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 September 30, 2000
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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 incorporation or organization)(I.R.S. Employer
Identification No.)
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 September 30, 2000
Part I
Page
Item 1: Financial Statements 4
Item 2: Managements Discussion & Analysis of Financial
Condition & Result of Operation
10
Part II
Item 1: Legal Proceedings 12
Item 2: Change in Securities 12
Item 3: Defaults upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits & Reports on Form 8-K 12
Item 7: Financial Data Schedule 14
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
September 30, 2000 AND December 31, 1999
2000 1999
ASSETS -------- ---------
Cash $ 73,961 $ 73,436
Cash - trust account 9,863 14,556
Loans Receivable from related party 3,841,723 3,904,309
Other Loans Receivable 372,239 680,186
Other receivable 96,242 223,048
Real estate owned 5,224,277 6,134,167
FTC account 36,000
Property and equipment, at cost, less
accumulated depreciation of $207,692
in 2000 and $173,477 in 1999 84,321 78,838
Other 120,008 54,637
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Total Assets $9,858,634 $11,163,177
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $127,085 102,095
Trust account payable 9,863 14,556
Loans payable other 8,890,915 9,520,600
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Total Liabilities 9,027,863 10,336,608
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STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares 10,000 10,000
authorized, issued and outstanding
Common stock, Class Two, $1000 par value 1,000,000 1,000,000
2,500 shares authorized, 1000 issued and
outstanding
Retained earnings (deficit) (179,229) (183,431)
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Total Stockholders' Equity 830,771 826,569
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Total Liabilities & Stockholders' Equity $9,858,634 $11,163,177
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
Nine Mos Ended 9/30 Quarter Ended 9/30
2000 1999 2000 1999
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REVENUES
Loan fees $484,326 $698,751 $125,367 $161,140
Interest on loans 649,840 501,756 193,598 178,445
Loan servicing and application fees 69,716 125,384 13,359 33,837
Gain (loss) sale of properties 6,886 24,950 10,441 24,950
Other income 179,362 11,215 126,704 7,069
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1,390,130 1,362,056 469,469 405,441
OPERATING EXPENSES
Wage and payroll taxes 389,158 437,764 117,050 126,561
Commissions and referrals 324,646 285,875 85,283 68,586
Interest expense 385,524 333,684 117,917 101,083
Advertising 46,718 28,567 21,252 15,824
Rent 34,260 58,929 4,753 19,753
Office and utilities 173,192 174,305 72,015 61,282
Depreciation and amortization 18,000 18,000 6,000 6,000
Excise tax and misc direct costs 14,431 15,873 6,301 5,995
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Total operating costs 1,385,929 1,352,997 430,571 405,084
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INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 4,201 9,059 38,898 357
PROVISION FOR FEDERAL INCOME TAX
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NET INCOME (LOSS) 4,201 9,059 38,898 357
RETAINED (DEFICIT), beg of period (183,430) (200,126) (218,127) (191,424)
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RETAINED(DEFICIT),end of period ($179,229) ($191,067) ($179,229) ($191,067)
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
September 30, 2000 AND 1999
2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) ($4,201) $ 9,059
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 18,000 18,000
Change in Operating assets and liabilities
Receivables, other than loan receivable 126,806 87,965
Accounts payable and accrued expenses 24,990 (11,649)
Other (101,370) (160,703)
Change in real estate owned 909,890 6,475
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NET CASH PROVIDED (USED) BY OPERATIONS 982,517 (63,803)
CASH FLOW FROM INVESTING ACTIVITIES:
Change in loans receivable 307,947 0
Change in related party loans 0 915,316
Change in loans receivable related party 62,586 (377,395)
Purchase of property and equipment (23,483) (2,166)
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CASH FROM INVESTING ACTIVITIES 347,050 535,755
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CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings(repayment) in loans payable (629,685) (48,633)
Borrowings (repayments) on line of credit (699,357) (215,000)
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NET CASH FROM FINANCING ACTIVITIES (1,329,042) (263,633)
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NET INCREASE (DECREASE) IN CASH 525 (208,319)
CASH BALANCE - BEGINNING OF PERIOD 73,436 42,367
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CASH BALANCE - END OF PERIOD $ 73,961 $ 250,686
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Interest paid on a cash basis $385,524 $ 333,684
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Income taxes paid on a cash basis $ 0 $ 0
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See Notes to Financial Statements
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
CLS FINANCIAL SERVICES, INC. ("CLS") earns fees from the origination of real
estate loans, commissions from the sale of real estate to home buyers, and
purchases and sells real estate contracts, mortgages and deeds of trust. As
such, CLS is subject to regulations in the state of Washington with respect
to mortgage broker dealers. CLS also buys and sells real estate.
CLS is related to a series of other companies that provide services to CLS
customers as follows:
Puget Sound Investment Group, Inc. (PSIG). PSIG owns and manages real
estate, and develops real estate for sale. PSIG borrows funds in its own
name, acquires property in its own name and has, in the past, borrowed funds
frominvestors on loans that were brokered by CLS.
