**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-QSB**

 

| **(Mark One)**                                                                                                                                                                                                                        |                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                            | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the quarterly period ended June 30, 2002**                                                                                                                                                                                      |
|                                                                                                                                                                                                                                  |
| **o**                                                                                                                                                                                                                                 | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE EXCHANGE ACT**                   |
| **For the transition period  from                to                ** |

 

**CommissionFile Number: 333-60326**

 

**TEMPORARY FINANCIAL SERVICES, INC.**

(Exact name of small business issuer as specified inits charter)

 

| **Washington**                                                                      |   | **91-2079472**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                     |   | (IRS  Employer Identification Number) |
|                                                                                |   |                                  |
| **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) |

 

Indicateby check mark whether the registrant: (1) has filed all documents and reportsrequired to be filed by Section 13, or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period as theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past ninety days.
|                                                                     |   | Yes  ý |   | No  o      |
|--------------------------------------------------------------------------|--------|-------------|--------|------------|
|                                                                     |   |        |   |       |
| The number of shares of  common stock outstanding on August 1, 2002 was: |   |        |   | 737,280    |
|                                                                     |   |        |   |       |
| Transitional Small  Business Disclosure Format.                          |   | Yes  o      |   | No  ý |

 

 

----

 

**FORM 10-QSB**

 

**Temporary Financial Services, Inc. and Subsidiary**

 

**Contents**

 
| **PART I**                                                                                                |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |
| **Item 1.  Financial statements.**                                                                   |
|                                                                                                      |
| *CONSOLIDATED FINANCIAL STATEMENTS (Unaudited):*                                                          |
|                                                                                                      |
| *Consolidated balance sheets*                                                                             |
|                                                                                                      |
| *Consolidated statements of income*                                                                       |
|                                                                                                      |
| *Consolidated statements of cash flows*                                                                   |
|                                                                                                      |
| *Notes to consolidated financial statements*                                                              |
|                                                                                                      |
| **Item 2.   Managements discussion and analysis of financial condition And results  of operations.** |
|                                                                                                      |
| **PART II**                                                                                               |
|                                                                                                      |
| **Item 1.  Legal Proceedings.**                                                                      |
|                                                                                                      |
| **Item 2.  Changes in securities.**                                                                  |
|                                                                                                      |
| **Item 3.   Defaults upon senior securities.**                                                       |
|                                                                                                      |
| **Item 4.   Submission of matters to a vote of security holders.**                                   |
|                                                                                                      |
| **Item 5.  Other information.**                                                                      |
|                                                                                                      |
| **Item 6.   Exhibits and reports on Form8-K.**                                                       |
|                                                                                                      |
| **Signatures**                                                                                            |

 

2

 

 

**Temporary Financial Services, Inc. and Subsidiary**

 

**ConsolidatedBalance Sheets**

 
|                                                                                                                                  |   | **June 30  2002** |      | **December  31  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|------------------------|--------|
|                                                                                                                                  |   | **(Unaudited)**   |      |                   |   |
| ***Assets***                                                                                                                          |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| *CURRENT ASSETS*                                                                                                                      |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| Cash                                                                                                                                  |   | $                 | 631,112   |                   | $      | 262,072 |   |
| Accounts receivable                                                                                                                   |   | 1,500             |      | 40                     |   |
| Federal income taxes                                                                                                                  |   | 297               |      | —                 |   |
| Prepaid expenses                                                                                                                      |   | 2,838             |      | —                 |   |
| Deferred offering costs                                                                                                               |   | —            |      | 56,218                 |   |
| Loans receivable:                                                                                                                     |   |              |      |                   |   |
| Affiliates                                                                                                                            |   | 665,332           |      | 110,872                |   |
| Other                                                                                                                                 |   | 503,501           |      | 295,209                |   |
|                                                                                                                                  |   |              |      |                   |   |
| Total current assets                                                                                                                  |   | 1,804,580         |      | 724,411                |   |
|                                                                                                                                  |   |              |      |                   |   |
| *OTHER ASSETS*                                                                                                                        |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| Investment in affiliated companies                                                                                                    |   | 418,075           |      | 1,705                  |   |
|                                                                                                                                  |   |              |      |                   |   |
| FURNITURE AND EQUIPMENT,  less accumulated depreciation of $4,060 in 2002, and $1,983 in 2001,  respectively                          |   | 26,895            |      | 23,535                 |   |
|                                                                                                                                  |   |              |      |                   |   |
|                                                                                                                                  |   | $                 | 2,249,550 |                   | $      | 749,651 |   |
|                                                                                                                                  |   |              |      |                   |   |
| ***Liabilities and Stockholders’  Equity***                                                                                      |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| *CURRENT LIABILITIES*                                                                                                                 |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| Accounts payable                                                                                                                      |   | —            |      | 10,474                 |   |
| Due to officer/stockholder                                                                                                            |   | 1,277             |      | 100,959                |   |
| Accrued expenses                                                                                                                      |   | 13,212            |      | 3,888                  |   |
| Total current liabilities                                                                                                             |   | 14,489            |      | 115,321                |   |
|                                                                                                                                  |   |              |      |                   |   |
| *STOCKHOLDERS’ EQUITY*                                                                                                           |   |              |      |                   |   |
|                                                                                                                                  |   |              |      |                   |   |
| Common Stock — 100,000,000 shares, $0.001 par value, authorized  737,280 and 350,000 shares respectively, issued and outstanding |   | $                 | 737       |                   | $      | 350 |   |
| Preferred stock — 5,000,000 shares, $0.001 par value, authorized;  none issued                                                   |   | —            |      | —                 |   |
| Additional paid in capital                                                                                                            |   | 2,499,312         |      | 749,650                |   |
| Retained earnings (deficit)                                                                                                           |   | (264,988          | )         | (115,670               | )      |
| Total stockholders’ equity                                                                                                       |   | 2,335,061         |      | 634,330                |   |
|                                                                                                                                  |   | $                 | 2,249,550 |                   | $      | 749,651 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

