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, 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 September 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 17
Item 3: Defaults upon Senior Securities 17
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
September 30,1999 AND 1998
1999 1998
ASSETS -------- ---------
Cash $250,686 $ 82,182
Cash - trust account 122,287 349,912
Loans Receivable from related party 2,973,006 4,538,279
Other Loans Receivable 697,758 1,914,035
Other receivable 76,302 89,330
Real estate owned 6,077,231 680,424
FTC account 60,000 0
Property and equipment, at cost, less
accumulated depreciation of $173,477
in 1999 and $151,686 in 1998 89,053 114,677
Other 119,175 142,413
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Total Assets $10,465,498 $7,911,252
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 97,807 133,273
Trust account payable 122,287 349,912
Loans payable other 9,426,471 5,995,895
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Total Liabilities 9,646,565 6,479,080
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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) (191,067) 422,172
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Total Stockholders' Equity 818,933 1,432,172
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Total Liabilities & Stockholders' Equity $10,465,498 $7,911,252
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
September 30, 1999 AND 1998
1999 1998
REVENUES ---- ----
Loan fees $698,751 $929,663
Interest on loans 501,756 579,508
Loan servicing and application fees 125,384 97,699
Gain on sale of properties 24,950 0
Other income 11,215 284
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1,362,056 1,607,154
OPERATING EXPENSES
Wage and payroll taxes 437,764 561,093
Commissions and referrals 285,875 175,199
Interest expense 333,684 485,241
Advertising 28,567 72,963
Rent 58,929 53,509
Office and utilities 174,305 215,222
Depreciation and amortization 18,000 18,000
Excise Tax & Misc Direct Costs 15,873 21,126
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Total operating costs 1,352,997 1,602,353
INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 9,059 4,801
PROVISION FOR FEDERAL INCOME TAX - 0
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NET INCOME (LOSS) 9,059 4,801
RETAINED EARNINGS, beginning of year (200,126) 417,371
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RETAINED EARNINGS (deficit),ending ($191,067) $422,172
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
September 30, 1999 AND 1998
1999 1998
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 9,059 $ 4,801
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 18,000 18,000
Change in Operating assets and liabilities
Receivables, other than loan receivable 87,965 80,775
Accounts payable and accrued expenses (11,649) (74)
Other (100,703) (115,620)
Purchase of equipment (2,166) (35,803)
FTC account (60,000) 0
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NET CASH PROVIDED (USED) BY OPERATIONS (59,494) (47,920)
CASH FLOW FROM INVESTING ACTIVITIES:
Change in related party loans 915,316 (181,695)
Change in loans receivable related party (377,395) (342,226)
Change in real estate owned (6,475) 117,306
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NET CASH FROM INVESTING ACTIVITIES 531,446 (406,615)
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CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable (48,633) 677,680
Borrowing (payments) on line of credit (215,000) 0
Common stock issued 0 (180,467)
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NET CASH FROM FINANCING ACTIVITIES (263,633) 497,213
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NET INCREASE (DECREASE) IN CASH (208,319) 42,678
CASH BALANCE - BEGINNING OF PERIOD 42,367 39,504
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CASH BALANCE - END OF PERIOD $ 250,686 $82,182
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Interest paid on a cash basis $333,684 $485,241
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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
September 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). PSIG owns, manages real estate and
develops real estate for sale. PSIG borrows funds in its own name, acquires
property in its own name and has, in the past, borrowed funds from investors
on loans that were brokered by CLS. PSIG has, in the past, acquired title to
properties through the foreclosure process on loans originated by CLS.
Puget Sound Appraisal Group, Inc. (PSAG). PSAG provides appraisal services for
loans originated by CLS. PSAG charges CLS customers directly for these
services. As of September 15, 1999 management has decided to close this
corporation and use outside appraisal companies instead.
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 have
been minor repairs performed on real estate owned by CLS by PSCW in the third
quarter of 1999.
The Class One stockholders of CLS are the stockholders in the companies listed
above.
CLS and its affiliated companies allocate rent based on space used, management
and labor costs based on time, telephone expenses based on number of
employees, computers and equipment based on usage and other overhead costs
based on reasonable estimates of use.
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
September 30, 1999
NOTE 1 - (continued)
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 collectability 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, except when loan is kept in the CLS portfolio.
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.
Advertising
Advertising costs are expenses as incurred.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
September 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.
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. FTC Regulations
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 September 30, 1999, this
amount had been requested by FTC and deposited into the escrow account.
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
NOTE 3. Loans Receivable From Related Party and Payable to Related Party
CLS has loans receivable from related parties as follows:
PSIG $2,710,208
PSRESG 87,451
PSAG 25,261
A partnership which PSIG is a partner 144,084
PSCW 6,002
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$2,973,006
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The loan receivable from PSIG at Sept 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 $ 650,450
Multi-Family Residential 497,925
Undeveloped Land 1,561,833
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$2,710,208
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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
September 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 Sept 30, 1999 and 1998 are as follows:
1999 1998
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Single Family Residential $ 682,471 $ 925,737
Commercial Property 903
Undeveloped Land 0 969,683
Other 15,287 17,712
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$ 697,758 $1,914,035
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Security positions on loans receivable are as follows:
1999 1998
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First lien position $ 646,621 $1,609,639
Second lien position 35,850 79,396
Other 15,287 225,000
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$ 697,758 $1,914,035
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Principal payments to be received for the years ending Sept 30 are as
follows:
2000 $ 120,387
2001 94,380
2002 387,341
2003 45,104
2004 29,200
Thereafter 21,346
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$ 697,758
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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
September 30, 1999
Note 5. (Continued)
Principal payments on loans and debentures payable for the years ending
September 30 are as follows:
2000 $ 1,508,235
2001 1,131,177
2002 2,733,677
2003 2,639,412
2004 565,588
Thereafter 848,382
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$ 9,426,471
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As of Sept 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 Sept 30, 1999. CLS voluntarily
suspended the offering of Debentures since the limit had been sold as
registered by coordination with the State of Washington's Department of
Financial Institutions, Securities Division. At present, CLS has no plans to
sell additional debentures pursuant to its Federal or State offerings.
