UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2001
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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)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required
to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. / /Yes / /No
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding on May 3, 2001
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Common 1,000
Transitional Small Business Disclosure Format (Check one): Yes/ / No/x/
CLS Financial Services, Inc.
Quarterly Report on Form 10-QSB
For the period ended March 31, 2001
Part I
Page
Item 1: Financial Statements 3
Item 2: Managements Discussion & Analysis of Financial Condition &
Result of Operation 13
Part II
Item 1: Legal Proceedings 16
Item 2: Change in Securities 16
Item 3: Defaults upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits & Reports on Form 8-K 16
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
March 31, 2001
ASSETS
Cash $ 41,934
Cash - trust account 32,337
Loans Receivable from related party 4,227,930
Other Loans Receivable 244,483
Other receivable 262,077
Real estate held for sale
5,480,592 Property and equipment, at cost,
less
accumulated depreciation of $216,693 in 2001 148,668
Other 67,183
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Total Assets $10,505,204
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 156,420
Trust account payable 32,337
Loans payable 8,734,750
Notes payable 684,000
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Total Liabilities 9,607,507
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STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares 10,000
authorized, issued and outstanding
Common stock, Class Two, $1000 par value 1,000,000
2,500 shares authorized, 1000 issued and
outstanding
Retained earnings (deficit) (112,303)
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Total Stockholders' Equity 897,697
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Total Liabilities & Stockholders' Equity $10,505,204
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended March 31, 2001 and 2000
2001 2000
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REVENUES
Loan fees $235,798 $209,068
Interest on loans 206,085 196,268
Loan servicing and application fees 875 29,396
Management Fees 215,096 -
Gain on Sale of Properties - 6,886
Other income 201 4,982
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658,055 446,600
OPERATING EXPENSES
Wage and payroll taxes 215,595 135,040
Commissions and referrals 141,107 118,825
Interest expense 154,905 105,429
Advertising 39,320 12,688
Rent 20,613 19,753
Office and utilities 33,519 50,045
Professional fees 40,070 -
Depreciation and amortization 1,506 6,000
Excise tax and misc direct costs 8,030 5,109
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Total operating costs 654,665 452,889
INCOME (LOSS) FROM OPERATIONS 3,390 (6,289)
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INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 3,390 (6,289)
PROVISION FOR FEDERAL INCOME TAX - -
NET INCOME 3,390 (6,289)
RETAINED EARNINGS, beginning of year (115,693) (183,430)
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RETAINED EARNINGS (deficit),ending ($112,303) $(189,719)
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BASIC EARNINGS PER SHARE $2.26 $(4.19)
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001
2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 3,390 $ (6,289)
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation 1,506 6,000
Change in Operating assets and liabilities
Receivables, other than loan receivable 19,365 122,098
Accounts payable and accrued expenses 26,624 83,357
Other (22,515) (110,748)
Sale of real estate held for sale (107,261) 746,925
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NET CASH FLOWS FROM OPERATIONS (78,891) 841,343
NET CASH FLOW FROM INVESTING ACTIVITIES:
Change in loans receivable 26,042 (79,518)
Change in loans related party loans (133,342) 364,309
Purchase of equipment (35,372) (6,000)
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NET CASH FLOWS FROM INVESTING ACTIVITIES: (142,672) 278,791
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (payments) on loans payable 45,677 (441,008)
Borrowing (payments) on lines of credit 148,300 (699,357)
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NET CASH FLOW FROM FINANCING ACTIVITIES 194,177 (1,140,365)
NET INCREASE (DECREASE) IN CASH (27,386) (20,231)
CASH BALANCE - BEGINNING OF PERIOD 69,320 73,436
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CASH BALANCE - END OF PERIOD $41,934 53,205
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Interest paid on a cash basis $154,905 105,429
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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
March 31, 2001
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
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 from
investors on loans that were brokered by CLS. PSIG has, in the past acquired
title to properties through the foreclosure process on loans originated by
CLS.
PSIG also provides CLS marketing services related to certain parcels of CLS's
real estate. As compensation for these services, CLS in the past has allowed
PSIG to retain any gains or losses for the eventual sales of this real estate.
CLS earned management fees from PSIG of $199,351 in first quarter 2001 for
the
oversight of certain PSIG operations. In addition, CLS services some loans
held by PSIG.
