**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 September 30, 2002**                                                                                                                          |
|                                                                                                                                                                           |   |
| **o**                                                                                                                                                                          | **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 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 |

 

 

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**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

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**TemporaryFinancial Services, Inc. and Subsidiary**

 

**ConsolidatedBalance Sheets**

 
|                                                                                                                                  |   | **September  30  2002** |      | **December  31  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                                                                                                  |   | **(Unaudited)**         |      |                   |   |
| ***Assets***                                                                                                                          |   |                    |      |                   |   |
|                                                                                                                                  |   |                    |      |                   |   |
| *CURRENT ASSETS*                                                                                                                      |   |                    |      |                   |   |
|                                                                                                                                  |   |                    |      |                   |   |
| Cash                                                                                                                                  |   | $                       | 1,342,111 |                   | $      | 262,072 |   |
| Accounts receivable                                                                                                                   |   | 69,326                  |      | 40                     |   |
| Federal income taxes                                                                                                                  |   | 297                     |      | —                 |   |
| Prepaid expenses                                                                                                                      |   | 1,876                   |      | —                 |   |
| Deferred offering costs                                                                                                               |   | —                  |      | 56,218                 |   |
| Loans receivable:                                                                                                                     |   |                    |      |                   |   |
| Affiliates                                                                                                                            |   | 1,304,871               |      | 110,872                |   |
| Other                                                                                                                                 |   | 435,800                 |      | 295,209                |   |
|                                                                                                                                  |   |                    |      |                   |   |
| Total current assets                                                                                                                  |   | 3,154,281               |      | 724,411                |   |
|                                                                                                                                  |   |                    |      |                   |   |
| *OTHER ASSETS*                                                                                                                        |   |                    |      |                   |   |
|                                                                                                                                  |   |                    |      |                   |   |
| Investment in affiliated companies                                                                                                    |   | 580,724                 |      | 1,705                  |   |
|                                                                                                                                  |   |                    |      |                   |   |
| FURNITURE AND EQUIPMENT,  less accumulated depreciation of $5,578 in 2002, and $1,983 in 2001,  respectively                          |   | 30,924                  |      | 23,535                 |   |
|                                                                                                                                  |   |                    |      |                   |   |
|                                                                                                                                  |   | $                       | 3,765,929 |                   | $      | 749,651 |   |
|                                                                                                                                  |   |                    |      |                   |   |
| ***Liabilities and Stockholders’  Equity***                                                                                      |   |                    |      |                   |   |
|                                                                                                                                  |   |                    |      |                   |   |
| *CURRENT LIABILITIES*                                                                                                                 |   |                    |      |                   |   |
|                                                                                                                                  |   |                    |      |                   |   |
| Accounts payable                                                                                                                      |   | 361                     |      | 10,474                 |   |
| Due to officer/stockholder                                                                                                            |   | 1,586,959               |      | 100,959                |   |
| Accrued expenses                                                                                                                      |   | 12,908                  |      | 3,888                  |   |
| Total current liabilities                                                                                                             |   | 1,600,228               |      | 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)                                                                                                           |   | (334,348                | )         | (115,670               | )      |
| Total stockholders’ equity                                                                                                       |   | 2,165,701               |      | 634,330                |   |
|                                                                                                                                  |   |                    |      |                   |   |
|                                                                                                                                  |   | $                       | 3,765,929 |                   | $      | 749,651 |   |

 

See accompanying notes to unauditedconsolidated financial statements.

 

3

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**TemporaryFinancial Services, Inc. and Subsidiary**

 