3

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**Temporary Financial Services, Inc. and Subsidiary**

 

**Consolidated Statements of Income (unaudited****)**

 
|                                   |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|----------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                   |   | **June 30****, 2002**   |    | **June 30, 2001**     |   | **June 30, 2002** |   | **June 30, 2001** |   |
| *REVENUE:*                             |   |                    |    |                  |   |   |   |   |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| Loan and related fees:                 |   |                    |    |                  |   |   |   |   |   |
| Affiliates                             |   | $                       | —  |                  | $      | — |   | $ | — |   | $ | — |   |
| Other                                  |   | 31,990                  |    | 8,854                 |   | 57,303 |   | 8,854 |   |
| Interest and investment income         |   | 13,045                  |    | 4,755                 |   | 22,765 |   | 10,825 |   |
| Rental Income                          |   | 1,500                   |    | 500                   |   | 3,000 |   | 500 |   |
| Accounting fees                        |   | 6,500                   |    | 2,000                 |   | 12,000 |   | 2,000 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
|                                   |   | 53,035                  |    | 16,109                |   | 95,068 |   | 22,179 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *OPERATING EXPENSES:*                  |   |                    |    |                  |   |   |   |   |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| Advertising                            |   | 86                      |    | —                |   | 5,171 |   | 70 |   |
| Compensation and related expenses      |   | 47,693                  |    | —                |   | 68,352 |   | — |   |
| Rent                                   |   | 5,373                   |    | 2,169                 |   | 10,705 |   | 2,769 |   |
| Legal and professional                 |   | 11,323                  |    | 10,312                |   | 53,658 |   | 21,621 |   |
| Office expense                         |   | 1,656                   |    | 3,215                 |   | 11,583 |   | 3,215 |   |
| Interest Expense                       |   | 6,429                   |    | —                |   | 16,756 |   | 25 |   |
| Other                                  |   | 14,086                  |    | 2,389                 |   | 22,430 |   | 4,325 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
|                                   |   | 86,646                  |    | 18,085                |   | 188,655 |   | 32,025 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *OTHER EXPENSE:*                       |   |                    |    |                  |   |   |   |   |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| Equity in losses of affiliates         |   | 10,154                  |    | 14,120                |   | 55,731 |   | 14,120 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *(LOSS) BEFORE INCOME TAX*             |   | (43,765                 | )       | (16,096               | )      | (149,318 | ) | (23,966 | ) |
|                                   |   |                    |    |                  |   |   |   |   |   |
| Income tax benefit                     |   | —                  |    | —                |   | — |   | 100 |   |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *NET INCOME (LOSS)*                    |   | $                       | (43,765 | )                     | $      | (16,096 | ) | $ | (149,318 | ) | $ | (23,866 | ) |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *BASIC EARNINGS (LOSS) PER SHARE*      |   | $                       | (0.06   | )                     | $      | (0.05 | ) | $ | (0.26 | ) | $ | (0.07 | ) |
|                                   |   |                    |    |                  |   |   |   |   |   |
| *WEIGHTED  AVERAGE SHARES OUTSTANDING* |   | 737,280                 |    | 350,000               |   | 568,640 |   | 350,000 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

