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 June 30, 1998
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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 June 30, 1998
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
June 30, 1998 AND 1997
1998 1997
ASSETS -------- ---------
Cash $275,873 $363,906
Cash - trust account 18,140 5,781
Accrued commission receivable 52,362 15,072
Accrued interest receivable 35,500 42,796
Loans receivable - (note 4) 2,927,736 2,300,476
Loans receivable - related party (note 8) 3,655,156 2,593,734
Less allowance for loan losses (45,639) (45,639)
Real estate held for sale 613,770 766,859
Prepaid expenses 46,053 21,785
Other receivables 86,595 37,843
Investments (note 2) 62,362 47,099
Office furniture and equipment 263,340 209,620
Less accumulated depreciation (143,686) (125,124)
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Total Assets $7,847,562 $6,234,208
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 2,867 22,267
Accrued wages and benefits - 22,119
Trust account payable 18,140 5,781
Unfunded loan liabilities (note 5) 111,727 -
Accrued interest payable - 32,399
Accrued federal income tax - -
Loans payable (note 6) 5,679,352 4,015,559
Loan payable related party - 504,556
Line of credit - -
Deferred federal income tax 17,413 9,463
Note Payable land Purchase 590,000 -
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Total Liabilities 6,419,499 4,612,144
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STOCKHOLDERS' EQUITY
Common stock, no par value, 500 shares 10,000 10,000
Common stock, no par value, nonvoting 1,000,000 1,180,467
Retained earnings 417,371 394,622
Net income (loss) 692 36,975
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Total Stockholders' Equity 1,428,063 1,622,064
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Total Liabilities & Stockholders' Equity $7,847,562 $6,234,208
======== ========
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
June 30, 1998 AND 1997
1998 1997
REVENUES ---- ----
Loan fees $366,040 $387,516
Interest on loans 286,445 213,172
Loan servicing and application fees 132,313 175,625
Other income 3,495 -
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788,293 776,313
OPERATING EXPENSES
Wage and payroll taxes 352,858 300,298
Commissions and referrals 25,277 50 673
Interest expense 254,861 217,510
Warehouse lending fee 14,698 4,879
Advertising 30,931 22,380
Rent 27,673 37,467
Telephone and utilities 7,252 8,489
Office expense 12,880 29,149
License and taxes 868 1,637
Postage 2,673 1,803
Printing 1,608 1,800
Credit and title fees 13,056 8,219
Professional fees 9,517 5,357
Travel, entertainment, promotion 2,000 4,770
Janitorial and maintenance 2,392 3,640
Fringe benefits 17,188 18,386
Depreciation and amortization 10,000 12,000
Training and other operating costs 1,869 5,089
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Total operating costs 787,601 733,546
INCOME (LOSS) FROM OPERATIONS 692 42,767
OTHER INCOME (EXPENSE) - -
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NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX - -
PROVISION FOR FEDERAL INCOME TAX - 5,792
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NET INCOME (LOSS) 692 36,975
RETAINED EARNINGS, beginning of year 417,371 394,622
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RETAINED EARNINGS, ending $418,063 $431,597
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CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
June 30, 1998 AND 1997
1998 1997
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 692 $ 36,975
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 10,000 12,000
Allowance for loan losses 30,675 -
Deferred income taxes - (6,680)
Decrease (increase) in accounts receivable - -
Decrease (increase) in interest receivable 3,550 23,911
Decrease (increase) in prepaid expenses (25,973) (10,132)
Increase (decrease) in accounts payable (21,928) 5,829
Increase (decrease) in accrued wages and benefits (39,080) (17,738)
Increase (decrease) in other payables (52,059) (22,625)
Decrease (increase) in other receivables (7,902) (51,529)
Decrease (increase) in related party receivable 45,390 (2,593,734)
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NET CASH PROVIDED (USED) BY OPERATIONS (56,635) (2,623,723)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (43,677) (6,545)
Increase (decrease) in related party loans (244,123) 427,007
Decrease (increase) in loans receivable (440,802) 722,937
Decrease (increase) in real estate held for sale 784,857 (30,871)
Increase (decrease) in loans payable 361,138 1,028,898
Increase (decrease) in debentures payable - -
Increase (decrease) in unfunded loan liabilities 111,727 (79,879)
Purchase of investments (55,649) (10,078)
Increase (decrease) in line of credit - 150,000
Increase (decrease) in deferred revenue - -
Increase (decrease) in retained earnings
Increase (decrease) in stock issued (180,467) 1,000,000
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NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 293,004 2,901,469
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NET INCREASE (DECREASE) IN CASH 236,369 277,746
CASH BALANCE - BEGINNING OF PERIOD 39,504 86,160
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CASH BALANCE - END OF PERIOD $275,873 $363,906
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
June 30, 1998
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
June 30, 1998
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. $39,276 and $5,781 were held in trust at Jun 30, 1998 and Jun 30,
1997.
