UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ___________.
Commission File Number: 333-60326
TEMPORARY FINANCIAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
Washington 91-2079472
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
200 North Mullan Road, Suite 213, Spokane, Washington 99206
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(Address of principal executive offices)
(509) 340-0273
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(Issuer's telephone number)
N.A.
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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 documents and
reports required to be filed by Section 13, or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period as
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days.
Yes [X] No [ ]
The number of shares of common stock outstanding on October 31, 2002 was:
737,280
Transitional Small Business Disclosure Format. Yes [ ] No [X]
1
FORM 10-QSB
Temporary Financial Services, Inc. and Subsidiary
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Contents
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Page
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PART I
Item 1. Financial statements.
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited):
Consolidated balance sheets 10-QSB Page 3
Consolidated statements of income 10-QSB Page 4
Consolidated statements of cash flows 10-QSB Page 5
Notes to consolidated financial statements 10-QSB Page 6 - 12
Item 2. Managements discussion and analysis of financial condition
And results of operations. 10-QSB Page 13 - 16
PART II
Item 1. Legal Proceedings. 10-QSB Page 17
Item 2. Changes in securities. 10-QSB Page 17
Item 3. Defaults upon senior securities. 10-QSB Page 17
Item 4. Submission of matters to a vote of security holders. 10-QSB Page 17
Item 5. Other information. 10-QSB Page 17
Item 6. Exhibits and reports on Form8-K. 10-QSB Page 17
Signatures 10-QSB Page 17
2
Temporary Financial Services, Inc.
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Consolidated Balance Sheets (Unaudited)
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September 30, December 31,
------------------ ------------------
Assets 2003 2002
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 90,194 $ 547,210
Securities available for sale - 80,600
Accounts receivable 9,313 13,452
Federal income taxes - -
Prepaid Expenses 1,877 1,877
Loans receivable:
Affiliates 1,522,082 1,055,525
Others 306,738 413,768
------------------ ------------------
Total current assets 1,930,204 2,112,432
OTHER ASSETS:
Investment in affiliated company 601,912 618,635
Real estate receivable contracts held for sale 1,057,320 90,250
------------------ ------------------
Total Other Assets 1,659,232 708,885
FURNITURE & EQUIPMENT, less accumulated
depreciation of $11,716 and $7,114 , respectively 24,571 29,173
------------------ ------------------
$3,614,007 $2,850,490
================== ==================
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Line of credit, officer/stockholder $1,386,498 $ 542,425
Accounts payable 4,583 4,914
Accrued expenses 5,704 3,338
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Total current liabilities 1,396,785 550,677
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STOCKHOLDERS' EQUITY
Common stock - 100,000,000 shares, $0.001 par value, authorized;
737,280 shares issued and outstanding 737 737
Preferred stock - 5,000,000 shares, $0.001 par value, authorized;
none issued - -
Additional paid-in capital 2,499,312 2,499,312
Retained earnings (deficit) (282,827) (200,236)
------------------ ------------------
Total stockholders' equity 2,217,222 2,299,813
------------------ ------------------
$3,614,007 $2,850,490
================== ==================
See accompanying notes to unaudited consolidated financial statements.
3
Temporary Financial Services, Inc.
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Consolidated Statements of Income (Unaudited)
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Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ---------------------------------------
2003 2002 2003 2002
------------------- ------------------- ------------------ ------------------
REVENUE:
Loan and related fees: $ 16,174 $ 34,181 $ 38,936 $ 91,484
Consulting and joint venture fees - - 21,150 -
Interest and investment income 63,506 15,783 150,644 38,547
Accounting fees and other income 8,390 9,000 24,890 24,000
------------------- ------------------- ------------------ ------------------
88,070 58,964 235,620 154,031
------------------- ------------------- ------------------ ------------------
OPERATING EXPENSES:
Advertising $ 56 $ 75 $ 6,543 $ 5,246
Compensation and related expenses 27,822 50,780 94,367 119,132
Rent 5,500 4,532 16,397 17,438
Legal and professional 17,556 5,370 59,737 59,028
Interest expense - related party 31,282 7,875 68,343 24,631
Office expense 4,546 8,623 10,069 20,206
Other expense 40,478 13,213 58,032 33,442
------------------- ------------------- ------------------ ------------------
127,240 90,468 313,488 279,123
------------------- ------------------- ------------------ ------------------
LOSS FROM OPERATIONS (39,170) (31,504) (77,868) (125,092)
OTHER EXPENSE
Equity in gains (losses) of affiliates 1,607 (37,857) (4,723) (93,587)
------------------- ------------------- ------------------ ------------------
LOSS BEFORE INCOME TAXES (37,563) (69,361) (82,591) (218,679)
INCOME TAX BENEFIT - - - -
------------------- ------------------- ------------------ ------------------
NET LOSS $ (37,563) $ (69,361) $ (82,591) $ (218,679)
=================== =================== ================== ==================
BASIC LOSS PER SHARE $ (0.05) $ (0.09) $ (0.11) $ (0.35)
=================== =================== ================== ==================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 737,280 737,280 737,280 624,853
=================== =================== ================== ==================
See accompanying notes to unaudited conolidated financial statements.
