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, 1999
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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, 1999
Part I
Page
Item 1: Financial Statements 4
Item 2: Managements Discussion & Analysis of Financial Condition &
Result of Operation 14
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 17
Item 5: Other Information 17
Item 6: Exhibits & Reports on Form 8-K 17
Item 7: Financial Data Schedule 18
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
June 30,1999 AND 1998
1999 1998
ASSETS -------- ---------
Cash $ 22,055 $ 68,207
Cash - trust account 16,075 17,980
Loans Receivable from related party 3,717,243 3,494,320
Other Loans Receivable 302,260 3,136,309
Other receivable 92,505 104,128
Real estate owned 6,213,178 656,229
Property and equipment, at cost, less
accumulated depreciation of $173,477
in 1999 and $145,686 in 1998 92,885 117,654
Other 134,598 330,300
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Total Assets $10,590,799 $7,925,127
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 140,841 104,332
Trust account payable 16,075 17,980
Deferred Income Tax 0 17,413
Loans payable other 9,615,307 6,334,221
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Total Liabilities 9,772,223 6,479,946
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STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares 10,000 10,000
authorized, issued and outstanding
Common stock, Class Two, $1000 par value 1,000,000 1,000,000
2,500 shares authorized, 1000 issued and
outstanding
Retained earnings (deficit) (191,424) 435,181
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Total Stockholders' Equity 818,576 1,445,081
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Total Liabilities & Stockholders' Equity $10,590,799 $7,925,127
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
June 30, 1999 AND 1998
1999 1998
REVENUES ---- ----
Loan fees $537,611 $487,984
Interest on loans 323,311 368,411
Loan servicing and application fees 91,547 147,019
Other income 4,146 3,495
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956,615 1,006,909
OPERATING EXPENSES
Wage and payroll taxes 311,203 416,909
Commissions and referrals 217,289 61,394
Interest expense 232,601 304,102
Advertising 12,743 39,348
Rent 39,176 34,153
Office and utilities 113,023 115,608
Depreciation and amortization 12,000 12,000
Excise Tax & Misc Direct Costs 9,878 3,485
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Total operating costs 947,913 986,999
INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 8,702 19,910
PROVISION FOR FEDERAL INCOME TAX - 2,100
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NET INCOME (LOSS) 8,702 17,810
RETAINED EARNINGS, beginning of year 200,126 417,371
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RETAINED EARNINGS (deficit),ending ($191,424) $435,181
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
June 30, 1999 AND 1998
1999 1998
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 8,702 $ 17,810
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 12,000 12,000
Change in Operating assets and liabilities
Receivables, other than loan receivable 102,437 (111,720)
Accounts payable and accrued expenses 31,387 (51,892)
Other (146,801) (84,613)
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NET CASH PROVIDED (USED) BY OPERATIONS 7,725 (218,415)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (43,677)
Change in related party loans 171,080 (17,824)
Change in loans receivable related party 18,103 (664,339)
Change in real estate owned (142,422) 742,398
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NET CASH FROM INVESTING ACTIVITIES 46,761 16,558
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CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable 140,202 411,027
Borrowings (payments) on line of credit (215,000) 0
Common stock issued 0 (180,467)
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NET CASH FROM FINANCING ACTIVITIES (74,798) 230,560
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NET INCREASE (DECREASE) IN CASH (20,312) 28,703
CASH BALANCE - BEGINNING OF PERIOD 42,367 39,504
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CASH BALANCE - END OF PERIOD $ 22,055 $68,207
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Interest paid on a cash basis $232,601 $304,102
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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
June 30, 1999
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
CLS FINANCIAL SERVICES, INC. ("CLS") earns fees from the origination of real
estate loans, 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 is related to a series of other companies that provide services to CLS
customers as follows:
Puget Sound Investment Group, Inc. (PSIG). When a real estate loan made by
CLS goes into foreclosure, PSIG assumes the payment obligation on the loan.
Any gain or loss recognized as part of the foreclosure and eventual
disposition of the collateral is recorded by PSIG.
Puget Sound Appraisal Group, Inc. (PSAG). PSAG provides appraisal services for
loans originated by CLS. PSAG charges CLS customers directly for these
services.
Puget Sound Real Estate Services Group, Inc. (PSRESG). PSRESG provides real
estate closing services for loans originated by CLS . PSRESG charges CLS
customers directly for these services.
Puget Sound Construction of Washington, Inc. (PSCW). PSCW provides
residential repair services to properties owned by PSIG and CLS. There were
no transactions between CLS and PSCW in 1999.
The Class One stockholders of CLS are the stockholders in the companies listed
above.
