UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-85864-LA
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CLS FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-1478196
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4720 200th St. SW, Suite 200, Lynnwood, WA 98036
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(Address of principal executive offices) (Zip Code)
(425) 744-0386
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 such
filing requirements for the past 90 days. /X/ Yes / / No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLS Financial Services, Inc.
Quarterly Report on Form 10-Q
For the period ended March 31, 1997
Part I Page
Item 1: Financial Statements 3
Item 2: Managements Discussion & Analysis of
Financial Condition & Result of Operation 11
Part II
Item 1: Legal Proceedings 13
Item 2: Change in Securities 13
Item 3: Defaults upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security
Holders 13
Item 5: Other Information 13
Item 6: Exhibits & Reports on Form 8-K 13
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
MARCH 31, 1997 AND 1996
1997 1996
ASSETS ---- ----
Cash $ 173,833 $ 135,484
Cash - trust account 38,227 18,083
Accrued commission receivable 9,141 9,634
Accrued interest receivable 72,646 23,013
Loans receivable - (note 4) 2,568,736 3,325,910
Loans receivable - related party (note 8) 895,924 20,899
Less allowance for loan losses (45,639) (49,149)
Real estate held for sale 754,301 678,726
Prepaid expenses 19,538 6,515
Other receivables 28,095 3,605
Investments (note 2) 43,740 46,484
Office furniture and equipment 206,523 202,698
Less accumulated depreciation (119,124) (93,117)
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Total Assets $ 4,645,941 $ 4,328,785
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 21,212 36,035
Accrued wages and benefits 21,048 5,784
Trust account payable 38,227 18,083
Unfunded loan liabilities (note 5) - 441,942
Accrued interest payable 41,120 37,118
Accrued federal income tax - 2,500
Loans payable (note 6) 3,273,698 2,668,971
Loan payable related party 196,287 568,405
Line of credit 295,000 100,000
Deferred federal income tax 15,121 16,148
Deferred revenue 189,000 -
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Total Liabilities 4,090,713 3,894,986
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STOCKHOLDERS' EQUITY
Common stock, no par value, 500 shares 10,000 10,000
Common stock, no par value, nonvoting 180,467 180,467
Retained earnings 394,622 317,242
Net income (loss) (29,861) (73,910)
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Total Stockholders' Equity 555,228 433,799
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Total Liabilities & Stockholders' Equity $ 4,645,941 $ 4,328,785
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UNAUDITED
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
MARCH 31, 1997 AND 1996
1997 1996
REVENUES ---- ----
Loan fees $ 109,968 $ 155,468
Interest on loans 150,024 173,874
Loan servicing and application fees 48,010 21,825
Other income - -
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308,002 351,167
OPERATING EXPENSES
Wage and payroll taxes 136,944 196,019
Commissions and referrals 23,226 26,025
Interest expense 98,162 101,145
Warehouse lending fee 5,815 4,903
Advertising 13,412 8,258
Rent 18,783 18,254
Telephone and utilities 3,785 4,853
Office expense 8,804 8,667
License and taxes 1,656 208
Postage 1,192 806
Printing 218 859
Credit and title fees 5,211 4,419
Professional fees 1,480 18,806
Travel, entertainment, promotion 1,819 1,498
Janitorial and maintenance 1,869 1,198
Fringe benefits 8,191 22,912
Depreciation and amortization 6,000 6,000
Training and other operating costs 1,296 247
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Total operating costs 337,863 425,077
INCOME (LOSS) FROM OPERATIONS (29,861) (73,910)
OTHER INCOME (EXPENSE) - -
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NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX (29,861) (73,910)
PROVISION FOR FEDERAL INCOME TAX - -
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NET INCOME (LOSS) (29,861) (73,910)
RETAINED EARNINGS, beginning of year 394,622 317,242
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RETAINED EARNINGS, ending $ 364,761 $ 243,332
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UNAUDITED
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
MARCH 31, 1997
1997
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ (29,681)
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 6,000
Allowance for loan losses -
Deferred income taxes -
Decrease (increase) in accounts receivable (7,756)
Decrease (increase) in interest receivable (5,939)
Decrease (increase) in prepaid expenses (7,885)
Increase (decrease) in accounts payable 4,774
Increase (decrease) in accrued wages and benefits (18,809)
Increase (decrease) in other payables (11,959)
Decrease (increase) in other receivables (28,095)
Decrease (increase) in related party receivable (895,924)
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NET CASH PROVIDED (USED) BY OPERATIONS (965,593)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,448)
Increase (decrease) in related party loans 118,738
Decrease (increase) in loans receivable 454,507
Decrease (increase) in real estate held for sale (18,313)
Increase (decrease) in loans payable 287,037
Increase (decrease) in debentures payable (2,967)
Increase (decrease) in unfunded loan liabilities (79,879)
Purchase of investments (6,728)
Increase (decrease) in line of credit 145,000
Increase (decrease) in deferred revenue 189,000
Increase (decrease) in retained earnings -
Increase (decrease) in stock issued -
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NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 1,082,947
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NET INCREASE (DECREASE) IN CASH 87,673
CASH BALANCE - BEGINNING OF PERIOD 86,160
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CASH BALANCE - END OF PERIOD $ 173,833
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UNAUDITED
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
C.L.S. FINANCIAL SERVICES, INC. is incorporated under the laws of the State of
Washington. The Company's primary business purpose is to engage in the
brokerage of loans and the purchase and sale of real estate contracts, mortgages
and deeds of trust. The company is also registered with the State of Washington
to sell securities involving mortgages, trust deeds and real estate contracts.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
The Company utilizes the allowance method of providing for losses on
uncollectible loans on overvalued real estate. Specific valuation of allowances
are provided for loans receivable when repayment becomes doubtful and the
amounts expected to be received in settlement of the loan are less than the
amount due.