4
Temporary Financial Services, Inc.
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Consolidated Statements of Cash Flows (Unaudited)
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Three Months Ended September 30, Nine Months Ended September 30,
----------- ----------------- ----------------- -----------------
Increase (Decrease) in Cash 2003 2002 2003 2002
----------- ----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (37,564) $ (69,361) $ (82,591) $ (218,679)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,534 1,519 4,602 3,596
Settlement expense paid with stock 12,000 -- 12,000 --
Equity in gains (losses) in affiliates (1,607) 37,857 4,723 93,587
Decrease (incr.) in accounts receivables 6,433 (67,826) 4,139 (69,286)
Decrease (incr.) in prepaid expenses -- 962 -- (1,876)
Increase (decr.) in accounts payable 3,952 361 (331) (10,113)
Increase (decr.) in accrued expenses (599) (304) 2,366 9,020
Decrease in income taxes -- -- -- (297)
----------- ----------------- ----------------- -----------------
Total adjustments 21,713 (27,431) 27,499 24,631
----------- ----------------- ----------------- -----------------
Net cash provided (used) by operating activities (15,851) (96,792) (55,092) (194,048)
----------- ----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in affiliates -- (200,506) -- (422,606)
Sale of securities available for sale 20,340 -- 80,600 --
Decrease (incr.) in loans receivable, net 7,634 (571,838) (359,527) (1,334,590)
Increase in investments in R.E. contracts (3,393) -- (967,070) --
Additions to furniture and equipment -- (5,547) -- (10,984)
----------- ----------------- ----------------- -----------------
Net cash provided (used) in investing activities 24,581 (777,891) (1,245,997) (1,768,180)
----------- ----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock sales for cash -- -- -- 1,500,049
(Increase) decrease in deferred offering costs -- -- -- 56,218
Proceeds from line of credit, net 26,174 1,585,682 844,073 1,486,000
----------- ----------------- ----------------- -----------------
26,174 1,585,682 844,073 3,042,267
----------- ----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH 34,904 710,999 (457,016) 1,080,039
CASH, BEGINNING OF PERIOD 55,290 631,112 547,210 262,072
----------- ----------------- ----------------- -----------------
CASH, END OF PERIOD $ 90,194 $ 1,342,111 $ 90,194 $ 1,342,111
=================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Exchange of 50,000 shares of common stock for
250,000 shares of Genesis Financial, Inc. common $ -- $ -- $ -- $ 250,000
=================================================================
Cash payments of Interest $ 35,109 $ -- $ 61,845 $ 16,756
=================================================================
See accompanying notes to unaudited consolidated financial statements.
5
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
The accompanying financial statements are those of Temporary Financial Services,
Inc., incorporated in Washington State on October 4, 2000, and its wholly-owned
subsidiary, Temps Unlimited, Incorporated, which was incorporated in Washington
State on October 31, 2000 (collectively referred to herein as the Company). Both
companies have established their fiscal year end to be December 31. The
Company's operations consist of three segments: the purchase of real estate
receivable contracts for the company's own account; financing the purchase of
real estate contracts receivable through an affiliated business; and financing
and other services for the temporary employment services industry.
The Company previously owned minority interests in two temporary staffing
businesses. During 2002, the Company sold its minority interests in the
temporary staffing businesses, and is no longer engaged in this segment of
business.
Summary of Significant Accounting Policies:
Principles of consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany accounts and transactions are eliminated in consolidation.
Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and reflect all normal recurring adjustments which, in the opinion of
Management of the Company, are necessary for a fair presentation of the results
for the periods presented. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements of the Company as of and for the year
ended December 31, 2002, and the notes thereto contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2002, filed with the
Securities and Exchange Commission.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
Cash and cash equivalents - Such assets consist of demand deposits, including
interest-bearing money market accounts, held in three financial institutions.
