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 |_| No |X|
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 December
13, 2004 was 38,167.499. Based on the closing price on December 13, 2004, the
aggregate market value of common stock held by non-affiliates of the registrant
was $763,350.
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 in-force 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.
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.
1
On May 8, 2003, Vaughn Partners LLC ("Vaughn"), an Illinois limited
liability company in which the Company owns a 37.5% 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 from the proceeds thereof. 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, with the exception of a
reserve in the amount of $200,000 which was created in order to absorb any
liabilities arising from the Vaughn partnership.
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 37.5% 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.
2
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.
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. The Company has accrued $355,676 associated with this
terminated lease.
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 is 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.
3
EMPLOYEES AND AGENTS
As of December 1, 2004, the Company had only one full-time employee, who
also acts as the sole officer of the Company. Jack I. Ehrenhaus, the Company's
President, chairman, and chief executive officer, currently receives cash or
stock compensation from the Company in his capacity as officer and employee. Mr.
Shalom 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. Mr. Donald Hommell was terminated by a majority vote as officer and
director of the Company in October, 2003.
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
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.
In addition, the Company has been party to subsequent legal disputes,
notably with respect to a Securities and Exchange Commission investigation that
was settled in October 2004. This investigation was initiated with respect to
the Company's dismissal of its certified auditor of record, Marcum & Kliegman,
LLC. The Company received notification from the SEC Division of Enforcement on
October 14, 2004 that a settlement offer was being submitted to the Commission.
The terms of the proposed settlement would stipulate that the Company violated
Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13
thereunder. Further, the Commission would not pursue any actions against Messrs.
Ehrenhaus or Hommel. Through the date of this report, the Company has not
received notification as to whether the Commission has accepted the terms of
this proposed settlement.
4
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.
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 de-listed 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 its 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 Quarter Quarter Quarter Quarter Quarter
2003 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.
5
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 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.
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 3,000,000 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.
6
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.
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 $ 1,245,582 $ 527,805 $ 869,196 $ 2,501,146 $ 1,451,183
Other income 716,813 584,589 268,369 949,066 1,288,147
Income (Loss) before income taxes (3,752,404) 56,784 (600,827) (1,552,080) (163,036)
Income taxes -- -- -- -- --
Net Income (Loss) (3,752,404) 56,784 (600,827) (1,552,080) (163,036)
Other comprehensive income (loss) -- (54,702) 27,539 44,015 (42,656)
Comprehensive income (loss) $ (3,752,404) $ 2,082 $ (573,288) $ (1,508,065) $ (205,692)
Per share data (a):
Basic and diluted loss per
common share $ (0.40) $ (0.08) $ (0.39) $ (0.76) $ (0.20)
Weighted average number of common
shares outstanding 9,463,716 3,501,238 2,577,701 2,578,231 2,942,847
Total assets $ 348,616 $ 597,766 $ 2,832,651 $ 25,304,782 $ 44,539,301
Redeemable preferred stock 675,129 739,949 4,428,381 4,444,197 4,498,107
Shareholders' deficiency (1,295,819) (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.
7
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.
8
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
$1,295,819 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 $3,752,404
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
$3,752,404 as compared with net income of $56,784 for 2002. In 2003, the Company
incurred approximately $79,505 in professional fees, $2,495,236 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 $1,245,582 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.
9
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 $165,658 to $100, 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 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.
10
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 $7,242. 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.
11
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. However, at December
31, 2003 the Company had a cash overdraft of $7,242, current liabilities of
$969,306, $62,167 in current assets, a shareholders' deficit of $1,295,819 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.
12
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
$3,595 and $84,448 for the twelve months ended December 31, 2003 and 2002,
respectively.
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.
13
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
--------
Report of Independent Registered Accounting Firm F-2
Report of Independent Accountants F-3
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
14
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 2001 contained 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 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.
In 2004 the accounting firm of Marcum & Kleigman resigned as the Company's
auditors of record. HJ & Associates, LLC was appointed to replace Marcum &
Kleigman in August, 2004.
15
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 management 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.
16
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. Mr. Hommel was terminated by a majority vote
as president and director in October 2004, and was replaced by Jack I.
Ehrenhaus.
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
(Age) (if any) Held, Director in the Company Director Since
--------------------- ----------------------------------------------------------------------- -------------------
Jack I. Ehrenhaus President and Founder, NAIS Corporation 1992 - present 2003
(56) Chairman, President, Chief Executive Officer,
Principal Accounting Officer
Shalom S. Maidenbaum Managing & Founding Partner, Rosenfeld & Maidenbaum 1999 - present 2002
(45)
Dr. William T. President, Port Jefferson Hospital Care 1999 - present 2003
Konczynin
(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.
