10QSB 1 f10qsb.txt 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 June 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 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 200 North Mullan Road, Suite 213, Spokane, Washington 99206 -------------------------------------------------------------------------------- (Address of principal executive offices) (509) 340-0273 -------------------------------------------------------------------------------- (Issuer's telephone number) N.A. -------------------------------------------------------------------------------- (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 July 18, 2002 was: 737,280 Transitional Small Business Disclosure Format. Yes [ ] No [X] 1 FORM 10-QSB Temporary Financial Services, Inc. and Subsidiary -------------------------------------------------------------------------------- Contents --------------------------------------------------------------------------------
Page ---- 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. -------------------------------------------------------------------------------- Consolidated Balance Sheets (Unaudited) ================================================================================
June 30, December 31, Assets 2003 2002 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 55,290 $ 547,210 Securities available for sale 20,340 80,600 Accounts receivable 15,746 13,452 Federal income taxes -- -- Prepaid Expenses 1,877 1,877 Loans receivable: Affiliates 1,633,416 1,055,525 Others 203,038 413,768 ----------- ----------- Total current assets 1,929,707 2,112,432 OTHER ASSETS: Investment in affiliated company 612,305 618,635 Investment in real estate contracts receivable 1,053,927 90,250 ----------- ----------- Total Other Assets 1,666,232 708,885 FURNITURE & EQUIPMENT, less accumulated depreciation of $10,182 and $7,114 , respectively 26,105 29,173 ----------- ----------- $ 3,622,044 $ 2,850,490 =========== =========== Liabilities and Stockholders' Equity CURRENT LIABILITIES: Line of credit, officer/stockholder $ 1,360,325 $ 542,425 Accounts payable 631 4,914 Accrued expenses 6,303 3,338 ----------- ----------- Total current liabilities 1,367,259 550,677 ----------- ----------- 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) (245,264) (200,236) ----------- ----------- Total stockholders' equity 2,254,785 2,299,813 ----------- ----------- $ 3,622,044 $ 2,850,490 =========== ===========
See accompanying notes to unaudited consolidated financial statements. -------------------------------------------------------------------------------- 3 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Consolidated Statements of Income (Unaudited) ================================================================================
Three Months Ended June 30, Six Months Ended June 30, ------------------------- ------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- REVENUE: Loan and related fees: Affiliates $ -- $ -- $ -- $ -- Other 9,976 31,990 22,762 57,303 Consulting and joint venture fees -- 21,150 -- Interest and investment income 60,743 13,045 87,137 22,765 Accounting fees and other income 5,500 8,000 16,500 15,000 --------- --------- --------- --------- 76,219 53,035 147,549 95,068 --------- --------- --------- --------- OPERATING EXPENSES: Advertising $ 6,090 $ 86 $ 6,487 $ 5,171 Compensation and related expenses 29,266 47,693 66,545 68,352 Rent 5,465 5,373 10,897 10,705 Legal and professional 8,116 11,323 20,016 53,658 Interest expense - related party 24,358 1,656 37,061 16,756 Office expense 2,325 6,429 5,523 11,583 Other expense 14,218 14,086 39,718 22,430 --------- --------- --------- --------- 89,838 86,646 186,247 188,655 --------- --------- --------- --------- LOSS FROM OPERATIONS (13,619) (33,611) (38,698) (93,587) OTHER EXPENSE Equity in losses of affiliates (14,559) (10,154) (6,329) (55,731) --------- --------- --------- --------- LOSS BEFORE INCOME TAXES (28,178) (43,765) (45,027) (149,318) INCOME TAX BENEFIT -- -- -- -- --------- --------- --------- --------- NET LOSS $ (28,178) $ (43,765) $ (45,027) $(149,318) ========= ========= ========= ========= BASIC LOSS PER SHARE $ (0.04) $ (0.06) $ (0.06) $ (0.26) ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 737,280 737,280 737,280 568,640 ========= ========= ========= =========
See accompanying notes to unaudited conolidated financial statements. -------------------------------------------------------------------------------- 4 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) ================================================================================
Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ----------------------------- Increase (Decrease) in Cash 2003 2002 2003 2002 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (28,178) $ (43,765) $ (45,027) $ (149,318) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 1,534 1,102 3,068 2,077 Equity losses in affiliates 14,559 10,154 6,329 55,730 Increase (decr.) in accounts receivables (2,145) -- (2,294) -- Increase (decr.) in prepaid expenses -- (962) -- (2,838) Increase (decr.) in accounts payable (5,896) (2,306) (4,283) (10,474) Increase (decr.) in accrued expenses (994) 8,844 2,965 9,324 Decrease in income taxes -- -- -- (297) ----------- ----------- ----------- ----------- Total adjustments 7,058 16,832 5,785 53,522 ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities (21,120) (26,933) (39,242) (95,796) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in affiliates -- (21,750) -- (222,100) Sale of securities available for sale 80,600 -- 80,600 -- Purchase of securities available for sale (20,340) (20,340) Increase in loans receivable, net (240,285) (526,086) (367,161) (764,212) Increase in investments in R.E. contracts (88,927) -- (963,677) -- Additions to furniture and equipment -- -- -- (5,437) ----------- ----------- ----------- ----------- Net cash used in investing activities (268,952) (547,836) (1,270,578) (991,749) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Stock sales for cash -- 1,500,049 -- 1,500,049 (Increase) decrease in deferred offering costs -- 62,081 -- 56,218 Proceeds from line of credit, net 55,328 (509,600) 817,900 (99,682) ----------- ----------- ----------- ----------- 55,328 1,052,530 817,900 1,456,585 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH (234,744) 477,761 (491,920) 369,040 CASH, BEGINNING OF PERIOD 290,034 153,351 547,210 262,072 ----------- ----------- ----------- CASH, END OF PERIOD $ 55,290 $ 631,112 $ 55,290 $ 631,112 =========== =========== =========== =========== 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 $ 19,030 $ 6,026 $ 29,885 $ 6,026 =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements. -------------------------------------------------------------------------------- 5 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 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 contracts receivable 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. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 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. Contracts receivable held for sale - Real estate contracts held for resale 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 resale. 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 contracts receivable, 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 contracts receivable 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 contract receivable 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 June 30, 2003 and December 31, 2002, management determined that no allowance for loan losses was necessary. 7 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 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: -------------------------------------------------------------------------------- During the six month period ended June 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 June 30, 2002, or in the three and six month periods ended June 30, 2003. As discussed in note 3, the Company had loans receivable from affiliates totaling $1,633,416 at June 30, 2003. At June 30, 2003, the Company had a $1,500,000 line of credit with an officer/stockholder (see note 5). NOTE 3 -- LOANS RECEIVABLE: -------------------------------------------------------------------------------- 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 contract receivable 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 contract receivable agreements and appraisals to maintain a comfort level regarding adequacy of the borrower's collateral base. For the three and six month periods ended June 30, 2003 and 2002, the Company incurred no loan losses and there were no impaired loans outstanding at June 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. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 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 six month periods ended June 30, 2003 and 2002, the Company incurred no loan losses and there were no impaired loans to temporary staffing businesses outstanding at June 30, 2003 or 2002.. At June 30, 2003, the Company had no outstanding commitments for undisbursed loans. NOTE 4 -- INVESTMENTS IN AFFILIATES: -------------------------------------------------------------------------------- In January, 2002, the Company acquired an interest in Genesis Financial, Inc., a company formed to engage in the business of purchasing and reselling seller financed 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. As a result of these transactions, at June 30, 2003, the Company owns 1,000,000 shares (45%) 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 six month periods ended June 30, 2003 and 2002, the Company recorded unrealized gains (losses) from its investment in Genesis, as follows:
------------------------------- ---------------------------- ---------------------------- ---------------------------- 3 Months - 06/30/2003 3 Months - 06/30/2002 6 Months - 06/30/2003 6 Months - 06/30/2002 ------------------------------- ---------------------------- ---------------------------- ---------------------------- ($14,559) ($17,782) ($6,329) ($58,558) ------------------------------- ---------------------------- ---------------------------- ----------------------------
At June 30, 2003, the carrying value of the investment in Genesis Financial, Inc. ($612,305) 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 June 30, 2003. See Note 9. 9 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ Unaudited financial information about Genesis as of June 30, 2003, follows: Assets: Cash $ 110,631 Inventory of contracts 2,110,456 Other current assets 17,341 Furniture and equipment, net 7,057 Investment in Temporary Financial Services, Inc. 192,500 Deferred offering costs 37,240 ----------- Total assets $ 2,475,225 ----------- Liabilities: Line of credit, Temporary Financial Services, Inc. $ 1,633,416 Accrued expenses 22,923 ----------- Total liabilities 1,656,339 Stockholders' equity 818,886 ----------- Total liabilities and stockholders' equity $ 2,475,225 ----------- Net Revenues $ 216,466 Expenses 230,805 Net Loss ($14,339)
NOTE 5 -- LINE OF CREDIT: The Company's Line of Credit with a Related Party. At June 30, 2003 and December 31, 2002, the Company had outstanding balances of $1,360,325 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, due to expire on August 1, 2003 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 six month periods ended June 30, 2003 and 2002, the Company incurred related party interest expenses as follows:
------------------------------- ---------------------------- ---------------------------- ---------------------------- 3 Months - 06/30/2003 3 Months - 06/30/2002 6 Months - 06/30/2003 6 Months - 06/30/2002 ------------------------------- ---------------------------- ---------------------------- ---------------------------- $10,324 $6,429 $22,887 $16,347 ------------------------------- ---------------------------- ---------------------------- ----------------------------
The Genesis Line of Credit. At June 30, 2003, the Company was owed $1,633,416 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 six month periods ended June 30, 2003 and 2002, the Company reported related party interest as follows:
------------------------------- ---------------------------- ---------------------------- ---------------------------- 3 Months - 06/30/2003 3 Months - 06/30/2002 6 Months - 06/30/2003 6 Months - 06/30/2002 ------------------------------- ---------------------------- ---------------------------- ---------------------------- $29,696 $2,706 $50,617 $2,729 ------------------------------- ---------------------------- ---------------------------- ----------------------------
