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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 March 31, 2000
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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.
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CLS Financial Services, Inc
Quarterly Report on Form 10-Q
For the period ended March 31, 2000
Part I
Page
Item 1: Financial Statements 4
Item 2: Managements Discussion & Analysis of Financial Condition &
Result of Operation 11
Part II
Item 1: Legal Proceedings 13
Item 2: Change in Securities 13
Item 3: Defaults upon Senior Securities 13
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 14
Item 7: Financial Data Schedule 15
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CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
March 31, 2000 AND 1999
<TABLE>
<S> <C> <C>
2000 1999
ASSETS -------- ---------
Cash $ 53,205 $ 7,332
Cash - trust account 57,227 27,481
Loans Receivable from related party 3,540,001 3,737,493
Other Loans Receivable 759,704 321,347
Other receivable 100,950 147,299
Real estate owned 5,387,242 6,058,431
Property and equipment, at cost, less
accumulated depreciation of $195,692
in 2000 and $167,477 in 1999 78,838 98,885
Other 129,385 61,706
FTC Account 36,000
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Total Assets $10,142,552 $10,459,974
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 185,452 150,758
Trust account payable 57,227 27,481
Loans payable other 9,079,592 9,508,850
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Total Liabilities 9,322,271 9,687,089
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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) (189,719) (237,115)
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Total Stockholders' Equity 820,281 772,885
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Total Liabilities & Stockholders' Equity $10,142,552 $10,459,974
======== ========
</TABLE>
See Notes to Financial Statements
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CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
March 31, 2000 AND 1999
<TABLE>
<S> <C> <C>
2000 1999
REVENUES ---- ----
Loan fees $209,068 $270,157
Interest on loans 196,268 176,333
Loan servicing and application fees 29,396 32,958
Gain on sale of properties 6,886 -
Other income 4,982 444
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446,600 479,892
OPERATING EXPENSES
Wage and payroll taxes 135,040 160,351
Commissions and referrals 118,825 114,730
Interest expense 105,429 164,486
Advertising 12,688 5,791
Rent 19,753 19,423
Office and utilities 50,045 46,100
Depreciation and amortization 6,000 6,000
Excise tax and misc. expense 5,109 -
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Total operating costs 452,889 516,881
INCOME (LOSS) FROM OPERATIONS ( 6,289) (36,989)
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NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX ( 6,289) (36,989)
PROVISION FOR FEDERAL INCOME TAX - -
------ ------
NET INCOME (LOSS) ( 6,289) (36,989)
RETAINED EARNINGS, beginning of year (183,430) (200,126)
-------- --------
RETAINED EARNINGS (deficit),ending $189,719) ($237,115)
======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
March 31, 2000 AND 1999
<TABLE>
<S> <C> <C>
2000 1999
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss ($6,289) ($36,986)
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 6,000 6,000
Change in Operating assets and liabilities
Receivables, other than loan receivable 122,098 16,968
Accounts payable and accrued expenses 83,357 41,302
Other (110,748) (43,234)
Change in real estate owned 746,925 12,325
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NET CASH PROVIDED (USED) BY OPERATIONS 841,343 (3,625)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,000) -
Change in related party loans 364,309 150,829
Change in loans receivable (79,518) (985)
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NET CASH FROM INVESTING ACTIVITIES 278,791 149,844
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CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable (441,008) 33,745
Borrowings (payments) on line of credit (699,357) (215,000)
__________ ________
NET CASH FROM FINANCING ACTIVITIES (1,140,365) (181,255)
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NET INCREASE (DECREASE) IN CASH (20,231) (35,035)
CASH BALANCE - BEGINNING OF PERIOD 73,436 42,367
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CASH BALANCE - END OF PERIOD $ 53,205 $ 7,332
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Interest paid on a cash basis $105,429 $164,486
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Income taxes paid on a cash basis $ 0 $ 0
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</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
CLS FINANCIAL SERVICES, INC. ("CLS") earns fees from the origination of real
estate loans, commissions from the sale of real estate to home buyers, 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 also buys and sells real estate.
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 and 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.
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. PSCW charges
CLS directly for these services.
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
Generally, interest on loans is recognized on loans using the interest method.
Interest on loans are 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.
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.
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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.
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. At March 31, 2000, CLS has a
deferred tax asset that primarily results from net operating loss
carryforwards. These carryforwards amount to $595,000 and expire in 2019.
The resulting asset of $213,000 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.
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Note 2. FTC Regulations
CLS is subject to various Federal Trade Commission (FTC) regulations. Based on
a series of relatively minor FTC violations, CLS was required to deposit
$60,000 in an escrow account to pay redress. The amount has been requested by
FTC and deposited in 1999 into an escrow account. At March 31, 2000, this
amount has been written down to a net realizable value of $36,000.