6
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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Securities available for sale - Investments in equity securities available for
sale are stated at cost, which approximates fair value.
Deferred stock offering costs - Legal and other fees and costs incurred in
connection with the Company's initial public stock offering were deferred in the
year ended December 31, 2001. The initial public offering closed in April, 2002,
and the costs incurred in connection with the offering, were deducted from the
offering proceeds and reduced additional paid-in capital.
Real estate receivable contracts held for sale - Real estate receivable
contracts held for sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs) or aggregate
market value. Gains or losses on sales are recognized for financial reporting
and income tax purposes at the time of sale. Interest on these receivables is
included in interest income during the period held for sale.
Office furniture and equipment - Office furniture and equipment are stated at
cost. Depreciation is computed using the straight-line method over an estimated
useful life of seven years.
Revenue recognition - The Company generates revenues from interest earned on
loans, investment income from real estate receivable contracts, loan and related
fee income from loans to temporary staffing businesses, fee based accounting
services, and joint venture and consulting services.
Interest earned on loans and investment income from real estate receivable
contracts are recognized when earned based on the amount of the loan, the rate,
and the time outstanding. The Company recognizes loan and related fee income
from temporary staffing businesses at the time the loan amounts are advanced to
the borrowers. Loan advances are typically made on a weekly basis to temporary
staffing borrowers, and the amount of the advance is netted against the
applicable loan and related fee income. Fee based accounting services are
typically charged at a monthly fixed rate, and are invoiced as income at the end
of the month in which the services are performed.
Joint venture revenues result from the Company's participation in real estate
receivable contract purchases. After holding the interest in the joint venture
contract for a relatively short period, the contract is sold and the Company's
gain is determined by the excess of the sale price over the cost basis of the
contract. Joint venture contract revenues are recognized when the related
contract is sold. Consulting fees are recognized when billed for services
provided to affiliated companies.
Allowance for loan losses - The Company provides for estimated loan losses on
loans receivable at a level which, in management's opinion, is adequate to
absorb credit losses on such loans. The amount of the allowance is based on
management's evaluation of the collectibility of the loans receivable, including
the nature of the loans, adequacy of collateral, credit concentrations, trends
in loss experience, specific impaired loans, economic conditions, and other
risks inherent in the loans. At September 30, 2003 and December 31, 2002,
management determined that no allowance for loan losses was necessary.
7
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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Investments in affiliates - The Company's investment in Genesis Financial, Inc.,
an affiliate, is reported using the equity method. The Company's share of
earnings and losses of the affiliate are reported as income or expense in the
period in which the earnings or losses are incurred. Genesis Financial, Inc. is
engaged in purchasing and selling real estate receivable contracts.
Income tax - The Company files a consolidated federal income tax return with its
subsidiary. Deferred taxes are provided, when material, on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. There were no material temporary
differences for the periods presented. Deferred tax assets, subject to a
valuation allowance, are recognized for future benefits of net operating losses
being carried forward.
Earnings per share - Earnings (loss) per common share has been computed on the
basis of the weighted-average number of common shares outstanding during the
years presented. Common shares issuable upon exercise of warrants (Note 6) have
not been included in the calculation because their inclusion would be
antidilutive.
NOTE 2 -- RELATED-PARTY TRANSACTIONS:
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During the nine month period ended September 30, 2002, the Company purchased
professional services of an officer/director at a cost of $34,725. The
officer/director did not receive any amounts for professional services in the
three month period ended September 30, 2002, or in the three and nine month
periods ended September 30, 2003.
As discussed in note 3, the Company had loans receivable from affiliates
totaling $1,522,082 at September 30, 2003.
At September 30, 2003, the Company had a $1,500,000 line of credit with an
officer/stockholder (see note 5).
NOTE 3 -- LOANS RECEIVABLE:
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The Company provides short-term financing for an affiliated business engaged in
purchasing and selling real estate receivable contracts, and for temporary
staffing businesses.
The Company provides financing to its affiliated real estate receivable
contracts borrower against a secured warehousing line of credit agreement. The
Company has established lending guidelines that limit loans to 80% of the
borrowers cost of the contracts purchased, and the Company periodically reviews
the receivable contract agreements and appraisals to maintain a comfort level
regarding adequacy of the borrower's collateral base. For the three and nine
month periods ended September 30, 2003 and 2002, the Company incurred no loan
losses and there were no impaired loans outstanding at September 30, 2003 or
2002.