17
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.
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
===============================================================================
Jack I. Ehrenhaus 56 Chief Operating Officer
Ehrenhaus was appointed and Chief Operating Officer in April 2003,
commencing January 1, 2003, and appointed as President and Chief Executive
Officer in October, 2004. 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.
18
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
OTHER
ANNUAL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------------------------------------------------------------
Jack I. Ehrenhaus 2003 $35,192(1) $430,435(5) $690,000(6) $85,600(3)
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)
Former 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, and President
and Chief Executive Officer of the Company in October, 2004.
(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, and resigned these
positions in October, 2004. 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
19
On September 1, 2003, the Company entered into employment agreements with
both 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, a liquidation or
transfer of assets, or merger and the Company is not the surviving entity, the
officer is entitled to a severance payment. In October of 2003, Mr. Donald J.
Hommel was dismissed with cause as President and Chief Executive Officer of the
Company by a majority vote of the shareholders. Mr. Hommel was replaced in these
positions by Mr. Jack I. Ehrenhaus in October, 2003.
The employment agreements also provide for the issuance of 3,000,000
shares of the Company's common stock to each of the officers. These shares 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.
20
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. Prior to his resignation in October 2003,
Mr. Hommel was also entitled to an automobile allowance of $750 per month and
reimbursement of all business expenses. The term of the employment agreement was
ten years. Because Mr. Hommel was dismissed for cause prior to the ending of the
contract term, Mr. Hommel is not entitled to a severance payment of any kind.
The employment agreement also provided 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. As of the date of this filing, the Company has no obligations to
Mr. Homell in relation to his compensation as CEO or the above-mentioned
employment agreement.
STOCK PERFORMANCE COMPARISON
As discussed in Item 5 of this Form 10-K, the Company's common stock was
de-listed 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 de-listed 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
21
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
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 (1,540,800 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)
22
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.
HJ & Associates, LLC ("HJ") audited the Company's financial statements for
fiscal 2003; the fees billed for professional services by HJ for 2003 were as
follows: Audit Fees--$20,000; Tax Fees (for preparation of federal and state
income tax returns) $-0- and All Other Fees of $-0-. The engagement of HJ for
the audit services for fiscal 2003 was approved in advance by the Board of
Directors.
23
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 - HJ & Associates, LLC
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
24
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2003.
25
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
President, Chairman of the Board,
Chief Executive Officer, Principal
Accounting Officer
Date: December 13, 2004
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 President, Chairman of the December 13, 2004
Jack I. Ehrenhaus Board, Chief Executive Officer,
Principal Accounting Officer
/s/ Shalom S. Maidenbaum Director December 13, 2004
Shalom S. Maidenbaum
/s/ William T. Konczynin Director, Chairman of the December 13, 2004
William T. Konczynin Audit Committee
26
INDEX
Page
--------
Report of Independent Registered Accounting Firm F-2
Report of Independent Public Accountants F-3
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' Equity (Deficit)
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-8
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors and Shareholders of
Consumers Financial Corporation, Inc. and Subsidiaries
Cedarhurst, New York
We have audited the accompanying consolidated balance sheet of Consumers
Financial Corporation, Inc. and Subsidiaries as of December 31, 2003, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year ended December 31, 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits . We conducted our audits in accordance with the auditing standards of
the Public Company Accounting Oversight Board (United States). 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
audits provide 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, Inc. and Subsidiaries as of December 31, 2003, and the results of
their operations and their cash flows for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated 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 has suffered recurring losses and has a
deficit in working capital as of December 31, 2003. Together these factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard 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.