Loans are placed in a nonaccrual status when loans become ninety days
delinquent. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments to principal and interest. Interest previously accrued but not
collected is charged against income at the time the loan is placed on nonaccrual
status.
Valuation allowances are provided for real estate loans held for sale when the
net realizable value of the property is less than its costs. Foreclosed assets
that are held for sale are carried at the lower of cost (recorded amount at the
date of foreclosure) or fair value less disposition costs. Additions to the
allowance are charged to expense.
SALES OF REAL ESTATE
Sales of real estate generally are accounted for under the full accrual method.
Under that method, gain is not recognized until the collectibility of the sales
price is reasonably assured and the earnings process is virtually complete. When
a sale does not meet the requirements for income recognition, gain is deferred
until those requirements are met.
LOAN ORIGINATION AND SERVICING FEES
Loan origination fees and direct loan origination costs are accounted for under
two methods. For loans held as investment the loan fees and direct costs are
amortized over the life of the loan. For loans which are held for sale loan
fees and direct costs are not recorded until the loans are sold by the company.
Loan servicing fees are charged at a flat rate of $250 per loan and $20 per
month over the servicing of the loan. Loan fees are paid by the borrower. Loan
fees vary from two up to eight percent depending upon collateral and the credit
history of the borrower.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D.
TRUST ACCOUNT
The Company holds money in trust for real estate transactions in process. The
amount held is shown as a current asset and current liability on the balance
sheet. $38,227 and $18,083 were held in trust at March 31, 1997 and March 31,
1996.
CASH
For purposes of the statement of cash flow, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
DEPRECIATION
Furniture and equipment is stated at cost and is depreciated using the straight
line method for financial reporting purposes. Estimated useful lives are as
follows:
Office Equipment 7 years
Computer Equipment 5 years
Expenditures for major renewals, additions and betterments which extend useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
FEDERAL INCOME TAX
The Company provides for income taxes based on its income for financial
reporting purposes, which is accounted for using the accrual method. For
federal income tax purposes, the Company uses the cash method of accounting. The
Company also records depreciation under two separate methods for financial
reporting and federal tax purposes. Deferred income taxes are provided for
timing differences created by these two reporting methods.
NOTE 2 - INVESTMENTS
Short term investments consist of marketable securities and are at the lower of
cost or market value.
NOTE 3 - COMMITMENTS
The Company leases office space under terms of an operating lease. Future years
lease payments under the lease are as follows:
March 31, 1998 $113,820
March 31, 1999 104,335
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$218,155
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
March 31, 1997
NOTE 4 - LOANS RECEIVABLE
Principal payments over the next five years are as follows:
March 31, 1998 $ 312,531
March 31, 1999 1,776,689
March 31, 2000 153,135
March 31, 2001 221,300
March 31, 2002 105,081
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$ 2,568,736
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Types of real and other property securing loan receivable at March 31, 1997 are
as follows:
Single Family Residential $ 241,291
Multi Family Residential 9,163
Commercial Property 1,931,726
Undeveloped Land 380,671
Automobile 5,885
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$ 2,568,736
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Security positions on loans receivable are as follows:
First lien position $ 2,393,588
Second lien position 160,148
Other 15,000
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$ 2,568,736
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A concentration of credit exists as substantially all of the loans are secured
by real property in the State of Washington.
NOTE 5 - UNFUNDED LOAN LIABILITIES
The unfunded loan liabilities account represents the unfunded portion of loans
which are generally payable to a third party contractor upon certification of
completion of construction or other condition.