4

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**Temporary Financial Services, Inc. and Subsidiary**

 

**ConsolidatedStatements of****CashFlows****(unaudited)**

 
|                                                                                  |   | **For the Three Months Ended** |    | **For the Six Months Ended** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------|---------|------------------------------|--------|
|                                                                                  |   | **June 30, 2002**              |    | **June 30, 2001**            |   | **June 30, 2002** |   | **June 30, 2001** |   |
| *Increase (Decrease) in Cash*                                                         |   |                           |    |                         |   |   |   |   |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *CASH FLOWS FROM OPERATING ACTIVITIES*                                                |   |                           |    |                         |   |   |   |   |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| Net income (loss)                                                                     |   | $                              | (43,765 | )                            | $      | (16,096 | ) | $ | (149,318 | ) | $ | (23,866 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities: |   |                           |    |                         |   |   |   |   |   |
| Depreciation                                                                          |   | 1,102                          |    | 166                          |   | 2,077 |   | 166 |   |
| Equity losses of affiliates                                                           |   | 10,154                         |    | 14,120                       |   | 55,730 |   | 14,120 |   |
| Increase in Prepaid Expenses                                                          |   | (962                           | )       | (4,776                       | )      | (2,838 | ) | (4,776 | ) |
| (Decrease) in accounts payable                                                        |   | (2,306                         | )       | 6,265                        |   | (10,474 | ) | 6,769 |   |
| Increase in accrued expenses                                                          |   | 8,844                          |    | —                       |   | 9,324 |   | — |   |
| Increase (decrease) in income taxes                                                   |   | —                         |    | (150                         | )      | (297 | ) | (397 | ) |
| Total adjustments                                                                     |   | 16,832                         |    | 15,625                       |   | 53,522 |   | 15,882 |   |
| Net cash used in operating activities                                                 |   | (26,933                        | )       | (471                         | )      | (95,796 | ) | (7,984 | ) |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *CASH FLOWS FROM INVESTING ACTIVITIES*                                                |   |                           |    |                         |   |   |   |   |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| (Increase) in loans receivable                                                        |   | (526,086                       | )       | (228,067                     | )      | (764,212 | ) | (228,067 | ) |
| Investment in affiliates                                                              |   | (21,750                        | )       | —                       |   | (222,100 | ) | (23,250 | ) |
| Additions to equipment and furniture                                                  |   | —                         |    | (13,968                      | )      | (5,437 | ) | (13,968 | ) |
| Net cash used in investing activities                                                 |   | (547,836                       | )       | (242,035                     | )      | (991,749 | ) | (265,285 | ) |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *CASH FLOWS FROM FINANCING ACTIVITIES*                                                |   |                           |    |                         |   |   |   |   |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| Stock sales for cash                                                                  |   | 1,500,049                      |    | —                       |   | 1,500,049 |   | — |   |
| (Increase) decrease in deferred offering costs                                        |   | 62,081                         |    | (15,616                      | )      | 56,218 |   | (16,166 | ) |
| Collections of stock subscriptions                                                    |   | —                         |    | —                       |   | — |   | 120,800 |   |
| Collection of Note Receivable                                                         |   | —                         |    | 75,000                       |   | — |   | 75,000 |   |
| Proceeds from line of credit                                                          |   | (509,600                       | )       | —                       |   | (99,682 | ) | — |   |
| Net cash from financing activities                                                    |   | 1,052,530                      |    | 59,384                       |   | 1,456,585 |   | 179,634 |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *NET INCREASE (**DECREASE) IN CASH*                                                   |   | 477,761                        |    | (183,122                     | )      | 369,040 |   | (93,635 | ) |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *CASH, BEGINNING OF PERIOD*                                                           |   | 153,351                        |    | 635,821                      |   | 262,072 |   | 546,334 |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *CASH, END OF**PERIOD*                                                                |   | $                              | 631,112 |                         | $      | 452,699 |   | $ | 631,112 |   | $ | 452,699 |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| *SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND  FINANCING ACTIVITIES:*               |   |                           |    |                         |   |   |   |   |   |
|                                                                                  |   |                           |    |                         |   |   |   |   |   |
| Exchange of 50,000 shares of common stock  for  250,000 shares of Genesis Financial   |   | $                              | —  |                         | $      | — |   | $ | 250,000 |   | $ | — |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

5

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***NOTE 1— BASIS OF PRESENTATION:***

 

The accompanying unaudited consolidated financial statements of Temporary Financial Services, Inc. (the “Company”) have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim information and with the instructions to Form 10-QSB and Regulation S-B.   Accordingly, they do not include all of the information and disclosures required for complete financial statements.  In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary for a fair presentation have been included.  Operating results in the 2002 interim periods may not necessarily be indicative of the results that may be expected for the year ending December 31, 2002.   This report should be read in conjunction with the financial statements included in the Company’s 2001 Form 10-KSB as filed with the Securities and Exchange Commission on March 29, 2002.