HJ & Associates, LLC
Salt Lake City, Utah
November 10, 2004
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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated 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 ability 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, PC
York, Pennsylvania
April 11, 2003
F-3
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
ASSETS
December 31,
----------------------------
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 100 $ 165,758
Prepaid expenses 13,300 30,420
------------ ------------
Total Current Assets 13,400 196,178
------------ ------------
FIXED ASSETS, NET (Note 1) 2,047 --
------------ ------------
OTHER ASSETS
Restricted cash (Note 1) 284,402 314,225
Prepaid insurance (Note 1) 48,767 87,363
------------ ------------
Total Other Assets 333,169 401,588
------------ ------------
TOTAL ASSETS $ 348,616 $ 597,766
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ 7,242 $ --
Accounts payable and accrued expenses 347,582 54,302
Contingent liability 355,676 --
Reserve for partnership liabilities (Note 13) 200,000 --
Note payable 20,000 --
Notes payable - related parties 38,806 --
------------ ------------
Total Current Liabilities 969,306 54,302
------------ ------------
REDEEMABLE PREFERRED STOCK
Preferred stock, 10,000,000 shares authorized,
68,376 and 75,326 shares issued and outstanding,
respectively 675,129 739,949
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 40,000,000
shares authorized, 17,550,731 and 5,276,781
shares issued and outstanding, respectively 175,507 52,768
Additional paid-in capital 11,526,316 8,938,865
Treasury stock, preferred (18,070) --
Deferred compensation (85,800) --
Accumulated Deficit (12,893,772) (9,188,118)
------------ ------------
Total Stockholders' Equity (Deficit) (1,295,819) (196,485)
------------ ------------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 348,616 $ 597,766
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001
For the years ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES $ -- $ -- $ --
EXPENSES
General and administrative 1,245,582 527,805 869,196
Bad debt expense 27,500 -- --
Salaries and wages 2,495,236 -- --
Depreciation 899 -- --
----------- ----------- -----------
Total Expenses 3,769,217 527,805 869,196
----------- ----------- -----------
LOSS FROM OPERATIONS (3,769,217) (527,805) (869,196)
OTHER INCOME (EXPENSES)
Interest income 2,461 45,300 150,301
Interest expense (5,648) -- --
Gain on extinguishment of debt 20,000 -- --
Other income -- 539,289 118,068
----------- ----------- -----------
Total Other Income (Expenses) 16,813 584,589 268,369
----------- ----------- -----------
Net Income (Loss) $(3,752,404) $ 56,784 $ (600,827)
----------- ----------- -----------
OTHER COMPREHENSIVE LOSS, CHANGE
IN UNREALIZED APPRECIATION OF DEBT
SECURITIES -- (54,702) 27,539
----------- ----------- -----------
Comprehensive Income (Loss) $(3,752,404) $ 2,082 $ (573,288)
=========== =========== ===========
PER SHARE DATA:
Basic and diliuted loss per common share
(Note 16) $ (0.40) $ (0.08) $ (0.39)
=========== =========== ===========
Weighted average number of common
shares outstanding 9,463,716 3,501,238 2,577,701
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consoldated Statements of Stockholders' Equity (Deficit)
December 31, 2003, 2002 and 2001
Common Stock Additional Preferred Treasury Stock
-------------------------- Paid-In -------------------------
Shares Amount Capital Shares Amount
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 2,578,188 $ 25,782 $ 6,722,485 -- $ --
Change in unrealized appreciation of
debt securities -- -- -- -- --
Preferred stock dividends -- -- -- -- --
Accretion of difference between
carrying value and mandatory
redemption value of preferred stock -- -- -- -- --
Retirement of treasury shares
(common) (1,407) (14) (46) -- --
Retirement of treasury shares
(preferred) -- -- 22,613 -- --
Net loss for the year ended
December 31, 2001 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 2,576,781 25,768 6,745,052 -- --
Change in unrealized appreciation of
debt securities -- -- -- -- --
Preferred stock dividends -- -- -- -- --
Accretion of difference between
carrying value and mandatory
redemption value of preferred stock -- -- -- -- --
Issuance of common stock 2,700,000 27,000 81,000 -- --
Retirement of treasury shares
(preferred) -- -- 2,112,813 -- --
Net income for the year ended
December 31, 2002 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 5,276,781 $ 52,768 $ 8,938,865 -- $ --
----------- ----------- ----------- ----------- -----------
Accumulated
Other
Deferred Comprehensive Accumulated
Compensation Income/Loss Deficit
------------ ------------- -----------
Balance, December 31, 2000 $ -- $ 27,163 $(7,899,588)
Change in unrealized appreciation of
debt securities -- 27,539 --
Preferred stock dividends -- -- (385,572)
Accretion of difference between
carrying value and mandatory
redemption value of preferred stock -- -- (18,654)
Retirement of treasury shares
(common) -- -- --
Retirement of treasury shares
(preferred) -- -- --
Net loss for the year ended
December 31, 2001 -- -- (600,827)
----------- ----------- -----------
Balance, December 31, 2001 -- 54,702 (8,904,641)
Change in unrealized appreciation of
debt securities -- (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 -- -- --
Retirement of treasury shares
(preferred) -- -- --
Net income for the year ended
December 31, 2002 -- -- 56,784