CLS rents the office facilities where it operates under a month-to-month
lease. The other entities pay a portion of the office facilities' rent.
Loan interest accrual and loan losses
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 payments.
Interest previously accrued but not collected is charged against income at the
time the loan becomes ninety days delinquent.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - (continued)
As noted above, PSIG assumes the payment obligation on foreclosed loans. PSIG
also recognizes any gain or loss on the eventual disposition of loan
collateral. Accordingly, an allowance for loan losses is not considered
necessary by CLS.
Sales of real estate
Real estate held for sale is stated at the lower of cost (specific
identification) or market. Sales of real estate generally are accounted for
under the full accrual method. Under that method, a gain is not recognized
until 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 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.
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.
Depreciation
Property and equipment are depreciated using the straight line method over the
estimated useful life of the assets.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - (continued)
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. CLS has a net operating tax
loss of approximately $600,000, expiring in 2019. The benefit of this loss
(approximately $200,000) has been fully reserved.
Advertising
Advertising costs are expended 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. Loss on Legal Settlement
During 1998, CLS, along with PSIG, were named defendants in a lawsuit brought
by a customer. The suit settled in February 1999 which resulted in a non-cash
loss of $1,949,777. Investors funds were originally used in loans to the
customer may also be able to recover their investments because of the nature
of the lawsuit. CLS determined that the net present value of this potential
liability is a loss of approximately $616,500. CLS and PSIG agreed that
$645,151 of the total loss amount is attributable to CLS. Therefore, CLS
recorded $645,151 as its agreed share of the loss in its December 31, 1998,
financial statements. However, the estimated amount potentially due to
investors may be subject to further refinement in the near term.
In addition, CLS is subject to various Federal Trade Commission (FTC)
regulations. Based on a series of relatively minor FTC violations, CLS is
required to deposit $60,000 in an escrow account to pay redress. As of
June 30, 1999, this amount had not been requested by FTC or deposited
into the escrow account, however, the funds were requested and deposited on
August 2, 1999.
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 3. Loans Receivable From Related Party and Payable to Related Party
CLS has loans receivable from related parties as follows:
PSIG $3,495,108
PSRESG 58,483
PSAG 18,980
A partnership which PSIG is a partner 144,434
PSCW 238
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$3,717,243
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The loan receivable from PSIG at June 30, 1999, is due on demand, bears
interest at 12% and is secured by real property as follows (amounts are as
represented by PSIG):
Single Family Residential $ 754,938
Multi-Family Residential 497,925
Undeveloped Land 1,886,028
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$3,138,891
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The other related party loans receivable are due on demand, bear no interest
and are unsecured. Also, CLS occasionally has loans payable to related
parties which are generally due on demand, bear no interest, and are
unsecured.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 4. Other Loans Receivable
CLS's other loans receivable are concentrated in the State of Washington and
are generally secured by real estate. Types of real property securing loans
receivable at June 30, 1999 and 1998 are as follows:
1999 1998
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Single Family Residential $ 284,678 $ 917,896
Commercial Property 221,500
Undeveloped Land 0 1,703,314
Other 17,582 339,238
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$ 302,260 $3,181,948
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Security positions on loans receivable are as follows:
1999 1998
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First lien position $ 219,451 $3,121,219
Second lien position 66,669 60,729
Other 16,140 -
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$ 302,260 $3,181,948
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Principal payments to be received for the years ending June 30 are as
follows:
2000 $ 79,717
2001 42,401
2002 92,673
2003 36,923
2004 29,200
Thereafter 21,346
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$ 302,260
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These loans have interest rates ranging from 10% to 14%.
Note 5. Other Loans Payable
Other loans payable include loans and debenture payable made up of amounts due
to investors with varying terms. Interest rates vary from 5% to 7%.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note 5. (Continued)
Principal payments on loans and debentures payable for the years ending
March 31 are as follows:
2000 $ 1,526,746
2001 1,143,920
2002 2,777,307
2003 2,632,314
2004 604,051
Thereafter 930,969
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$ 9,615,307
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As of June 30, 1999, CLS had issued $5,250,000 in unsecured debenture
certificates. Debenture certificates plus accrued interest amounting to a
total of $5,901,499 are outstanding at June 30, 1999. Management is
presently attempting to extend maturity dates and reduce the rate of interest
on these debentures. However, there is no assurance that management's effort
will be successful. Additional debentures are not allowed since CLS has
violated certain regulations in the state of Washington.
Management is also attempting to reduce the interest rate on CLS's secured
debt. However, there can be no assurance that any creditors will agree to the
reorganization plan.