 

***NOTE 2—RELATED-PARTY TRANSACTIONS:***

 

As discussed in note 3, theCompany had loans receivable from affiliates totaling $665,332 at June 30,2002.

 

At June 30, 2002, the Companyhad a $1,000,000 line of credit with an officer/stockholder (see note 4) onwhich interest expense of $6,429 was incurred in the quarter ending June 30,2002 and $16,347 was incurred for the six months ended June 30, 2002.

 

***NOTE 3 — LOANS RECEIVABLE:***

 

TheCompany provides short-term financing for temporary staffing businesses,including affiliates.  The financingconsists of notes receivable that are generally collateralized by theborrower’s accounts receivable, all assets of the borrower, and the use ofpersonal guarantees and pledges where appropriate.  Lending criteria established to minimize credit risk include,among other things, assessment of the operators capabilities, minimum businesscapitalization requirements, maintenance of an adequate accounts receivableborrowing base, and a requirement for timely reporting of financial informationto demonstrate ongoing compliance with loan covenants.  For the three months and six months endedJune 30, 2002, the Company incurred no loan losses and there were no impairedloans outstanding at June 30, 2002.

 

AtJune 30, 2002, the Company had an outstanding loan balance with Genesis of$200,000 on a two year convertible note bearing interest at 6%, and anoutstanding commitment for a secured warehousing line of credit to Genesis inthe amount of $2,000,000.  At June 30,2002, Genesis had borrowed $177,211 against the line of credit.

 

***NOTE 4 — LINE OF CREDIT:***

 

At June 30, 2002, the Companyhad a zero balance against a $1,000,000 line-of-credit with anofficer/stockholder.  The line-of-creditis unsecured and bears interest at 10%. The line-of-credit agreement expires on August 15, 2002 and anyoutstanding balance is due on that date. The Company is presently in negotiations to extend the line for anotheryear.

 

***NOTE 5 — PUBLIC STOCK OFFERING:***

 

On April 18, 2002, the Company closed an initial public offering of337,280 shares of its common stock at $5 per share.  In connection with the initial public offering, the Companypreviously filed a registration statement with the Securities and ExchangeCommission and the registration statement was declared effective by the 

 

6

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Commission on January 8, 2002. Net offering proceeds of $1,500,049 were received by the Company fromthe offering on the closing date.

 

***NOTE 6 — INCOME TAX:***

 

The Company generated a tax-basis net operating loss of approximately$43,765 for the three months ended June 30, 2002 ($149,318 for the six monthsended June 30, 2002) which is available for carryover to offset future taxableincome through 2022.  Total tax-basisnet operating losses available for carryover as of June 30, 2002 amounted toapproximately $265,000 (from inception of the Company on October 4, 2000).

 

At June 30, 2002, the Company estimates that it has a $66,250 deferredtax asset relating to the operating loss carryovers.  The deferred tax asset was fully offset by a valuation allowancebecause of uncertainties if the Company will generate sufficient future taxableincome to realize the tax benefit.  AtJune 30, 2002, the income tax benefit differed from the $66,250 expected amountbecause of the impact of recognizing the deferred tax asset valuationallowance.

 

7

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**FORM 10-QSB**

 

**PartI, Item 2. ****                                                                ManagementsDiscussion and Analysis of financial condition and results of operations.**

 

TemporaryFinancial Services, Inc. and its wholly owned subsidiary, Temps Unlimited, Inc.are engaged in the business of lending to, investing in, and providing servicesto businesses.  We generate revenuesfrom lending activities and fee based services.  Our investing activities will yield returns through currentdistributions of earnings from the businesses we invest in and through realizationof value appreciation when the investment asset is sold or transferred.  After payment of operating expenses, weanticipate that profits and surplus cash flows will be reinvested in the growthof the Company for the foreseeable future. We do not expect to pay cash dividends.