----------- ----------- -----------
Balance, December 31, 2002 $ -- $ -- $(9,188,118)
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consoldated Statements of Stockholders' Equity (Deficit) (Continued)
December 31, 2003, 2002 and 2001
Common Stock Additional Preferred Treasury Stock
-------------------------- Paid-In ---------------------------
Shares Amount Capital Shares Amount
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 5,276,781 $ 52,768 $ 8,938,865 -- $ --
Common stock issued for services
rendered 353,000 3,530 134,780 -- --
Redemption of preferred stock -- -- -- (2,600) (6,760)
Common stock issued for services
rendered 140,000 1,400 16,800 -- --
Redemption of preferred stock -- -- -- (785) (2,041)
Common shares issued for
investments to related party 1,227,273 12,273 257,727 -- --
Common shares issued for services
rendred by officers 6,000,000 60,000 1,206,000 -- --
Common shares issued as bonuses
for officers 3,913,042 39,130 841,304 -- --
Common shares issued for services
rendered 92,000 920 22,080 -- --
Redemption of preferred stock -- -- -- (3,565) (9,269)
Common shares issued for cash 208,000 2,080 23,920 -- --
Common shares issued for services
rendered 330,000 3,300 82,500 -- --
Common shares issued for services
rendered 10,635 106 2,340 -- --
Accretion of difference between
carrying value and mandatory
redemption value of preferred stock -- -- -- -- --
Net loss for the year ended
December 31, 2003
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 17,550,731 $ 175,507 $ 11,526,316 (6,950) $ (18,070)
============ ============ ============ ============ ============
Accumulated
Other
Deferred Comprehensive Accumulated
Compensation Income/Loss Deficit
------------ ------------- ------------
Balance, December 31, 2002 $ -- $ -- $ (9,188,118)
Common stock issued for services
rendered -- -- --
Redemption of preferred stock -- -- 18,813
Common stock issued for services
rendered -- -- --
Redemption of preferred stock -- -- 5,691
Common shares issued for
investments to related party -- -- --
Common shares issued for services
rendred by officers -- -- --
Common shares issued as bonuses
for officers -- -- --
Common shares issued for services
rendered -- -- --
Redemption of preferred stock -- -- 25,841
Common shares issued for cash -- -- --
Common shares issued for services
rendered (85,800) -- --
Common shares issued for services
rendered -- -- --
Accretion of difference between
carrying value and mandatory
redemption value of preferred stock -- -- (3,595)
Net loss for the year ended
December 31, 2003 (3,752,404)
------------ ------------ ------------
Balance, December 31, 2003 $ (85,800) $ -- $(12,893,772)
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
For the years ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(3,752,404) $ 56,784 $ (600,827)
Adjustments to reconcile net loss to net cash
used by operating activities:
Collection of receivable from joint-venture
partner -- -- 287,441
Common stock issued for services 2,598,390 -- --
Change in receivables -- 22,501 23,823
Depreciation 889 -- --
Change in prepaid expenses (31,647) (31,882) (25,093)
Change in restricted cash 11,753 -- --
Change in other assets 87,363 -- --
Gain on sale of investments -- (56,448) --
Gain on sale of insurance licenses -- (178,483) --
Write-down of value of insurance licenses -- -- 80,250
Change in employee severance liability -- (177,962) --
Change in accounts payable and accrued
expenses 293,280 (22,825) (130,326)
Increase in contingent and other liabilities 555,676 -- --
Other -- (48,201) 48,835
----------- ----------- -----------
Net Cash Used in Operating Activities (236,700) (436,516) (315,897)
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets (2,936) -- --
Proceeds from sale of investments -- 945,181 36,935
Proceeds from sale of insurance
licenses, net -- 73,113 --
Cash deposited into preferred stock
escrow account, net -- (314,225) --
----------- ----------- -----------
Net Cash Provided (Used) By Operating
Activities (2,936) 704,069 36,935
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Purchase of redeemable preferred stock (18,070) (1,660,067) (11,917)
Change in bank overdraft 7,242 -- --
Proceeds from notes payable 20,000 -- --
Proceeds from notes payable - related 38,806 -- --
Cash dividends to preferred shareholders -- (351,993) (385,572)
Common stock issued for cash 26,000 108,000 --
----------- ----------- -----------
Net Cash Provided (Used) By Financing
Activities 73,978 (1,904,060) (397,489)
----------- ----------- -----------
DECREASE IN CASH $ (165,658) $(1,636,507) $ (676,451)
CASH AT BEGINNING OF YEAR $ 165,758 $ 1,802,265 $ 2,478,716
----------- ----------- -----------
CASH AT END OF YEAR $ 100 $ 165,758 $ 1,802,265
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2003, 2002 and 2001
For the years ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
SUPPLIMENTAL SCHEDULE OF CASH FLOW
ACTIVITIES:
Cash Paid For:
Income taxes $ -- $ -- $ --
Interest $ -- $ -- $ --
Schedule of Non-Cash Financing Activities:
Common stock issued for services $2,598,390 $ -- $ --
Common stock issued for deferred compensation $ 85,800 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
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 $7,242, its current liabilities of
$969,306 exceeded its current assets by $955,906, the Company had an accumulated
deficit of $12,893,772, and was delinquent in its payments on certain accounts
payable. 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.
