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, 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 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, 1997
Part I
Page
Item 1: Financial Statements 4
Item 2: Managements Discussion & Analysis of Financial Condition &
Result of Operation 12
Part II
Item 1: Legal Proceedings 14
Item 2: Change in Securities 14
Item 3: Defaults upon Senior Securities 14
Item 4: Submission of Matters to a Vote of Security Holders 14
Item 5: Other Information 14
Item 6: Exhibits & Reports on Form 8-K 15
Item 7: Financial Data Schedule 16
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
September 30, 1997 AND 1996
1997 1996
ASSETS -------- ---------
Cash $ 46,134 $ 30,686
Cash - trust account 18,833 29,510
Accrued commission receivable 37,539 119,278
Accrued interest receivable 40,907 21,188
Loans receivable - (note 4) 2,534,196 2,233,478
Loans receivable - related party (note 8) 3,245,167 730,439
Less allowance for loan losses (45,639) (49,149)
Real estate held for sale 779,416 716,479
Prepaid expenses 17,836 8,810
Other receivables 38,177 7,705
Investments (note 2) 52,138 41,269
Office furniture and equipment 210,978 203,076
Less accumulated depreciation (131,124) (105,117)
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Total Assets $6,844,558 $3,987,652
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 15,577 13,920
Accrued wages and benefits 20,101 5,211
Trust account payable 18,833 34,549
Unfunded loan liabilities (note 5) - -
Accrued interest payable 54,929 32,614
Accrued federal income tax - 18,648
Loans payable (note 6) 4,639,473 2,633,487
Loan payable related party 480,795 437,739
Line of credit - 175,000
Deferred federal income tax 9,463 -
Deferred revenue - -
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Total Liabilities 5,239,171 3,351,168
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STOCKHOLDERS' EQUITY
Common stock, no par value, 500 shares 10,000 10,000
Common stock, no par value, nonvoting 1,180,467 180,467
Retained earnings 394,622 317,242
Net income (loss) 20,298 128,775
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Total Stockholders' Equity 1,605,387 636,484
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Total Liabilities & Stockholders' Equity $6,844,558 $3,987,652
======== ========
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
September 30, 1997 AND 1996
1997 1996
REVENUES ---- ----
Loan fees $638,418 $610,110
Interest on loans 423,894 496,949
Loan servicing and application fees 206,080 76,317
Other income - 44,866
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1,268,392 1,228,242
OPERATING EXPENSES
Wage and payroll taxes 489,131 459,287
Commissions and referrals 68,752 80,691
Interest expense 386,975 286,477
Warehouse lending fee 11,778 11,290
Advertising 32,342 36,852
Rent 55,762 55,702
Telephone and utilities 11,809 12,894
Office expense 40,438 23,278
License and taxes 1,880 3,991
Postage 3,641 3,541
Printing 2,522 3,191
Credit and title fees 18,202 13,837
Professional fees 41,676 23,372
Travel, entertainment, promotion 6,020 3,473
Janitorial and maintenance 5,480 3,919
Fringe benefits 35,959 51,408
Depreciation and amortization 18,000 18,000
Training and other operating costs 6,162 2,464
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Total operating costs 1,236,529 1,093,667
INCOME (LOSS) FROM OPERATIONS 31,863 134,575
OTHER INCOME (EXPENSE) - -
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NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX - -
PROVISION FOR FEDERAL INCOME TAX 11,565 5,800
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NET INCOME (LOSS) 20,298 128,775
RETAINED EARNINGS, beginning of year 394,622 317,242
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RETAINED EARNINGS, ending $414,920 $446,017
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CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
September 30, 1997 AND 1996
1997 1996
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $20,298 $128,775
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 18,000 18,000
Allowance for loan losses 30,675 30,675
Deferred income taxes (8,625) -
Decrease (increase) in accounts receivable 0 (94,458)
Decrease (increase) in interest receivable 25,800 4,317
Decrease (increase) in prepaid expenses (6,183) (3,352)
Increase (decrease) in accounts payable (861) (15,120)
Increase (decrease) in accrued wages and benefits (19,756) 1,280
Increase (decrease) in other payables (1,580) (8,388)
Decrease (increase) in other receivables (74,331) (7,705)
Decrease (increase) in related party receivable (3,245,167) (580,439)
