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 September 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 October 31, 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 September 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
September 30, 2001 AND December 31, 2000
September 30, December 31,
2001 2000
ASSETS -------- ---------
Cash $ 100,990 $ 69,320
Cash - trust account 10,689 13,087
Loans receivable from related party 4,343,841 4,094,588
Loans held for resale 1,365,532 0
Other loans receivable 170,979 270,525
Other receivables 125,681 0
Real estate owned 5,981,007 5,373,331
Property and equipment, at cost, less
accumulated depreciation of $226,703
in 2001 and $211,683 in 2000 154,394 114,802
Other 67,434 326,110
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Total Assets $12,320,547 $10,261,763
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 118,824 $ 129,796
Trust account payable 10,689 13,087
Loans payable 9,235,386 8,689,073
Notes payable 2,036,532
Loans payable other 0 535,500
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Total Liabilities 11,401,431 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) ( 90,884) (115,693)
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Total Stockholders' Equity 919,116 894,307
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Total Liabilities & Stockholders' Equity $12,320,547 $10,261,763
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME
Nine Mos Ended 9/30 Quarter Ended 9/30
2001 2000 2001 2000
REVENUES ---- ---- ---- ----
Loan fees $ 718,797 $484,326 $234,408 $125,367
Interest on loans 629,782 649,840 205,350 193,598
Management fees 321,669 0 73,802 0
Other income 23,320 255,964 7,507 150,504
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1,693,568 1,390,130 521,067 469,469
OPERATING EXPENSES
Wage and payroll taxes 541,676 389,158 142,404 117,050
Commissions and referrals 407,877 324,646 111,171 85,283
Interest expense 450,730 385,524 151,356 117,917
General and administrative 268,476 286,601 101,642 110,321
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Total operating costs 1,668,759 1,385,929 506,573
430,571
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INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 24,809 4,201 14,494 38,898
PROVISION FOR FEDERAL INCOME TAX - - - -
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NET INCOME (LOSS) 24,809 4,201 14,494 38,898
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BASIC EARNINGS PER SHARE 16.54 2.80 9.66 25.93
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000
2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 24,809 $( 4,201)
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 15,030 18,000
Change in Operating assets and liabilities
Receivables, other than loans receivable 155,761 126,806
Accounts payable and accrued expenses (10,972) 24,990
Other (22,766) (101,370)
Purchase of real estate held for sale (193,487) 909,890
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(31,625) 982,517
NET CASH PROVIDED (USED) BY OPERATIONS
CASH FLOW FROM INVESTING ACTIVITIES:
Change in loans receivable 99,546 307,947
Change in loans receivable related party (202,896) 62,586
Purchase of property and equipment (54,622) (23,483)
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NET CASH FROM INVESTING ACTIVITIES $(157,972) 347,050
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing on loans payable 85,767 (629,685)
Borrowings (payments) on line of credit 135,500 (699,357)
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NET CASH FROM FINANCING ACTIVITIES $ 221,267 (1,329,042)
NET INCREASE (DECREASE) IN CASH 31,670 525
CASH BALANCE - BEGINNING OF PERIOD 69,320 73,436
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CASH BALANCE - END OF PERIOD $ 100,990 73,961
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Interest paid on a cash basis $ 450,730 385,524
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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 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 necessary 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 September 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
receivable, sales of loan receivable, and sales of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended September 30, 2001 reflects income of $14,494. Set forth
below are the key results from operation for the quarter ended September 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 third 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 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 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 increase in 2001.
3. REVENUES INCREASE
Revenue for the quarter ended September 30, 2001 increased by 11% over the
quarter ended September 30, 2000 from $469,469 to $521,067 primarily due to
higher loan fee revenue generated by higher mortgage volume. Loan fee revenue
increased by 94%, from $125,367 for the quarter ended September 30, 2000 to
$234,408 for the quarter ended September 30, 2001. At the same time interest
on loans increased by 6% from $193,598 to $205,350 for the quarters ended
September 30, 2000 and 2001, respectively. 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 September 30, 2001, 45% 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 $506,573 for the quarter ended September 30, 2001 compared
to $430,571 for the quarter ended September 30, 2000. This represents an 18%
increase. Wages and payroll taxes rose by 22%, from 117,050 to $142,404 for
the quarters ended September 30, 2001 and 2000, respectively. This is due to
the hiring of additional managers for the loan department and additional
accounting staff. Commissions paid to loan officers rose from $85,283 for the
quarter ended September 30, 2000 to $111,171 for the quarter ended September
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 September 30, 2000
to September 30, 2001 by 9% from $110,321 to $101,642 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 nine months ended September
30, 2001 and 2000:
Nine months ended September 30,
2001 2000
Return on assets
(net income divided by average total asset) .22% .04%
Return on equity
(net income divided by average equity) 2.74% .51%)
Equity to assets
(average equity divided by average assets 8.02% 7.88%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company has proposed a reorganization plan to the debenture investors
converting their debentures into common stock. The company has held daily and
weekly meetings to determine the interest and has briefed the Securities
Division for the State of Washington on the plan. On October 19, 2001, the
Board of Directors approved the necessary amendments to the Articles of
Incorporation to provide for the issuance of Common Stock and an increase in
the Board of Directors to accommodate the reorganization. The Board intends
to execute the reorganization plan provided at least 80% of the debenture
investors agree to do so.
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 September 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
As of September 30, 2001, the company was 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.
Subsequent Event
On October 16, 2001, Mr. Melvin L. Johnson without authority wrongfully
removed the computer he used in his office from the company offices. On
October 17, 2001, the President, Mr. Gerald C. Vanhook suspended Mr. Johnson
for improper conduct toward employees, for completing a false financial
statement that was to be sent to a bank in conjunction with an operating line
of credit, for failing to file or provide the company with his 2000 tax
return, for breaching his duty of loyalty to the company, for improperly and
without authority wrongfully rolling over an investor's funds and other
allegations that require investigation. On October 18, 2001, Mr. Johnson
attempted to enter the company property for the purposes of removing records
and was stopped by security and finally ordered off the premises by the
Lynnwood police. On October 19, 2001, the Board of Directors ratified the
suspension at a Board Meeting and further suspended Mr. Johnson without pay
for the duration of the investigation. The company is in the process of
submitting the U4 to the Securities Division of the Department of Financial
Institutions for the State of Washington. Subsequently, Mr. Johnson initiated
a lawsuit against the Company, its affiliate companies, Mr. Vanhook, other
officers, an independent director and counsel in King County Cause Number
01-2-31145-OSEA, with a trial date of March 31, 2003. The Company has
forwarded a copy of the complaint to the Securities Division for the State of
Washington. Subsequent to the filing of the complaint, Mr. Johnson attempted
to redirect tenant rent payments to his own account and did further attempt to
redirect closing proceeds on an affiliate company to his own account. Further
legal and disciplinary action will be taken against Mr. Johnson to protect the
investors.
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 third 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/
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Gerald C. Vanhook, President Date