Upon completion of the condition the Company funds the remaining portion of the
loans from its line of credit or funds available from the sale of debt
securities. At March 31, 1997 and 1996 the balance of unfunded loan liabilities
were $0 and $441,942 respectively.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
March 31, 1997
NOTE 6 - LOANS PAYABLE AND DEBENTURES PAYABLE
Loans payable and debenture payable are made up of amounts due to investors with
varying terms. Obligations on these loans and debentures are classified as
short or long term based upon their maturity dates.
Principal payments on loans and debenture payable are as follows:
March 31, 1998 $ 1,507,346
March 31, 1999 313,668
March 31, 2000 624,919
March 31, 2001 91,688
March 31, 2002 736,077
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$ 3,273,698
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The company is registered as a securities broker dealer with the State of
Washington. As of March 31, 1997 the Company has issued $3,468,862 in debenture
certificates under this program. Of this total $3,127,004 in debenture
certificates are outstanding at March 31, 1997.
NOTE 7 - LINE OF CREDIT
The Company has a $400,000 line of credit. The Company pays $1,800 per month in
addition to 12% interest on funds borrowed. At March 31, 1997 the amount owing
on this line of credit is $195,000. The Company also has a $100,000 line of
credit with US Bank. The interest rate is prime plus 2% on borrowed. At
March 31, 1997 the amount due on this line is $100,000.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Stockholders of the Company also own 100% of the stock in Puget Sound
Investment Group, Inc. (PSIG), Puget Sound Appraisal Group, Inc. (PSAG), Puget
Sound Real Estate Services Group, Inc. (PSREG), and Puget Sound Construction of
Washington, Inc. (PSCW). The Stockholders and PSIG also own 100% partnership
units of PSIG - ONE LP.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
March 31, 1997
NOTE 8 - RELATED PARTY TRANSACTIONS CONT'D.
PSIG assumes the payment obligations on real estate loans which have gone into
foreclosure. Once a loan has gone into foreclosure the loan interest escalates
and PSIG will collect the higher interest upon disposition of the property.
These loans are retained by the Company and no revenues are recorded until the
loan balance has been paid.
The Company and PSIG lends funds to each other to meet short term working
capital needs. At March 31, 1997 the Company owes PSIG $196,287. PSIG is
charged rent by the Company for office space. For the three months ended
March 31, 1997 the Company has charged PSIG $1,837.50 for rent.
PSAG provides appraisal services for loans originated by the Company. PSAG is
charged rent by the Company for office space. For the three months ended
March 30, 1997 the Company has charged PSAG $1,650 for rent.
PSREG provides real estate closing services for loans originated by the Company.
For the three months ending March 31, 1997 the Company has charged PSREG $ 5,775
for rent.
PSCW provides residential repair on properties owned by the affiliate PSIG. For
the three months ending March 31, 1997 the Company has charged PSCW $825 for
rent.
NOTE 9 - COMMON STOCK
As of March 31, 1997 Common Stock consists of the following:
Class One - Common Stock
No Par Value, 500 shares
Authorized and outstanding $ 10,000
Class Two - Common Stock
$1,000 Par Value, 2,500 shares
authorized and outstanding 180 1/2 shares $180,500
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Total Common Stock issued and outstanding $190,500
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Class One common stock has non cumulative voting rights.
Class Two common stock has no voting rights or conversion privileges. Class Two
shares have preference as to dividend distributions to the extent of 80% of
dividend distributions paid and preference upon dissolution to the extent of
book value attributable to Class Two capital contributions.
PART I
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PLAN OF OPERATION AND LIQUIDITY
The sale of debenture investments combined with principal payments on loan
receivable provide the source of funds to invest in loans receivable. For the
three months ended March 31, 1997 sale of debenture under the SB-2 registration
approved May 3, 1996 were $786,077. The company has no nonearning assets at
this time primarily due to a major emphasis on collection policies by
management. Available liquidity will dictate the volume of loan purchases that
may be acquired by the Company.
The interest received on loans and funding fees provide the funds necessary to
pay the expenses and interest due to investors on debenture purchases. The
company manages it's cash by reselling the loans to other investors in order to
recapture the original debenture investment which will in turn be used again to
fund other loans. The company expects to continue the present cash management
procedures for the foreseeable future.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Historically, the first quarter of each year is the least profitable. The
quarter ended March 31, 1997 also reflects a current loss of $29,601. However,
with the reduction of many expenses this is an improvement over last year first
quarter end by approximately $44,000. Set forth below are the key results from
operation for quarter ended March 31, 1997 and March 31, 1996.
1. THE COMPANY MET IT'S OBLIGATION TO THE INVESTORS FOR QUARTER ENDED
MARCH 31, 1997 AND MARCH 31, 1996.