The company's temporary staffing business financing consists of notes receivable
that are generally collateralized by the borrower's accounts receivable, all
assets of the borrower, and
8
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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personal guarantees and pledges where appropriate. Lending criteria established
to minimize credit risk include, among other things, assessment of the
operator's capabilities, minimum business capitalization requirements,
maintenance of an adequate accounts receivable borrowing base, and a requirement
for timely reporting of financial information to demonstrate ongoing compliance
with loan covenants. For the three and nine month periods ended September 30,
2003 and 2002, the Company incurred no loan losses and there were no impaired
loans to temporary staffing businesses outstanding at September 30, 2003 or
2002..
At September 30, 2003, the Company had no outstanding commitments for
undisbursed loans.
NOTE 4 -- INVESTMENTS IN AFFILIATES:
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In January, 2002, the Company acquired an interest in Genesis Financial, Inc., a
company formed to engage in the business of purchasing and selling real estate
receivable contracts. The Company acquired 350,000 shares of common stock at
$.001 per share, 200,000 shares at $1.00 per share, and $200,000 of convertible
debt with a conversion right at $1.00 per share. The convertible debt was
converted in 2002. The Company also exchanged 50,000 shares of its common stock
for 250,000 shares of Genesis Financial, Inc. common stock with a fair value of
$250,000. In September, 2003, the Company entered into an agreement with its
underwriter (in the initial public offering) to cancel the outstanding
underwriters' warrants in exchange for $22,000 and 12,000 shares of Genesis
common stock owned by the Company. As a result of these transactions, at
September 30, 2003, the Company owns 988,000 shares (44%) of the total
outstanding stock of Genesis Financial, Inc. The investment in Genesis is
reported on the equity method of accounting, and during the three and nine month
periods ended September 30, 2003 and 2002, the Company recorded unrealized gains
(losses) from its investment in Genesis, as follows:
------------------------------- ---------------------------- ---------------------------- ----------------------------
3 Months - 09/30/2003 3 Months - 09/30/2002 9 Months - 09/30/2003 9 Months - 09/30/2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
$1607 ($37,857) ($4,723) ($93,587)
------------------------------- ---------------------------- ---------------------------- ----------------------------
At September 30, 2003, the carrying value of the investment in Genesis
Financial, Inc. ($601,912) exceeded the Company's share in Genesis' net assets
by approximately $240,000. This excess has been deemed to be equivalent to
goodwill. As required by Statement of Financial Accounting Standards No. 142,
goodwill is not amortized and is annually evaluated for impairment. Such
evaluation did not result in an impairment at September 30, 2003. See Note 9.
9
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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Unaudited financial information about Genesis as of September 30, 2003, follows:
Assets:
Cash $ 151250
Inventory of contracts 1,989,809
Other current assets 16,510
Furniture and equipment, net 6,531
Investment in Temporary Financial Services, Inc. 217,500
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Total assets $ 2,381,600
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Liabilities:
Line of credit, Temporary Financial Services, Inc. $ 1,522,082
Accrued expenses 21,919
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Total liabilities 1,544,001
Stockholders' equity 837,599
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Total liabilities and stockholders' equity $ 2,381,600
------------
Net Revenues $ 419,596
Expenses 430,221
Net Loss ($ 10,625)
NOTE 5 -- LINE OF CREDIT:
The Company's Line of Credit with a Related Party. At September 30, 2003 and
December 31, 2002, the Company had outstanding balances of $1,386,498 and
$542,425, respectively, payable against a $1,500,000 line-of-credit with an
officer/stockholder. The line-of-credit is unsecured and bears interest at 8%.