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:
June 30, 1999 $85,365
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$85,365
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CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
June 30, 1998
NOTE 4 - LOANS RECEIVABLE
Principal payments over the next five years are as follows:
June 30, 1999 $ 2,204,756
June 30, 2000 272,920
June 30, 2001 158,371
June 30, 2002 26,134
June 30, 2003 98,227
June 30, 2004 167,328
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$ 2,927,736
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Types of real and other property securing loan receivable at Jun 30, 1998
are as follows:
1998 1997
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Single Family Residential $ 523,798 $ 524,359
Multi Family Residential - -
Commercial Property 418,531 1,635,036
Undeveloped Land 1,976,534 136,220
Automobile 8,873 4,861
Unsecured - -
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$ 2,927,736 $ 2,300,476
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Security positions on loans receivable are as follows:
1998 1997
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First lien position $ 2,846,137 $ 2,140,328
Second lien position 81,599 160,148
Other - -
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$ 2,927,736 $ 2,300,476
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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 Jun 30, 1998 and 1997 the balance of unfunded loan
liabilities were $111,727 and $0 respectively.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
June 30, 1998
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:
June 30, 1999 $ 341,105
June 30, 2000 783,028
June 30, 2001 591,352
June 30, 2002 1,417,285
June 30, 2003 2,386,989
June 30, 2004 749,593
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$ 6,269,352
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The company is registered as a securities broker dealer with the State of
Washington. As of Jun 30, 1998 the Company has issued $5,150,000 in
debenture certificates under this program. Of this total $4,770,729 in
debenture certificates are outstanding at Jun 30, 1998.
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 Jun 30,1998 the amount
owing on this line of credit is $00. The Company also has a $150,000 line of
credit with US Bank. The interest rate is prime plus 2% on borrowed. At Jun
31, 1998 the amount due on this line is $0.
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
June 30, 1998
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 Jun 30, 1998 PSIG owes the company
$3,589,212. PSIG is charged rent by the Company for office space. For the
six months ended June 30, 1998 the Company has charged PSIG $3,675.00 for
rent.
PSAG provides appraisal services for loans originated by the Company. PSAG is
charged rent by the Company for office space. For the six months ended June
30, 1998 the Company has charged PSAG $3,300 for rent.
PSRESG provides real estate closing services for loans originated by the
Company. For the six months ending Jun 30, 1998 the Company has charged
PSRESG $11,550 for rent.
PSCW provides residential repair on properties owned by the affiliate PSIG.
For the six months ending Jun 30, 1998 the Company has charged PSCW $1650.00
for rent.
NOTE 9 - COMMON STOCK
As of Jun 30, 1998 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 1000 shares 1,000,000
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Total Common Stock issued and outstanding $1,010,000
=========
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 six
months ended Jun 30, 1998 sale of debentures including accrued interest under
the SB-2 registration approved May 3, 1996 were $2,645,327. 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 Jun 30, 1998 also reflects a net income of $692. Set
forth below are the key results from operation for the quarter ended Jun 30,
1998 and Jun 30, 1997.
1. THE COMPANY MET ITS OBLIGATION TO THE INVESTORS FOR THE QUARTER ENDED
JUN 30, 1998 AND JUN 30, 1997.
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 49%, 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 5%
for in house funding, but up to 15% in brokered loans funded.
3. REVENUES INCREASE
Total revenues for the quarter ended Jun 30, 1998 increased by $11,980, a 2%
rise over quarter end Jun 30, 1997. 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 Jun 30,1998. The third quarter for CLS
Financial Services is projected to be the best quarter yet for loan revenue.
The month of April and May have already proven 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 Jun 30, 1998, 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 REMAINED THE SAME FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND 1997. Actual losses charged against the allowance for periods
ending Jun 30,1998 and Jun 30, 1997 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 7% FOR THE SIX MONTHS ENDED JUN 30, 1998.
Total expenses ending Jun 30, 1998 increased by $54,055 from Jun 30, 1997.
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 six months ended Jun 30,
1998 and Jun 30, 1997.
Six months ended Jun 30,
1998 1997
Return on assets
(net income divided by average total asset) .00% .69%
Return on equity
(net income divided by average equity) .0002% 3.43%
Equity to assets
(average equity divided by average assets .17% 40.53%
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, 1998. 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 multiple sales closed and or
pending sale already. 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 Jun 30, 1998 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 first quarter of
1998.
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 31,1998
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Gerald C. Vanhook, President Date