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NET CASH PROVIDED (USED) BY OPERATIONS (3,258,300) (526,415)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,903) (4,562)
Increase (decrease) in related party loans 403,246 (317,421)
Decrease (increase) in loans receivable 458,542 1,330,059
Decrease (increase) in real estate held for sale (43,428) (46,151)
Increase (decrease) in loans payable 1,652,812 26,479
Increase (decrease) in debentures payable - (8,192)
Increase (decrease) in unfunded loan liabilities (79,879) (531,337)
Purchase of investments (15,116) (20,096)
Increase (decrease) in line of credit (150,000) (95,000)
Increase (decrease) in deferred revenue - -
Increase (decrease) in retained earnings - -
Increase (decrease) in stock issued 1,000,000 -
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NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 3,218,274 523,779
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NET INCREASE (DECREASE) IN CASH (40,026) (2,636)
CASH BALANCE - BEGINNING OF PERIOD 86,160 33,322
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CASH BALANCE - END OF PERIOD $ 46,134 $ 30,686
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
September 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS
CLS 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
September 30, 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. $18,833 and $29,510 were held in trust at Sept 30, 1997 and Sept 30,
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:
Sept 30, 1998 $113,820
Sept 30, 1999 47,425
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$161,245
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
September 30,1997
NOTE 4 - LOANS RECEIVABLE
Principal payments over the next five years are as follows:
Sept 30, 1998 $ 1,671,756
Sept 30, 1999 429,580
Sept 30, 2000 187,100
Sept 30, 2001 104,500
Sept 30, 2002 111,403
Sept 30, 2003 29,857
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$ 2,534,196
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Types of real and other property securing loan receivable at June 30, 1997
are as follows:
1997 1996
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Single Family Residential $ 189,316 $ 890,747
Multi Family Residential - 36,407
Commercial Property 1,256,821 164,088
Undeveloped Land 1,074,021 1,133,483
Automobile 14,038 7,868
Unsecured - 884
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$ 2,534,196 $ 2,233,477
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Security positions on loans receivable are as follows:
1997 1996
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First lien position $ 2,493,446 $ 2,080,299
Second lien position 37,050 152,294
Other 3,700 884
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$ 2,534,196 $ 2,233,477
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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 Sept 30, 1997 and 1996 the balance of unfunded loan
liabilities were $0 and $0 respectively.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
September 30, 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:
Sept 30, 1998 $ 534,633
Sept 30, 1999 294,891
Sept 30, 2000 596,170
Sept 30, 2001 179,500
Sept 30, 2002 2,957,814
Sept 30, 2003 76,465
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$ 4,639,473
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The company is registered as a securities broker dealer with the State of
Washington. As of Sept 30, 1997 the Company has issued $4,977,585 in
debenture certificates under this program. Of this total $4,598,214 in
debenture certificates are outstanding at Sept 30, 1997.
NOTE 7 - LINE OF CREDIT
The Company has a $650,000 line of credit. The Company pays $2,200 per month
in addition to 12% interest on funds borrowed. At Sept 30,1997 the amount
owing on this line of credit is $00. The Company also has a $100,000 line of
credit with US Bank. The interest rate is prime plus 2% on borrowed. At Sept
30, 1997 the amount due on this line is $00.
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. (PSRESG), 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
September 30, 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 Sept 30, 1997 PSIG owes the company
$3,245,167. PSIG is charged rent by the Company for office space. For the
nine months ended Sept 30, 1997 the Company has charged PSIG $5,512.50 for
rent.
PSAG provides appraisal services for loans originated by the Company. PSAG is
charged rent by the Company for office space. For the nine months ended Sept
30, 1997 the Company has charged PSAG $4,950 for rent.
PSRESG provides real estate closing services for loans originated by the
Company. For the nine months ending Sept 30, 1997 the Company has charged
PSRESG $17,325 for rent.