 

The Companywas organized in October, 2000, and began operations in the second quarter of2001.  In the three and six months endedJune 30, 2001, our business operations were at a very early operational stageand, consequently, the results of operations for the three and six months endedJune 30, 2001 are not comparable to the three and six month periods ended June30, 2002.  This quarterly report focuseson the three and six month periods ended June 30, 2002.  Limited analysis of the three and six monthperiods ending on June 30, 2001 is provided where such analysis aids inunderstanding the current financial condition of the business.

 

**Resultsof Operations**

 

As of June 30,2002, we had loans outstanding of $1,168,833, with six businesses in twodistinct industry segments.  Thefollowing table provides borrower information, affiliate status and outstandingbalances as of June 30, 2002.

 

**Temporary StaffingBusinesses**
| **Business Name**                                      |   | **Affiliate Status**          |         | **Loan Balance** |          |
|--------------------------------------------------------|--------|-------------------------------|--------------|------------------|---------------|
| Everyday Staffing                                      |   | Independent                   |         | $                | 417,765       |   |
| Ozark Labor                                            |   | Independent                   |         | 137,717          |          |
| Subtotal Independent Loans                             |   |                          |         | 555,482          |          |
| Staffing on Demand                                     |   | Affiliated (18%)              |         | 85,365           |          |
| Valustaff                                              |   | Affiliated (18%)              |         | 80,049           |          |
| Workers For You                                        |   | Affiliated (Common Ownership) |         | 65,597           |          |
| Subtotal Affiliated Loans                              |   |                          |         | 231,011          |          |
| Total temporary staffing loans                         |   |                          | *** *** | ***$***          | ***786,493*** | *** *** |
|                                                   |   |                          |         |             |          |   |
| **Seller Financed Real Estate Receivables Businesses** |
| Genesis – Convertible Note                        |   | Affiliated (42%)              |         | 205,129          |          |
| Genesis – Contract’s Financed                |   | Affiliated (42%)              |         | 177,211          |          |
| Total seller financed real estate  receivables loans   |   |                          | *** *** | ***$***          | ***382,340*** | *** *** |
| Total loans outstanding all segments.                  |   |                          | ** **   | **$**            | **1,168,833** | ** ** |

 

8

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**Three Months Ended June 30, 2002 and 2001**

 

In the quarterending June 30, 2002, the Company generated loan related revenues of $31,990 onits lending business, compared to $8,854 for the three months ended June 30,2001.   The results for 2001 are for apartial period since the Company did not begin active operations until lateApril.  The increase in revenues for thecurrent quarter reflects an increase in the number of borrowers andcorresponding growth in the loan base.

 

Revenues fromfunds loaned to businesses in the temporary staffing industry are derived fromloan fees and loan set-up and administration costs.  Loan advances to temporary labor businesses are made weekly basedon sales and collection reports provided by the temporary labor office, andrequire significant monitoring and review of accounts receivable collateral andweekly operations reports.  We considerloans to temporary labor businesses to entail more than an average amount ofrisk and have based our loan rates on our assessment of effort and risk.  We currently loan to five temporary laborbusinesses, three of which are affiliated with the Company. Total outstandingloans to temporary labor businesses at June 30, 2002 amounted to $786,493.  Of this amount, $555,482 is with independentborrowers and $231,011 is with affiliates.

 

In the quarterended June 30, 2002, we generated $6,500 in accounting fee service income byproviding monthly accounting services to three temporary staffing businessesand Genesis Financial, Inc.  Two of ourtemporary labor accounting customers are located long distances from ouroffices, making onsite accounting assistance impracticable, and we have foundthat the local operators require regular monitoring to assure that the properprocedures are being followed in the local offices.  Some of this problem is related to the temporary labor businesssoftware that our customers use.  In themeantime, however, we have found that we cannot charge a fair amount for theeffort we must expend to provide accounting services.  Accordingly, accounting services in the temporary staffing industryis not considered a viable business for the Company in the long term, and weexpect that we will phase out much of our temporary labor accounting servicesbusiness by the end of 2002.

 

Near the endof the quarter, the Company began restructuring the interests in minority ownedtemporary labor offices, and is now in the process of reducing or eliminatingits interests in the Minnesota and Nebraska operations.  Management believes that this restructuringwill help to minimize conflicts of interest inherent in loaning funds torelated businesses, and will allow the Company to better focus on monitoringand controlling its loan accounts.