10 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ 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 June 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: -------------------------------------------------------------------------------- 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 June 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: -------------------------------------------------------------------------------- The Company generated tax-basis net operating losses of approximately $28,000 and $45,000, respectively, for the three and six month periods ended June 30, 2003 and aggregate losses since inception of approximately $245,000. These losses are available for carryover to offset future taxable income through 2022. At June 30, 2003 and December 31, 2002, the Company had a deferred tax asset of $61,250 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 six month periods ended June 30, 2003 and 2002, the income tax benefit differed from the expected amounts of $7,000 (3 mos. ended 06/30/2003), $11,250 (6 mos. ended 06/30/2003), $11,000 (3 mos. ended 06/30/2002) and $37,000 (6 mos. ended 6/30/2002), respectively, primarily because of the impact of recognizing the deferred tax asset valuation allowance. NOTE 8 -- OPERATING LEASES: -------------------------------------------------------------------------------- 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 (six months) $ 8,727 2004 8,000 11 Temporary Financial Services, Inc. -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) ================================================================================ NOTE 9 - PROPOSED DIVIDEND DISTRIBUTION: -------------------------------------------------------------------------------- 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 262,720 shares (12%) of Genesis common stock. NOTE 10 - LITIGATION: -------------------------------------------------------------------------------- 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 June 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. 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. Three Months Ended June 30, 2003 and 2002 Results of Operations. For the three months ended June 30, 2003, the company generated gross revenues of $76,219, compared to $53,035 for the comparable period in 2002. This represents an aggregate increase of 44%. More significant, temp labor loan and related fees decreased to $9,976 from $31,990 (68%) in the three months ended June 30, 2003 compared to 2002, while interest and investment income increased to $60,743 from $13,045, an increase of 466%. 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 slightly to $89,838 from $86,646 for the three month period ended June 30, 2003 compared to 2002. While total operating expenses remained relatively static, the mix of expenses changed. Interest expense, relating primarily to the Company's line of credit from an officer and director, increased to $24,358 from $1,656 for the three months ended June 30, 2003 compared to 2002. The line of credit is used to fund a line of credit that TFS provides to 13 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 yield positive interest spreads of 6% or more to TFS. Compensation and related expenses decreased to $29,266 from $47,693 in the three months ended June 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 $$28,440 in defense of this litigation. For the three month periods ended June 30, 2003, March 31, 2003 and December 31, 2002 litigation expenses amounted to $15,473, $6,692 and $6,276, respectively. 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. Six Months Ended June 30, 2003 and 2002 For the six months ended June 30, 2003, the company generated gross revenues of $147,549, compared to $95,068 for the comparable period in 2002. This represents an aggregate increase of 55%. Temp labor loan and related fees decreased to $22,762 from $57,303 (60%) in the six months ended June 30, 2003 compared to 2002, while interest and investment income increased to $87,137 from $22,765, an increase of 382%. 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 decreased slightly to $186,247 from $188,655 for the six month period ended June 30, 2003 compared to 2002. While total operating expenses remained relatively static, the mix of expenses changed. Interest expense, relating primarily to the Company's line of credit from an officer and director, increased to $37,061from $16,756 for the six months ended 14 June 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 only slightly to $66,545 from $68,352 in the six months ended June 30, 2003 compared to 2002. The minimal decrease in the six month period does not reflect the current cost cutting and cost shifting efforts described for the three month period ended June 30, 2003. As the cost cutting measures are implemented, we expect that additional bottom line impact will be reflected in coming periods. 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 June 30, 2003, TFS held approximately $75,000 in cash and securities available for sale, and had short term revolving credit type loans outstanding of $1,836,000. In addition, the Company had approximately $150,000 available on its line of credit from an officer and director. This represents a reduction in the liquidity of the company at June 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 additional flexibility as our business grows. Our investment in real estate contracts receivable consists of interests in three real estate loans. We hold interests in three real estate receivable contracts. 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 June 30, 2003, the outstanding balance amounted to $203,038. This balance is expected to fluctuate with larger borrowing anticipated in the warm months when temp 15 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 that 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 six month periods ended June 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) Exhibits. 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 July 16, 2003 ------------------------------------------------------------------------------------------------------------------- Signature Title Printed Name Date /s/Brad E. Herr Secretary, Principal Financial Officer Brad E. Herr July 16, 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: July 16, 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: July 16, 2003 /s/ Brad E. Herr Brad E. Herr, Principal Financial Officer 19