The line-of-credit agreement was renewed on April 1, 2003 for twelve months. The
Company incurred a renewal/commitment fee of $20,000 for the extension
agreement. The Company will pay this renewal/commitment fee to the
lender/officer/stockholder by assignment of the commitment/renewal fee to be
received by the Company from Genesis Financial, Inc. (see "The Genesis Line of
Credit," below). The agreement now expires on March 31, 2004 and any outstanding
balance is due on that date. In the three and nine month periods ended September
30, 2003 and 2002, the Company incurred related party interest expenses as
follows:
------------------------------- ---------------------------- ---------------------------- ----------------------------
3 Months - 09/30/2003 3 Months - 09/30/2002 9 Months - 09/30/2003 9 Months - 09/30/2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
$29,197 $7,875 $63,258 $24,222
------------------------------- ---------------------------- ---------------------------- ----------------------------
The Genesis Line of Credit. At September 30, 2003, the Company was owed
$1,522,082 by Genesis Financial, Inc. against a $2,000,000 line of credit
secured by all of the assets of Genesis Financial, Inc. and personally
guaranteed by two principals of the borrower. In the three and nine month
periods ended September 30, 2003 and 2002, the Company reported related party
interest as follows:
------------------------------- ---------------------------- ---------------------------- ----------------------------
3 Months - 09/30/2003 3 Months - 09/30/2002 9 Months - 09/30/2003 9 Months - 09/30/2002
------------------------------- ---------------------------- ---------------------------- ----------------------------
$27,373 $13,166 $97,856 $26,027
------------------------------- ---------------------------- ---------------------------- ----------------------------
10
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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The line of credit was due to expire on August 15, 2003, but was amended and
extended on April 1, 2003 through March 31, 2004. The renewed line of credit
bears interest at the rate of 8%. TFS charged a commitment/renewal fee of 1% of
the amount of the line of credit ($20,000) payable $5,000 in cash and by
issuance of 15,000 shares of Genesis Common Stock valued at $1.00 per share. As
of September 30, 2003, the Company has not established any reserve for losses on
its line of credit with Genesis as no loss is expected.
NOTE 6 -- CAPITAL STOCK:
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Exchange of Stock with Genesis.
In conjunction with the Company's investment in Genesis Financial, Inc. (see
Note 4), the Company exchanged 50,000 shares of its common stock valued at $5.00
per share, for 250,000 shares of Genesis common stock. The Genesis common shares
are restricted securities and were acquired for investment purposes. At
September 30, 2003, the Company evaluated its investment in the Genesis shares
and has determined that $1.00 per share is a reasonable estimate of the fair
market value of the Genesis common stock. No impairment adjustment has been made
to the carrying value of the Genesis common stock.
NOTE 7 - INCOME TAX:
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The Company generated tax-basis net operating losses of approximately $37,000
and $83,000, respectively, for the three and nine month periods ended September
30, 2003 and aggregate losses since inception of approximately $282,000. These
losses are available for carryover to offset future taxable income through 2022.
At September 30, 2003 and December 31, 2002, the Company had a deferred tax
asset of $70,500 and $50,000, respectively. The deferred tax asset was fully
offset by a valuation allowance because of uncertainties if the Company will
generate sufficient taxable income to realize the tax benefit. For the three and
nine month periods ended September 30, 2003 and 2002, the income tax benefit
differed from the expected amounts of $9,250 (3 mos. ended 09/30/2003), $20,750
(9 mos. ended 09/30/2003), $17,500 (3 mos. ended 09/30/2002) and $55,000 (9 mos.
ended 9/30/2002), respectively, primarily because of the impact of recognizing
the deferred tax asset valuation allowance.
NOTE 8 -- OPERATING LEASES:
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In June, 2001, the Company entered into an operating lease of its office
premises. Also in 2001, the Company leased certain office equipment under an
operating lease agreement. Following are the future commitments under the leases
as of June 30, 2003:
2003 (three months) $ 4,364
2004 8,000
NOTE 9 - PROPOSED DIVIDEND DISTRIBUTION:
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11
Temporary Financial Services, Inc.
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Notes to Consolidated Financial Statements (Unaudited)
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On February 19, 2003, Genesis Financial, Inc. filed a registration statement on
Form SB-2 with the United States Securities and Exchange Commission to register
its securities for distribution to the public. At the request of management of
Temporary Financial Services, Inc., the Genesis registration statement includes
737,280 shares of Genesis common stock that is currently owned by Temporary
Financial Services, Inc. It is the intention of management to distribute the
737,280 shares of Genesis common stock being registered to shareholders of
Temporary Financial Services, Inc. in a spin-off distribution. Each shareholder
of Temporary Financial Services, Inc. will receive one share of Genesis common
stock in the distribution for each one share of Temporary Financial Services,
Inc. common stock held at the record date for the distribution. Upon completion
of the spin-off distribution, Temporary Financial Services, Inc. will then own
250,720 shares (11%) of Genesis common stock.
NOTE 10 - LITIGATION:
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On October 17, 2002, Temporary Financial Services, Inc. (TFS) and Temps
Unlimited, Inc. were served with a lawsuit by Labor Ready, Inc. The suit
alleges, among other things, that TFS and our affiliated companies are illegally
conspiring to compete against Labor Ready in the temporary labor business and
seeks injunctions prohibiting actionable conduct and unspecified monetary
damages. Management has indicated its belief that the complaint contains a
number of inaccurate allegations, and that the claims are without foundation in
law or fact. The Company is vigorously defending the action but the expected
outcome cannot be determined at this time, and accordingly, no provision has
been made at September 30, 2003 for losses, if any, that could result from the
litigation. The cost of litigation will continue to be a drain on corporate
resources until the matter is resolved. Through October 31, 2003, the Company
has paid out $38,610 in legal fees in defense of the Labor Ready claims.
