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 June 30, 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:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding on July 17, 2001
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Common, Class One 500
Common, Class Two 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 June 30, 2001
Part I
Page
Item 1: Financial Statements 3
Item 2: Managements Discussion & Analysis of Financial Condition &
Results of Operation 7
Part II
Item 1: Legal Proceedings
9
Item 2: Change in Securities 9
Item 3: Defaults upon Senior Securities 9
Item 4: Submission of Matters to a Vote of Security Holders 9
Item 5: Other Information 9
Item 6: Exhibits & Reports on Form 8-K 9
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
June 30, 2001 AND December 31, 2000
June 30, December 31,
2001 2000
ASSETS -------- ---------
Cash $ 197,999 $
69,320
Cash - trust account 31,510
13,087
Loans receivable from related party 4,454,842
4,094,588
Other loans receivable 167,028 270,525
Real estate owned 5,531,103 5,373,331
Property and equipment, at cost, less
accumulated depreciation of $221,703
in 2001 and $211,683 in 2000 148,372 114,802
Other 214,093 326,110
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Total Assets $10,744,947 $10,261,763
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 140,968 $
129,796
Trust account payable 31,510 13,087
Loans payable 8,983,847 8,689,073
Loans payable other 684,000
535,500 -----------
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Total Liabilities 9,840,325 9,367,456
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STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares
authorized, issued and outstanding 10,000 10,000
Common stock, Class Two, $1000 par value
2,500 shares authorized, 1000 issued and
outstanding 1,000,000 1,000,000
Retained earnings (deficit) (105,378) (115,693)
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Total Stockholders' Equity 904,622 894,307
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Total Liabilities & Stockholders' Equity $10,744,947
$10,261,763
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME
Six Mos Ended 6/30 Quarter Ended 6/30
2001 2000 2001 2000
REVENUES ---- ---- ---- ----
Loan fees $ 484,389 $358,959 $248,591
$149,891
Interest on loans 424,432 456,242 218,347
259,974
Management fees 247,867 42,181 32,771 42,181
Other income 15,813 63,279 14,737 22,015
---------- -------- --------
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1,172,501 920,661 514,446
474,061
OPERATING EXPENSES
Wage and payroll taxes 399,272 272,108 183,677 137,068
Commissions and referrals 296,706 239,363 155,599 120,538
Interest expense 299,374 267,607 144,469 162,178
General and administrative 166,834 176,280 23,776 82,685
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- -------- Total operating costs 1,162,186 955,358
507,521 502,469
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INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 10,315 (34,697) 6,925 (28,408)
PROVISION FOR FEDERAL INCOME TAX - - - -
---------- -------- -------- --------
NET INCOME (LOSS) 10,315 (34,697) 6,925 (28,408)
========== ======== ======== ========
BASIC EARNINGS PER SHARE 6.88 (23.13) 4.62 (18.94)
========== ========= ======== ========
See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
2001
2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 10,315
$(34,697)
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 3,489
12,000
Change in Operating assets and liabilities
Accounts payable and accrued expenses 11,172
(15,918)
Other 112,017
38,435
Change in real estate owned (157,772)
635,562 ---------
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NET CASH PROVIDED (USED) BY OPERATIONS (20,779)
635,382
CASH FLOW FROM INVESTING ACTIVITIES:
Change in loans receivable 103,497
269,665 Change in loans receivable related party
(360,254) 174,835 Purchase of property and
equipment (37,059)
(8,530) ---------
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CASH FROM INVESTING ACTIVITIES (293,816)
435,970
CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable 294,774
(285,459) Borrowings (payments) on line of credit
148,500 (699,357)
- --------- --------- NET CASH FROM FINANCING
ACTIVITIES 443,274
(984,816)
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NET INCREASE (DECREASE) IN CASH 128,679
86,536 CASH BALANCE - BEGINNING OF PERIOD
69,320 73,436
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CASH BALANCE - END OF PERIOD $ 197,999 $
159,972 =========
=========
Interest paid on a cash basis $ 299,374 $
267,607 =========
=========
Income taxes paid on a cash basis $ 0 $
0 =========
=========
See Notes to Financial Statements
CLS FINANCIAL SERVICES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not include
all disclosures necessary for a fair presentation of financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles. The operating results for interim periods are
unaudited and are not necessarily an indication of the results to be expected
for the full fiscal year. In the opinion of management, the financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which are necesary for a fair presentation of operating results.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are based on 1,500 common shares outstanding (weighted
average). There are no dilutive items at June 30, 2001 and 2000.
