty product. The
Company operated through various wholly-owned subsidiaries since it was formed;
however, as of December 31, 2002, all of these subsidiaries have either been
sold or liquidated and dissolved. From 1992 through 1997, the Company also sold
all of its inforce insurance policies to various third party insurers.
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution (the "Plan of Liquidation"), pursuant to which the
Company would be liquidated and dissolved. The Plan of Liquidation permitted the
Board of Directors to continue to consider other alternatives to liquidating the
Company if such alternatives were deemed by the Board to be in the best interest
of the Company and its shareholders. It became apparent to the Board during 2001
that the common shareholders would not receive any distribution under the Plan
of Liquidation, and the preferred shareholders would receive less than the full
liquidation value of their shares. Consequently, the Board concluded that
selling the Company for its value as a "public company shell" was a better
alternative for the common and preferred shareholders than liquidating the
Company. Accordingly, in August 2001, the Company sent request for proposal
letters to several investor groups that had expressed an interest in acquiring
the Company, and also issued a press release soliciting similar offers. In
October 2001, the Board of directors met to consider three offers which were
received, one of which was from CFC Partners, Ltd. ("CFC Partners"). Following
its review of each offer, the Board determined that the offer from CFC Partners
was the best offer. In February 2002, the Company and CFC Partners entered into
an option agreement (the "Option Agreement") which permitted CFC Partners to
acquire a 51.2% interest in the Company's common stock for $108,000, or $.04 per
common share. The purchase price was deposited into an escrow account held by
the Company in March 2002.
The option held by CFC Partners was exercisable within 15 business days
following the completion by the Company of a tender offer to its preferred
shareholders. The completion of the tender offer was, in turn, dependent on the
sale of the Company's remaining insurance subsidiary, since substantially all of
the Company's assets were held by the subsidiary and state insurance laws would
not permit the withdrawal of those assets. In June 2002, the Company completed
the sale of the insurance subsidiary, and in August 2002, the Company purchased
377,288 shares of preferred stock at $4.40 per preferred share plus accrued
dividends, representing 83.4% of the then total shares outstanding, from those
preferred shareholders who elected to tender their shares.
3
On August 28, 2002, CFC Partners exercised its option to acquire a
majority of the outstanding common shares of the Company. Accordingly, on that
date, the Board of Directors terminated the Plan of Liquidation and authorized
the issuance of 2,700,000 shares of common stock to CFC Partners. In accordance
with the Option Agreement with CFC Partners, the Company deposited the sum of
$331,434 into an escrow account, such amount representing the tender price of
$4.40 per preferred share multiplied by the 75,326 preferred shares not tendered
at that time.
On May 8, 2003, Vaughn Partners LLC ("Vaughn"), an Illinois limited
liability company in which the Company owns a 47.5% interest, acquired a
garden-type apartment complex located in Springfield, Illinois for a purchase
price of $5,440,940. The purchase price was comprised of (i) a $4,650, 000
interest only bank loan secured by a first mortgage lien on the property payable
in two years, (ii) a $1,200,000 second mortgage on the property with principal
amounts of $500,000 due six months from acquisition and $700,000 due twelve
months from acquisition, (iii) a $100,000 interest-free loan made by a private
investor due in full on June 13, 2003 and which accrues interest at an annual
rate of 18% beyond its due date, and (iv) $200,000 in cash which was contributed
by third party investors to Vaughn. Vaughn is currently in default on the second
mortgage and on the $100,000 private investor loan. As a result of the default
under the second mortgage, the second mortgagee has the right to, among other
rights, sell the property, collect all rental income from the property and
exclude Vaughn therefore. As a result of the default under the $100,000 loan,
Vaughn is liable for accrued interest from June 15, 2003 at an annual rate of
18% plus all costs and fees incurred by the lender in collecting the amounts due
under the note. The Company has no obligations under or guarantees of these
notes and the Company's financial risk is limited to its investment in Vaughn,
which is carried at zero value.
Effective as of October 31, 2003, the Company approved an amended
operating agreement whereby Spartan would transfer to the Company 24.22% of its
interest in Vaughn in consideration for issuance by the Company of 250,000
shares of common stock. This amended operating agreement memorializing this
arrangement was not executed by members of Vaughn Partners holding 5% of the
membership interests and the 250,000 shares of common stock were not issued.
This amended operating agreement has therefore not and will not be ratified.
The 47.5% equity interest in Vaughn is being accounted for under the
equity method in the Company's financial statements at December 31, 2003.
On January 29, 2004, the Company, pursuant to approval by shareholders at
a special meeting held in August 2003, filed an amendment to its Articles of
Incorporation increasing its authorized capital shares to 50 million; 40 million
in common shares and 10 million in preferred shares.
PLAN OF OPERATIONS
Prior to the discontinuation of its business operations as noted above,
the Company operated in three industry segments: the Automotive Resource
Division, which marketed credit insurance and other products and services to its
automobile dealer customers, the Individual Life Insurance Division and the Auto
Auction Division. These segments did not include the corporate activities of the
Company. Effective with the real estate acquisition by Vaughn, the Company,
through its Vaughn subsidiary operates a garden-type apartment complex in
Springfield, Illinois.
The Company intends to initially expand into the real estate, construction
management, insurance agent and medical technology industries through a
combination of strategic alliances, mergers or consolidations, or acquisitions.
With respect to its plans for the real estate business, the Company
intends to acquire additional garden-type apartment complexes initially in
Illinois and New York and subsequently in other northeastern United States
locations. The Company also expects to become involved in real estate
development activity, initially in the New York area.
In connection with its construction management initiatives, the Company
intends to manage its real estate development activities as well as selected
outside projects.
4
With regard to the medical technology business, the Company plans to
develop, own and operate positron emission tomography ("PET") imaging centers
initially in the New York area and then in other regional locations. The Company
has formed a 55% owned subsidiary, P.E.T Centers of America LLC, and through
this subsidiary, has initiated some business arrangements, but none of
significant consequence to date. In September the Company, through its
subsidiary, had signed a lease for a PET center in Suffolk County, New York, but
subsequently the lease terminated. The Company received a letter from the
landlord dated November 11, 2003 claiming that the Company and the subsidiary
are liable to the landlord for all costs and expenses incurred in connection
with enforcing the lease provisions as well as liquidated damages provided for
in the lease (the present value of the lease payments discounted at 6%). The
Company has received no further communications from the landlord in connection
with its demand.
During April, 2003, the Company entered into a Memorandum of Understanding
with Mariculture Systems, Inc. ("Mariculture") whereby the Company would acquire
60% of the outstanding shares of Mariculture in exchange for the Company's
management and financial expertise. Mariculture designs, builds and operates
aquaculture farms used for raising certain species of fish for the consumer
market. Although not aggressively pursued by either party to date, and still
requiring appropriate due diligence review and board approvals, this memorandum
has no expiration date and neither party has expressed an intent to terminate
it.
During February 2004, the Company entered into a Memorandum of
Understanding with a privately-held corporation located in Connecticut with the
intent of a possible business combination either directly with the Company,
through a subsidiary of the Company or with a public shell available to the
Company. The Company is in the preliminary investigative stages of its customary
due diligence and this combination is subject to certain conditions precedent
that are material to the transaction and whose outcome in subject to material
uncertainty at the present time.
The Company intends to move forward with its due diligence in this
transaction pursuant to this memorandum.
COMPETITION
Each of the industry segments in which the Company intends to operate is
highly competitive. Many of the Company's potential competitors have
significantly greater financial, technical, sales, marketing and other resources
as well as greater name recognition and a larger customer base than the Company.
While the Company believes it can successfully compete in selected niche markets
in each of its intended industry segments, there is no assurance that the
Company will be able to develop sufficient revenues and cash flows from these
businesses to operate profitably and compete effectively with other companies.
EMPLOYEES AND AGENTS
As of May 1, 2004, the Company had only 2 full-time employees, both of
which were also officers of the Company. Donald J. Hommel, the Company's
president and chief executive officer, and Jack I. Ehrenhaus, the Company's
chairman and chief operating officer currently receive cash or stock
compensation from the Company in their capacity as officers and employees. Mr.
Maidenbaum, who was the Company's Vice President, resigned as an officer of the
Company during the 4th Quarter of 2003 and remains a Director of the Company.
The Company maintained insurance coverage against employee dishonesty,
theft, forgery and alteration of checks and similar items until October 2003.
Although the Company is in the process of obtaining new coverage, there can be
no assurance that the Company will be able to obtain such coverage or that it
will not experience uninsured losses.
ITEM 2. PROPERTIES
The Company leased approximately 400 square feet of office space, on a
month-to-month basis, at 1525 Cedar Cliff Drive, Camp Hill, Pennsylvania until
October 31, 2003. The monthly rent for this space was $400. The Company leases
an additional 800 square feet of office space in Cedarhurst, New York under a
5
lease that expired on December 31, 2003 and is now on a month-to month basis.
The monthly rent for this space is $850 per month. Until December 31, 2002, the
Company also leased approximately 1,100 square feet of warehouse space for the
storage of its records. The monthly rent for this space was approximately $650.
The Company terminated this lease as of December 31, 2002 and effective January
1, 2003, entered into a month-to-month lease for approximately 550 square feet
at a monthly rent of $325. The Company's office and warehouse space are adequate
for its current needs
ITEM 3. LEGAL PROCEEDINGS
The Company is currently in arbitration against its co-defendant, Life of
the South, from a previously settled claim. Life of the South is seeking to
recover from the Company its share of the settlement totaling $17,500,
unreimbursed fees of $27,825 plus interest, attorney fees and cost of
arbitration from the Company. The arbitration is in its initial stages and while
the outcome can not be predicted, the Company believes the arbitration will be
settled in favor of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of shareholders during the
quarter ended December 31, 2003.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Consumers Financial Corporation common stock was traded on the NASDAQ
National Market System with a ticker symbol of CFIN until June 1, 1998 when it
was delisted by NASDAQ for non-compliance with NASDAQ's market value of public
float requirements. The Company's Convertible Preferred Stock, Series A, was
also traded on the NASDAQ National Market System until March 16, 1998, when it
was also delisted by NASDAQ for non-compliance with the public float requirement
of a minimum of 750,000 shares. Since the shareholders of the Company approved
the Plan of Liquidation on March 24, 1998, the Company did not appeal the
delisting decision for either the common or preferred stock, nor did it take any
steps to come into compliance with the new rules or attempt to seek inclusion on
the NASDAQ Small Cap Market. The Company is currently delisted to the Pink
Sheets as a result of its untimely filing of it 3rd Quarter Report on Form 10-Q.
Quarterly high and low bid prices for the Company's common and preferred
stock, based on information provided by The National Association of Securities
Dealers ("NASD") through the NASD OTC Bulletin Board, are presented below. Such
prices do not reflect prices in actual transactions and exclude retail mark-ups
and mark-downs and broker commissions.
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter2003 Quarter Quarter Quarter Quarter
2003 2003 2003 2002 2002 2002 2002
Common Stock
High 0.45 0.30 0.43 0.15 0.09 0.22 0.28 0.65
Low 0.45 0.30 0.25 0.08 0.03 0.07 0.09 0.15
---------
Convertible Preferred Stock
Series A
High 2.20 2.20 5.00 2.93 3.70 3.86 4.20 4.00
Low 2.20 2.20 5.00 2.91 2.26 3.30 3.86 2.00
As of March 31, 2004, there were 6,446 shareholders of record who
collectively held 22,506,696 common shares and 18 shareholders of record
of the Convertible Preferred Stock, Series A, who held 72,226 shares. The
number of shareholders presented above excludes individual participants in
securities positions listings.
During the three months ended December 31, 2003, there have been no
limitations or qualifications, through charter documents, loan agreements
or otherwise, placed upon the holders of the registrant's common or
preferred stock to receive dividends, except as described below.
On October 10, 2003 the Company sold 208,000 shares of its common
stock to Wall Street Communications for $26,000 or $0.125 per share
pursuant to a subscription agreement.
On October 27, 2003, the Company entered into an investment banking
agreement with David Sassoon & Co. Plc. Pursuant to which, among other
things, the Company issued 85,000 shares to its investment banker. The
issuance was pursuant to an exemption from the registration requirements
of the Securities Act of 1933, as amended. The cost of these services as
measured by the market value of the shares at the time of issuance was
approximately $15,300.
On October 31, 2003, the Company filed a Registration Statement with
the Securities and Exchange Commission to register 330,000 shares of
common stock
7
issued on October 31, 2003 to a consultant, Pinchus Gold. The agreement is for
services to be provided through January 31, 2004. In exchange for receipt of the
shares of common stock, the consultant would provide various services to the
Company, principally relating to the identification of suitable merger or
acquisition partners for the Company. The cost of these services, as measured by
the market value of the shares at time of issuance, was approximately $82,500.