PSCW provides residential repair on properties owned by the affiliate PSIG.
For the nine months ending Sept 30, 1997 the Company has charged PSCW $2,475
for rent.
NOTE 9 - COMMON STOCK
As of Sept 30, 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 1180 1/2 shares 1,180,500
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Total Common Stock issued and outstanding $1,190,500
=========
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 1
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PLAN OF OPERATION AND LIQUIDITY
The sale of debenture investments and the sale of previously held loans
receivable to Investors, combined with principal payments on loan receivable
provide the source of funds to invest in loans receivable. For the nine
months ended Sept 30, 1997 sale of debentures under the SB-2 registration
approved May 3, 1996 were $2,258,890. 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 its 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
The quarter ended Sept 30, 1997 also reflects a net income of $20,298. Set
forth below are the key results from operation for the quarter ended Sept 30,
1997 and Sept 30, 1996.
1. THE COMPANY MET ITS OBLIGATION TO THE INVESTORS FOR THE QUARTER ENDED
SEPT 30, 1997 AND SEPT 30, 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.
2. THE SALE OF DEBENTURE INVESTMENTS AND LOAN RECEIVABLE TO INVESTORS PROVIDES
THE FUNDS NECESSARY TO FUND MORE LOANS.
Total loans receivable (including related party) increased by 48%, as a direct
result of the sale of debenture investments and loans receivable. Management
expects this trend to taper as the sale of this debenture offering is almost
complete. However, the demand for loans receivable to purchase by investors
continues to be very high. Management expects loan growth to increase to 10%
average over 1997.
3. REVENUES INCREASE
Total revenues for the quarter ended Sept 30, 1997 increased by $40,105, a 3%
rise over quarter end Sept 30, 1996. A major focus has been placed on revenue
generation with the restructuring of the loan department including a dynamic
sales manager. The subsequent loan volume has increased by the direct focus
on loan volume, both brokered and in-house lending. This is evidenced by the
current loans in process since Sept 30,1997. The fourth quarter for CLS
Financial Services is projected to be the best quarter yet for loan revenue.
The month of October has already proved to be the best month for loan revenue
in the history of the company. The company's principle performance objective
is to provide an annual increase in net income.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of Sept 30, 1997, 99% of 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 this manner.
5. ALLOWANCE FOR LOAN LOSSES DECREASED 1% FOR THE NINE MONTHS ENDED SEPT 30,
1997. Actual losses charged against the allowance for periods ending Sept 30,
1997 and Sept 30, 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 INCREASED BY 11% FOR THE NINE MONTHS ENDED SEPT 30, 1997.
Total expenses ending Sept 30, 1997 increased by $142,862 from Sept 30, 1996.
This was largely due to increases in salaries and employer taxes relating to
the increase in sales staff and to interest expense which increased due to a
larger investor base as the debentures have been sold.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the nine months ended Sept 30,
1997 and Sept 30, 1996.
Nine months ended Sept 30,
1997 1996
Return on assets
(net income divided by average total asset) .37% 3.11%
Return on equity
(net income divided by average equity) 1.81% 23.70%
Equity to assets
(average equity divided by average assets 20.70% 13.12%
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 or to sell a complete loan to an investor as a mortgage broker dealer.
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". Some of the available funds
for loan receivable have temporarily routed to a related party. This loan is
scheduled to be repaid by December 31, 1997. The loan is directly tied to
real estate owned and is secured by a 1st lien on these properties. The sale
of these properties has already begun with eight sales closed already. There
are approximately five other pending sales. Other sales are promising as the
market for these properties is very good.
The company actively pursues delinquent accounts and immediately sells any
foreclosed property thus having no nonearning receivables. Management's
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 its services in the foreseeable
future, evidenced by the daily loan inquiries, portfolio performance,
subsequent loans closed after Sept 30, 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 portfolio's interest rate
increased after a rise in market rates.
Part 2
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 second 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 SERVICES, INC
Registrant
/S/Gerald C. Vanhook July 21,1997
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Gerald C. Vanhook, President Date