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 obligation 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
recievable, sales of loan recievable, and sales of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended June 30, 2001 reflects income of $6,925. Set forth below
are the key results from operation for the quarter ended June 30, 2001.
1. OBILIGATIONS
The company continues 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 second quarter 2001. The
company's principal performance objective is to meet all restructuring
obligations and provide an annual increase to retained earnings. Interest
payments from loans recievable 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 investors.
2. THE SALE OF LOANS RECEIVABLE PROVIDES THE FUNDS NECESSARY TO FUND MORE
LOANS.
The demand for loans receivable to purchase by investors remains strong.
There are no known or predicted property value downward trends. Industry
reports indicate the value of property in the western Washington area
continues to incease in 2001.
3. REVENUES INCREASE
Revenue for the quarter ended June 30, 2001 increased by 8.5% over the
quarter
ended June 30, 2000 from $474,061 to $514,446 primarily due to higher loan
fee
revenue generated by higher mortgage volume. Loan fee revenue increased by
66%, from $149,891 for the quarter ended June 30, 2000 to $248,591 for the
quarter ended June 30, 2001. At the same time interest on loans decreased by
16% from $259,974 to $218,347 for the quarters ended June 30, 2000 and 2001,
respectively. The decrease in interest revenue is due to fewer loans being
funded off the warehouse line of credit, which is the primary source of
interest income. Revenue is expected to continue at the same level through
the end of the year.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of June 30, 2001, 49% of loans receivable portfolio was secured by a first
lien on real property. Management projects that this trend will continue.
5. TOTAL EXPENSES INCREASED.
Total expenses were $507,521 for the quarter ended June 30, 2001 compared to
$502,469 for the quarter ended June 30, 2000. This represents a 1%
increase.
Wages and payroll taxes rose by 34%, $137,068 to $183,677 for the quarters
ended June 30, 2001 and 2000, respectively. This is due to the hiring of two
additional loan processors and raises given to certain management employees
who had previously forgone raises due to the restructuring plan. Commissions
paid to loan officers rose from $120,538 for the quarter ended June 30, 2000
to $155,599 for the quarter ended June 30, 2001 because of higher loan
volume. The company plans to increase management and loan officer staffing
in
the latter half of the year to take advantage of the continued strong loan
market. The increase in staffing is not expected to have an impact on
revenue
until the first quarter of 2002. Commission expense should remain at current
levels since revenue is expected to remain at current levels.
Other operating expenses decreased from the quarter ended June 30, 2000 to
June 30, 2001 by 31% from $244,863 to $168,245 due to updating the allocation
percentages between CLS and its sister company Puget Sound Investment Group.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the six months ended June 30,
2001 and 2000:
Six months ended June 30,
2001 2000
Return on assets
(net income divided by average total asset) .10% (.32%)
Return on equity
(net income divided by average equity) 1.15% (4.29%)
Equity to assets
(average equity divided by average assets 8.56% 7.49%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company is committed to continue to offer real estate and loans receivable
for sale to the public for the foreseeable future. Management expects loan
originations to continue at the current 2001 level through the end of the
year.
The company's cash management goal is to invest all available funds through
loans receivable on 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.
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 June 30, 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's
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
principal, 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
The company did not file any reports on Form 8-K in the second quarter of
2001.
Exhibit
Number Exhibit
27 Financial Data Schedule
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