**ConsolidatedStatements of Income (unaudited)**

 
|                                   |   | **Three  Months Ended** |    | **Nine  Months Ended** |   |
|----------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                   |   | **September 30  2002**  |    | **September 30  2001** |   | **September 30  2002** |   | **September  30  2001** |   |
| *REVENUE:*                             |   |                    |    |                   |   |   |   |   |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| Loan and related fees:                 |   | $                       | 34,181  |                   | $      | 21,735 |   | $ | 91,484 |   | $ | 30,589 |   |
| Interest and investment income         |   | 15,783                  |    | 975                    |   | 38,547 |   | 11,800 |   |
| Rental Income                          |   | 1,500                   |    | 1,500                  |   | 4,500 |   | 2,000 |   |
| Accounting fees                        |   | 7,500                   |    | 4,500                  |   | 19,500 |   | 6,500 |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
|                                   |   | 58,964                  |    | 28,710                 |   | 154,031 |   | 50,889 |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| *OPERATING EXPENSES:*                  |   |                    |    |                   |   |   |   |   |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| Advertising                            |   | 75                      |    | 51                     |   | 5,246 |   | 121 |   |
| Compensation and related expenses      |   | 50,780                  |    | 11,899                 |   | 119,132 |   | 11,899 |   |
| Rent                                   |   | 4,532                   |    | 6,729                  |   | 17,438 |   | 9,498 |   |
| Legal and professional                 |   | 5,370                   |    | 28,050                 |   | 59,028 |   | 49,671 |   |
| Office expense                         |   | 8,623                   |    | 23,958                 |   | 20,206 |   | 27,173 |   |
| Interest expense                       |   | 7,875                   |    | —                 |   | 24,631 |   | 25 |   |
| Other                                  |   | 13,213                  |    | 9,497                  |   | 33,442 |   | 13,820 |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
|                                   |   | 90,468                  |    | 80,184                 |   | 279,123 |   | 112,207 |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| *OTHER EXPENSE:*                       |   |                    |    |                   |   |   |   |   |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| Equity in losses of affiliates         |   | 37,857                  |    | 4,364                  |   | 93,587 |   | 18,484 |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| *(LOSS) BEFORE INCOME TAX*             |   | (69,361                 | )       | (55,838                | )      | (218,679 | ) | (79,802 | ) |
|                                   |   |                    |    |                   |   |   |   |   |   |
| Income tax benefit                     |   | —                  |    | —                 |   | — |   | — |   |
|                                   |   |                    |    |                   |   |   |   |   |   |
| *NET INCOME (LOSS)*                    |   | $                       | (69,361 | )                      | $      | (55,838 | ) | $ | (218,679 | ) | $ | (79,802 | ) |
|                                   |   |                    |    |                   |   |   |   |   |   |
| BASIC EARNINGS (LOSS) PER SHARE        |   | $                       | (0.09   | )                      | $      | (0.16 | ) | $ | (0.35 | ) | $ | (0.23 | ) |
|                                   |   |                    |    |                   |   |   |   |   |   |
| *WEIGHTED  AVERAGE SHARES OUTSTANDING* |   | 737,280                 |    | 350,000                |   | 624,853 |   | 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 Nine Months Ended** |      |
|---------------------------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                                                  |   | **September 30, 2002**        |      | **September 30, 2001** |   |
| *Increase (Decrease) in Cash*                                                         |   |                          |      |   |   |
|                                                                                  |   |                          |      |   |   |
| *CASH FLOWS FROM OPERATING ACTIVITIES*                                                |   |                          |      |   |   |
|                                                                                  |   |                          |      |   |   |
| Net income (loss)                                                                     |   | $                             | (218,679  | ) | $ | (79,802 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |   |                          |      |   |   |
| Depreciation                                                                          |   | 3,596                         |      | 1,065 |   |
| Equity losses of affiliates                                                           |   | 93,587                        |      | 18,484 |   |
| Increase in accounts receivable                                                       |   | (69,286                       | )         | — |   |
| Increase in prepaid expenses                                                          |   | (1,876                        | )         | (1,876 | ) |
| Increase (decrease) in accounts payable                                               |   | (10,113                       | )         | 10,573 |   |
| Increase in accrued expenses                                                          |   | 9,020                         |      | — |   |
| Decrease in income taxes                                                              |   | (297                          | )         | (297 | ) |
| Total adjustments                                                                     |   | 24,631                        |      | 27,949 |   |
| Net cash used in operating activities                                                 |   | (194,048                      | )         | (51,853 | ) |
|                                                                                  |   |                          |      |   |   |
| *CASH FLOWS FROM INVESTING ACTIVITIES*                                                |   |                          |      |   |   |
|                                                                                  |   |                          |      |   |   |
| Increase in loans receivable                                                          |   | (1,334,590                    | )         | (377,952 | ) |
| Investment in affiliates                                                              |   | (422,606                      | )         | (23,250 | ) |
| Additions to equipment and furniture                                                  |   | (10,984                       | )         | (25,518 | ) |
| Net cash used in investing activities                                                 |   | (1,768,180                    | )         | (426,720 | ) |
|                                                                                  |   |                          |      |   |   |
| *CASH FLOWS FROM FINANCING ACTIVITIES*                                                |   |                          |      |   |   |
|                                                                                  |   |                          |      |   |   |
| Stock sales for cash                                                                  |   | 1,500,049                     |      | — |   |
| (Increase) decrease in deferred offering costs                                        |   | 56,218                        |      | (22,575 | ) |
| Collections of stock subscriptions                                                    |   | —                        |      | 120,800 |   |
| Collection of note receivable                                                         |   | —                        |      | 75,000 |   |
| Proceeds from line of credit                                                          |   | 1,486,000                     |      | — |   |
| Net cash from financing activities                                                    |   | 3,042,267                     |      | 173,225 |   |
|                                                                                  |   |                          |      |   |   |
| *NET INCREASE (**DECREASE) IN CASH*                                                   |   | 1,080,039                     |      | (305,348 | ) |
|                                                                                  |   |                          |      |   |   |
| *CASH, BEGINNING OF PERIOD*                                                           |   | 262,072                       |      | 546,334 |   |
|                                                                                  |   |                          |      |   |   |
| *CASH, END OF**PERIOD*                                                                |   | $                             | 1,342,111 |   | $ | 240,986 |   |
|                                                                                  |   |                          |      |   |   |
| *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 accompanyingnotes to unaudited consolidated financial statements.