12
FORM 10-QSB
Part I, Item 2. Managements Discussion and Analysis of financial condition and
results of operations.
Background
TFS was organized in October 2000 to provide accounts receivable
financing for temporary labor businesses. Outstanding loans to temp labor
businesses reached a peak of nearly $800,000 in June, 2002. Even though the temp
labor lending business showed potential for further growth, management's
assessment of the risk associated with temp labor loans and the level of effort
required for managing the loans and protecting TFS' rights to repayment made the
business opportunity less attractive than originally anticipated.
In January, 2002, TFS acquired an interest in Genesis Financial, Inc.,
a company engaged in buying and selling real estate receivable contracts and
other types of cash flow instruments. While management was evaluating the temp
labor loan business, the real estate receivable contract business began to grow
and the company was presented with opportunities to acquire interests in real
estate contracts with attractive yields. Upon review, management determined that
the real estate contract business offered nearly the same return with less risk
and less requirement for management oversight. As a result, the Company began to
move out of the temp labor loan business and into the business of buying and
holding and/or reselling real estate receivable contracts for resale. At this
time, TFS has phased out all but one of its temp labor loan customers, and has
shifted the majority of its assets into the real estate receivable contracts
business.
In future periods, we expect that TFS will continue to focus on real
estate receivable contracts, and will phase out the remaining temp labor loan
business over the next twelve months. We believe that the change in business
direction will require less overhead in future periods and that the revenues we
are able to generate from the real estate receivable contracts business will
begin to generate profits toward the end of 2003. The change in business
strategy and its affect on operations is discussed in the period to period
comparison set forth below.
In addition to the real estate receivable contract business, the
Company is also searching for a viable merger candidate for a reverse merger
acquisition. The Company hopes to find a candidate with a going business,
profitable operations and good upside potential, and to negotiate the
acquisition of such a target at some time in the future. No deals are currently
being seriously reviewed. If such a transaction occurs, it is likely that
management of the Company will change and the target management team will take
over day to day operations of the Company. Additional details on a potential
reverse acquisition transaction will be provided to our shareholders when a
target is identified and discussions progress to a formal expression of
interest.
Three Months Ended September 30, 2003 and 2002
Results of Operations. For the three months ended September 30, 2003,
the company generated gross revenues of $88,070, compared to $58,694 for the
comparable period in 2002. This represents an aggregate increase of 50%. More
significant, temp labor loan and related fees decreased to $16,174 from $34,581
(53%) in the three months ended September 30, 2003 compared to 2002, while
interest and investment income increased to $63,506 from $15,783, an increase of
302%. The reduction of temp labor loan fees and the increase in interest and
investment income are consistent with the company's current focus on real estate
receivables contract business.
13
Total operating expenses increased to $127,240 from $90,468 for the
three month period ended September 30, 2003 compared to 2002. Interest expense,
relating primarily to the Company's line of credit from an officer and director,
increased to $31,282 from $7,875 for the three months ended September 30, 2003
compared to 2002. The line of credit is used to fund a line of credit that TFS
provides to Genesis, and to fund a portion of the inventory of contracts held
for resale. Interest income earned by TFS from its' line of credit is offset by
the interest expense TFS pays to its officer director, and there is no interest
rate spread on this loan. The company's investment assets, on the other hand,
have yields ranging from 12% to 15% or more and these investment yields positive
interest spreads of 6% or more to TFS.
Compensation and related expenses decreased to $27,822 from $50,780 in
the three months ended September 30, 2003 compared to 2002. The decrease is the
result of two factors. The decision to focus on the real estate receivable
contracts business reduced personnel needs of the company and the reductions
created savings in compensation costs. Additionally, an officer of the company
that was employed full time by TFS in June 2002, is now splitting his time 70%
to TFS and 30% to Genesis. We expect that we will continue to see a shift in
overhead from TFS to Genesis in coming periods as Genesis grows and TFS further
shifts its focus and revenue sources to real estate receivable contracts that
require less personnel and management oversight. In this regard, TFS and Genesis
are currently reviewing plans to share phone and network costs, and consolidate
offices to further reduce overhead.