 

For the threemonths ended June 30, 2002, our investments in temporary labor businessesconsisted of the following.  We invested$12,000 for 18% of Temps Unlimited of Minnesota, LLC (dba Staffing on Demand),and $33,000 for 42% of Temps Unlimited of Nebraska, LLC (dba ValuStaff).  In the three months ended June 30, 2002, weincreased our interest in Valustaff with an additional investment of $21,750and an increase in ownership to 42% from 18%. The additional investment in Valustaff was made to facilitate a plannedreorganization of the Valustaff office. We expect that the reorganization will be completed sometime before theend of the year.  We have alsoreorganized our investment in Staffing on Demand.  Both reorganizations will eventually result in a reduction orelimination of the Company’s ownership position in Staffing on Demand beforethe end of the year.

 

We account forour investments in Staffing on Demand and ValuStaff under the equity method ofaccounting.  Unrealized profits andlosses on the investments are recorded as income or loss on the

 

9

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books of Temps Unlimited, Inc.and are then consolidated with the results of Temporary Financial Services,Inc.

 

Staffing onDemand commenced operations on June 15, 2001. From April 1 through June 30,2002, Staffing on Demand reported gross revenues of $120,767 against operatingexpenses of $138,200 for a total operating loss for the quarter of$17,433.  Our share of losses fromStaffing on Demand for the three months ended June 30, 2002 total $3,138.    In addition to the operating loss, inconnection with the reorganization of Staffing on Demand, the business reporteda gain on sale of assets amounting to $40,000. Our share of this gain on sale was $7,200, resulting in an aggregateunrealized profit of $4,061 for our investment in Staffing on Demand.

 

ValuStaffopened for business on May 7, 2001. From April 1 through June 30, 2002, Valustaff reported gross revenues of$212,223 against operating expenses of $208,492, for a total operating profitof $3,731. Our share of profits from Valustaff for the three months ended June30, 2002 total $1,567.

 

In January,2002, we loaned $200,000 to Genesis on a convertible note bearing interest at6%. The interest rate on the Genesis loan reflects the conversion featureincluded in the note and a lower servicing cost for a two year fixed termloan.  The company expects to obtain ahigher yield on this note over the term by converting the note when theunderlying shares have appreciated in value. We have no assurances that the underlying shares will actuallyappreciate in value, and, if not converted to Genesis common stock, the loanwill yield 6% to maturity on January 4, 2004.

 

In addition tothe Genesis convertible note, on February 20, 2002, we also provided Genesiswith a $2,000,000 secured warehousing line of credit bearing interest at theSterling Savings Bank (Spokane, Washington) prime rate plus two percent.  At June 30, 2002, Genesis had an outstandingbalance of $177,211 against the line. Line of Credit interest income amounted to $2,694 for the three monthperiod ended June 30, 2002.

 

We also own42% of Genesis Financial, Inc.   For thethree months ended June 30, 2002, Genesis generated gross revenues of $353,758against cost of sales of $311,181 for an operating margin of $42,577.  Selling, general and administrative expensestotaled $83,293 for the quarter for a net loss of $$40,716.  Genesis was profitable for the first time inthe month of June, generating a profit of $9,106 on total revenues of $352,488.

 

Start-upexpenses incurred by Genesis from inception (January 24, 2002) through June 30,2002, resulted in aggregate unrealized losses of $139,076, and $58,558 of thisloss flowed through to the books of Temporary Financial Services.  This amount is reflected as Equity in Lossesof Affiliates on the income statement and as a reduction in the Genesisinvestment on the balance sheet.  Thelosses incurred by Genesis in the second quarter were expected and areconsistent with the Genesis business plan.

 

Overall, TFSgenerated gross revenues of $53,035 during the three months ended June 30,2002.  Expenses totaled $96,800,resulting in a net operating loss of $43,765 for the period.    We expect that operating results for theremainder of the year will continue to reflect operating losses, but the levelof losses will decrease.  We anticipatebreakeven operating results by the end of 2002.

 

We believethat the losses incurred to date are in line with our business plan.  As our loan portfolio grows, our loanrevenues will increase.  We expect thatearnings from our equity investment

 

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in Genesis will also have apositive impact on our earnings in future periods. We will continue to monitorprogress throughout 2002 and will adjust our business plan to address anyoperational issues as they arise.  Weare in the process of reorganizing our Minneapolis and Nebraska temporary laboraffiliates, and we will work to phase out our temporary labor businessinvestments and accounting services over the remainder of the year.  This will allow us more time to focus on ourlending activities where the bulk of our operating cash flows will begenerated, and to review and evaluate other business opportunities.