 

5

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***NOTE 1 — BASIS OF PRESENTATION:***

 

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

 

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

 

As discussed in note 3, theCompany provides a $2,000,000 line of credit facility to an affiliate.  At September 30, 2002, the outstandingbalance on the line of credit was $1,304,871. The credit facility bears interest at the rate of 8% per annum onamounts actually outstanding.

 

At September 30, 2002, theCompany was borrower on a $1,750,000 line of credit from an officer/stockholder(see note 4).  For the three and ninemonth periods ended September 30, 2002, the Company incurred interest expenseof $7,875 and 24,222, respectively, on the line of credit.  The outstanding balance on the line atSeptember 30, 2002 was $1,586,959.  Theline bears interest at 8% and expires August 15, 2003.

 

***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 by personalguarantees and pledges where appropriate. Lending criteria established to minimize credit risk include, amongother 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.

 

Priorto September 30, 2002, the Company had an outstanding convertible notereceivable from Genesis in the amount of $200,000.  The note was scheduled to mature on January 25, 2004 and boreinterest at 6%.  On September 30, 2002,the Company converted the Note into 200,000 shares of Genesis commonstock.  Accrued interest to the date ofconversion was paid in full.  TheCompany also provides Genesis with a secured warehousing line of credit in theamount of $2,000,000.  At September 30,2002, Genesis had borrowed $1,304,871 against the line of credit.

 

***NOTE 4 — LINE OF CREDIT:***

 

At September 30, 2002, theCompany had a $1,586,959 balance against a $1,750,000 line-of-credit with anofficer/stockholder.  The line-of-creditis unsecured and bears interest at 8%. The line-of-credit agreement expires on August 15, 2003 and anyoutstanding balance is due on that date. The original line of credit agreement provided for a $1,000,000 cap andexpired on August 15, 2002.  The linewas renewed on August 15, 2002

 

6

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for an additional year, theborrowing limit was increased to $1,750,000, and the interest rate was reducedfrom 10% to 8% retroactive to January 1, 2002.

 

***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 theCommission on January 8, 2002.  Netoffering proceeds of $1,500,049 were received by the Company from the offeringon the closing date.

 

***NOTE 6 – INCOME TAX:***

 

The Company generated a tax-basis net operating loss of approximately$69,361 for the three months ended September 30, 2002 ($218,679 for the ninemonths ended September 30, 2002) which is available for carryover to offsetfuture taxable income through 2022. Total tax-basis net operating losses available for carryover as ofSeptember 30, 2002 amounted to approximately $334,000 (from inception of theCompany on October 4, 2000).