On November 7, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 140,000 shares of its common
stock issued by the Company to a consultant pursuant to a consultancy agreement
entered into and between the Company and the consultant on July 2, 2003. The
agreement terminated on December 31, 2003. In exchange for receipt of the shares
of common stock, the consultant provided various services to the Company,
principally relating to the identification of suitable merger or acquisition
partners for the Company. The cost of these services, as measured by the market
value of the shares at time of issuance, was approximately $18,200.
At December 31, 2003, the Company accrued unpaid salaries for Mr. Hommel
and Mr. Ehrenhaus, each in the amount of $107,856. Both Mr. Hommel and Mr.
Ehrenhaus agreed to accept common stock in lieu of cash and the Company has
agreed to issue 1,540,800 shares of common stock to each of Mr. Hommel and Mr.
Ehrenhaus in satisfaction of these unpaid and accrued salaries and these shares
are deemed to have been issued as of December 31, 2003. These shares have not
been issued to date. However, the issuance will be pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended.
Dividends on both the Company's common stock and Convertible
Preferred Stock Series A are declared by the Board of Directors. No common
stock dividends have been paid since 1994. The payment of dividends on the
common stock in the future, if any, will be subordinate to the preferred
stock, must comply with the provisions of the Pennsylvania Business
Corporation Law and will be determined by the Board of Directors. In
addition, the payment of such dividends will depend on the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant. Dividends on the
preferred stock are paid quarterly on the first day of January, April,
July and October at an annual rate of $.85 per share. The dividends
payable, collectively totaling $58,198, due on January 1, April 1, July 1
and October 1, 2003 have not been declared or paid by the Company. In
addition, the dividend payable on January 1, 2004 also has not been
declared or paid by the Company. The aggregate dividends in arrears for
all five quarters equals $74,205. When the Company is in arrears as to
dividends or sinking fund appropriations for the preferred stock,
dividends to holders of the Company's common stock as well as purchases,
redemptions or acquisitions by the Company of its common stock are
restricted. Since the Company is in default with respect to the payment of
preferred dividends and the aggregate amount of the deficiency is equal to
at least four quarterly dividends , the holders of the preferred stock are
entitled, only while such arrears exists, to elect two additional members
to the then existing Board of Directors. The preferred shareholders have
not elected these two additional directors as of this date.
In the event of a liquidation of the Company, the holders of the
preferred stock are entitled to receive $10 per share plus all unpaid and
accrued dividends prior to any distribution to be made to the holders of
common stock.
The difference between the fair value of the preferred stock at the
date of issue and the mandatory redemption value is being recorded through
periodic accretions with an offsetting charge to the deficit. Such
accretions totaled $4,134 and $84,448 for the years ended December 31,
2003 and 2002, respectively.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained in or
derived from the Consolidated Financial Statements and the Notes thereto.
Years Ended December 31,
------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Selling, general and
administrative expenses $ 3,245,277 $ 527,805 $ 869,196 $ 2,501,146 $ 1,451,183
Other income 257 584,589 268,369 949,066 1,288,147
Income (Loss) before income taxes (3,245,020) 56,784 (600,827) (1,552,080) (163,036)
Income taxes -- -- -- -- --
Net Income (Loss) (3,245,020) 56,784 (600,827) (1,552,080) (163,036)
Other comprehensive income (loss) -- (54,702) 27,539 44,015 (42,656)
Comprehensive income (loss) $ (3,245,020) $ 2,082 $ (573,288) $ (1,508,065) $ (205,692)
Per share data (a):
Basic and diluted loss per
common share $ (0.35) $ (0.08) $ (0.39) $ (0.76) $ (0.20)
Weighted average number of common
shares outstanding 9,514,892 3,501,238 2,577,701 2,578,231 2,942,847
Total assets $ 331,016 $ 597,766 $ 2,832,651 $ 25,304,782 $ 44,539,301
Total debt
Redeemable preferred stock 712,454 739,949 4,428,381 4,444,197 4,498,107
Shareholders' deficiency (577,952) (196,485) (2,079,119) (1,124,157) (375,129)
Cash dividends declared per common share NONE NONE NONE NONE NONE
(a) The per share data presented above has not been adjusted to reflect the
effect of a one-for-ten reverse common stock split approved by the Company's
common shareholders on March 15, 2003 but has yet to be effected by the Company.
See Note 11 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-K.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 comprised
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.
On August 28, 2002, the Board of Directors appointed Donald J.
Hommel, the president of CFC Partners as a Director of the Company to fill
an existing vacancy on the Board. Following such appointment, the
Company's officers resigned as planned and the Board elected Mr. Hommel as
the Company's President and Chief Executive Officer. In addition, James C.
Robertson and John E. Groninger, who had been Directors of the Company for
more than 30 years, also resigned as planned.
On October 17, 2002, the Board of Directors appointed Shalom S.
Maindenbaum, Esq., as a Director of the Company to fill an existing
vacancy on the Board. In addition, the Directors elected Mr. Hommel as the
Company's Treasurer and Mr. Maidenbaum as the Company's Vice President and
Secretary. On March 13, 2003, the Board of Directors appointed William T.
Konczynin as an additional Director to fill an existing vacancy and
Chairman of the Audit Committee. Jack I. Ehrenhaus was appointed as
Chairman of the Board in April 2003 and has served as the Company's Chief
Operating Officer effective January 1, 2003
As a result of the approval of the Plan of Liquidation, the Company
adopted a liquidation basis of accounting in its financial statements for
the period from March 25, 1998 to August 28, 2002. Under this basis of
accounting, assets were stated at their estimated net realizable values
and liabilities were stated at their anticipated settlement amounts. As a
result of the transaction with CFC Partners and the related termination of
the Plan of Liquidation, effective August 29. 2002, the Company re-adopted
accounting principles applicable to going concern entities. Furthermore,
as discussed elsewhere in this Form 10-K, the Company has restated its
liquidation-basis financial statements for prior periods to conform such
statements to the current presentation.
At December 31, 2003, Vaughn operated a garden-type apartment
complex in Springfield, Illinois as its sole operation. The Company
intends to acquire additional real estate operations exclusive of Vaughn
and to establish majority-owned operating subsidiaries to accommodate
these acquisitions in the future.
At December 31, 2003 the Company had no business operations and its
revenue and expenses during the previous five years have been
non-operating in nature.
At December 31, 2003 the Company's shareholders' deficiency totaled
$577,952 as compared with a shareholders' deficiency of $196,485 at
December 31, 2002.
For the year ended December 31, 2003 the Company's net loss was
$3,245,020 as compared with net income of $56,784 and a net loss of
$600,827 for the years ended December 31, 2002 and 2001, respectively.
Dividends to preferred shareholders totaled $0, $255,813 and
$385,572 in 2003, 2002 and 2001, respectively.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
For the year ended December 31, 2003, the Company reported a net
loss of $3,245,020 as compared with net income of $56,784 for 2002. In
2003, the Company incurred approximately $79,505 in professional fees,
10
$2,841,686 in compensation and consulting expenses paid for by the
issuance of shares of common stock, a $27,500 provision for loss on a
receivable from the Company's majority shareholder and approximately
$280,000 in selling, general and administrative expenses against a nominal
amount of non-operating income. During the same period in 2002, the
Company reported net income of $56,784 primarily as a result of one time
gains from the sale of its life insurance subsidiary of $242,480 and
proceeds of $255,000 from settlements, offset principally by salaries and
fees of $327,576 and insurance costs of $78,438.
YEAR ENDED DECEMBER 31, 2002
For the year ended December 31, 2002, the Company reported net
income of $56,784, which translated into a loss of $.08 per common share
after deducting the preferred dividend requirement. The 2002 results were
positively impacted by a $242,480 gain on the sale of the Company's life
insurance subsidiary and $255,000 in proceeds received from the settlement
of litigation and other disputes. The gain from the sale of the insurance
subsidiary includes a $178,483 gain from the sale of its insurance
licenses and charter, a $56, 448 gain from the transfer to the buyer of
appreciated bonds held by the subsidiary and $7,549 in other gains. Prior
to the collection of the $255,000 in settlement proceeds, the Company had
not reflected any amounts due from the other parties in its financial
statements due to the uncertainty as to not only the amounts which the
Company might be entitled to receive as determined by the courts or as a
result of a settlement between the parties, but also the collectibility of
such amounts.
The improved results in 2002 also reflect reductions in salaries and
professional fees as compared with 2001. Partially offsetting the
non-recurring revenues and the reductions in salaries and professional
fees were (i) a decline in investment income of approximately $105,000 due
to both a decrease in the Company's invested asset base coupled with a
decline in short-term interest rates and, (ii) an increase in insurance
costs of approximately $30,370 over 2001.
YEAR ENDED DECEMBER 31, 2001
The Company's net loss for the year ended December 31, 2001 was
$600,827. The results in 2001 were adversely impacted by a $216,000 charge
related to the settlement of certain litigation matters and a $80,250
write-down of the value of the state licenses and charter of the insurance
subsidiary, based upon the Company's assessment at that time that the
subsidiary would be liquidated rather than sold.
For 2001, the Company originally reported an excess of expenses over
revenues of $520,577 under the liquidation basis of accounting. This
amount differs from the $600,827 net loss being reported in the
accompanying consolidated financial statements by $80,250, which is the
amount of the write-down of the value of the insurance license and charter
noted above. Under liquidation accounting, this amount was not treated as
an adjustment of assets to estimated net realizable value and was,
therefore, not included in the determination of excess of expenses over
revenues.
FINANCIAL CONDITION
CAPITAL RESOURCES
Other than as described below, the Company currently has no
commitments for any capital expenditures. However, if the Company develops
certain planned strategic alliances or identifies a target company to be
merged or otherwise combined with the Company, the Company's plans
regarding capital expenditures and related commitments are likely to
change.
During the year ended December 31, 2003, the Company's cash and cash
equivalents decreased by $165,758 to $0, principally as a result of the
cash expenses paid by the Company during the period and the $27,500 loan
made to CFC Partners. The Company has no ability to pay any additional
expenses until it either develops new revenue sources or obtains
financing.
Hudson Valley
On September 10, 2003, the Company entered into an agreement with
Hudson Valley Home Builders & Developers Corp. ("Hudson") pursuant to
which Hudson would use its commercially reasonable efforts to introduce
funding sources to provide the Company with financing to consummate real
estate transactions. Hudson agreed to provide the Company with financing
11
between $2,000,000 and $4,000,000 for 36 months from the date of the
agreement. The Company agreed to use commercially reasonable efforts to
consummate a maximum of 10 real estate transactions each 12 month period.
Pursuant to the terms of the agreement, Hudson would notify the Company
within 21 days of receipt of an executed contract on a real estate
project, that it would fund such project. The investors would have the
right to designate a portion of their funding to be used to purchase
shares of the Company at a premium above market.
Pursuant to the agreement, Hudson and its investors would be
entitled to 60% of the equity of a deal, as well as a cash payment equal
to 10% of the consideration received by the Company from Hudson and its
investors. Upon financing a real estate deal, the Company would issue to
Hudson and its investors, a warrant to purchase shares of the Company. The
Company agreed to file a registration statement for the shares issued to
Hudson and its investors within 24 months of issuance and granted them
piggyback registration rights after 18 months. Either party has the right
to terminate the agreement by written notice to the other. To date, no
funds have been generated by Hudson.
Equity Credit Lines
During October, 2003, the Company entered into a term sheet with
Dutchess Private Equities Fund II LP, an equity funding group ("Dutchess")
to provide the Company with a $2,000,000 equity line of credit to be used
for general corporate purposes. A formal agreement with Dutchess for this
equity line was executed on April 15, 2004 and provides that the market
price of the Company's stock for the 5 consecutive days prior to the put
date can not be below 75% of the closing bid price for the 10 trading days
prior to the put date. The put date is the date that the Company submits
notice to the investor that it desires to draw down a portion of the line.
The purchase price for the shares to be paid to the investor is discounted
to the lowest closing bid price of the stock during the 5 trading days
immediately after a put date. The funds will be available to the Company
upon an effective registration of the Company's stock issued pursuant to
this agreement.
Investment Banking Agreement
On October 27, 2003, the Company entered into an agreement with an
investment banking firm to arrange financing for the Company's operations
and expansion, provide financial advisory services on mergers and
acquisitions, and represent the Company with regard to introductions to
accredited investors, financial institutions, strategic partners and
potential clients. The investment banker is to receive a percentage based
on the amount of equity or debt raised for the Company, as well as a
retainer of $3,750 plus 85,000 shares of the common stock of the Company
with demand and piggyback registration rights. In addition, the investment
banker is entitled to warrants equal to 3% of the equity of the Company
upon the successful completion of any financing or M&A transaction. The
investment banker is also entitled to registration rights, tag along
rights, a put option, anti-dilution protection and a right of first
refusal. If the Company fails or refuses to close a transaction after
funds have been placed in escrow or a commitment letter accepted and
approved, the Company is liable for all direct and consequential damages
incurred by the investment banker.