F-10
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 inter-company balances and
transactions have been eliminated in consolidation.
Equity method investee
The Company carries its 37.5% 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. .
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.
F-11
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, "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
F-12
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.
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.
F-13
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:
Cash and cash equivalents $ 491,399
Government bonds 931,904
Other assets 7,665
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 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 2002and 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.
F-14
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-15
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.
F-16
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.
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-17
12. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components as of December 31,
2003 and 2002:
2003 2002
----------- -----------
Deferred tax assets:
NOL carryover $ 2,699,419 $ 2,038,000
Capital loss carryforward 5,112,442 4,457,000
Accrued expenses 135,500 --
Deferred tax liabilities: -- --
Valuation allowance (7,947,361) (6,495,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rates of 39% to pretax income
from continuing operations for the years ended December 31, 2003 and 2002 due to
the following:
2003 2002
----------- -----------
Book income $(1,463,398) $ 22,145
Other 2,200 13,529
Reserve liability 78,000 --
Stock for services /
options expense 899,270 --
NOL utilization -- (35,674)
Valuation allowance 483,928 --
----------- -----------
$ -- $ --
=========== ===========
At December 31, 2003, the Company had net operating loss carryforwards of
approximately $6,921,588 that may be offset against future taxable income from
the year 2003 through 2023. No tax benefit has been reported in the December 31,
2003 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
F-18
13. Equity Investments
Vaughn Partners, LLC
In May 2003, Vaughn Partners LLC, an Illinois limited liability company
("Vaughn") in which the Company owns a 37.5 % interest, acquired a garden
apartment style real estate project in Springfield, Illinois. Of the remaining
interest in the LLC, 37.5% is owned by Spartan Properties ("Spartan") and 25% 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 from the proceeds thereof. 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 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.
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.
Vaughn properties operated at a loss for the fiscal year ended December 31,
2003. Since the Company has not basis in the partnership, there is no adjustment
to the valuation of the equity investment.
The Company does not believe that it is 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.
However, subsequent to December 31, 2003, Mr. Coby Hakalir, the Chief Executive
Officer of Spartan, made certain claims indicating the Company was responsible
for approximately $200,000 in outstanding liabilities pertaining to the Vaughn
partnership and its related properties. The Company has performed significant
due diligence procedures in an attempt to substantiate Mr. Hakalir's claims, but
has not obtained any evidence that supports the claims. Furthermore, Mr. Hakalir
has not provided evidence to the Company to support his claims. However, in an
attempt to portray the financial condition of the Company as accurately as
possible, the Company believes that the risk of loss is greater that remote and
has elected to record a reserve of $200,000 to cover any liabilities arising
from the Vaughn partnership.
F-19
Other Investments
On September 4, 2003, the Company's Board of Directors approved the payment of
broker's fees to the Company's majority shareholder, CFC Partners, for real
estate and other contracts obtained by CFC Partners and assigned to the Company.
The Board agreed to pay CFC Partners an amount equal to 5% of the contract price
following 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.
F-20
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.