Puget Sound Real Estate Services Group, Inc. (PSRESG). PSRESG provided real
estate closing services for loans originated by CLS . PSRESG charged CLS
customers directly for these services. PSRESG was closed December 31, 2000.
Puget Sound Construction of Washington, Inc. (PSCW). PSCW provided
residential repair services to properties owned by PSIG and CLS. PSCW
charged
CLS directly for these services. PSCW was closed in February 2001.
The Class One stockholders of CLS are the stockholders in the companies listed
above.
CLS and its affiliated companies allocate rent, management and labor costs,
telephone expense, computer and equipment and other overhead costs based on
reasonable estimates of use.
Loan interest
Generally, interest on loans is recognized when earned using the interest
method. Interest on loans is not recognized 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
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
NOTE 1 - (continued)
payments. Interest previously accrued but not collected is charged against
income at the time the loan becomes ninety days delinquent.
Sales of real estate
Real estate held for sale is stated at cost (specific identification) unless
the estimated future undiscounted cash proceeds expected to result from
disposition are less than the carrying value, in which case a loss is
recognized based on the fair value of similar real estate. Sales of real
estate generally are accounted for under the full accrual method. Under that
method, a gain is not recognized until collectability 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.
Allowances for losses
Any allowances for losses on notes receivable will include amounts for
estimated probable losses on receivables determined in accordance with the
provisions of Statement of Financial Accounting Standard No 114, "Accounting
by Creditors for Impairment of a Loan," as amended. Specific allowances will
be established for delinquent receivables, as necessary. Additionally, CLS
will establish allowances, based on prior delinquency and loss experience,
for
currently performing receivables and smaller delinquent receivables.
Allowances for losses will be based on the net carrying values of the
receivables, including accrued interest.
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.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
NOTE 1 - (continued)
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 March 31, 2001, CLS has a deferred tax asset that primarily results from
net operating loss carryforwards and future tax deductions resulting from
reporting on the cash basis for income tax purposes. The net operating loss
carryforwards amount to $81,000 and expire in 2019. The future tax
deductions
resulting for reporting on the cash basis of accounting for income tax
purposes amount to $479,000. The asset resulting from these items amounts to
$190,000 and has been fully reserved.
Advertising
Advertising costs are expensed 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. Loans Receivable From Related Parties
CLS has loans receivable from related parties as follows:
PSIG and affiliates $ 3,893,892
A limited partnership in which PSIG is a partner 334,038
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$ 4,227,930
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CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
Note 2. (Continued)
Of the total loan receivable from PSIG and affiliates, $3,746,495 is due on
demand and bears interest at 12% at March 31, 2001. Interest income earned
from PSIG was $174,702 for the first quarter of 2001. Interest receivable
from PSIG amounted to $167,798 at March 31, 2001, and is included in other
receivables. At March 31, 2001, this portion of the loan is secured by real
property as follows (amounts are as represented by PSIG):
Single Family Residential $ 1,175,345
Multi-Family Residential 1,340,312
Undeveloped Land 1,562,667
___________
$ 4,078,324
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The remaining amount due from PSIG and affiliates ($147,397 at March 31,
2001)
is due on demand, bears no interest and is unsecured. These amounts are
expected to be repaid in the near-term.
Combined in the receivable from the limited partnership is a loan to the
limited partnership in the amount of $235,200 which is due on demand, bears
interest at 12% and is secured by multi-family residential at March 31, 2001.
NOTE 3. Other Loans Receivable
CLS's loans receivable are concentrated in the State of Washington and
are generally secured by real estate. Types of real property securing loans
receivable at March 31, 2001 are as follows:
Single Family Residential $ 173,874
Undeveloped Land 28,890
Other 41,629
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$ 244,483
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CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2001
Note 3. - (Continued)
Security positions on loans receivable are as follows:
First Lien Position $ 124,025
Second Lien Position 50,714
Third Lien Position 31,850
Other 37,894
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$ 244,483
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Principal payments to be received for the years ending March 31 are as
follows:
2002 $ 32,377
2003 169,469
2004 16,552
2005 26,085
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$244,483
These loans have interest rates ranging from 10% to 14%.