LIQUIDITY
In connection with the acquisition of the Company by CFC Partners,
substantially all of the Company's remaining liquid assets were used to
complete a tender offer to the preferred shareholders in August 2002. At
December 31, 2003, the Company had a bank overdraft of $8,441.
Furthermore, as of that date, the Company had no significant business
operations, sources of operating revenues and cash flows. As indicated
above, the Company is currently pursuing various business opportunities,
including strategic alliances as well as the merger or combination of
existing businesses with the Company. The Company's management is
initially focusing on joint ventures with, or acquisitions of, companies
in the real estate, construction management and medical technology
segments. However, there are no assurances that the Company's effort in
this regard will be successful.
As indicated above, the Company currently has no ability to pay any
additional expenses until it either develops new revenue sources or
obtains financing. Without new revenues and/or immediate financing,
management's efforts to develop the Company's real estate, construction
and medical technology businesses are not likely to succeed.
GOING CONCERN AND MANAGEMENT PLANS
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern.
12
However, at December 31, 2003 the Company had a cash overdraft of $8,441,
current liabilities of $196,514 without any current assets, a
shareholders' deficit of $577,952 and was delinquent in its payment to its
existing creditors. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
CFC Partners is currently pursuing various business opportunities
for the Company, including strategic alliances, as well as the merger or
combination of existing businesses within the Company. The new management
of the Company is initially focusing on joint ventures with, or
acquisitions of, companies in the real estate, construction management and
medical technology sectors as well as the direct purchase of
income-producing real estate. However, there is no assurance that the
Company's efforts in this regard will be successful. In fact, given the
Company's current cash position, without new revenues and/or immediate
financing, the Company's efforts to develop the above-referenced
businesses are not likely to succeed.
The Company's ability to continue as a going concern is dependent on
its success in developing new cash revenue sources or, alternatively, in
obtaining short-term financing while its businesses are being developed.
There are no assurances that such financing can be obtained or, if
available, be obtained at terms acceptable to the Company. To the extent
that such financing is equity based, this may result in dilution to the
existing shareholders.
The consolidated financial statements presented herein do not
include any adjustments that might result from the outcome of this
uncertainty.
REDEEMABLE PREFERRED STOCK
On August 23, 2002, the Company completed a tender offer to all of
its preferred shareholders, pursuant to which it purchased 377,288 shares
representing 83.4% of the shares then outstanding, at $4.40 per share plus
accrued dividends. The tender offer was completed in conjunction with and
was a condition of the Option Agreement by CFC Partners. Since all of the
Company's remaining assets would have been distributed to the preferred
shareholders if the Company had been liquidated, the Board of Directors
believed that the exercise of the option, and the related termination of
the Plan of Liquidation, should not take place until the preferred
shareholders had been given a chance to exchange their shares for cash.
The terms of the redeemable preferred stock require the Company,
when and as appropriated by the Board out of funds legally available for
that purpose, to make annual payments to a sinking fund. Such payments
were to have commenced on July 1, 1998. The preferred stock terms also
provide that any purchase of preferred shares by the Company will reduce
the sinking fund requirements by an amount equal to the redemption value,
$10 per share, of the shares acquired. As a result of the Company's
purchases of preferred stock in the open market and in the tender offer
described above, no sinking fund payment for the preferred stock is due
until July 1, 2006. However, in connection with the exercise of the option
by CFC partners, the Company deposited $331,434 into a bank escrow account
for the benefit of the remaining preferred shareholders.
The redeemable preferred stock is redeemable at the option of the
Company at any time, in whole or in part, for a redemption price of $10
per share plus all unpaid and accrued dividends.
Dividends at an annual rate of $.85 per share are cumulative from
the original issue date of the preferred stock. Dividends are payable
quarterly on January 1, April1, July 1 and October1 of each year. The
dividends payable on January 1, 2004 and for all four quarters of 2003
have not been declared or paid by the Company. Dividends in arrears for
the five quarters total $74,205, $60,783 of which relate to the four
quarterly dividends for 2003. When the Company is in arrears as to
dividends or sinking fund appropriations for the preferred stock,
dividends to holders of the Company's common stock as well as purchases,
redemptions or acquisitions by the Company of shares of the Company's
common stock are restricted. Since the Company is in default with respect
to the payment of preferred dividends and the aggregate amount of the
deficiency is equal to at least four quarterly dividends, the holders of
the preferred stock are entitled, only while such arrearage exists, to
elect two additional members to the then existing Board of Directors. .
The preferred shareholders have not elected these two additional directors
as of this date.
In the event of a liquidation of the Company, the holders of the
preferred stock are entitled to receive $10 per share plus all unpaid and
accrued dividends prior to any distribution to be made to the holders of
common stock.
The difference between the fair value of the preferred stock at the
date of issue and the mandatory redemption value is being recorded through
periodic accretions with an offsetting charge to the deficit. Such
accretions totaled $4,134 and $84,448 for the twelve months ended December
31, 2003 and 2002, respectively.
13
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
In December 2001, the Securities and Exchange Commission ("SEC")
requested that all registrants list their critical accounting policies in
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of their Form 10-K. The SEC defined a critical
accounting policy as one that is important to the portrayal of the
company's financial condition and results of operations and requires
management's subjective or complex judgments. Accordingly, the Company has
described its critical accounting policies below:
DEFERRED TAX VALUATION ALLOWANCE
Periodically, management reviews the adequacy of its deferred tax
valuation allowance. This review entails estimating: the Company's future
taxable income through fiscal 2004. A reduction in the valuation allowance
can result in a decrease in the Company's income tax expense. Conversely,
an increase in the valuation allowance can lead the Company to report its
income tax at a higher rate. Since future results may differ materially
from those estimates, the Company's estimate of the amount of deferred tax
assets that will be ultimately realized could differ materially.
CONTRACTUAL OBLIGATIONS
The Company has no long-term contractual obligations or guarantees.
All leases are on a month-to-month basis and the Company has not entered
into any off balance sheet transactions. The Company's exposure as a 47.5%
partner of Vaughn is limited to the loss of its investment in Vaughn,
which is carried at zero. The Company is not liable, directly or
indirectly, for any of the obligations of Vaughn. All of the obligations
of the Company are unsecured.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes it does not have any material exposure to
interest rate risk as its cash equivalents are short-term in nature and
its debt obligations are at fixed rates. The Company does not use
derivative financial instruments to hedge interest rate exposure and did
not experience a material impact from interest rate risk during fiscal
2003.
Currently, the Company does not have any significant investments in
financial instruments for trading or other speculative purposes, or to
manage its interest rate exposure and has no other material speculative or
quantitative market risks particular to it.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following table contains our selected unaudited consolidated quarterly
financial data:
2003
-----------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- -----------
Selling, general and
administrative expenses $ 126,211 $ 96,422 $ 2,707,611 $ 315,033 $ 3,245,277
Other income (loss) 917 2,098 (3,177) 419 257
Loss before extraordinary items (125,294) (94,324) (2,710,788) (314,614) (3,245,020)
Net (loss) (125,294) (94,324) (2,710,788) (314,614) (3,245,020)
Net loss per share (0.03) (0.02) (0.29) (0.02) (0.35)
2002
-----------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- -----------
Selling, general and
administrative expenses $ 130,538 150,887 $ 137,653 $ 108,727 $ 527,805
Other income 35,441 285,984 261,542 1,622 584,589
(Loss) income before extraordinary
items (95,097) 135,097 123,889 (107,105) 56,784
Net (loss) income (95,097) 135,097 123,889 (107,105) 56,784
Net (loss) income per share (0.08) 0.01 0.00 (0.01) (0.08)
We believe that you should not rely upon period-to-period
comparisons of our financial results as an indication of future
performance. Our results of operations have been subject to significant
fluctuations, particularly on a quarterly basis, and results of operations
could fluctuate significantly quarter-to-quarter and year-to-year.
The financial statements and supplementary data required by this
item are set forth in Item 15 (a) (1) and begin at page F-1 of this
report.
15
Page
--------
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of
December 31, 2003 and December 31, 2002 F-4
Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001 F-5
Consoldated Statements of Shareholders' Deficiency for
the years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the
the years ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of September 18, 2003, Stambaugh Ness, PC resigned as the
principal independent accountants for the Company.
The report of Stambaugh Ness, PC on the financial statements for the
years ended December 31, 2002 and 2001contained no adverse opinion or
disclaimer of opinion, and were not qualified or modified as to scope or
accounting principles. Although the financial statements audited by
Stambaugh Ness, PC for the year ended December 31, 2002 contained an
explanatory paragraph pertaining to the Company's ability to continue as a
going concern, such financial statements did not contain an adjustment
that might result from the uncertainty stated therein. In addition, during
the Company's the fiscal years ended December 31, 2002 and 2001 and
through September 18, 2003, there were no disagreements with Stambaugh
Ness, PC on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedures; which disagreements,
if not resolved to the satisfaction of Stambaugh Ness, PC would have
caused that firm to make reference in connection with its report to the
subject matter of the disagreements or a reportable event.
As of September 23, 2003, the Board of Directors of the Company
approved the appointment of Marcum & Kliegman LLP as the Company's new
principal independent accountants commencing with the interim financial
statement review for the third quarter ending September 30, 2003 and the
audit for the year ending December 31, 2003.
During the years ended December 31, 2002 and 2001 and until
September 23, 2003, Marcum & Kliegman LLP had not been engaged by the
Company as an independent accountant to audit the financial statements of
the Company or any of its subsidiaries, nor had it been consulted
regarding the application of accounting principles to any specified
transaction, either completed or proposed, or the type of audit opinion
that might be rendered on the Company's financial statements, or any
matter that was the subject of a disagreement or reportable event
identified in response to paragraph (a) (1) (iv) of Item 304, as those
terms are used in Item 304 (a) (1) (iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K.
The Company requested that Stambaugh Ness, PC furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not it
agrees with the above statements. A copy of such letter from Stambaugh Ness, PC
is filed as an Exhibit on Form 8-K filed with the Securities and Exchange
Commission on September 25, 2003.
17
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation
of the principal executive officer and principal financial officer, of the
Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")). Based on this evaluation, the principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
Internal controls over financial reporting consists of control
processes designed to provide assurance regarding the reliability of
financial reporting and preparation of our financial statements in
accordance with accounting principles generally accepted in the United
States of America. To the extent that components of our internal controls
over financial reporting are included in our disclosure controls, they are
included in the scope of the evaluation by our chief executive officer and
chief financial officer referenced above. There have been no significant
changes in the Company's internal controls over financial reporting during
the Company's most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's
internal controls over financial reporting.
Our independent auditors have reported to our Audit Committee
certain matters involving internal controls that our independent auditors
considered to be reportable conditions, and a material weakness, under
standards established by the American Institute of Certified Public
Accountants. The reportable conditions and material weaknesses relate to
the December 31, 2003 financial close process and absence of appropriate
reviews and approvals of transactions and accounting entries. Certain
adjustments were identified in the annual audit process, related to the
recording of stock-based compensation, prepaid expenses, accrued expenses,
preferred stock and accounting for an equity method investment. The
adjustments related to these matters were made by the Company in
connection with the preparation of the audited financial statements for
the year ended December 31, 2003.
Given these reportable conditions and material weaknesses,
management devoted additional resources to resolving questions that arose
during our year-end audit. As a result, we are confident that our
financial statements for the year ended December 31, 2003 fairly present,
in all material respects, our financial condition and results of
operations.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Historically, the Board of Directors of the Company was divided into three (3)
groups, with the directors in each group serving terms of three (3) years.
However, due to the Directors' decision in 1996 to merge, sell or otherwise
dispose of the Company or its assets, the eventual approval by the shareholders
of the Plan of Liquidation in 1998 and the acquisition of a 51.2% interest in
the Company by CFC Partners, Ltd. on August 28, 2002, there had been no election
of Directors since 1995. On August 28, 2002 the Board of Directors appointed
Donald J. Hommel, the president of CFC Partners, as a Director of the Company to
fill an existing vacancy on the Board. Following such appointment, James C.
Robertson and John E. Groninger, who had been Directors of the Company for more
than 30 years, resigned as planned.
On October 17, 2002 the Board of Directors appointed Shalom S. Maidenbaum,
Esq. as a Director of the Company to fill an existing vacancy on the Board, and
on March 13, 2003, the Board of Directors appointed William T. Konczynin as an
additional Director and Chairman of the Audit Committee to fill an existing
vacancy. Mr. Jack I. Ehrenhaus was elected as Chairman of the Board in April
2003.