If the attempts to restructure the debentures and secured debt described above
are not successful, management expects to address its potential liquidity
issues by selling certain real estate.
Note 6. Notes Payable
1999 1998
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Line of credit with an individual for a
maximum of $700,000 due Nov 15, 2000.
Interest at 12% annually is to be paid
monthly. In addition. CLS is to pay
a loan service fee of $2300 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. $ - $ -
=============== ==============
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
Note 6. (Continued)
CLS also has a line of credit with a bank for a maximum of $150,000. This line
of credit is secured by personal guarantees of the Class One CLS stockholders,
and expires November 24, 2002.
Note 7. 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.
Part 1
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION PLAN OF OPERATION AND LIQUIDITY
The sale of real estate 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
June 30, 1999 sale of debentures including accrued interest under
the SB-2 registration approved May 3, 1996 were $2,962,865. The company is
no longer pursuing debenture offerings as a source of funds for making loans.
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.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended Jun 30, 1999 reflects a net gain of $8,702. Set
forth below are the key results from operation for the quarter ended June 30,
1999 and June 30, 1998.
1. OBILIGATIONS
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 per the
reorganization plan set forth in the prior 10-K filing. The company has had
several investor meetings and is continuing to schedule similar meetings with
investors each month through this reorganization process in order to keep the
investor informed of the financial condition and changes of CLS.
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 but at a
much slower pace due to the reorganization plan provided by management. The
real estate market continues to thrive in western Washington. It has been
reported that in 1999, property values increased by an average of 10%-15% in
both King and Snohomish Counties. The company does have prime commercial and
residential properties in both of these counties.
3. LOAN FEES INCREASE
As reported on the previous 10Q, the second quarter has proved to be a better
revenue generator as far as loan fees, specifically, an increase of $49,627 or
10% over the same period in 1998. The other revenue accounts have decreased
over the same period in 1998. This is largely due to the change in policy of
pursuing hard money loans. The competitive nature and potential liabilities
that ensue from this types of loans has created a shift to pursuing the
brokered loan market rather than the hard money lending market. The third
quarter ending 9/30/99 also looks promising for revenues generated. Management
has focused on hiring proven loan officers and is hopeful that the volume
generated from these loan officers will dramatically increase net income.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of June 30, 1999, 94% 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. TOTAL EXPENSES DECREASED FOR THE SIX MONTHS ENDED JUNE 30, 1999.
Total expenses ending June 30, 1999 decreased by $39,086 from June 30, 1998.
This was largely due to the decrease in interest expense paid to investors and
the 50% reduction in the owners wages. Further decreases in expenses will be
recognized in subsequent quarters as tighter restraints are being placed on
office expenditures and the accurate allocation of various expenses to related
party companies.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the six months ended June 30,
1999 and June 30, 1998.
Six months ended June 30,
1999 1998
Return on assets
(net income divided by average total asset) .09% .01%
Return on equity
(net income divided by average equity) 7.14% .02%
Equity to assets
(average equity divided by average assets 1.32% .22%
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 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 the debenture offering
notes, sell real estate or to sell a complete loan to an investor as a
mortgage broker dealer.
The company has begun a reorganization plan which mainly affects debenture
holders, and the owners of the company. This includes a 50% reduction in
interest rates paid to investors, an extension of the maturity date of the
debentures, and a 50% reduction in salaries paid to both Jerry Vanhook and Mel
Johnson. In subsequent quarters these reductions will directly decrease
expenses and increase profitability. This will offset the deficit in Retained
Earnings currently carried on CLS's financial statements.
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 June 30, 1999 and the attractive real estate
market in which the company services.
UNCERTAINTIES
The initial reorganization plan proposed by management has been accepted by
the clear majority of the investors of debentures. However, there is no
certainty that the company will be able to reorganize if the investors do not
agree. In that case, the company will be forced to liquidate or file for a
reorganization under Chapter 11 of the Bankruptcy Code. Management
believes that after the investors study the formal plan submitted, that the
management's plan is in the best interest of the investor. 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
The company was involved in a lawsuit, (see prior filing 10-K for more
information) which was settled and subsequently completed April of 1999.
Because of this lawsuit, the company has been compelled to present a
reorganization plan to it's investors. As discussed before this plan would
reduce interest rates and extend the maturity dates of the debenture holders.
With the exception of two investors, the reorganization plan has been accepted
and is underway. The two investors have filed a lawsuit, however, subsequent
to the 6/30/99 ending date of this filing settlement discussions are underway.
However, it is clear to the majority of the investors that it is in their best
interest to work with management through this recovery period. 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
1999.
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
AUG 10, 1999
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Gerald C. Vanhook, President Date