NOTE 4. Loans Payable
Loans payable include loans and debentures payable made up of amounts due to
investors with varying terms. Interest rates vary from 5% to 14%.
Principal payments on loans and debentures payable for the years ending March
31 are as follows:
2002 $1,112,554
2003 163,058
2004 298,641
2005 1,076,882
2006 1,308,389
Thereafter 4,775,225
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$8,734,750
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
March 31, 2001
Note 4. (Continued)
As of March 31, 2001, the company had $5,200,000 in unsecured debenture
certificates outstanding. Debenture certificates plus accrued interest
totaled
$5,811,260 at March 31, 2001.
Other loans payable consists of numerous small loans that are secured by real
estate. Included in this balance is $98,554 due to a family member of a
stockholder at March 31, 2001.
Note 5. Notes Payable
The company has a line of credit with an individual for a maximum of $700,000
due October 8, 2001. Interest at 12% annually is to be paid monthly. In
addition, CLS is to pay a loan service fee of $2,500 per month when there are
outstanding balances. The line of credit is secured by a blanket assignment
of
notes and related deeds of trust as draws are made. Some deeds of trust
securing this line of credit are owned by PSIG. CLS has drawn $684,000 on
the
line as of March 31, 2001.
CLS also has a line of credit with a bank for a maximum of $150,000 that it
shares with PSIG. This line of credit is secured by personal guarantees of
the Class One CLS stockholders, and expires November 24, 2002. PSIG has
drawn
$140,543 on the line and that amount is recorded on PSIG's books.
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.
Note 7. Earnings Per Share
Earnings per share are based on 1500 common shares outstanding (weighted
average). There are no dilutive items at March 31, 2001 and 2000.
Note 8. Commitments
CLS leases office space under a non-cancelable operating lease. Approximated
minimum lease payments under this lease for the years ending March 31 are as
follows:
2002 $ 79,000
2003 $ 79,000
2004 $ 79,000
2005 $ 79,000
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$316,000
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Part 1
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION PLAN OF OPERATION AND LIQUIDITY
STATEMENT OF FORWARD-LOOKING INFORMATION
This discussion and analysis should be read together with our financial
statements and related notes appearing in Item 1, above. This report
contains
both objective historical information and subjective "forward-looking
statements" that are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and bear certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Generally, forward-looking statements are prefaced by the words:
"believe," "expect," "intend," "anticipate," and similar expressions; but
their absence does not mean that a statement is not forward-looking.
Numerous
factors both within and outside our control could affect our actual results,
including but not limited to the factors set forth in the "Legal Proceedings"
and "Uncertainties" contained in Form 10-K for the year ended December 31,
2000. These risk factors, among others, could cause results to differ
materially from those presently anticipated by us. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date of this report. We undertake no obligaion to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of anticipated events.
GENERAL
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
established a 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 rate when the borrower cures the loan.
The company manages cash by reselling the loan to other investors in order to
recapture original debenture investments which will then in turn be used to
fund other loans. The company relies on its ability to resell loans
receivable or real estate in sufficient amounts to generate funds needed to
pay off maturing debentures under the restructuring plan (See
Uncertainties).
The external sources of liquidity include a line of credit, payoff on loans
receivable, sales of loan receivable, and sales of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended March 31, 2001 reflects net income of $3,390. Set
forth below are the key results from operation for the quarters ended March
31, 2001 and March 31, 2000.
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 met its
obligations under the restructuring plan in the first quarter of 2001. 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 receivable to
generate enough cash to pay principal to the investor.
2. THE SALE OF REAL ESTATE AND LOAN RECEIVABLE PROVIDES 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 2001.
3. REVENUES INCREASE
Revenues for the quarter ended March 31, 2001 increased by $211,455, a 47%
increase over quarter end March 31, 2000. This increase is primarily due to
management fees on new joint venture developments and increased loan fee
revenues caused by a higher volume of loans processed. The increase in loan
fee revenue also saw an increase in commissions paid to loan officer. Other
wages and salaries also rose sharply due to a one-time retroactive pay
adjustment for certain managers whose pay increases were frozen for 1999 and
2000.
Interest expense increased $49,476 from March 31, 2000 to March 31, 2001.