The table below sets forth the period for which the current Directors have
served as Directors of the Company, their principal occupation or employment for
the last five (5) years, and their other major affiliations and age as of May 1,
2004
Name Principal Occupation for the Past Five Years, Office (if any) Held Director
(Age) in the Company and Other Information Since
----------------------- --------------------------------------------------------------------------- --------
Jack I. Ehrenhaus President and Founder, NAIS Corporation 1992 - present
Chairman of the Board and Chief Operating Officer of
(56) the Company 2003
2002 -
Donald J. Hommel President and Chief Executive Officer of the Company present 2002
(44) President and Founder, Gracemoor & Co. 1995-2002
1999 -
Shalom S. Maidenbaum Managing & Founding Partner, Rosenfeld & Maidenbaum present 2002
(45)
Dr. William T. 1999 -
Konczynin President, Port Jefferson Hospital Care present 2003
(52)
None of our directors holds any directorships in companies with a class of
securities registered pursuant to Section 12 of the Securities Exchange Act or
subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended.
Our directors are appointed for a one-year term to hold office until the
next annual general meeting of our shareholders or until removed from office in
accordance with our bylaws. Our officers are appointed by our Board of Directors
and hold office until removed by the Board.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors conducts its business through meetings of the Board
and through activities of its committees. During the fiscal year ended December
31, 2003, the Board of Directors held ten (10) meetings and took all actions by
unanimous written consent.
19
The Board of Directors has established an Audit Committee. Dr. Konczynin,
the sole member of the Audit Committee is a financial expert. The Audit
Committee recommends engagement of the Company's independent auditors, is
primarily responsible for approving the services performed by the independent
auditors and for reviewing and evaluating our accounting principles and its
system of internal accounting controls and has general responsibility in
connection with related matters.
The Board has not established an Option Committee, a Compensation
Committee, or a Nominating Committee, the functions of which are currently
performed by the Board.
The following information is provided as of May 1, 2004 for each executive
officer of the Company. The executive officers are appointed annually by the
Board of Directors and serve at the discretion of the Board.
NAME AGE OFFICE
===============================================================================
Donald J. Hommel 44 President and Chief Executive
Officer
Jack I. Ehrenhaus 56 Chief Operating Officer
Mr. Hommel was appointed President and Chief Executive Officer of the
Company in August 2002 and was named as Treasurer of the Company in October
2002. Mr. Ehrenhaus was appointed and Chief Operating Officer in April 2003,
commencing January 1, 2003. Mr. Maidenbaum was appointed Vice President and
Secretary of the Company in October 2002 and resigned as an officer of the
Company during the 4th quarter of 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) reports they file.
CODE OF ETHICS
At December 31, 2003, the Company had not yet adopted a Code of Ethics for
its Executive Officer and Directors. This delay has been a result of the
restructuring of the Company after its emergence its Plan of Liquidation coupled
with the focus of management on raising capital and implementation of a business
plan of action to preserve and increase its value to its common shareholders.
The Board of Directors of the Company is in the process of reviewing a
Code of Ethics and anticipates its adoption and implementation during the second
quarter of 2004.
20
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the annual
compensation for services in all capacities to the Company for the years ended
December 31, 2003, 2002 and 2001 of the Chief Executive Officer and the Chief
Operating Officer whose annual compensation exceeded $100,000 and who were
serving as executive officers at the end of the fiscal year ended December 31,
2003
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION ALL
OTHER OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ANNUAL COMPENSATION
-------------------------------------------------------------------------------------------------------------------
Jack I. Ehrenhaus 2003 $35,192 (1) $430,435 (5) $690,000 (6) $85,600 (3)
$85,600
Chairman and 2002 - 0 - - 0 - - 0 - - 0 -
Chief Operating Officer
Donald J. Hommel 2003 $35,192 (4) $430,435 (5) $690,000 (6) $85,600 (3)
$85,600
Chairman, President and 2002 - 0 - - 0 - $1,115 (2) - 0 -
Chief Executive Officer
-------------------------------------------------------------------------------------------------------------------
(1) Mr. Ehrenhaus was named as Chairman of the board of Directors and Chief
Operating Officer of the Company effective January 1, 2003.
(2) Represents retainer and board fees earned.
(3) Mr. Ehrenhaus and Mr. Hommel each accepted stock in lieu of cash
compensation for services performed in 2003 at a value of $0.06 per share.
The 1,540,800 shares for each of Mr. Hommel and Mr. Ehrenhaus are to be
issued in 2004
(4) Mr. Hommel was appointed to the Board of Directors, President and Chief
Executive Officer of the Company on August 28, 2002. Mr. Hommel received
no compensation for his services as Chief Executive Officer in 2002.
(5) At a board meeting on September 4, 2003, the Board of Directors approved
bonuses for Donald J. Hommel, President and Chief Executive Officer, and
Jack I. Ehrenhaus, Chairman and Chief Operating Officer, of the Company.
Each of the individuals was issued 1,956,521 shares of common stock valued
at $430,435.
(6) Issuance of 3,000,000 shares valued at $690,000 to each of Mr. Hommel and
Mr. Ehrenhaus pursuant to their respective employment agreements
On September 1, 2003, the Company entered into employment agreements with
each of Donald J. Hommel, President and Chief Executive Officer and Jack I.
Ehrenhaus, Chairman and Chief Operating Officer, of the Company. Each agreement
provides for annual compensation of $225,000 in base salary with annual
increases of 10% and annual bonuses as determined by the Board, which can range
up to twice the amount of the base salary but in no event will the bonus be less
than 50% of the base salary. Each officer is also entitled to an automobile
allowance of $750 per month and reimbursement of all business expenses. The term
of each employment agreement is ten years. If the Company terminates either
officer without cause prior to the term, the officer is entitled to a severance
payment equal to his salary for the remainder of the ten year term or two years'
salary, whichever is greater. If there is a material change in the Company that
causes a substantial reduction in the officer's duties, or a liquidation,
transfer of assets or merger and the Company is not the surviving entity, the
officer is entitled to a severance payment.
21
The employment agreements also provide for the issuance of 3,000,000
shares of the Company's common stock to each of the officers that were valued at
an aggregate of $1,380,000.
Each officer also agreed that if the Company has a cash flow shortfall,
the officer will take stock in lieu of cash at a 20% discount to the stock price
at the payment date.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No stock options or stock appreciation rights were granted by the Company
to the named executives officers in 2003.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTIONS/SAR TABLE
At December 31, 2003, the Company had no stock options or stock
appreciation rights outstanding. Furthermore, the Company has no current plans
to grant any options or stock appreciation rights.
REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors has the exclusive authority to establish
the level of base salary payable to the Chief Executive Officer ("CEO") and
certain other executive officers of the Company and to administer the company's
equity incentive plans. The Board of Directors does not maintain a Compensation
Committee as the employments agreements executed in 2003 will determine the
individual bonus programs to be in effect for the CEO and certain executive
officers each fiscal year. Participants in deliberations of the Company's Board
of Directors concerning executive compensation were Donald J. Hommel, Jack I.
Ehrenhaus, Shalom S. Maidenbaum and William T. Konczynin.
GENERAL COMPENSATION PHILOSOPHY
Historically, the compensation policy of the Company is to offer the
Company's executive officers competitive opportunities based upon the overall
Company performance, their individual contribution to the financial success of
the Company and their personal performance. It is the Board's objective to have
a meaningful portion of each executive officer's compensation contingent upon
the performance of the Company, as well as the individual contribution of each
officer.
CEO COMPENSATION
On September 1, 2003, the Company entered into an employment agreement
with Donald J. Hommel, President and Chief Executive Officer of the Company. The
agreement provides for annual compensation of $225,000 in base salary with
annual increases of 10% and annual bonuses as determined by the Board, which can
range up to twice the amount of the base salary but in no event will the bonus
be less than 50% of the base salary. Mr. Hommel is also entitled to an
automobile allowance of $750 per month and reimbursement of all business
expenses. The term of the employment agreement is ten years. If the Company
terminates Mr. Hommel without cause prior to the term, Mr. Hommel is entitled to
a severance payment equal to his salary for the remainder of the ten year term
or two years' salary, whichever is greater. If there is a material change in the
Company which causes a substantial reduction in Mr. Hommel's duties, or a
22
liquidation, transfer of assets or merger and the Company is not the surviving
entity, Mr. Hommel is entitled to a severance payment. The employment agreement
also provides for the issuance of 3,000,000 shares of the Company's common stock
to Mr. Hommel which was valued at an aggregate of $690,000. Mr, Hommel also
agreed that if the Company has a cash flow shortfall, he will take stock in lieu
of cash at a 20% discount to the stock price at the payment dates.
STOCK PERFORMANCE COMPARISON
As discussed in Item 5 of this Form 10-K, the Company's common stock was
delisted by NASDAQ on June 1, 1998 for noncompliance with NASDAQ's market value
of public float requirements. As a result of this delisting coupled with the
absence of any continuing operations since 1998, the Company believes that any
stock price comparisons after that date are not considered meaningful. The
Company is currently delisted to the Pink Sheets as a result of its untimely
filing of it 3rd Quarter Report on Form 10-Q.
12/31/98
Company/Market/Index (A) 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
---------------------------------- ------------ ----------- ----------- ----------- ---------- -----------
Consumers Financial Corp (1) 100.0 n/a n/a n/a n/a n/a
Peer Group (2) 100.0 n/a n/a n/a n/a n/a
NASDAQ Stock Market (3) 100.0 n/a n/a n/a n/a n/a
NOTES TO TABLE
(A) Assumes $100 invested on December 31, 1998 in the Company's common stock,
the Peers Group's common stock and the NASDAQ Stock Index. Total
shareholder returns assume reinvestment of dividends.
The Company has had no operations since 1998
(1) Consumer Financial Corporation
(2) At December 31, 2003,the Company has no operations for relevant peer group
comparison
(3) NASDAQ Stock Market - US
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 1, 2004, the beneficial
ownership of the Company's Common Stock, the only class of voting securities
outstanding, (i) by any person or group known by the Company to beneficially own
more than 5% of the outstanding Common Stock, (ii) by each Director and
executive officer and (iii) by all Directors and executive officers as a group.
Unless otherwise indicated, the holders of the shares shown in the table have
sole voting and investment power with respect to such shares.
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
=============================================================================================================
PRINCIPAL SHAREHOLDERS:
Common CFC Partners, Ltd. (1)
132 Spruce Street, Cedarhurst, NY 11516 3,927,273 18.96
Common Michael P. Ehrenhaus, M.D. 0 ----
132 Spruce Street, Cedarhurst, NY 11516
Donald J. Hommel (2), (3)
Common 132 Spruce Street, Cedarhurst, NY 11516 6,497,321 32.15
Jack I. Ehrenhaus (2), (3)
Common 132 Spruce Street, Cedarhurst, NY 11516 6,497,321 32.15
DIRECTORS AND EXECUTIVE OFFICERS:
Directors and Executive Officers:
Common Donald J. Hommel 6,497,321 32.15
132 Spruce Street, Cedarhurst, NY 11516
Common Jack I. Ehrenhaus 6,497,321 32.15
132 Spruce Street, Cedarhurst, NY 11516
Common Shalom S. Maidenbaum 0 ----
132 Spruce Street, Cedarhurst, NY 11516
Common All Directors and Officers and 16,921,915 64.31
Principal Beneficial
Shareholders as a group
(1) Mr. Hommel, Mr. Maidenbaum and Mr. Ehrenhaus each own one-third of the
outstanding common stock of CFC Partners. These individuals may each be
deemed to be beneficial owners of the 3,927,273 shares pursuant to Rule
13d-3 of the Securities and Exchange Act of 1934, as amended. These
individuals have shared voting and investment power with respect to the
3,927,273 shares of common stock.
(2) Includes stock to be issued in 2004 in lieu of 2003 compensation for Mr.
Hommel (1,540,800 shares) and Mr. Ehrenhaus (1,540,80 shares); these
shares have been accrued for and were issued May 1, 2004.
(3) Includes shares issued to each of Mr. Hommel and Mr. Ehrenhaus for 2003
bonus (1,956,521 shares) and pursuant to their respective employment
agreements (3,000,000 shares)
24
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The Company has no compensation plans.