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 $ 117,000
Wong Consulting 4/15/03 36,000 360 14,040
Moline Consulting 6/10/03 17,000 170 3,740
Burns Consulting 7/2/03 140,000 1,400 16,800
Pinchus Gold Consulting 9/12/03 92,000 920 20,080
Pinchus Gold Consulting 10/31/03 330,000 3,300 82,500
Other Consulting 4/30/03 10,635 106 2,340
---------- ----------- -----------
Total Consultants 925,635 9,256 256,500
---------- ----------- -----------
Jack I
Ehrenhaus Empl Agreement 9/1/03 3,000,000 30,000 603,000
Donald J
Hommel Empl Agreement 9/1/03 3,000,000 30,000 603,000
Jack I
Ehrenhaus 2003 Bonus 9/4/03 1,956,521 19,565 420,652
Donald J
Hommel 2003 Bonus 9/4/03 1,956,521 19,565 420,652
---------- ----------- -----------
Total Executives 9,913,042 99,130 2,047,304
---------- ----------- -----------
Wall Street Subscription
.Com Agreement 10/10/03 208,000 2,080 23,920
---------- ----------- -----------
Total Subscriptions 208,000 2,080 23,920
---------- ----------- -----------
CFC
Partners Investment 8/11/03 1,227,273 1,227 257,727
---------- ----------- -----------
Total Investments 1,227,273 1,227 257,727
---------- ----------- -----------
Total Issuances 12,273,950 $ 12,276 $ 2,585,451
========== =========== ===========
F-21
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 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.
F-22
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.
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:
Years ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income (loss) $(3,752,404) $ 56,784 $ (600,827)
Preferred stock dividend
requirement (58,198) (255,813) (385,572)
Accretion of carrying value
of preferred stock (3,595) (84,448) (18,654)
----------- ----------- -----------
Numerator for basic loss per
share - loss attributable
to common shareholders (3,690,611) (283,477) (1,005,053)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Numerator for diluted loss
per share $(3,690,611) $ (283,477) $(1,005,053)
=========== =========== ===========
Denominator for basic loss
per share - weighted
average shares 9,463,716 3,501,238 2,577,701
Effect of dilutive securities -- -- --
----------- ----------- -----------
Denominator for diluted loss
per share 9,463,716 3,501,238 2,577,701
Basic and diluted loss per
common share $ (0.40) $ (0.08) $ (0.39)
F-23
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 anti-dilutive.
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. In October of 2004, Mr. Hommell was dismissed with cause from
his positions with the Company by a majority vote of the shareholders. Mr.
Hommell's employment agreement was thus rendered void, and the Company had not
further obligations to Mr. Hommell relating to this employment agreement.
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.
F-24
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. 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.
In addition, the Company has been party to subsequent legal disputes,
notably with respect to a Securities and Exchange Commission investigation that
was settled in October 2004. This investigation was initiated with respect to
the Company's dismissal of its certified auditor of record, Marcum & Kliegman,
LLC. The Company received notification from the SEC Division of Enforcement on
October 14, 2004 that a settlement offer was being submitted to the Commission.
The terms of the proposed settlement would stipulate that the Company violated
Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13
thereunder. Further, the Commission would not pursue any actions against Messrs.
Ehrenhaus or Hommel. Through the date of this report, the Company has not
received notification as to whether the Commission has accepted the terms of
this proposed settlement.
20. 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 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.
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
five consecutive days prior to the put date can not be below 75% of the closing
bid price for the ten 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
five 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.
F-25
On June 1, 2004 the Company issued 2,471,700 shares of its previously
unissued common stock to both Donald Hommel and Jack Ehrenhaus as payment for
executive services rendered under the terms of the officers' respective
employment agreements (See note 17). In addition, the Company issued an
aggregate of 1,437,368 to Mr. Hommel and Mr. Ehrenhaus, as bonus compensation
per the terms of the aforementioned employment agreements. All shares issued on
this date were valued at market value of $0.05 per share, resulting in an
aggregate compensation expense of $319,038.
On July 23, 2004 the Company issued 8,000,000 shares of common stock to
Cove Hill, Inc. as consideration for certain fund-raising services to be
performed. The shares were valued at $0.125 per share, for a total of
$1,000,000. The shares have been held in an escrow account since the date of
issuance, pending the completion of certain due diligence measures and the
Company completing certain filings with the Securities and Exchange Commission.
On October 12, 2004 the Company issued an additional 6,000,000 shares to Cove
Hill, Inc., which shares are also being held in escrow under the same
provisions. The additional shares were issued at $0.0714 per share, and the
original 8,000,000 shares were revalued to $0.0714 per share, thus maintaining
the aggregate total of the shares at $1,000,000. As of the date of this report,
Cove Hill has not received the shares, and has not begun to perform the agreed
upon fundraising services, as the due diligence provisions have not been fully
satisfied.
In October 2004 the Company's Board of Directors resolved to terminate for
cause the Company's President and Chief Executive Officer Donald J. Hommel. Mr.
Jack Ehrenhaus was appointed by the Board to fill these executive offices.
F-26