Puget Sound Real Estate Services Group, Inc. (PSRESG). PSRESG provides real
estate closing services for loans originated by CLS . PSRESG charges CLS
customers directly for these services.
Puget Sound Construction of Washington, Inc. (PSCW). PSCW provides
residential repair services to properties owned by PSIG and CLS. PSCW
charges CLS directly for these services.
The Class One stockholders of CLS are the stockholders in the companies listed
above.
CLS and its affiliated companies allocate rent based on space used,
management and labor costs based on time, telephone expenses based on number
of employees, computers and equipment based on usage and other overhead costs
based on reasonable estimates of use.
Loan interest
Generally, interest on loans is recognized on loans using the interest
method. Interest on loans are not recognized when loans become ninety days
delinquent. Thereafter, no interest is taken into income unless received in
cash or untilsuch time as the borrower demonstrates the ability to resume
payments. Interest previously accrued but not collected is charged against
income at thetime the loan becomes ninety days delinquent.
Sales of real estate
Real estate held for sale is stated at the lower of cost (specific
identification) or market. Sales of real estate generally are accounted for
under the full accrual method. Under that method, a gain is not recognized
until 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 recognized when
the loans are sold by CLS.
Loan servicing fees are charged at a rate of $20 per month over the servicing
of the loan. Loan servicing fees are paid by the borrower and are recognized
as revenue as the services are provided.
Cash
For purposes of the statement of cash flow, CLS considers all highly
liquid investments with an original maturity of three months or less to be
cash. From time to time, CLS has cash balances in excess of federally insured
limits.
Trust Accounts
CLS holds money in trust for real estate transactions in process. The amount
held is shown as an asset and a liability on the balance sheet.
Depreciation
Property and equipment are depreciated using the straight line method over the
estimated useful life of the assets.
Income Taxes
CLS accounts for income taxes under the assets and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
CLS financial statements or income tax returns. At September 30, 2000, CLS
has a deferred tax asset that primarily results from net operating loss
carryforwards. These carryforwards amount to $595,000 and expire in 2019.
The resulting asset of $213,000 has been fully reserved.
Advertising
Advertising costs are expended as incurred.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and related
disclosures. Accordingly, the actual amounts could differ from those
estimates.
Note 2. FTC Regulations
CLS is subject to various Federal Trade Commission ("FTC") regulations.
Based on a series of relatively minor FTC violations, CLS was required to
deposit $60,000 in an escrow account to pay redress. The amount has been
requested by FTC and deposited in 1999 into an escrow account. At September
30,2000,based on the uncertainty associated with the eventual collection,
this
amount has been written down to net realizable value of $36,000.
NOTE 3. Loans Receivable From Related Party and Payable to Related Party
CLS has loans receivable from related parties as follows:
PSIG $3,604,743
PSRESG
152,802
PSCW 41,082
Two partnerships in which PSIG is a partner
40,723
Other
2,373
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$3,841,723
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The loan receivable from PSIG at September 30, 2000, is due on demand, bears
interest at 12%. At September 30, 2000, the loan is secured by real property
as follows (amounts are as represented by PSIG):
Single Family Residential $ 951,692
Multi-Family Residential 867,443
Undeveloped Land 928,525
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$2,747,660
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The other related party loans receivable are due on demand, bear no interest
and are unsecured.
NOTE 4. Other Loans Receivable
CLS's other loans receivable are concentrated in the State of Washington and
are generally secured by real estate. Types of real property securing loans
receivable at September 30, 2000 and 1999 are as follows:
Single Family Residential $
205,618
Undeveloped Land 140,458
Other 26,163
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$ 372,239
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Security positions on loans receivable are as follows:
First lien position $ 179,748
Second lien position
146,332
Third lien position
31,850
Other
14,309
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$ 372,239
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Principal payments to be received for the years ending September 30th are as
follows:
2001 $ 66,886
2002 49,182
2003 180,437
2004 49,243
2005 26,491
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$ 372,239
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These loans have interest rates ranging from 10% to 14%.
Note 5. Loans Payable
Loans payable include loans and debenture payable made up of amounts due
to investors with varying terms. Interest rates vary from 10% to 14%.
Principal payments on loans and debentures payable for the years ending
September 30 are as follows:
2001 $ 1,244,427
2002 2,543,204
2003 1,442,134
2004 715,571
2005 877,495
Thereafter 2,068,084
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$ 8,890,915
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As of September 30, 2000, CLS had issued $5,250,000 in unsecured debenture
certificates. Debenture certificates plus accrued interest amounting to a
total of $5,903,448 are outstanding at September 30, 2000.
Note 6. Common Stock
Class One shares of common stock are voting shares. Class Two shares are
nonvoting. Class Two shares are to receive 80% of any dividends paid, and
have a dissolution preference over Class One to the extent of the Class Two
capital contributions.
Part 1
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Plan of Operation and Liquidity
Principal payments and the reselling of loans to investors provided the
source of funds to invest in loans receivable. Available liquidity will
dictate the volume of loan purchases that may be acquired by the company.