 

**Six Months Ended June 30, 2002 and 2001.**

 

For the sixmonths ended June 30, 2002, the Company generated gross revenues of $95,068,expenses of $188,655, equity in losses of affiliates of $55,731, and a net lossbefore income taxes of $149,318.  Thiscompares to $22,179 in revenues, $32,035 in expenses, $14,120 equity in lossesof affiliates, and a net loss before taxes of $23,966 in 2001. The Genesisinvestment occurred in January, 2002, and our loan activity did not commenceuntil April, 2001, so the six month periods are not considered comparable.  Through the first half of 2002, we haveexpanded our business operation through our investment in Genesis.  Our loan portfolio has also grown in thefirst half of 2002.  These activitiesare consistent with our business plan and we expect that our operating resultswill improve in the second half of 2002.

 

Compensationexpense and advertising expense saw significant increases in 2002 compared to2001.  Compensation increased to $68,352from -0- in 2001, and advertising increased to $5,171 in 2002, compared to $70in 2001.  These increases are the resultof business growth and positioning the Company for additional growth in thefuture.

 

Legal expensesincurred in the six months ended June 30, 2002 amounted to $53,658.  Most of this amount was incurred inconnection with the completion of the Company’s public offering registration,and the closing of the offering which occurred in April 2002.  Most of the legal services were performed byBrad E. Herr.  On April 1, 2002, Mr. Herrbecame an employee of the company and will receive a salary for his services inthe future.  As a result, legal feeswhich had previously been paid to Mr. Herr will no longer be paid, but thedecrease in legal fees will be at least partially offset by an increase incompensation costs.

 

**EvolvingOperations.**

 

Since we began active operations in mid 2001, we have gained additionalinsights into the business of lending to temporary labor businesses.  We have also monitored a group of temporarylabor business entrepreneurs with whom we expected to do substantial amounts of business.  The entrepreneurial group has proceeded moreslowly and cautiously to develop new temporary labor offices, and this hasaffected the number and quality of borrowers that we are seeing.  As a result, our business of lending totemporary labor businesses is growing more slowly than we originallyanticipated.

 

Our initial public offering raised net offering proceeds ofapproximately $1,500,000 and this amount coupled with our prior private equity placements leave us with total investedcapital to date of approximately $2,500,000.  We believe that we can build additional value for our shareholders byexpanding the focus of our business. During the remainder of 2002, we will evaluate other businessopportunities and continue to refine the business plan to accommodate valuebuilding activities.  We anticipate thatthe funds from our public offering will be applied in a manner consistent withthe Use

 

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ofProceeds in our Prospectus, but as additional opportunities arise, we may seekadditional funding through private placements, follow-on public offerings,preferred stock or debt financings, or other appropriate sources, in order topursue the additional opportunities. When warranted, we may also redirect our existing capital structure tonew business opportunities where we believe the benefits to our shareholdersexceed the returns from the existing plan.

 

**Liquidityand Capital Resources**.

 

At June 30,2002, we have loans to temporary labor businesses outstanding in the amount of$786,493, a term loan of $205,129 (including accrued interest) to Genesis, anda secured warehousing line of credit commitment to Genesis in the amount of$2,000,000, with an outstanding balance of $177,211.   We expect the amount of loaned funds to continue to increase asthe borrowers’ businesses grow and their borrowing needs increase.

 

At June 30,2002, cash and cash equivalents amounted to $631,112 and our unused line ofcredit with an officer and director amounted to $1,000,000.  In anticipation of increasing loans toGenesis under the secured warehousing line of credit, and increasing loans totemporary labor businesses as business grows during the spring and summer,  we have discussed back-up financing with ourprimary bank and an officer and director should additional financing beneeded.  In addition, we closed ourpublic offering on April 18, 2002 and received over $1,500,000 in net offeringproceeds.  Consequently, we believe thatour cash position will be adequate to support our business operations for thenext twelve to eighteen months.  Ifnecessary, we believe that additional leverage is available to supplement ourcash position if our borrowers require more funds than we are able to cover withour internal capital position.

 

Pending use offree cash for loans, investments, or operations, we will place the funds inaccessible interest or dividend bearing accounts and will manage our surplusworking capital position to provide current earnings.

 

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**FORM 10-QSB**

**PART II**

 

**PartII, Item 1. Legal proceedings. None**

 

**Part II, Item2. Changes in securities.**

 

On June 30, 2002, Temporary Financial Services, Inc. terminated itsinitial public offering.  On April 18,2002, a closing was held for the offering and the offering proceeds weredistributed in accordance with the terms of the offering.  The following information is provided.