As a publicly traded company subject to ongoing reporting requirements
with the Securities and Exchange Commission (SEC), TFS will continue to incur
significant expenses to maintain current status with the SEC. These expenses are
likely to increase in coming periods based on more stringent reporting
requirements and public oversight initiatives that have been or are being
adopted by the SEC in response to corporate governance concerns caused by Enron,
Worldcom and other corporate scandals and abuses. Audit and professional fees
will increase as a result of these changes and the increases will impact the
profitability of the company in future periods.
In connection with previously described litigation filed by Labor
Ready, TFS is continuing to incur legal expenses for defense costs. We believe
the litigation is groundless and that TFS will ultimately prevail on the merits,
and we are hopeful that the court will eventually award TFS at least a recovery
of expenses. No assurances can be given, however, regarding the outcome of the
matter, the time frame of the resolution or if any recovery will be received by
TFS. To date, the company has incurred $38,610 in defense of this litigation.
For the three month period ended September 30, 2003, litigation expenses
amounted to $13,061. The trend of litigation expenses has been increasing as the
case progresses through discovery. We expect that litigation expenses will hold
at current levels averaging approximately $5,000 per month as the case proceeds
to resolution.
During the quarter ended September 30, 2003, the company entered into
an agreement with its initial public offering underwriter for cancellation of
the underwriter's warrants that were issued on closing the IPO on March 31,
2002. These underwriters' warrants included certain demand registration rights
and we believe that elimination of this contractual obligation will make the
Company more marketable in our search for a viable reverse acquisition
candidate. The Company paid $22,000 cash and 12,000 shares of Genesis common
stock owned by the Company for the cancellation. The Genesis common stock was
valued at $1.00 per share for purposes of expensing the settlement. The basis of
the shares distributed to the underwriter was also $1.00 per share so no gain or
loss was recognized on the distribution of the 12,000 shares of Genesis common
stock. We consider the $1.00 valuation to be a reasonable estimate of the fair
market value of the shares distributed.
14
Nine Months Ended September 30, 2003 and 2002
For the nine months ended September 30, 2003, the company generated
gross revenues of $235,620, compared to $154,031 for the comparable period in
2002. This represents an aggregate increase of 53%. Temp labor loan and related
fees decreased to $38,936 from $91,484 (57%) in the nine months ended September
30, 2003 compared to 2002, while interest and investment income increased to
$150,644 from $38,547, an increase of 290%. The reduction of temp labor loan
fees and the increase in interest and investment income are consistent with the
company's current focus on real estate receivables contract business.
Total operating expenses increased to $313,488 from $279,123 for the
nine month period ended September 30, 2003 compared to 2002. Interest expense,
relating primarily to the Company's line of credit from an officer and director,
increased to $68,343 from $24,631 for the nine months ended September 30, 2003
compared to 2002. The line of credit is used to fund a line of credit that TFS
provides to Genesis, and to fund a portion of the inventory of contracts held
for resale. Interest income earned by TFS from its' line of credit is offset by
the interest expense TFS pays to its officer director, and there is no interest
rate spread on this loan. The company's investment assets have yields ranging
from 12% to 15% or more and these investment yield positive interest spreads of
6% or more to TFS.
Compensation and related expenses decreased to $94,367 from $119,132 in
the six months ended September 30, 2003 compared to 2002. Office expenses also
decreased to $10,069 form $20,206 in the nine months ended September 30, 2003
compared to 2002. The decrease in the nine month period reflect the current cost
cutting and cost shifting efforts described for the three month period ended
September 30, 2003. As the cost cutting measures are implemented, we expect that
additional bottom line impact will be reflected in coming periods.
The overall increase in operating costs in the nine month period ended
September 30, 2003 is primarily the result of litigation expenses and settlement
costs incurred in the period. Aggregate litigation costs incurred in the nine
months were $32,333, and settlement costs on the underwriters' warrants expensed
in the period were $34,000.
With the change in business focus and our continuing efforts to reduce
costs, we expect that the mix and amount of expenses incurred by the company in
coming periods will continue to change. Results in future periods may not be
comparable to historical results.
Liquidity and Capital Resources.