CHANGE OF CONTROL
Other than the right of the preferred shareholders to appoint two directors to
the board, there are no other arrangements, known to the Company, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2003, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
the Company, or any of its subsidiaries was or is to be a party in which the
amount involved exceeded or will exceed $60,000 and in which any director,
executive officer, security holder known to the Company to own more than 5% of
the Company's common stock or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest, other
than the compensation agreements, issuance of shares to CFC, and other
arrangements, which are described above where required.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Marcum & Kliegman LLP ("M&K") audited the Company's financial statements
for fiscal 2003;the fees billed for professional services by M&K were as
follows: Audit Fees--$100,000; Audit related fees $-0-;Tax Fees (for preparation
of federal and state income tax returns) $-0- and All Other Fees of $-0-. The
policy of the Audit Committee is that it must approve in advance all services
(audit and non-audit) to be rendered by the Company's independent auditors. The
Board of Directors established the Audit Committee during 2003 with the
appointment of Mr. Konczynin to the Board of directors. For at least two years
prior to that, the Board of Directors did not have an Audit Committee. The
engagement of M&K for the audit for fiscal 2003 was approved in advance by the
Audit Committee.
Stambaugh Ness, PC ("SN") audited the Company's financial statements for
fiscal 2002; the fees billed for professional services by SN for 2002 were as
follows: Audit Fees--$26,225 including $9,225 for review services for the
Company's SEC filings during the first and second quarters of 2003; Tax Fees
(for preparation of federal and state income tax returns) $-0- and All Other
Fees of $-0-. The engagement of SN for the audit services for fiscal 2002 was
approved in advance by the Board of Directors.
The Audit Committee is comprised solely of Mr. Konczynin, and as such, is
limited in resources and therefore operates closely with the other members of
the Board of Directors. Upon recommendation by its then accounting consultant,
the Audit Committee in conjunction with the Board, took this recommendation into
advisement and reviewed the experience, professional credentials and public
company experience of M&K. Upon the positive results of such review, the Company
sought to engage M&K as its Principal Accountant for the review of its Form 10-Q
for the quarter ended September 30, 2003 and for its Annual Filing of Form 10-K
for the year ended December 31, 2003.
25
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Listing of Documents filed:
1. Financial Statements (included in Part II of this Report):
Report of Independent Public Accountants - Marcum & Kliegman, LLP
Report of Independent Public Accountants - Stambaugh Ness PC
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations and Comprehensive Income - For
the years ended December 31, 2003, 2002 and 2001 Consolidated
Statements of Shareholders' Deficiency - For the years ended
December 31, 2003, 2002 and 2001 Consolidated Statements of Cash
Flows - For the years ended December 31, 2003, 2002 and 2001 Notes
to Consolidated Financial Statements
2. Financial Statement Schedules (included in Part IV of this Report):
Schedules other than those listed above have been omitted because they are
not required, not applicable or the required information is set forth in the
financial statements or notes thereto.
3. Exhibits:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession (1)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders, including
indentures (i)
(9) Voting trust agreements (ii)
(10) Material contracts (ii)
(11) Statement re: computation of per share earnings (ii)
(12) Statement re: computation of ratios (ii)
(13) Annual report to security holders (ii)
(16) Letter re: change in certifying accountants (i)
(18) Letter re: change in accounting principles (ii)
(21) Subsidiaries of the registrant (iii)
(22) Published report regarding matters submitted to a vote of security
holders (i)
(23) Consents of experts and counsel (ii)
(24) Power of attorney (ii)
(31.1)Certification of Chief Executive Officer (Section 302 of
Sarbanes-Oxley Act) (iii)
(31.2)Certification of Chief Financial Officer (Section 302 of
Sarbanes-Oxley Act) (iii)
(32.1) Certification of Chief Executive Officer (Section 906 of
Sarbanes-Oxley Act) (iv)
(32.2)Certification of Chief Financial Officer (Section 906 of
Sarbanes-Oxley Act) (iv)
(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-K
(iv) Document furnished with this Form 10-K
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2003.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Jack I. Ehrenhaus
------------------------
Jack I. Ehrenhaus
Chairman of the Board and Chief Operating Officer
Date: May 20, 2004
27
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Jack I. Ehrenhaus Chairman of the Board and Chief May 20, 2004
Jack I. Ehrenhaus Operating Officer
/s/ Donald J. Hommel Director, President and Treasurer May 20, 2004
Donald J. Hommel (Chief Executive Officer and Chief
Financial Officer)
/s/ Shalom S. Maidenbaum Director May 20, 2004
Shalom S. Maidenbaum
May 20, 2004
/s/ William T. Konczynin Director, Chairman of the Audit
William T. Konczynin Committee
28
INDEX
Page
--------
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of
December 31, 2003 and December 31, 2002 F-4
Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001 F-5
Consoldated Statements of Shareholders' Deficiency for
the years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the
the years ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Audit Committee of the Board of Directors of Consumers Financial
Corporation:
We have audited the accompanying consolidated balance sheet of Consumers
Financial Corporation and Subsidiaries as of December 31, 2003, and the related
consolidated statement of operations and comprehensive income, shareholders'
deficiency and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Consumers Financial
Corporation and Subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
New York, NY
April 23, 2004
/s/ Marcum & Kliegman, LLP
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance sheet of Consumers
Financial Corporation and subsidiary as of December 31, 2002, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity deficiency and cash flows for each of the two years in the period ended
December 31, 2002. These financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Note 3 to the consolidated financial statements, the
Company has restated its liquidation-basis financial statements for periods
prior to December 31, 2002 to conform to the current presentation using
generally accepted accounting principles applicable to going-concern entities.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Consumers Financial Corporation
and subsidiary as of December 31, 2002 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying conslidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
conslidated financial statements, the Company has a shareholders' equity
deficiency at December 31, 2002 and has no operating revenues. These matters
raise substantial doubt about the COmpany's abhility to continue as a going
concern. Management's plans with respect to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules at Item 15(a) are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. The amounts included in these schedules
have been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ STAMBAUGH NESS, INC
York, Pennsylvania
April 11, 2003
F-3
Consumers Financial Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2003 and 2002
2003 2002
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ 165,758
Prepaid expenses -- 30,420
------------ ------------
Total current assets -- 196,178
Property and equipment, net of accumulated
depreciation of $43,989 and $43,090, respectively 2,047 --
Restricted cash held in escrow account 266,902 314,225
Prepaid insurance 62,067 87,363
------------ ------------
Total Assets $ 331,016 $ 597,766
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Bank overdraft $ 8,441 $ --
Accounts payable and accrued expenses 129,267 32,168
Due to Investor 20,000 --
Due to Officers 38,806 --
Other -- 22,134
------------ ------------
Total current liabilities 196,514 54,302
------------ ------------
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued 75,326 shares, outstanding 2003, 63,161 shares;
2002, 75,326 shares; redemption amount 2003, $631,610;
2002, $753,260; net of treasury stock of $31,629 in 2003 712,454 739,949
------------ ------------
Shareholders' Deficiency:
Preferred stock, $1.00 par value, authorized 10,000,000 shares,
632,500 shares authorized as Series A -- --
Common stock, $.01 stated value, authorized 40,000,000 shares,
20,706,696 (includes 11,123,121 shares to be issued) and
5,276,781 shares issued and outstanding, respectively 207,067 52,768
Capital in excess of stated value 11,748,778 8,938,865
Deficiency (12,437,272) (9,188,118)
Less: Deferred compensation (96,525) --
------------ ------------
Total shareholders' deficiency (577,952) (196,485)
------------ ------------
Total liabilities and shareholders' deficiency $ 331,016 $ 597,766
============ ============
See accompanying notes to consolidated financial statements
F-4
Consumers Financial Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
----------- ----------- ------------
Selling, general and administrative expenses (Including
stock based compensation of $2,841,686 for the
year ended December 31, 2003) $ 3,245,277 $ 527,805 $ 869,196
----------- ----------- -----------
Other Income/Expense
Interest income 2,461 45,300 150,301
Interest expense (5,648) -- --
Net realized investment gains -- 56,448 --
Proceeds from settlement of litigation -- 255,000 --
Gain on sale of insurance licenses -- 178,483 --
Other income 3,444 49,358 118,068
----------- ----------- -----------
257 584,589 268,369
----------- ----------- -----------
Net (Loss) Income (3,245,020) 56,784 (600,827)
Other comprehensive loss, change in unrealized
appreciation of debt securities -- (54,702) 27,539
----------- ----------- -----------
Comprehensive (Loss) Income $(3,245,020) $ 2,082 $ (573,288)
=========== =========== ===========
Per share data:
Basic and diluted loss per common share $ (0.35) $ (0.08) $ (0.39)
=========== =========== ===========
Weighted average number of common shares outstanding 9,514,892 3,501,238 2,577,701
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
Consumers Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Deficiency
For the Years ended December 31, 2003, 2002 and 2001
Accumulated
Capital in
Common Stock excess of Deferred
Shares Amount stated value Deficiency Compensation
-------------- ---------- ------------ ------------- --------------
Balance, December 31, 2000 2,578,188 $ 25,782 $ 6,722,485 $ (7,899,588) $ 0
Change in net unrealized appreciation of debt
securities for the year
Preferred stock dividends (385,572)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (18,654)
Purchase of common stock
Retirement of treasury shares, common (1,407) (14) (46)
Retirement of treasury shares, preferred 22,613
Net loss for the year (600,827)
-------------- ----------- ------------- -------------- --------------
Balance, December 31, 2001 2,576,781 25,768 6,745,052 (8,904,641) 0
Change in net unrealized appreciation of debt
securities for the year
Preferred stock dividends (255,813)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (84,448)
Issuance of common stock 2,700,000 27,000 81,000
Retirement of treasury shares, preferred 2,112,813
Net income for the year 56,784
-------------- ----------- ------------- -------------- --------------
Balance, December 31, 2002 5,276,781 52,768 8,938,865 (9,188,118) 0
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (4,134)
Issuance of common stock 15,429,915 154,299 2,809,913
Deferred compensation (96,525)
Net loss for the year (3,245,020)
-------------- ---------- ------------ ------------- --------------
Balance, December 31, 2003 20,706,696 $ 207,067 $ 11,748,778 $ (12,437,272) (96,525)
============== =========== ============= ============== ==============
Other
Preferred Comprehensive Treasury stock, common Total
-----------------------
Stock Income (loss) Shares Amount Amount
------------ --------------- -------- ----------- -----------
Balance, December 31, 2000 $ 0.00 27,163 0 $ 0 $(1,124,158)
Change in net unrealized appreciation of debt
securities for the year 27,539 27,539
Preferred stock dividends (385,572)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (18,654)
Purchase of common stock (980) (39) (39)
Retirement of treasury shares, common 980 39 (21)
Retirement of treasury shares, preferred 22,613
Net loss for the year (600,827)
-------------- --------------- -------- ----------- -----------
Balance, December 31, 2001 54,702 0 0 (2,079,119)
Change in net unrealized appreciation of debt
securities for the year (54,702) (54,702)
Preferred stock dividends (255,813)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (84,448)
Issuance of common stock 108,000
Retirement of treasury shares, preferred 2,112,813
Net income for the year 56,784
-------------- --------------- -------- ----------- -----------
Balance, December 31, 2002 0 0 0 (196,485)
Accretion of difference between carrying value and
mandatory redemption value of preferred stock (4,134)
Issuance of common stock 2,964,212
Deferred compensation (96,525)
Net loss for the year (3,245,020)
-------------- --------------- -------- ----------- -----------
Balance, December 31, 2003 $ 0 0 0 $ 0 $ (577,952)
============== =============== ======== =========== ===========
See accompanying notes to consolidated financial statements
F-6
Consumers Financial Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended December 31,
-----------------------------------------------
2003 2002 2001
------------ ------------- -----------
Cash flows from operating activities:
Net (loss) income $(3,245,020) $ 56,784 $ (600,827)
Adjustments to reconcile net income (loss) to cash flows
used in operating activities:
Depreciation and amortization 899 -- --
Write-off of loans receivable from
majority shareholder 27,500 -- --
Gain on sale of investments -- (56,448) --
Gain on sale of insurance licenses -- (178,483) --
Write down in value of insurance licenses -- -- 80,250
Stock based compensation 2,841,686 -- --
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Receivable from joint venture partner -- -- 287,441
Other receivables -- 22,501 23,823
Prepaid expenses 55,716 (31,882) (25,093)
Accrued expenses 84,840 -- --
Employee severance liability -- (177,962) --
Other current liabilities (22,134) (22,825) (130,326)
Other -- (48,201) 48,835
----------- ----------- -----------
Total adjustments 2,988,507 (493,300) 284,930
----------- ----------- -----------
Net cash used in operating activities (256,513) (436,516) (315,897)
----------- ----------- -----------
Cash flows from investing activities:
Loans to majority shareholder (27,500) -- --
Purchase of capital assets (2,946) -- --
Proceeds from sale of investments -- 945,181 36,935
Proceeds from sale of insurance licenses, net of selling
expenses of $44,767 and liability assumed by buyer
of $132,120 -- 73,113 --
Cash deposited into preferred stock excrow account, net
of withdrawal 47,323 (314,225) --
----------- ----------- -----------
Net cash provided by investing activities 16,877 704,069 36,935
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loans by officers 38,806 -- --
Proceeds from investor 20,000 -- --
Bank overdraft 8,441
Purchase of redeemable preferred stock (19,369) (1,660,067) (11,917)
Cash dividends to preferred shareholders -- (351,993) (385,572)
Proceeds from issuance of common stock 26,000 108,000 --
----------- ----------- -----------
Net cash provided by (used in) financing activities 73,878 (1,904,060) (397,489)
----------- ----------- -----------
Net decrease in cash and cash equivalents (165,758) (1,636,507) (676,451)
Cash and cash equivalents at beginning of year 165,758 1,802,265 2,478,716
----------- ----------- -----------
Cash and cash equivalents at end of year $ -- $ 165,758 $ 1,802,265
=========== =========== ===========
Non-cash investing activities:
Due to preferred stockholder for redemption of
shares $ 12,260 $ -- $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements
F-7
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. Overview, Going Concern and Management Plans
Since 1998, the Company has had no business operations, and its revenues
and expenses have consisted principally of investment income on remaining assets
and corporate and other administrative expenses. In March 1998, the Company's
shareholders approved a Plan of Liquidation and Dissolution (the "Plan of
Liquidation") pursuant to which the Company began liquidating its remaining
assets and paying or providing for all of its liabilities. However, in February
2002, the Company entered into an option agreement with CFC Partners, Ltd., a
New York investor group ("CFC Partners"), pursuant to which CFC Partners could
obtain a majority interest in the Company's common stock. In August 2002 (See
Note 4), the option was exercised and 2,700,000 new common shares, representing
approximately 51.2% of the then total outstanding shares of common stock, were
issued by the Company to CFC Partners. As a result of the acquisition of the
Company, the Plan of Liquidation was discontinued. Immediately prior to the
transaction with CFC Partners, the Company paid a substantial portion of its
remaining assets to its preferred shareholders in connection with a tender offer
to those shareholders.