NOTE 3. Loans Receivable From Related Party and Payable to Related Party
CLS has loans receivable from related parties as follows:
2000 1999
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PSIG $3,294,462 $3,694,719
PSRESG 116,710 34,332
PSAG - 8,028
A partnership which PSIG is a partner 79,427 159,155
SCW 8,811 414
RMX REIT, Inc 40,591 -
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$3,540,001 $3,737,493
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The loan receivable from PSIG at March 31, 2000 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 $ 705,728
Multi-Family Residential 638,760
Undeveloped Land 1,852,474
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$3,196,962
==========
The other related party loans receivable are due on demand, bear no interest
and are unsecured.
NOTE 4. 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 March 31, 2000 and 1999 are as follows:
1999 1999
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Single Family Residential $ 705,460 $ 298,162
Undeveloped Land 40,000 7,093
Other 14,244 16,092
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$ 759,704 $ 321,347
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Security positions on loans receivable are as follows:
2000 1999
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First lien position $ 690,460 $ 288,898
Second lien position 23,150 -
Third lien position 31,850 -
Other 14,244 32,449
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$ 759,704 $ 321,347
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Principal payments to be received for the years ending March 31 are as
follows:
2000 $ 195,850
2001 210,000
2002 218,801
2003 133,649
2004 1,404
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$ 759,704
These loans have interest rates ranging from 10% to 14%.
Note 5. Loans Payable
Loans payable include loans and debenture payable made up of amounts due
to investors with varying terms. Interest rates vary from 10 to 14%.
Principal payments on loans and debentures payable for the years ending
March 31 are as follows:
2000 $ 1,100,461
2001 919,886
2002 2,870,034
2003 2,546,502
2004 649,509
Thereafter 993,200
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$ 9,079,592
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As of March 31, 1999, CLS had issued $5,250,000 in unsecured debenture
certificates. Debenture certificates plus accrued interest amounting to a
total of $5,920,557 are outstanding at March 31, 2000.
Note 6. 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.
<PAGE>
Part 1
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Plan of Operation and Liquidity
Principal payments and the reselling of loans to investors provided the source
of funds to invest in loans receivable. Available liquidity will dictate the
volume of loan purchases that may be acquired by the company. Management has
established a policy of conservative collateral lending. As a result,
defaulted loans generally create additional profit centers as the collateral
value has been sufficient to sustain the increased yield created by the
company servicing the debt on behalf of the borrower but retaining the
increased default rate when the borrower cures the loan. The company manages
cash by reselling the loans to other investors in order to recapture original
debenture investments which is to fund other loans. The company relies on its
ability to resell loan receivable or real estate in sufficient amounts to
generate funds needed to pay off maturing debentures under the restructuring
plan. The external sources of liquidity include a line of credit, sale of
debentures, payoff on loan receivables, the sale of loan receivables, and sale
of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended Mar 31, 2000 reflects a net loss of $6,289. Set
forth below are the key results from operation for the quarter ended Mar 31,
2000 and Mar 31, 1999.
1. OBILIGATIONS
The company has continued to have quarterly meetings with the investors to
keep them informed of the financial condition of CLS. In the first quarter of
2000, the interest rates on debenture accounts were increased based on the
financial success of the restructuring plans. The company did meet its
obligations under the restructuring plan in the first quarter of 2000. The
company's principle performance objective is to meet all restructuring
obligations and provide an annual increase to retained earnings. Interest
payments from loans receivable are sufficient to pay debenture investor
interest. The company relies on its ability to sell loans receivable to
generate enough cash to pay principle to the investor.
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 to remain
steady. There are no known or predicted property value downward trends.
Industry reports indicate the value of property in the western Washington area
has increased in 2000.
3. REVENUES DECREASE
Total revenues for the quarter ended Mar 31, 2000 decreased by $33,292,
however, the relative expenses have also decreased by a greater amount of
$63,992. The management's focus has been mainly on reducing expenses and
developing the relatively new division for real estate brokerage. The company
has hired a dynamic sales manager to assist in producing more lending
opportunities for CLS as well as managing the brokerage division previously
discussed. Historically, the first quarter has been the slowest in regards to
revenue generated.
<PAGE>
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of Mar 31, 2000, 90% 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 THREE MONTHS ENDED MAR 31, 2000.
Total expenses ending Mar 31, 2000 decreased by $63,992 from Mar 31, 1999.
This was largely due to decreases in payroll and to interest expense.
