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, 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.
<PAGE>
CLS Financial Services, Inc
Quarterly Report on Form 10-Q
For the period ended June 30, 2000
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 16
Item 5: Other Information
17
Item 6: Exhibits & Reports on Form 8-K 17
Item 7: Financial Data Schedule 18
<PAGE>
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
June 30, 2000 AND 1999
<TABLE>
<S> <C> <C>
2000 1999
ASSETS -------- ---------
Cash $ 159,972 $ 22,055
Cash - trust account 336,037 16,075
Loans Receivable from related party 3,749,719 3,717,243
Other Loans Receivable 390,276 302,260
Other receivable 84,553 92,505
Real estate owned 5,498,606 6,213,178
FTC account 36,000 -
Property and equipment, at cost, less
accumulated depreciation of $201,692
in 2000 and $173,477 in 1999 75,368 92,885
Other 118,697 134,598
--------- ---------
Total Assets $10,449,228 $10,590,799
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 86,177 140,841
Trust account payable 336,037 16,075
Loans payable other 9,235,141 9,615,307
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Total Liabilities 9,657,355 9,772,223
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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) (218,127) (191,424)
--------- --------
Total Stockholders' Equity 791,873 818,576
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Total Liabilities & Stockholders' Equity $10,449,228 $10,590,799
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Six Mos Ended 6/30 Quarter Ended 6/30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Loan fees $358,959 $537,611 $149,891 $267,454
Interest on loans 456,242 323,311 259,974 146,978
Loan servicing and application fees 56,357 91,547 26,961 58,589
Gain (loss) sale of properties (3,555) - (10,441) -
Other income 52,658 4,146 47,676 3,702
------- ------- -------- -------
920,661 956,615 474,061 476,723
OPERATING EXPENSES
Wage and payroll taxes 272,108 311,203 137,068 150,852
Commissions and referrals 239,363 217,289 120,538 102,559
Interest expense 267,607 232,601 162,178 68,115
Advertising 25,466 12,743 12,778 6,952
Rent 29,507 39,176 9,754 19,753
Office and utilities 101,177 113,023 51,132 66,923
Depreciation and amortization 12,000 12,000 6,000 6,000
Excise tax and misc direct costs 8,130 9,878 3,021 9,878
------- ------- ------- -------
Total operating costs 955,358 947,913 502,469 431,032
------- ------- ------- -------
INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX (34,697) 8,702 (28,408) 45,691
PROVISION FOR FEDERAL INCOME TAX - - - -
------ ------ ------ -------
NET INCOME (LOSS) (34,697) 8,702 (28,408) 45,691
RETAINED (DEFICIT), beg of period (183,430) (200,126) (189,719) (237,115)
-------- -------- ------- -------
RETAINED(DEFICIT),end of period ($218,127) ($191,424) ($218,127) (191,424)
======= ======= ======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
June 30, 2000 AND 1999
<TABLE>
<S> <C> <C>
2000 1999
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) ($34,697) $ 8,702
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 138,495 102,437
Accounts payable and accrued expenses (15,918) 31,387
Other (100,060) (146,801)
Change in real estate owned 635,562 -
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NET CASH PROVIDED (USED) BY OPERATIONS 635,382 7,725
CASH FLOW FROM INVESTING ACTIVITIES:
Change in loans receivable 269,665 -
Change in related party loans - 171,080
Change in loans receivable related party 174,835 18,103
Change in real estate owned - (142,422)
Purchase of property and equipment (8,530) -
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CASH FROM INVESTING ACTIVITIES 435,970 46,761
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CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable (285,459) 140,202
Borrowings (payments) on line of credit (699,357)
(215,000) ----------
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NET CASH FROM FINANCING ACTIVITIES (984,816) (74,798)
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NET INCREASE (DECREASE) IN CASH 86,536 (20,312)
CASH BALANCE - BEGINNING OF PERIOD 73,436 42,367
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CASH BALANCE - END OF PERIOD $159,972 $ 22,055
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Interest paid on a cash basis $267,607 $ 232,601
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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
June 30, 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.
<PAGE>
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 June 30, 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.
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
<PAGE>
FTC and deposited in 1999 into an escrow account. At June 30, 2000, this
amount has been written down to 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 $3,509,061 $3,495,108
PSRESG 132,322 58,483
PSCW 23,693 238
Two partnerships in which PSIG is a partner 52,632 144,434
RMX REIT, Inc. 32,011 -
PSAG - 18,980
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$3,749,719 $3,717,243
=========== ===========
The loan receivable from PSIG at June 30, 2000, is due on demand, bears
interest at 12%. At June 30, 2000, the loan is secured by real property as
follows (amounts are as represented by PSIG):
Single Family Residential $ 813,625
Multi-Family Residential 677,379
Undeveloped Land 1,976,938
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$3,467,942
==========
The other related party loans receivable are due on demand, bear no interest
and are unsecured.