 

At September 30, 2002, the Company estimates that it has an $83,500deferred tax asset relating to the operating loss carryovers.  The deferred tax asset was fully offset by avaluation allowance because of uncertainties if the Company will generatesufficient future taxable income to realize the tax benefit.  At September 30, 2002, the income taxbenefit differed from the $83,500 expected amount because of the impact ofrecognizing the deferred tax asset valuation allowance.

 

***NOTE 7 – SALE OFEQUITY INTERESTS IN AFFILIATES:***

 

The Company previously invested in minority interests of two temporarylabor businesses that were reported in the Company’s financial statements onthe equity method.  On September 30,2002, the Company sold the equity interests to an affiliated company.  Immediately before the sale, the book valueof the $12,000 investment in Temps Unlimited of Minnesota LLC (d.b.a. Staffingon Demand), was $874 and TUI-MN was indebted to the Company in the amount of$69,242.  The Company has bookedadditional losses in equity of affiliates in the amount of $21,242.

 

Immediately before the sale of Temps Unlimited of Nebraska LLC (d.b.a.Valustaff), the book value of the Company’s $33,000 investment in Valustaff was$17,188, and Valustaff is indebted to the Company in the amount of$171,451.  The company’s interest inValustaff was sold for $27,500.  As aresult of the sale, the Company has booked additional losses in equity ofaffiliates in the amount of $5,500.

 

The sales of the interests in Staffing on Demand and Valustaff wereapproved by the shareholders of the Company at the annual shareholder’s meetingon August 1, 2002.

 

***NOTE 8– SUBSEQUENTEVENTS:***

 

On October 17, 2002, the Company and others were sued by Labor Ready,Inc. for unfair business practices.  TheCompany disputes the allegations and intends to vigorously defend the action.  The potential impact of the litigation onthe Company cannot be determined at this time.

 

7

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**FORM10-QSB**

 

**Part I****, 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 throughrealization of 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 Company was organized inOctober, 2000, and began operations in the second quarter of 2001.  In the three and nine months ended September30, 2001, our business operations were at a very early operational stage and,consequently, the results of operations for the three and nine months endedSeptember 30, 2001 are not comparable to the three and nine month periods endedSeptember 30, 2002.  This quarterlyreport focuses on the three and nine month periods ended September 30,2002.  Limited analysis of the three andnine month periods ending on September 30, 2001 is provided where such analysisaids in understanding the current financial condition of the business.

 

**Resultsof Operations**

 

As ofSeptember 30, 2002, we had loans outstanding of $1,740,671, with fivebusinesses in two distinct industry segments. The following table provides borrower information, affiliate status andoutstanding balances as of September 30, 2002.

 

**Temporary Staffing Businesses**
| **Business  Name**                                     |       | **Affiliate  Status** |       | **Loan  Balance** |          |
|--------------------------------------------------------|------------|-----------------------|------------|-------------------|---------------|
| Everyday Staffing                                      |       | Independent           |       | $                 | 320,778       |   |
| Ozark Labor                                            |       | Independent           |       | 115,022           |          |
| Valustaff                                              |       | Common Ownership      |       | 56,280            |          |
| Staffing on Demand – Note 1                       |       | Common Ownership      |       | (142              | )             |
| Workers For You                                        |       | Common Ownership      |       | 41,939            |          |
| Total temporary staffing                               |       |                  |       | 533,877           |          |
| **Seller Financed Real Estate Receivables Businesses** | ** ** |
| Genesis – Contract’s Financed                |       | Affiliated (45%)      |       | 1,206,794         |          |
| Total loans outstanding all segments.                  |       |                  | ** ** | **$**             | **1,740,671** | ** ** |

 

**Three Months Ended September 30, 2002 and2001**

 

In the quarterending September 30, 2002, the Company generated loan related revenues of$34,181 on its lending business, compared to $21,735 for the three months endedSeptember 30, 2001.   The increase inrevenues for the current quarter reflects an increase in the number ofborrowers and corresponding growth in the loan base.