The company strives to be investor oriented, servicing the investor is of utmost
importance, timely payments to the investor is a standard operating procedure,
all investors received interest and/or principal payments as agreed. The
company's principle performance objective is to provide a annual increase in net
income.
2. THE SALE OF DEBENTURE INVESTMENTS AND LOAN RECEIVABLE TO INVESTORS PROVIDE
THE FUNDS NECESSARY TO FUND MORE LOANS.
Total loans receivable (including related party) increased by 4%, as a direct
result of the sale of debenture investments and loans receivable. Management
expects this trend to continue with the subsequent sale of more debentures and
loans receivable. Management expects loan growth to increase to 10% over 1997.
3. REVENUES DECREASE.
Total revenues for the quarter ended March 31, 1997 were $308,002 a decrease of
12% over quarter end March 31, 1996. Management expects the loss in revenue to
quickly end, as a major focus has been placed on revenue generation, (i.e.
hiring more sales staff, etc.)
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAVE CHANGED.
As of March 31, 1997, 94 % of loans receivable portfolio were secured by a first
lien on real property. Management projects that a continued high percentage of
loan will be secured in this manner.
5. ALLOWANCE FOR LOAN LOSSES DECREASED 1% FOR THE THREE MONTHS ENDED MARCH 31,
1997.
Actual losses charged against the allowance for periods ending March 31, 1997
and March 31, 1996 were 0 and 0 respectively. Management reviews each
delinquent loan receivable and real estate property held for sale to determine
if a specific provision in the allowance for losses is needed. Management uses a
systematic approach to evaluate the need for general allowances based upon
portfolio performance, industry trends, economic conditions, and historical
trends.
6. TOTAL EXPENSES DECREASED BY 20% FOR THE THREE MONTHS ENDED MARCH 31, 1997.
Total expenses ending March 31, 1997 decreased by $87,144 from March 31, 1996.
This was largely due to decreases in salaries and employer taxes.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the three months ended March 31,
1997 and March 31, 1996.
Three months ended March 31
1997 1996
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Return on assets
(net income divided by average total assets) -.67% -1.88%
Return on equity
(net income divided by average equity) -8.39% -29.76%
Equity to assets
(average equity divided by average assets) 7.93% 6.31%
PLAN OF OPERATION THROUGHOUT THE YEAR.
The company is committed to continue to offer debentures and loan receivable for
sale to the public for the foreseeable future. Management expects loan growth
through the sale of these items to increase conservatively by 10%.
The company expects to repay the debenture investments as they mature with
maturing loans receivable that are tied exclusively to this debenture offering
notes.
The company has been able to invest primarily all available funds through loans
receivable. The company expects to continue to acquire similar loans in the
future. Loan purchases will be limited by available liquidity as discussed in
"Plan of Operation and Liquidity".
The company actively pursues delinquent accounts and immediately sells any
foreclosed property thus having no nonearning receivables. Managements strategy
and policy has been to retain loans with a loan to value ratio of no more than
65%. Every effort is made to assure profitability even in the event of a
foreclosure sale.
The company forecasts a stable demand for it's services in the foreseeable
future, evidenced by the daily loan inquiries, portfolio performance, subsequent
loans booked after March 31, 1997 and the attractive real estate market in which
the company services.
UNCERTAINTIES
The principle competition for investors' funds due to change in market rates may
result in investors choosing to change their portfolios when it comes to loan
receivable purchases. This does not affect the debenture securities because
they are for a preset period of time.
The loan portfolio consists of loans with maturities of one to three years. As
loans mature and balloon payments are paid, new loans are expected to be funded
at present market rates. It is possible that a one to three year lag could
occur before the overall average of the portfolios interest rate increased after
a rise in market rates.
PART II
ITEM 1 LEGAL PROCEEDINGS
The company is not presently involved nor does it expect to be involved in any
legal proceeding, excepting collection action on loans that are in default.
Since the company is involved in purchasing loans secured by real property, it
will, by its nature, always be involved in collection activities to enforce
collection on past due accounts, including but not limited to judicial and
nonjudicial foreclosure on deeds of trust, and mortgage foreclosures. Counsel
for the Company is of the opinion that collection actions on delinquent accounts
does not constitute pending or threatening litigation under Financial Accounting
Standard Board Opinion Number 5 (FASB 5) and is properly categorized as routine
litigation incidental to its business.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Exhibit
27 Financial Data Schedule
The company did not file any reports on Form 8-K in the first quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLS FINANCIAL SERVICE, INC
Registrant
/s/ Gerald C. Vanhook 5/13/97
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Gerald C. Vanhook, President Date