Going concern and management plans
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, at December
31, 2003, the Company had a cash overdraft of $8,441, current liabilities of
$196,514 without any current assets, a shareholders' deficit of $577,952 and was
delinquent in its payment to its existing creditors. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
CFC Partners is currently pursuing various business opportunities for the
Company, including strategic alliances, as well as the merger or combination of
existing businesses within the Company. The new management of the Company is
initially focusing on joint ventures with, or acquisitions of, companies in the
real estate, construction management and medical technology sectors as well as
the direct purchase of income-producing real estate. However, there is no
assurance that the Company's efforts in this regard will be successful. In fact,
given the Company's current cash position, without new revenues and/or immediate
financing, the Company's efforts to develop the above-referenced businesses are
not likely to succeed.
The Company's ability to continue as a going concern is dependent on its
success in developing new cash revenue sources or, alternatively, in obtaining
short-term financing while its businesses are being developed. There are no
assurances that such financing can be obtained or, if available, be obtained at
terms acceptable to the Company. To the extent that such financing is equity
based, this may result in dilution to the existing shareholders.
The consolidated financial statements presented herein do not include any
adjustments that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its former wholly-owned subsidiary, Consumers Life
Insurance Company ("Consumers Life") until June 19, 2002 when Consumers Life was
sold. The consolidated financial statements also include the Company's
wholly-owned subsidiary, Consumers Management Group and its 55% owned
subsidiary, P.E.T. Centers of America LLC, neither of which had any operations
during the periods presented. All material intercompany balances and
transactions have been eliminated in consolidation.
Equity method investee
The Company carries its 47.5% investment in Vaughn at a value of zero,
which was the original cost, and accounts for its financial activity under the
equity method of accounting. Vaughn is operating at a loss and the Company is
not liable for any of the obligations of Vaughn, either direct or indirect, and
is under no requirement to contribute any capital to Vaughn. .
F-8
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less when purchased to be cash equivalents.
Income taxes
The Company accounts for income taxes using the liability method, which
requires the determination of deferred tax assets and liabilities based on the
differences between the financial and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are adjusted by a valuation allowance, if, based
on the weight of available evidence, it is more likely than not that some
portion of, or all of the deferred tax assets, will not be realized.
Equipment and fixtures
Equipment and fixtures are stated at cost. Maintenance and repairs are
charged to expenses as incurred; costs of major additions and betterments are
capitalized. When equipment and fixtures are sold or otherwise disposed of, the
cost and related accumulated depreciation are eliminated from the accounts and
any resulting gain or loss is reflected in the Consolidated Statement of
Operations.
Depreciation and amortization
Depreciation of equipment and fixtures is computed on the straight-line
method at rates adequate to allocate the cost of applicable assets over their
expected useful lives of three years.
Use of estimates in the financial statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Reclassifications
Certain accounts in the prior years' financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications have no effect on
previously reported income.
Net loss per share
Basic EPS is computed by dividing income (loss) available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS is based on the weighted-average number of shares of common
stock and common stock equivalents outstanding at year-end.
Stock based compensation
In October 1995, the Financial Accounting Standards Board "(FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 prescribes accounting and reporting
standards for all stock based compensation plans, including employees tock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS 123 requires compensation expense to be recorded (i) using the new
fair value method or (ii) using the existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25") and related interpretations with pro forma disclosure of
what net income and earnings per share would have been had the Company adopted
the new fair value method. The Company intends to continue to account for its
stock based compensation plans in accordance with the provisions of APB 25.
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide an alternative
method of transition to SFAS 123's fair value method of accounting for stock
based employee compensation. SFAS 148 also amends the disclosure provisions of
SFAS 123 and Accounting Principles Board Opinion No. 28,
F-9
"Interim Financial Reporting" ("APB 28"), to require disclosure in summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While the
statement does not amend SFAS 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS 123
are applicable to all companies with stock based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS 123 or the intrinsic value method of APB 25. The adoption of SFAS
148 did not have an impact on net income or pro forma net income applying the
fair value method as the Company did not have compensatory stock options or
warrants for the year ended December 31, 2003, 2002 or 2001.
New Accounting Pronouncements
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" (SFAS 150"). SFAS 150 addresses certain financial
instruments that, under previous guidance, could be accounted for as equity, but
now must be classified as liabilities in statements of financial position. These
financial instruments include: (i) mandatory redeemable financial instruments,
(ii) obligations to repurchase the issuer's equity shares by transferring
assets, and (iii) obligations to issue a variable number of shares. SFAS 150 is
generally effective for all financial instruments entered into or modified after
May 31, 2003, and otherwise effective at the first interim period beginning
after June 15, 2003. The adoption of the effective provisions of SFAS 150 did
not have any impact on the Company's consolidated financial position or
statement of operations
In January 2003 and revised in December 2003, the FASB issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," addresses consolidation by business enterprises of
variable interest entities, which possess certain characteristics. FIN 46
requires that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities, and results of the activities
of the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. FIN 46 applies immediately to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that
date. The consolidation requirements apply to older entities in the first fiscal
year or interim period after June 15, 2003. The adoption of the effective
provisions of Interpretation 46 did not have any impact on the Company's
consolidated financial position or statement of operations
3. Restatement of Financial Statements
In connection with the acquisition of the Company by CFC Partners on
August 28, 2002, as described in Note 4, and the related termination of
the Plan of Liquidation, the Company re-adopted accounting principles
applicable to going-concern entities as of that date. The Company's
consolidated financial statements had been prepared using a liquidation
basis of accounting since March 25, 1998 when the Plan of Liquidation was
approved by the Company's shareholders. In order to provide comparative
financial information, the Company has restated its liquidation-basis
financial statements for 2001 to conform to the current presentation which
utilizes accounting principles applicable to going-concern entities.
Accordingly, in the accompanying consolidated financial statements, the
Statement of Net Assets in Liquidation as of December 31, 2001 and the
Statement of Changes in Net Assets in Liquidation for the year ended
December 31, 2001, as originally prepared on a liquidation basis of
accounting, have been replaced by a Balance Sheet, Statement of Operations
and Statement of Cash Flows.
At December 31, 2001, the Company's net assets in liquidation, as
originally reported, were zero. For the year ended December 31, 2001, the
Company originally reported an excess of expenses over revenues of
$520,577.
4. Acquisition of the Company
On August 28, 2002, CFC Partners, pursuant to the Option Agreement,
exercised its option to acquire 2,700,000 shares of the Company's common stock.
The option price of $108,000 had previously been deposited by CFC Partners into
an escrow account held by the Company. The newly issued shares represented
approximately 51.2% of the then outstanding common stock of the Company.
F-10
At the August 28, 2002 meeting of the Board of Directors, Donald J.
Hommel, the President of CFC Partners, was appointed as a Director of the
Company to fill an existing vacancy on the Board. Following such appointment,
the Company's officers resigned as planned and the Board elected Mr. Hommel as
the Company's President and Chief Executive Officer. In addition, the Company's
two Directors, other than Mr. Hommel, also resigned as planned. In October 2002,
at a subsequent meeting of the Board of Directors, Mr. Shalom S. Maidenbaum was
appointed to fill an existing vacancy and officers were elected. In March 2003,
William Konczynin was appointed as an additional director and Chairman of the
Audit Committee, and in April 2003, Jack Ehrenhaus was appointed as Chairman of
the Board and Chief Operating Officer, effective January 1, 2003.
In connection with the issuance of the new shares to CFC Partners, the
Board of Directors also terminated the Plan of Liquidation. The Board had
previously determined that selling the Company for its value as a "public
company shell" was a better alternative for the shareholders than the Plan of
Liquidation, in as much as the common shareholders were not expected to receive
any distribution in a liquidation of the Company. The preferred shareholders
were given an opportunity to exchange their shares for cash in a tender offer
completed by the Company on August 23, 2002.
The new management of the Company is currently pursuing various business
opportunities for the Company. Management's efforts have initially been focused
on joint ventures with, or acquisition of, companies in the real estate,
construction management and medical technology sectors as well as the direct
purchase of income-producing real estate.
5. Restricted Assets
As required by the terms of the option agreement with CFC Partners, in
October 2002, the Company deposited $331,434 (representing the tender offer
price of $4.40 multiplied by the 75,326 shares of preferred stock not tendered)
into a bank escrow account for the benefit of the remaining preferred
shareholders. The funds in this account, including any earnings thereon, are
restricted in that they may only be used by the Company to pay dividends or make
other distributions to the holders of the preferred stock. During 2003, $47,323
was withdrawn from the escrow account to purchase 12,165 shares of preferred
stock for $31,629. The remaining $15,409 was deposited into the Company's
general cash account. Included in accounts payable and accrued expenses at
December 31, 2003 is $12,260 due to preferred shareholders .At December 31, 2003
and 2002, restricted assets consisted entirely of money market funds in the
amount of $266,902 and $314,225, respectively.
6. Sale of Stock of Insurance Subsidiary
On June 19, 2002, the Company completed the sale of Consumers Life to
Black Diamond Insurance Group, Inc., a Delaware corporation. The purchaser paid
the Company $1,548,846 in cash and assumed a $132,120 liability in connection
with its acquisition of the Consumers Life stock. The cash proceeds consisted of
the following:
Value of underlying net assets of subsidiary: $ 930
Cash and cash equivalents $ 491,399
Government bonds 931,904
Other assets 7,664
Unclaimed property liability (132,120)
-------------
1,298,846
Value of state insurance licenses 250,000
-------------
Total consideration received $ 1,548,846
============
The sale of Consumers Life resulted in a gain to the Company of $242,480.
Prior to the sale of
F-11
Consumers Life, dividends and other distributions to the Company from the
subsidiary were limited in that Consumers Life was required to maintain minimum
capital and surplus in each of the states in which it was licensed, as
determined in accordance with regulatory accounting practices. Under Delaware
insurance laws, distributions to the Company were subject to further
restrictions relating to capital and surplus and operating earnings. Because of
its prior operating losses and its capital and surplus position, Consumers Life
was not permitted to pay any dividends without prior approval from the Delaware
Insurance Department. Also, any loans or advances to the Company were required
to be reported to and approved by the Delaware Insurance Department. During 2002
and 2001, the Delaware insurance Department approved payment by Consumers Life
of dividends totaling $1,481,510 and $212,500, respectively. Substantially all
of the 2002 dividends were approved in connection with the sale transaction.
7. Net Investment Income
Net investment income is applicable to the following investments:
Years ended December 31,
----------------------------------------------------
2003 2002 2001
---- ---- ----
Interest:
Marketable securities $ - $ 24,324 $ 52,230
Mortgage Loans - 338 3,091
Cash equivalents 2,461 20,638 94,980
-------------- ------------- ---------------
Net investment income $ 2,461 $ 45,300 $ 150,301
============== ============= ===============
8. Property and Equipment
December 31,
----------------------------------
2003 2002
---- ----
Property & equipment:
Data processing equipment and software $ 28,671 $ 25,725
Furniture and equipment 17,365 17,365
-------------- -------------
46,036 43,090
Less: accumulated depreciation and
amortization (43,989) (43,090)
-------------- -------------
Balance $ 2,047 $ -
============== =============
F-12
Depreciation expense was $899, $-0- and $-0- for the years ended December
31, 2003, 2002 and 2001, respectively.