Investor interest rates were increased in early 2000 as part of the
restructuring. Advertising expense is also higher than 2000 due to contracts
entered into in 2000 for the lending and investor sides of the company.
Professional fees rose by $40,070 because of higher attorney fees related to
the restructuring and audit fees billed earlier in 2001 than 2000.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of March 31, 2001, 51% of the loans receivable portfolio was secured by a
first lien on real property. Management projects that this trend will
continue.
5. TOTAL EXPENSES INCREASED FOR THE THREE MONTHS ENDED MARCH 31, 2001.
Total expenses for the quarter ending March 31, 2001 increased by $201,776
from March 31, 2000. Interest expense increased $49,476 from March 31, 2000
to March 31, 2001. As part of the restructuring, investor interest rates were
increased in early 2000 as operations improved.
Wages and commissions increased by $102,837 from the quarter ended March 31,
2000 to the quarter ended March 31, 2001. Commissions paid to loan officers
increased in conjunction with the increase in loan fee revenue. Other wages
and salaries saw a one-time retroactive pay adjustment for certain managers
whose pay increases were frozen for 1999 and 2000.
The lending and investor sides of the company stepped up their advertising,
causing a $26,632 increase in advertising expense over the quarter ended
March
31, 2000. Professional fees are higher by $40,070 due to increased attorney
fees related to the restructuring and audit fees billed earlier in 2001 than
2000.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the six months ended March 31,
2001 and March 31, 2000.
Three months ended Mar 31,
2001 2000
Return on assets
(net income divided by average total asset) .03% (.06%)
Return on equity
(net income divided by average equity) .38% (.79%)
Equity to assets
(average equity divided by average assets 8.63% 7.40%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company is committed to continue to offer real estate and loan receivable
for sale to the public for the foreseeable future. Management expects loan
growth to exceed 2000 due to current refinancing trend. More effort has been
placed on the loan department to obtain A & B type loans to sell to brokers
which will generate more income based on the volume alone.
The company's cash management goal is to invest all available funds through
loans receivable or real estate. There has been no shortage of investment
options that meet the company 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.
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 loans
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.
The company forecasts a stable demand for its services in the foreseeable
future, evidenced by the daily loan inquiries, portfolio performance,
external
predictions and subsequent loans funded.
UNCERTAINTIES
In a prior year, the company established a restructuring plan with debenture
holders generally reducing the interest rate on the debentures. The
restructuring plan has been accepted by the clear majority of the debenture
investors. As of March 31, 2001, a total of 88% of the investors (93% of the
dollars) had agreed to the restructuring in writing. There is no guarantee
that the company will be able to reorganize if all of the investors do not
agree. However, the uncertainty of this happening is reduced. In case a
debenture holder, with investments in an amount material in relation to the
company's net worth, proceeds with litigation, the company will be forced to
liquidate to protect investors who agreed to the restructuring. In the
alternative, and in a worst case scenario, the company could be forced to
liquidate or perhaps file for a formal reorganization under Chapter 11 of the
Bankruptcy Code. Management believes that after the investors study the
audited financial statements, the information contained in this 10QSB,
reviews
the real estate portfolio and loan portfolio and reviews the industry
predictions, that they will agree that it is in their collective best
interests to support the restructuring plan initiated by management. The
savings of administration costs, court hearings, and compliance with the
Bankruptcy Code, rules and United States Trustee directives, will ultimately
inure to the investors, rather than counsel, accountants and the Trustee
office.
Part 2
Item 1 LEGAL PROCEEDINGS
At present the company is not involved in any lawsuits with the investors.
The company has entered the execution phase of the restructuring plan. There
still remains a risk that some of the debenture holders who have not yet
signed the agreement regarding the restructuring plan may initiate legal
proceedings. At present the company is current in its obligations to all of
its investors regarding the restructuring plans. It has been clear to the
majority of the investors that it is in their best interest to work with
management through this restructuring process. In the event the company is
unable to reorganize with the investors consent, CLS may be forced to
liquidate or file under Chapter 11 of the Bankruptcy Code. In that case, the
investors of debentures will most likely lose a substantial portion of their
principle, since the value of CLS is represented in the market equity in real
property, namely the market value of the property sold at a price in excess
of
book value.
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
2001.
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/
- ---------------------------- ------------
Gerald C. Vanhook, President Date