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, 2000 and 1999 are as follows:
2000 1999
-------------- --------------
Single Family Residential $ 302,273 $284,678
Undeveloped Land 56,261
- Other 31,742
17,582
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$ 390,276 $302,260
============== ==============
Security positions on loans receivable are as follows:
<PAGE>
2000 1999
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First lien position $ 291,588 $219,451
Second lien position 47,098 66,669
Third lien position 31,850 -
Other 19,740 16,140
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$ 390,276 $302,260
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Principal payments to be received for the years ending June 30 are as
follows:
2001 $ 158,776
2002 -
2003 136,750
2004 67,826
2005 26,924
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$ 390,276
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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
June 30 are as follows:
2001 $ 1,485,752
2002 2,794,525
2003 1,650,384
2004 894,389
2005 1,011,108
Thereafter 1,398,983
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$ 9,235,141
============
As of June 30, 2000, CLS had issued $5,250,000 in unsecured debenture
certificates. Debenture certificates plus accrued interest amounting to a
total of $5,914,171 are outstanding at June 30, 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 of loan receivables, the sale of loan receivables, and
sale
of real estate.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The quarter ended June 30, 2000 reflects a net loss of $28,408. Set
forth below are the key results from operation for the quarters ended June
30,
2000 and June 30, 1999.
1. OBILIGATIONS
The company has continued to have quarterly meetings with the investors to
keep them informed of the financial condition of CLS. The company did meet
its obligations under the restructuring plan in the second 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 recievable to
generate enough cash to pay principle to the investor.
2. THE SALE OF REAL ESTATE AND LOANS RECEIVABLE PROVIDE 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
continues to increase in 2000.
3. REVENUES DECREASE
Total revenues for the quarter ended June 30, 2000 decreased by $2,662, a .6%
decrease from the quarter ended June 30, 1999. While interest expense
increased by $94,063 due to raising rates, operating expenses decreased by
$22,626. Management's focus continues to be controlling expenses while
developing the new real estate brokerage division. Along with this, a
decision has been made to aggressively expand the institutional lending side,
particularly wholesale lending. To this end, a new sales manager was hired
late in the first quarter. As of this writing, the new sales manager has
already hired six new loan officers, which are expected to increase revenue
more than expense.
<PAGE>
4. TYPE OF PROPERTY SECURING LOANS RECEIVABLE HAS CHANGED.
As of June 30, 2000, 75% 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 a first lien position..
5. TOTAL EXPENSES INCREASED FOR THE THREE MONTHS ENDED JUNE 30, 2000.
Total expenses for the quarter ending June 30, 2000 increased by $71,437 from
June 30, 1999.
Interest expense increased by $94,063, due to increasing interest rates at
the
end of the first quarter 2000. Operating expenses decreased by $22,626 due
to
continued management cost controls.
RETURN ON ASSETS, EQUITY, AND EQUITY TO ASSETS RATIO
The following net returns were realized during the six months ended June 30,
2000 and June 30, 1999.
Six months ended June 30,
2000 1999
Return on assets
(net income divided by average total asset) ( .32%) .09%
Return on equity
(net income divided by average equity) (4.29%) 7.14%
Equity to assets
(average equity divided by average assets 7.49.% 1.32%
PLAN OF OPERATION THROUGHOUT THE YEAR
The company is committed to continue to offer real estate and loans receivable
for sale to investors for the foreseeable future. Management expects loan
growth to improve steadily as the new manager's plans take hold. 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
homes sold through the real estate brokerage division.
The company opened a new division in 1999 for real estate brokerage in order
to sell company and affiliate owned real estate and to satisfy 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 sale.
The company's cash management goal is to invest all available funds through
loan receivables or real estate. Market demand for the company's services
remains 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.
<PAGE>
UNCERTAINTIES
The company continues in the process of restructuring its debt financing .
All debenture holders have been contacted and the overwhelming majority are
in
agreement regarding the need to restructure and the terms proposed by
management. It reamins uncertain that at least 90% of the current debenture
holders will agree with the restructuring in a writtem agreement. The
company
will report on the progress in the next 10Q.
Previous 10Q and 10K reports have outlined the uncertainties associated with
the restructuring. The company hopes to report that at least 90% of the
debenture holders are in written agreement in support of the restructuring.
Part 2
ITEM 1 LEGAL PROCEEDINGS
The company has no new legal proceedings that require reporting. The company
remains in the process of restructuring its debt with the debenture holders.
As of the end of the quarter, no lawsuits have been filed or threatened by
the
debenture holders.
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.
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-k
Exhibit
Number Exhibit
27 Financial Data Schedule
The company did not file any reports on Form 8-K in the second quarter of
2000.
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/
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Gerald C. Vanhook, President Date