9. Commitments and Contingencies
Rental expense in 2003, 2002 and 2001 was approximately $18,100, $23,400
and $23,400, respectively. All leases currently in effect are on a
month-to-month basis.
In September the Company, through its subsidiary, had signed a lease for a
PET center in Suffolk County, New York, but subsequently the lease terminated.
The Company received a letter from the landlord dated November 11, 2003 claiming
that the Company and the subsidiary are liable to the landlord for all costs and
expenses incurred in connection with enforcing the lease provisions as well as
liquidated damages provided for in the lease (the present value of the lease
payments discounted at 6%). The Company has received no further communications
from the landlord in connection with its demand.
10. Redeemable Preferred Stock
On August 23, 2002, the Company completed a tender offer to all of the
preferred shareholders, pursuant to which it purchased 377,288 shares
(approximately 83.4% of the shares outstanding) at $4.40 per share plus accrued
dividends. The tender offer was completed in conjunction with and was a
condition to the exercise of the option by CFC Partners (See Note 4). Since all
of the Company's remaining assets would have been distributed to the holders of
the preferred stock if the Company had been liquidated, the Board of Directors
believed that the exercise of the option (and the related termination of the
Plan of Liquidation) should not take place until the preferred shareholders had
been given a chance to exchange their shares for cash.
The terms of the preferred stock require the Company, when and as
appropriated by the Board out of funds legally available for that purpose, to
make annual payments to a sinking fund. Such payments were to have commenced on
July 1, 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by an
amount equal to the redemption value ($10 per share) of the shares acquired. As
a result of the Company's purchases of preferred stock in the open market and in
the tender offer described above, no sinking fund payment for the preferred
stock is due until July 1, 2006. However, in connection with the exercise of the
option by CFC Partners, the Company deposited $331,434 into a bank escrow
account for the benefit of the remaining preferred shareholders.
The redeemable preferred stock is redeemable at the option of the Company
at any time, as a whole or in part, for a redemption price of $10 per share plus
all unpaid and accrued dividends.
Dividends at an annual rate of $.85 per share are cumulative from the date
of original issue of the preferred stock. Dividends are payable quarterly on the
first day of January, April, July and October. The dividends payable on January
1, April 1, July 1 and October 1, 2003 have not been declared or paid by the
Company. In addition, the dividend payable at January 1, 2004 has also not been
declared or paid by the Company. Dividends in arrears for the five quarters as
of January 1, 2004 total $74,205, $58,198 of which relates to the four quarters
of 2003.
When the Company is in arrears as to preferred dividends or sinking fund
appropriations for the preferred stock, dividends to holders of the Company's
common stock as well as purchases, redemptions or acquisitions by the Company of
shares of the Company's common stock are restricted. Since the Company is in
default with respect to the payment of preferred dividends and the aggregate
amount of the deficiency is equal to at least four quarterly dividends, the
holders of the preferred stock are entitled, only while such arrearage exists,
to elect two additional members to the then existing Board of Directors. . The
preferred shareholders have not elected these two additional directors as of
this date.
In event of a liquidation of the Company, the holders of the preferred
stock are entitled to receive $10 per share plus all unpaid and accrued
dividends prior to any distribution to be made to the holders of common stock.
F-13
The preferred stock is convertible at any time, unless previously
redeemed, into shares of common stock at the rate of 1.482 shares of common
stock for each share of preferred stock (equivalent to a conversion price of
$6.75 per share).
The difference between the fair value of the preferred stock at the date
of issue and the redemption value is being recorded through periodic accretions,
using the interest method, with an offsetting charge to the deficit. Such
accretions totaled $4,134, $84,448 and $18,654 in 2003, 2002 and 2001,
respectively. The unaccreted discounts were $9,806, $13,311 and $97,759 at
December 31, 2003, 2002 and 2001, respectively.
11. Changes to the Company's Articles of Incorporation
At the Special Meeting of the Shareholders of the Company held on August
27, 2003, the shareholders were asked to consider and vote upon a proposal to
amend the Company's Articles of Incorporation (i) to effect a one-for-ten
reverse stock split of the Company's common stock by reducing the number of
issued and outstanding shares of common stock; (ii) to authorize 50 million
shares of capital stock of the Company, 40 million shares will relate to common
stock and 10 million shares will relate to preferred stock; and (iii) to permit
action upon the written consent of less than all the shareholders of the
Company, pursuant to section 2524 of the Pennsylvania Business Corporation Law
of 1988. Although the meeting occurred and the three actions were approved by
the shareholders, at this time the Company's management has only effected two
out of three of such authorized actions. On January 29, 2004, an amendment to
the Company's Articles of Incorporation was filed with the Pennsylvania
Department of State Corporation Bureau which (i) increased the authorized share
capital of the Company to 50 million shares, divided into 40 million shares of
common stock and 10 million shares of preferred stock and (ii) authorizing the
Company to take action upon the written consent of shareholders holding the
minimum number of votes that would be necessary to authorize the action at a
meeting at which all shareholders entitled to vote thereon were present and
voting.
F-14
12. Income Taxes
The Company recognized deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. In addition, the Company also recognizes deferred tax assets for future
tax benefits, such as net operating loss ("NOL") carryforwards, to the extent
that realization of such benefits is more likely than not.
The components of the net deferred tax assets as of December 31, 2003 and
2002 are as follows:
2003 2002
---- ----
Stock compensation $ 58,000 $ --
NOL carryforwards 3,015,000 2,038,000
Capital loss carryforwards 4,457,000 4,457,000
----------- -----------
Total deferred tax asset 7,530,000 6,495,000
Valuation allowance (7,530,000) (6,495,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The valuation allowance increased $1,035,000 and $4,482,000 for the years
ended December 31, 2003 and 2002, respectively.
At December 31, 2003, the Company had available NOL carryforwards for
income tax purposes of approximately $8,804,000 which expire at various dates
through 2023. The use of the NOL carryforwards is subject to limitations under
Section 382 of the Internal Revenue Code pertaining to changes in stock
ownership.
The change in the valuation allowance for deferred tax assets are summarized as
follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Beginning Balance $6,495,000 $2,013,000 $1,869,000
Change in Allowance 1,035,000 4,482,000 144,000
---------- ---------- ----------
Ending Balance $7,530,000 $6,495,000 $2,013,000
========== ========== ==========
F-15
13. Equity Investment
In May 2003, Vaughn Partners LLC, an Illinois limited liability company
("Vaughn") in which the Company owns a 47.5 % interest, acquired a garden
apartment style real estate project in Springfield, Illinois. Of the remaining
interest in the LLC, 47.5% is owned by Spartan Properties ("Spartan")and 5% by
other investors. Vaughn acquired this property for a purchase price of
$5,440.940, comprised of (i) a $4,650,000 interest only bank loan secured by a
first mortgage lien on the property payable in two years at an annual interest
rate of 7.25% and with monthly interest payments approximating $28,100; (ii) a
$1,200,000 second mortgage on the property at an annual interest rate of 13%
with principal amounts of $500,000 due six months from the date of acquisition
and $700,000 due twelve months from the date of acquisition with monthly
interest payments due on the outstanding balance (iii) a $100,000 interest-free
loan made by a private investor that was due and payable on June 13, 2003 and
which accrues interest at an annual rate of 18% beyond its due date and (iv)
$200,000 in cash contributed by third party investors to Vaughn. As a result of
the default under the second mortgage, the second mortgagee has the right to,
among other rights, sell the property, collect all rental income from the
property and exclude Vaughn therefrom. As a result of the default under the
$100,000 loan, Vaughn is liable for accrued interest from June 15, 2003 at an
annual rate of18% plus all costs and fees incurred by the lender in collecting
amounts due under the note. The Company is in discussions with the lender
regarding repayment of this loan. Vaughn also obtained a $600,000 construction
loan from the bank under similar terms as the mortgage, of which $30,357 has not
been used, for the purpose of completing certain renovation to the property.
The Company is not directly or indirectly liable for any of the
obligations of Vaughn and its exposure is limited solely to its investment in
Vaughn which is carried at zero in these consolidated financial statements.
Effective as of October 31, 2003, the Company approved an amended
operating agreement whereby Spartan would transfer to the Company 24.22% of its
interest in Vaughn in consideration for issuance by the Company of 250,000
shares of common stock. This amended operating agreement memorializing this
arrangement was not executed by members of Vaughn holding 5% of the membership
interests and the 250,000 shares of common stock were not issued. This amended
operating agreement has therefore not and will not be ratified.
Selected unaudited financial information for Vaughn at December 31, 2003
and for the year then ended is as follows:
Current Assets $ 139,768
Non-Current Assets $ 5,958,368
--------------
Total Assets $ 6,098,136
Current liabilities $ 1,654,902
Non-current liabilities $ 4,714,955
Rental income $ 310,514
Rental expenses $ 441,253
Loss on rentals $ (130,739)
Loss from continuing operations $ (130,739)
Net loss $ (471,721)
On September 4, 2003, the Company's Board of Directors approved the
payment of broker's fees to the Company's majority shareholder, CFC Partners,
for real estate and other contracts obtained by
F-16
CFC Partners and assigned to the Company. The Board agreed to pay CFC Partners
an amount equal to 5% of the contract price following completion of each
transaction. Such payments may be in the form of cash or common stock of the
Company. In that regard, the Board authorized the issuance to CFC Partners of
1,227,273 shares of the Company's common stock in connection with the
acquisition of the Springfield, Illinois real estate. The cost of this
transaction to the Company, as measured by the market value of the shares at the
time of issuance, was approximately $270,000 which was expensed in 2003.
14. Business Development and Financing Activities
On September 10, 2003, the Company entered into an agreement with Hudson
Valley Home Builders & Developers Corp ("Hudson") pursuant to which Hudson would
use its commercially reasonable efforts to introduce funding sources to provide
the Company with financing to consummate real estate transaction. Hudson agreed
to provide the Company with financing between $2,000,000 and $4,000,000 for 36
months from the date of the agreement. The Company agreed to use commercially
reasonable efforts to consummate a maximum of 10 real estate transactions during
each 12 month period. Pursuant to the terms of the agreement, Hudson would
notify the Company within 21 days of receipt of an executed contract on a real
estate project, that it would fund such project. The investors would have the
right to designate a portion of their funding to be used to purchase shares of
the Company at a premium above cost.
Pursuant to the agreement, Hudson and its investors would be entitled to
60% of the equity of a deal, as well as a cash payment equal to 10% of the
consideration received by the Company from Hudson and its investors. Upon
financing a real estate deal, the Company would issue to Hudson and its
investors a warrant to purchase shares of the Company. The Company agreed to
file a registration statement covering such shares issued to Hudson and its
investors within 24 months of such issuance and granting them piggyback
registration rights after 18 months of such issuance. Either party has the right
to terminate the agreement by written notice to the other. To date, no funds
have been generated by Hudson.
During October, 2003, the Company entered into a term sheet with Dutchess
Private Equities Fund II LP, a equity funding group ("Dutchess") to provide the
Company with a $2,000,000 equity line of credit to be used for general corporate
purposes. A formal agreement with Dutchess for this equity line was executed on
April 15, 2004 and provides that the market price of the Company's stock for the
5 consecutive days prior to the put date can not be below 75% of the closing bid
price for the 10 trading days prior to the put date. The put date is the date
that the Company submits notice to the investor that it desires to draw down a
portion of the line. The purchase price for the shares to be paid to the
investor is discounted to the lowest closing bid price of the stock during the 5
trading days immediately after a put date. The funds will be available to the
Company upon an effective registration of the Company's stock issued pursuant to
this agreement.
On October 27, 2003, the Company entered into an agreement with an
investment banking firm to arrange financing for the Company's operations and
expansion, provide financial advisory services on mergers and acquisitions, and
represent the Company with regard to introductions to accredited investors,
financial institutions, strategic partners and potential clients. The investment
banker is to receive a percentage based on the amount of equity or debt raised
for the Company, and has received a retainer of $3,750 plus 85,000 shares of
common stock of the Company, which were valued at $15,300, with demand and
piggyback registration rights. In addition, the banker is entitled to warrants
equal to 3% of the equity of the Company upon the successful completion of any
financing or merger and acquisition transaction. The banker is also entitled to
registration rights, tag along rights, a put option, anti-dilution protection
and a right of first refusal. If the Company fails or refuses to close a
transaction after funds have been placed in escrow or a commitment letter
accepted and approved, the Company is liable for all direct and consequential
damages incurred by the banker. To date, no financing or mergers and
acquisitions have been generated by this investment banking firm.