Management has an established policy of conservative collateral lending. As a
result, defaulted loans generally create additional profit centers as the
collateral value has been sufficient to sustain the increased yield created by
the company servicing the debt on behalf of the borrower but retaining the
increased default interest rate when the borrower cures the loan. The company
manages cash by reselling the loans to other investors in order to recapture
original debenture investments which is then used to fund other loans. The
company relies on its ability to resell loans receivable and/or real estate in
sufficient amounts to generate funds needed to pay off maturing debentures
under the restructuring plan. The external sources of liquidity include a
line of credit, payoff of loan receivables, the sale of loan receivables, and
sale of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended September 30, 2000 reflects net income of $38,898. Set
forth below are the key results from operation for the quarters ended
September 30, 2000 and September 30, 1999.
1. OBILIGATIONS
The company has continued to have quarterly meetings with the investors to
keep them informed of the financial condition of CLS. The company did meet
its obligations under the restructuring plan in the third quarter of 2000.
The company's principle performance objective is to meet all restructuring
obligations and provide an annual increase to retained earnings. Interest
payments from loans receivable are sufficient to pay debenture investor
interest. The company relies on its ability to sell loans recievable to
generate enough cash to pay principal to the investor.
2. THE SALE OF REAL ESTATE AND LOANS RECEIVABLE PROVIDE THE FUNDS
NECESSARY TO FUND MORE LOANS.
The demand for loans receivable to purchase by investors continues to remain
steady. There are no known or predicted property value downward trends.
Industry reports indicate the value of property in the western Washington
area continues to increase in 2000.
3. REVENUES INCREASE
Net revenues for the quarter ended September 30, 2000 increased by $38,541.
Interest expense increased by $16,834 due to the Company raising interest
rates, and other operating expenses increased by $8,653. Management's focus
continues to be controlling expenses while developing the real estate
brokerage division. Along with this, a decision was made to aggressively
expand institutional lending, particularly wholesale lending. To this end, a
new sales manager was hired late in the first quarter. The new sales manager
has hired ten new loan officers, which is expected to increase revenues in the
future.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of September 30, 2000, 48% of the other loans receivable portfolio was
secured by a first lien on real property. Management projects that a
continued high percentage of loans will be secured in a first lien position.
5. TOTAL EXPENSES INCREASED FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000.
Total expenses for the quarter ending September 30, 2000 increased by $25,487
from September 30, 1999. Interest expense increased by $16,834, due to the
company increasing interest rates at the end of the first quarter 2000 to
debenture holders. Despite management cost controls, operating expenses
increased by $8,653. This was attributed to the expansion of the marketing
department.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the nine months ended September
30, 2000 and September 30, 1999.
Nine months ended Sept. 30,
2000 1999
Return on assets
(net income divided by average total asset) .04% .09%
Return on equity
(net income divided by average equity) .51% 1.11%
Equity to assets
(average equity divided by average assets 7.88% 7.72%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company is committed to continue to offer real estate and loans receivable
for sale to investors for the foreseeable future. Management expects loan
growth to improve steadily as the new manager's plans take hold. The company
forecasts a stable demand for its services in the foreseeable future,
evidenced by the daily loan inquiries, portfolio performance, external
predications and subsequent loans funded and brokered and subsequent
homes sold through the real estate brokerage division.
The company opened a new division in 1999 for real estate brokerage in order
to sell company and affiliate owned real estate and to satisfy demand to
assist buyers in finding and purchasing a home. The company expects this
synergy to be an important part of its long term success. This division
establishes CLS as the premier one stop real estate company by helping the
home buyer finance the home purchase, and assist in the home search and/or
sale process.
The company's cash management goal is to invest all available funds in loan
receivables or real estate. Market demand for the company's services
remains strong as there has been no shortage of investment options that meet
the company's investment criteria. The company expects to be able to
continue to acquire similar loans in the future. Loan purchases will be
limited by available liquidity as previously discussed.
The company actively pursues delinquent accounts. As a result, nonearning
receivables are minimal and generally fully collected within thirty to sixty
days. Management's strategy and policy has been to underwrite
conservatively. This strategy will continue with a loan to value ratio
average of 65%. Every effort is made to assure profitability even in the
event of a foreclosure sale.
UNCERTAINTIES
The company continues in the process of restructuring its debt financing.
All debenture holders have been contacted and the overwhelming majority are
in agreement regarding the need to restructure and the terms proposed by
management. It now appears that well over 90% of the current debenture
holders will agree with the restructuring in a written agreement. The
company will report on the status in the next 10Q and 10K. Previous 10Q and
10K reports have outlined the uncertainties associated with the
restructuring.
Part 2
ITEM 1 LEGAL PROCEEDINGS
The company has no new legal proceedings that require reporting. The company
remains in the process of restructuring its debt with the debenture holders.
As of the end of the quarter, no new lawsuits have been filed or threatened
by
the debenture holders.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
See Item 1. At present, CLS is not in default according to its restructuring
plan.
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 second quarter of
2000.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLS FINANCIAL SERVICES, INC
Registrant
/S/
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Gerald C. Vanhook, President Date