 

8

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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 four temporary laborbusinesses, two of which are affiliated with the Company through commonownership. Total outstanding loans to temporary labor businesses at September30, 2002 amounted to $533,837.  Of thisamount, $435,800 is with independent borrowers and $98,077 is with affiliates.

 

In the quarterended September 30, 2002, we generated $7,500 in accounting fee service incomeby providing monthly accounting services to three temporary staffing businessesand Genesis Financial, Inc.  We havebeen working with our temporary staffing software provider to develop remoteconnectivity capabilities and expect that we will soon be able to provideoversight and review services to our borrowers.  We are currently reducing our focus on providing accountingservices and may eliminate this business offering once the remote connectivitycapabilities are fully operational.

 

Near the endof the second quarter, 2002, the Company began restructuring the interests inminority owned temporary labor offices, and on September 30, 2002, has sold itsinterests in the Minnesota and Nebraska operations.  Management believes that this restructuring will help to minimizeconflicts of interest inherent in loaning funds to related businesses, and willallow the Company to better focus on monitoring and controlling its loanaccounts.

 

Prior toSeptember 30, 2002, our investments in temporary labor businesses consisted of$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).  On September 30, 2002, we sold our interestsin Staffing on Demand and Valustaff to an affiliated company as part of ashareholder approved plan to focus our energies on the lending business.

 

Our investmentin Staffing on Demand as of September 30, 2002, had book value of $874 and wasindebted to the TFS in the amount of $69,942. The affiliated purchaser of the Company’s interest in Staffing on Demandhas agreed to assume a pro rata share of the obligations of Staffing onDemand.  Had Staffing on Demand not beensold, TFS would have been obligated to contribute additional capital to coverits negative capital account balance. After all remaining Staffing on Demand accounts and notes are collected,it appears that there will still be a deficiency of approximately $60,000 thatwould also need to be made up by the members of Staffing on Demand.  For these reasons, TFS believes that the saleof the interest was in the best interest of the company.

 

Our investmentin Valustaff as of September 30, 2002, had a book value of $17,188.  The Valustaff business is now operating ator near breakeven, and Rule 1-4 LLC has agreed to purchase the Valustaffinterest for $27,500.  Managementbelieves that this amount is a reasonable price for the interest.

 

As a result ofthe sale of the interests in Staffing on Demand and Valustaff, TFS incurredadditional losses in equity of affiliates in the amount of $26,789.  These additional losses are reflected in theincome statement for the three months ended September 30, 2002.

 

In January,2002, we loaned $200,000 to Genesis on a convertible note bearing interest at6%.  On September 30, 2002, TFSconverted the Note into 200,000 shares of Genesis common stock in

 

9

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accordance with the terms ofthe Note.  All interest accrued to thedate of conversion was paid by Genesis.

 

On February20, 2002, we also provided Genesis with a $2,000,000 secured warehousing lineof credit bearing interest at the Sterling Savings Bank (Spokane, Washington)prime rate plus two percent.  AtSeptember 30, 2002, Genesis had an outstanding balance of $1,206,794 againstthe line.  Line of Credit interestincome amounted to $7,875 for the three month period ended September 30, 2002.

 

We also own45% of Genesis Financial, Inc.   For thethree months ended September 30, 2002, Genesis generated gross revenues of$666,613 against cost of sales of $586,863 for an operating margin of$79,750.  Selling, general andadministrative expenses totaled $94,622 for the quarter producing a net loss of$14,873.  During the current quarter,TFS increased its ownership of Genesis through conversion of the $200,000 note,and as a result, has recorded losses of $11,068 for the quarter to reflect theCompany’s pro rata share of losses incurred in the nine months ended September30, 2002.

 

Overall, TFSgenerated gross revenues of $58,964 during the three months ended September 30,2002.  Expenses totaled $90,468,resulting in a net operating loss of $31,504 for the period, before includingequity losses of affiliates.    Weexpect that we will continue to increase revenues from operations in the fourthquarter and beyond and anticipate that we will be profitable in the fourthquarter.

 

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 in Genesis will also have a positive impacton our earnings in future periods. We will continue to monitor progressthroughout the remainder of 2002 and into 2003, and will adjust our businessplan to address any operational issues as they arise.  The sale of our interests in Staffing on Demand and Valustaffwill allow us more time to focus on our lending activities where the bulk ofour operating cash flows will be generated. In 2003, we will also review and evaluate other business opportunitieswith the intention of continuing to build long term shareholder value.