During April, 2003, the Company entered into a Memorandum of Understanding
with Mariculture Systems, Inc. ("Mariculture") whereby the Company would acquire
60% of the outstanding shares of Mariculture in exchange for the Company's
management and financial expertise. Mariculture designs, builds and operates
aquaculture farms used for raising certain species of fish for the consumer
market. Although not aggressively pursued by either party to date, and still
requiring appropriate due diligence review and board approvals, this memorandum
has no expiration date and neither party has expressed an intent to terminate
it.
F-17
15. Issuance of Common Stock
During 2003, the Company issued common stock as follows:
Common
Stock Capital in
Issue $.01 Stated Excess of
Issued To Purpose Date Shares Value Stated Value
--------- ------- ---- ------ ----- ------------
Scala Consulting 4/15/03 300,000 $ 3,000 $ 60,000
Wong Consulting 4/15/03 36,000 360 7,200
Moline Consulting 6/10/03 17,000 170 3,740
Burns Consulting 7/2/03 140,000 1,400 16,800
CFC Partners Consulting 8/11/03 1,227,273 12,273 257,727
Pinchus Gold Consulting 9/12/03 92,000 920 20,240
David Sassoon Consulting 10/27/03 85,000 850 14,450
Pinchus Gold Consulting 10/31/03 330,000 3,300 79,200
Total Consultants 2,227,273 22,273 459,357
---------- ----------- -----------
Jack I Ehrenhaus Empl Agreement 9/1/03 3,000,000 30,000 660,000
Donald J Hommel Empl Agreement 9/1/03 3,000,000 30,000 660,000
Jack I Ehrenhaus 2003 Bonus 9/4/03 1,956,521 19,565 410,870
Donald J Hommel 2003 Bonus 9/4/03 1,956,521 19,565 410,870
Jack I Ehrenhaus 2003 Compensation 12/31/03 1,540,800 15,408 92,448
Donald J Hommel 2003 Compensation 12/31/03 1,540,800 15,408 92,448
Total Executives 12,994,642 129,946 2,326,636
---------- ----------- -----------
Wall Street Comm Subscription Agreement 10/10/03 208,000 2,080 23,920
Total Subscriptions 208,000 2,080 23,920
---------- ----------- -----------
Total Issuances 15,429,915 $ 154,299 $ 2,809,913
========== =========== ===========
Stock Issuances to Consultants
On July 1, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register an aggregate of 353,000 shares of
its common stock issued by the Company to three consultants during April and
June of 2003, pursuant to certain agreements entered into and between the
Company and the prospective consultants. Each of these agreements terminated on
December 31, 2003. In exchange for receipt of the shares of common stock, such
consultants would provide various services to the Company, principally relating
to the identification of suitable merger or acquisition partners for the
Company. The cost of these services, as measured by the market value of the
shares at time of issuance, was $74,470.
On September 19, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 92,000 shares of its common stock
issued by the Company to a consultant pursuant to a consultancy agreement
entered into and between the Company and the consultant, Pinchus Gold on
September 12, 2003. The agreement terminated on December 31, 2003. In exchange
for receipt of the shares of common stock, the consultant provided various
services to the Company, principally relating to the identification of suitable
merger or acquisition partners for the
F-18
Company. The cost of these services, as measured by the market value of the
shares at time of issuance, was $21,160
On October 31, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 330,000 shares of common stock
issued on October 31, 2003 to a consultant, Pinchus Gold. The agreement is for
services to be provided through January 31, 2004. In exchange for receipt of the
shares of common stock, the consultant would provide various services to the
Company, principally relating to the identification of suitable merger or
acquisition partners for the Company. The cost of these services, as measured by
the market value of the shares at time of issuance, was approximately $82,500.
On November 7, 2003, the Company filed a Registration Statement with the
Securities and Exchange Commission to register 140,000 shares of its common
stock issued by the Company to a consultant pursuant to a consultancy agreement
entered into and between the Company and the consultant on July 2, 2003. The
agreement terminated on December 31, 2003. In exchange for receipt of the shares
of common stock, the consultant provided various services to the Company,
principally relating to the identification of suitable merger or acquisition
partners for the Company. The cost of these services, as measured by the market
value of the shares at time of issuance, was approximately $18,200.
Stock Issuances to Officers
On September 1, 2003, the Company entered into employment agreements with
each of Donald J. Hommel, President and Chief Executive Officer and Jack I.
Ehrenhaus, Chairman and Chief Operating Officer of the Company (See Note 17),
pursuant to which, each of the officers was issued 3,000,000 shares of the
Company's common stock valued at an aggregate of $1,380,000.
At the September 4, 2003 meeting of the Board of Directors, the Board
approved bonuses for Donald J. Hommel, President and Chief Executive Officer and
Jack I. Ehrenhaus, Chairman and Chief Operating Officer of the Company. Each of
the individuals was issued 1,956,521 shares of common stock each valued at
$430,435.
At December 31, 2003, the Company accrued unpaid salaries for Mr. Hommel
and Mr. Ehrenhaus, each in the amount of $85,600. Both Mr. Hommel and Mr.
Ehrenhaus agreed to accept common stock in lieu of cash and the Company has
agreed to issue 1,540,800 shares of common stock to each of Mr. Hommel and Mr.
Ehrenhaus, each valued at $107,856, in satisfaction of these unpaid and accrued
salaries.
Other Stock Issuances
On October 10, 2003 the Company sold 208,000 shares of its common stock to
Wall Street Communications for $26,000 or $0.125 per share pursuant to a
subscription agreement.
In November 2003, an investor executed a subscription agreement to
purchase 1,000,000 shares of the Company's common stock for ten cents ($0.10)
per share. As of December 31, 2003, the investor has only paid $20,000 toward
the aggregate purchase price of $100,000; no additional amounts have been
received to date. This amount has been recorded as a current liability as the
Private Placement has been cancelled.
16. Earnings per share
The following table set forth the computation of basic and diluted per
share data:
F-19
Years ended December 31,
------------------------
2003 2002 2001
---- ---- ----
Net income (loss) $(3,245,020) $ 56,784 $ (600,827)
Preferred stock dividend requirement (58,198) (255,813) (385,572)
Accretion of carrying value of preferred stock (4,134) (84,448) (18,654)
----------- ----------- -----------
Numerator for basic loss per share - loss attributable
to common shareholders (3,307,352) (283,477) (1,005,053)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Numerator for diluted loss per share $(3,307,352) $ (283,477) $(1,005,053)
=========== =========== ===========
Denominator for basic loss per share - weighted
average shares 9,514,892 3,501,238 2,577,701
Effect of dilutive securities -- -- --
----------- ----------- -----------
Denominator for diluted loss per share 9,514,892 3,501,238 2,577,701
Basic and diluted loss per common share $ (0.35) $ (0.08) $ (0.39)
The redeemable preferred stock is convertible at any time, unless
previously redeemed, into shares of common stock at the rate of 1.482 shares of
common stock for each share of preferred stock (equivalent to a conversion price
of $6.75 per share). None of the common shares contingently issuable upon the
conversion of the preferred stock have been included in the computation of
diluted per share information as the effects would be antidilutive.
As discussed in Note 12, on March 15, 2003, the Company's shareholders
approved a proposal to amend the Articles of Incorporation to effect a
one-for-ten reverse stock split. The stock split will become effective upon
Management's decision to effectuate the Board resolution. Basic and diluted loss
per share calculations included in the consolidated financial statements have
not been restated to reflect this transaction. The pro forma unaudited effects
of the anticipated stock split on basic and diluted loss per common share,
giving retroactive effect to the reverse stock split, would be $(3.48), $(0.81)
and $(3.90) for the years ended December 31, 2003, 2002 and 2001, respectively.
17. Executive Employment Agreements
On September 1, 2003, the Company entered into employment agreements with
each of Donald J. Hommel, President and Chief Executive Officer and Jack I.
Ehrenhaus, Chairman and Chief Operating Officer, of the Company. Each agreement
provides for annual compensation of $225,000 in base salary with annual
increases of 10% and annual bonuses as determined by the Board, which can range
up to twice the amount of the base salary but in no event will the bonus be less
than 50% of the base salary. Each officer is also entitled to an automobile
allowance of $750 per month and reimbursement of all business expenses. The term
of each employment agreement is ten years. If the Company terminates either
officer without cause prior to the term, the officer is entitled to a severance
payment equal to his salary for the remainder of the ten year term or two years'
salary, whichever is greater. If there is a material change in the Company that
causes a substantial reduction in the officer's duties, or a liquidation,
transfer of assets or merger and the Company is not the surviving entity, the
officer is entitled to a severance payment. The employment agreements also
provide for the issuance of 3,000,000 shares of the Company's common stock to
each of the officers that were valued at an aggregate of $1,380,000 (See Note
15). Each officer also agreed that if the Company has a cash flow shortfall, the
officer will take stock in lieu of cash at a 20% discount to the stock price at
the payment date.
F-20
18. Related Party Transactions
During the first quarter of 2003. the Company made payments totaling
$27,500 to certain individuals so that CFC Partners could purchase its majority
interest in the Company's common stock. Since any obligation to repay this loan
by these individuals, one of whom is a director of the Company, is the
responsibility of CFC Partners, CFC Partners have agreed to repay this loan to
the Company. However, because CFC Partners currently has no ability to repay the
amount borrowed, this loan has been fully reserved in the Company's consolidated
financial statements through a charge to non-operating expenses.
During 2003, the Company received unsecured loans from officers of the
Company to meet operating costs. These loans from Mr. Hommel in the amount of
$23,006 and Mr. Ehrenhaus in the amount of $15,800 bear no interest rate and
have no repayment terms. No payments of principal have been made on these loans
and the aggregate amount of $38,806 is outstanding at December 31, 2003.
19. Unaudited quarterly financial data
The following table provides summarized unaudited fiscal quarterly
financial data for 2003 and 2002
2003
---------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------- ------------- -------------- ------------- ---------------
Selling, general and
administrative expenses $ 126,211 $ 96,422 $ 2,707,611 $ 315,033 $ 3,245,277
Other income (loss) 917 2,098 (3,177) 419 257
Loss before extraordinary items (125,294) (94,324) (2,710,788) (314,614) (3,245,020)
Net (loss) (125,294) (94,324) (2,710,788) (314,614) (3,245,020)
Net loss per share (0.03) (0.02) (0.29) (0.02) (0.35)
2002
---------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------- ------------- -------------- ------------- ---------------
Selling, general and
administrative expenses $ 130,538 150,887 $ 137,653 $ 108,727 $ 527,805
Other income 35,441 285,984 261,542 1,622 584,589
(Loss) income before extraordinary
items (95,097) 135,097 123,889 (107,105) 56,784
Net (loss) income (95,097) 135,097 123,889 (107,105) 56,784
Net (loss) income per share (0.08) 0.01 0.00 (0.01) (0.08)
20. Legal Proceedings
The Company is currently in arbitration against its co-defendant, Life of
the South, from a previously settled claim. Life of the South is seeking to
recover from the Company its share of the settlement totaling $17,500, its
unreimbursed fees of $27,825 plus interest, attorney fees and cost of
arbitration from the Company. The arbitration is in its initial stages and while
the outcome can not be predicted, the Company believes the arbitration will be
settled in favor of the Company.
F-21
21. Subsequent Events
During February 2004, the Company entered into a Memorandum of
Understanding with a privately-held corporation located in Connecticut with the
intent of a possible business combination either directly with the Company,
through a controlled subsidiary of the Company or with a public shell available
to the Company. The Company is in the preliminary investigative stages of its
customary due diligence and this combination is subject to certain conditions
precedent that are material to the transaction and whose outcome in subject to
material uncertainty at the present time.
On March 1, 2004, the Company entered into a one-year consulting agreement
with Corporate Communications Group ("CCG") whereby CCG would provide business
development and marketing services in exchange for 300,000 shares of the common
stock of the Company. The value of these shares on March 1, 2004 was $21,000.
On March 19, 2004 the Company executed a loan agreement with Thomas
Willemsen in the amount of $50,000 for operating capital. This is an unsecured
loan, due on June 19, 2004 as to both interest in the amount of $5,000 and
principal.
On March 22, 2004 the Company executed a loan agreement with Adar Ulster
Realty in the amount of $40,000 for operating capital. This is an unsecured loan
due on May 22, 2004 as to both interest in the amount of $1,200 and principal.
On May 1, 2004, the Company issued 1,540,800 shares of common stock that
were accrued at December 31, 2003, each to Mr. Ehrenhaus and Mr. Hommel for
unpaid compensation. (See Note 15)
F-22