At September 30, 2003, TFS held approximately $90,000 in cash, and had
short term revolving credit type loans outstanding of $1,828,600. In addition,
the Company had approximately $120,000 available on its line of credit from an
officer and director. This represents a reduction in the liquidity of the
company at September 30, 2003, compared to December 31, 2002. The erosion of the
liquidity position was primarily caused by the purchase of $1,050,000 in real
estate contracts receivable during the period. The reduction in liquidity will
limit the new business that the Company is able to conduct unless other sources
of capital are located at terms acceptable to the company and the lender. The
existing revolving credit facilities with Genesis and one temporary labor
business will see periodic fluctuations in outstanding balances, and we expect
that excess cash from reductions in our revolving loan receivable accounts will
be held in cash to be used when additional loan advances are requested. We are
currently reviewing the potential for bank financing to supplement our
liquidity, and are also in discussions with an officer/director about additional
investment to provide flexibility as our business grows.
15
Our investment in real estate contracts receivable consists of
interests in three real estate loans. The first is a $50,000 partial interest in
a contract secured by a commercial building and land in North Idaho, bearing
interest only payments at 15% per annum and due in full on March 5, 2006. The
second is an $820,000 contract secured by a mobile home park in Moscow, Idaho,
bearing interest at 12% per annum with principal and interest payments of $8,636
per month and the remaining principal due in thirty six months from March 21,
2003 unless extended for up to two one year periods. If extended, the Moscow,
Idaho loan calls for a 2% extension fee due on each extension. The third
contract for $185,250 calls for interest only payments of 14% per annum and the
full principal balance is due on June 20, 2004. Each of these contracts are
secured by real estate that TFS management believes is more than adequate to
protect TFS' interests. In the aggregate, our investment in real estate
contracts generates about $11,500 in monthly operating cash flow.
We now have only one loan outstanding to the temp labor business. At
September 30, 2003, the outstanding balance amounted to $306,738. This balance
is expected to fluctuate with larger borrowing anticipated in the warm months
when temp labor activity is at its peak, and lower borrowing in the winter when
there is less demand for temporary workers. Our sole remaining temp labor loan
bears an average interest rate of 20.0%, payable weekly and secured by all
assets of the borrower (primarily accounts receivable). The loan is also
personally guaranteed up to $100,000 by an owner of the borrower. We are
currently working with this borrower to move the accounts receivable funding to
a more traditional lender, and we anticipate that this last temp labor borrower
will find replacement funds at more attractive rates than we are willing to
offer sometime in the next twelve months. Once our last temp labor borrower pays
off our loan, we will be out of the temp labor business entirely, and we do not
anticipate that we will do any more lending to the temp labor industry. If or
when our temporary labor borrower pays off our loan, we will use the funds to
expand our lending capacity in the real estate contract receivable business, or
will use the funds to purchase additional real estate contracts.
We believe that our existing capital position will restrict our growth
in the coming year, and we are evaluating steps to improve our capital position
through bank financing and/or additional equity offerings. These plans have not
been finalized and we cannot determine if additional bank financing or equity
capital will be available to us or if available, that the terms will be
acceptable. Pending a determination on other capital resources, we will continue
to do business as we have and will adjust our lending rates where possible to
limit the deal flow to a level that matches our available resources. We will
also continue to reduce overhead and operating costs while working toward a goal
of positive cash flow and earnings in 2004.
The results of operations for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the entire year.
16
FORM 10-QSB
PART II
Part II, Item 1. Legal proceedings. None, except as previously reported.
Part II, Item 2. Changes in securities. None
Part II, Item 3. Defaults upon senior securities. None
Part II, Item 4. Submission of matters to a vote of security holders. None
Part II, Item 5. Other information. None
Part II Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
99.1 Certification of PEO under ss.906 of Sarbanes-Oxley
99.2 Certification of PFO under ss.906 of Sarbanes-Oxley
(b) Reports on Form 8-K. None
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.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned certifies that this periodic report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in this periodic report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
TEMPORARY FINANCIAL SERVICES, INC.
/s/John R. Coghlan President, Principal Executive Officer John R. Coghlan November 7, 2003
---------------------------------------------------------------------------------------------------------------------------
Signature Title Printed Name Date
/s/Brad E. Herr Secretary, Principal Financial Officer Brad E. Herr November 7, 2003
---------------------------------------------------------------------------------------------------------------------------
Signature Title Printed Name Date
17
CERTIFICATIONS
I, John R. Coghlan, President and Principal Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Temporary Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2003
/s/ John R. Coghlan
------------------------------------------------------------
John R. Coghlan, President and Principal Executive Officer
18
CERTIFICATIONS
I, Brad E. Herr, Principal Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Temporary Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2003
/s/ Brad E. Herr
-----------------------------------------
Brad E. Herr, Principal Financial Officer
19