Management has focused extensively on excess costs along with the continued
reduction in salaries paid to themselves and the continued freeze on middle
management salaries.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the six months ended Mar 31,
1999 and Mar 31, 1998.
Three months ended Mar 31,
2000 1999
Return on assets
(net income divided by average total asset) .150% (.4%)
Return on equity
(net income divided by average equity) 2.04% (3.33%)
Equity to assets
(average equity divided by average assets 7.50% 12.00%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company is committed to offer real estate and loan receivables for sale to
investors for the foreseeable future. Management expects loan growth to
remain steady, with little change from 1999. The company forecasts a stable
demand for its services in the foreseeable future, evidenced by the daily loan
inquiries, portfolio performance, external predications and subsequent loans
funded and brokered and subsequent noninventory homes sold through the real
estate brokerage division.
The company has also opened a new division in 1999 for real estate brokerage
in order to satisfy the demand to assist buyers in finding and purchasing a
home. The company expects this to be an important part of its long term
success. This division establishes CLS as the premier one stop real estate
company by not only helping the home buyer finance the home purchase, but
actually helping with the home search and/or sell.
The company's cash management goal is to invest all available funds through
loan receivables or real estate. Market demand for the company services
remain strong as there has been no shortage of investment options that meet
the company's investment criteria. The company expects to be able to continue
to acquire similar loans in the future. Loan purchases will be limited by
available liquidity as previously discussed.
The company actively pursues delinquent accounts. As a result, nonearning
receivables are minimal and generally fully collected within thirty to sixty
days. Management's strategy and policy has been to underwrite conservatively.
This strategy will continue with a loan to value ratio average of 65%. Every
effort is made to assure profitability even in the event of a foreclosure
sale.
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UNCERTAINTIES
The restructuring plan has been accepted by the clear majority of the
debenture investors generally, 90% in number of investors and in dollars.
However, there is no certainty that the company will be able to reorganize if
the remaining 10% holdout 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
1999 audited financial statements, the information contained in this 10Q, the
real estate portfolio, the loan portfolio and reviews the industry
predictions, that they will agree that it is in their collective best
interests to support the restructuring plan initiated by management. The
savings of administration costs, court hearings, and compliance with the
Bankruptcy Code, rules and United States Trustee directives, will ultimately
inure to the investors, rather than counsel, accountants and the Trustee
office.
Part 2
Item 1 LEGAL PROCEEDINGS
At year end 1999, the company circulated amended debenture agreements and
certificates to the debenture holders, seeking their agreement with the
restructuring plan discussed in the 1999 and 1998 10K filings. The company
has received almost a ninety percent approval thus far by the investors. One
debenture holder has disagreed and has indicated the potential likelihood of
litigating the matter. If the company were forced to liquidate its assets in
an auction scenario, investors in debentures will most likely lose a
substantial portion of their principal, since the property would have to be
sold at bargain prices rather than the company's intention to eventually sell
at favorable market prices. Based on the improved financial condition of the
company in the first quarter of 2000, the interest rate of return to debenture
holders was increased. The company plans to increase the rate again in the
third and fourth quarters of 2000 as the financial condition permits.
The company is not involved in any adverse litigation against it, as of March
31, 2000. However, there are at least 3 threatened lawsuits over some aspect
of the restructuring which do not involve routine collection activities.
There is no certainty that the threatened lawsuits will be filed, however,
counsel for the company is of the opinion that the threatened lawsuits will
not jeopardize the company status as a going concern. Counsel is of the
opinion that CLS has the defenses available to it to successfully defend the
matters in Court, which could take at least 2 to 3 years to resolve. In any
event, CLS has the present ability to settle the threatened litigation and
will continue to address settlement proposals. CLS continues to address
potential securities issues related to the restructuring of the company and is
cooperating fully with the Securities Division of the Department of Financial
Institutions for the State of Washington.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
See Item 1. At present, CLS is not in default according to its restructuring
plan.
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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
Apr 28, 2000
- ---------------------------- ------------
Gerald C. Vanhook, President Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 110,432
<SECURITIES> 129,385
<RECEIVABLES> 4,436,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,676,472
<PP&E> 5,661,772
<DEPRECIATION> (195,692)
<TOTAL-ASSETS> 10,142,552
<CURRENT-LIABILITIES> 242,679
<BONDS> 9,079,592
0
0
<COMMON> 1,010,000
<OTHER-SE> (189,719)
<TOTAL-LIABILITY-AND-EQUITY> 10,142,552
<SALES> 0
<TOTAL-REVENUES> 446,600
<CGS> 0
<TOTAL-COSTS> 347,460
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,429
<INCOME-PRETAX> (6,289)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,289)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