Management has reduced the interest rate paid to debenture holders in order to
preserve cash flow for current operations and extended the term of the
debentures for maturity. There is no assurance that the Debenture Holders
will continue to accept the reduced interest payments or the term extension.
Management has made plans to address this potential liquidity issue in the
future by selling real estate owned.
Note 6. Notes Payable
CLS has a 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. There was an outstanding balance at
the end of September 1999 in the amount of $684,357 included in loans payable.
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
September 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. As of
September 30, 1999 CLS had issued $5,250,000 in unsecured debentures. The
total outstanding balance for the most recent registered debentures including
accrued interest was $2,962,865. The total outstanding debenture balance is
$5,919,220. 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 year to date September 30, 1999 a net income is $9,059. Set
forth below are the key results from operation for the quarter ended September
30, 1999 and September 30, 1998.
1. OBLIGATIONS
The company strives to be investor oriented and the primary goal is to protect
the investors' principle to the extent possible, especially for the unsecured
debenture holders. During the quarter, the debenture holders were paid
interest at 50% of the debenture rate for each holder. The company
unilaterally restructured the debenture debt in the first quarter of 1999, by
reducing the interest payments by 50% and extending the maturity date by 5
years in order to preserve cash flow, prevent a default and protect the
investor's principle. The company has held monthly meetings and a quarterly
meeting to reassess when increases in the interest rate can be implemented.
All investors have been contacted and are being kept informed of the
restructuring of the company. Management expects to increase the interest
rate paid to investors in the first quarter of 2000, at the meeting to be held
in February, 2000.
2. THE SALE OF REAL ESTATE AND LOAN RECEIVABLE PROVIDES THE FUNDS
NECESSARY TO FUND MORE LOANS.
Investor demand for loans receivable to purchase continues but at a
slower pace due to the repayment plan provided by management. 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 and a vibrant market in which
to sell properties if need be. CLS was issued a broker dealer permit as of
October 1, 1999, in which the company can fractionalize larger loans
receivable to multiple outside investors.
3. LOAN FEES INCREASE
Loan fees increased from the quarter ended 6/30/99 to the quarter ended
9/30/99 by 24%. The company attributes the continued growth to the increase
in loans originated and sole. The competitive nature and potential
liabilities that ensue from hard money lending has created a shift to pursuing
the brokered loan market rather than the hard money lending market. The fourth
quarter ending 12/31/99 looks promising for revenues generated.
CLS has been approved as a Washington State Real Estate Broker, Gerald C.
Vanhook, designated broker.
Management intends to operate the Broker division as an additional profit
center to market and sell CLS and affiliated company real property and retain
the customary broker and agent commission. The more significant long term
impact of this new department is the availability of critical data about the
real estate market, individual properties in particular, and opportunity for
more aggressive, consistent approach to obtaining distressed real estate at
discount.
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of September 30, 1999, 92% 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 NINE MONTHS ENDED SEPTEMBER 30, 1999.
Total expenses for the quarter ending September 30, 1999 decreased by $249,356
from September 30, 1998. This was largely due to the decrease in interest
expense paid to investors and the 50% reduction in the salaries of the
president and vice-president. 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 nine months ended September
30, 1999 and September 30, 1998.
Nine months ended September 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 initiated a restructuring plan to reduce the interest payment to
debenture holders by 50% and extend the term by 5 years in the first quarter
of 1999. The company has reduced the salaries of the President (Jerry
Vanhook) and the Vice President (Mel Johnson) by 50% and continued to reduce
costs. Management has terminated the affiliated appraisal company and
continued to right size the company employee duties and responsibilities.
Management expects that this cost restructuring will allow the company to
continue to operate profitably, as the company readies real property for sale
at the optimum market price.
The company actively pursues delinquent accounts. 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 September 30, 1999 and the attractive real
estate market which the company services.
UNCERTAINTIES
The investors have overwhelmingly supported the restructuring plan previously
discussed. However, there is no certainty that the company will be able to
cut costs if the investors do not agree. In that case, the company would 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, they will see the new repayment plan is in the best
interest of the investor. The savings in administration costs that would be
incurred under a more formal legal proceeding will ultimately inure to the
investors.
Part 2
Item 1 LEGAL PROCEEDINGS
At present, the Company is not involved in any lawsuits, other than collection
actions. The Company has settled the lawsuits previously discussed in the 10K
for 1998 and the previous 10Q's. Although settlement terms remain
confidential, the financial statements clearly set forth that the terms of the
settled lawsuits have been in the best financial interest of the debenture
investors. In addition, the Department of Financial Institutions, Securities
Division, has resorted the Company permit to sell fractional interests in
loans to Washington Residents (Broker Dealer permit Q-03792) effective October
1, 1999.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
See restructuring initiative previously discusses.
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 third 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 there-unto duly authorized.
CLS FINANCIAL SERVICES, INC
Registrant
Nov 11, 1999
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Gerald C. Vanhook, President Date