 

•                  The effective date of the RegistrationStatement on Form SB-2 was January 8, 2002.

•                  The Registration Statement file number withthe Securities & Exchange Commission is 333-60326.  800,000 shares of common stock wereregistered for sale at $5.00 per share.

•                  The offering Prospectus was dated January 9,2002 and the offering commenced on January 15, 2002.

•                  In accordance with the terms set forth in theProspectus, the offering terminated on March 31, 2002.

•                  As of the offering the termination date, atotal of 337,280 shares had been sold at $5.00 per share, raising an aggregateof $1,686,400.

•                  The Underwriting was conducted by PublicSecurities Corporation as lead underwriter.

•                  The offering consisted of 200,000 shares(minimum), 800,000 shares (maximum) of Temporary Financial Services, Inc.common stock, $0.001 par value per share.

•                  Offering proceeds, offering costs, and netoffering proceeds were as follows:

| • |   | Gross offering proceeds                              |   | $1,686,400            |   |
|--------|--------|------------------------------------------------------|--------|-----------------------|--------|
|   |   |                                                 |   |                  |   |
| • |   | Transfer agent fees                                  |   | 2,032                 |   |
| • |   | EDGAR filing services                                |   | 2,073                 |   |
| • |   | Audit fees                                           |   | 3,434                 |   |
| • |   | Printing costs                                       |   | 25,874                |   |
| • |   | Underwriter’s non-accountable expense allowance |   | 16,864                |   |
| • |   | Underwriter’s discounts                         |   | 100,000               |   |
| • |   | State blue sky filing fees                           |   | 7,785                 |   |
| • |   | Legal fees                                           |   | 28,289                |   |
|   |   |                                                 | • | Total Offering Costs  |   | 186,352 |   |
|   |   |                                                 | • | Net Offering Proceeds |   | $1,500,048 |   |

 

As of June 30, 2002, the netoffering proceeds have been applied to the business purposes of the Company inaccordance with the Uses of Proceeds set out in the offering document.  Loans of $786,493 have been made totemporary labor businesses, $200,000 was invested in Genesis, and at June 30,2002, the Company was holding in excess of $600,000 in cash for working capitalpurposes.

 

**PartII, Item 3. Defaults upon seniorsecurities.  None**

 

**PartII, Item 4. Submission of matters toa vote of security holders.**

 

No matterswere submitted to a vote of the shareholders in the quarter ended June 30,2002.  Subsequent to the end of thequarter, the Company held its annual meeting of shareholders on August 1, 2002.

 

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The meeting involved electionof the slate of Directors nominated by the prior Board.  At the meeting, John R. Coghlan, Brad E.Herr, Michael Kirk, Gregory Lipsker, and C. Eugene Olsen were elected to serveas directors for the coming year and until their successors are elected andqualified.  A total of 449,790 shares(61%) of the 737,280 shares issued and outstanding were represented at themeeting and constituted a valid quorum. All shares represented voted for John Coghlan as director.  A total of 600 shares abstained from votingfor the other directors and the remaining 449,190 shares (61%) were voted infavor of the remaining slate.  Theshareholders also approved a resolution authorizing the officers of theCompany, subject to board approval, to pursue reorganization of the Minnesotaand Nebraska temporary labor investments with the objective of reducing oreliminating the company’s interests in those operations.  No other matters came before theshareholders for vote at the annual meeting.

 

**PartII, Item 5. Other information.  None**

 

**Part II Item 6. Exhibits and Reports on Form 8-K**

 

**(a)****                                  Exhibits.  No exhibits are required to be filed withthis Form 10-QSB.**

 

**(b)****                                  Reportson 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 theundersigned, thereunto duly authorized.

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of theundersigned certifies that this periodic report fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934and that the information contained in this periodic report fairly presents, inall material respects, the financial condition and results of operations of theCompany.

 

TEMPORARY FINANCIAL SERVICES, INC.

 
| /s/ John R. Coghlan |   | President                               |   | John R. Coghlan |   | August 9, 2002 |
|---------------------|--------|-----------------------------------------|--------|-----------------|--------|----------------|
| Signature           |   | Title                                   |   | Printed Name    |   | Date           |
|                |   |                                    |   |            |   |           |
| /s/ Brad E. Herr    |   | Secretary, Principal Financial  Officer |   | Brad E. Herr    |   | August 9, 2002 |
| Signature           |   | Title                                   |   | Printed Name    |   | Date           |

 

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