 

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

 

For the ninemonths ended September 30, 2002, the Company generated gross revenues of$154,031, operating expenses of $279,123, equity in losses of affiliates of$93,587, and a net loss before income taxes of $218,679.  This compares to $50,889 in revenues,$112,207 in expenses, $18,484 equity in losses of affiliates, and a net lossbefore taxes of $79,802 in 2001. The Genesis investment occurred in January,2002, and our loan activity did not commence until April, 2001, so the sixmonth periods are not considered comparable. Through the first three quarters of 2002, we have expanded our businessoperation through our investment in Genesis. Our loan portfolio has also grown in 2002.  These activities are consistent with our business plan and weexpect that our operating results will improve in 2003.

 

Compensationexpense and advertising expense saw significant increases in 2002 compared to2001.  Compensation increased to$119,232 from 11,899 in 2001, and advertising increased to $5,246 in 2002,compared to $121 in 2001.  We incurredinterest expense of $24,631, in the third quarter 2002.  These increases are the result of businessgrowth and positioning.  While losseshave continued for the first nine months of 2002, we believe that the directionthe business is taking is the correct one.

 

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**Liquidityand Capital Resources**.

 

At September30, 2002, we have loans to temporary labor businesses outstanding in the amountof $533,877 and a secured warehousing line of credit commitment to Genesis inthe amount of $2,000,000, with an outstanding balance of $1,206,794.   We expect the amount of loaned funds tocontinue to increase as the borrowers’ businesses grow and their borrowingneeds increase.

 

At September30, 2002, cash and cash equivalents amounted to $1,342,111 and the balanceavailable on our line of credit with an officer and director amounted to$163,000.  In anticipation of increasingloans to Genesis under the secured warehousing line of credit, and increasingloans to temporary labor businesses as business grows during the spring andsummer,  we have discussed back-upfinancing with our primary bank and an officer and director should additionalfinancing be needed.  In addition, weclosed our public offering on April 18, 2002 and received over $1,500,000 innet offering proceeds.  With ourexisting cash position and our backup plans, and subject to the outcome of thelitigation discussed in the following paragraph, we believe that our cashposition will be adequate to support our business operations for the nexttwelve to eighteen months.

 

On October 17,2002, Temporary Financial Services, Inc. (TFS), Temps Unlimited, Inc., TempsUnlimited of Minnesota LLC, and Temps Unlimited of Nebraska LLC were servedwith a lawsuit by Labor Ready, Inc.  Thesuit alleges, among other things, that TFS and our affiliated companies areillegally conspiring to compete against Labor Ready in the temporary laborbusiness.  The complaint contains anumber of inaccurate allegations, and we believe the claims are withoutfoundation in law or fact.  We intend tovigorously defend the action and are considering offensive actions to obtainearly dismissal of the action.  Wecannot be certain that early dismissal will occur, and if early dismissal isnot obtained, the cost of litigation may be a serious drain on corporateresources for some time to come.  Wealso believe that, so long as the litigation is pending, it will impact ourability to obtain future funding for Genesis and TFS.  This could significantly impact the earnings and liquiditypositions of both Genesis and TFS in coming periods.  See Part II, Item 1 on page 12, below.

 

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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**FORM10-QSB**

**PART II**

 

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

 

A lawsuit hasbeen filed by Labor Ready under the following caption:

 

Labor Ready, Inc., Labor ReadyNorthwest, Inc., Labor Ready Midwest, Inc, and Labor Ready Southwest, Inc.,(collectively “Labor ready”) as plaintiffs,

Vs.

Glenn Welstad, Welstad FamilyLLC, **TemporaryFinancial Services, Inc., Temps Unlimited, Inc., Temps Unlimited of MinnesotaLLC, Temps Unlimited of Nebraska LLC**, Anytime Labor LLC, EverydayStaffing LLC, and Temp Services of Arkansas LLC, as defendants.

 

The suit wasfiled in the Superior Court of the State of Washington in and for PierceCounty, Cause Number 02-2-12031-3, alleging that the defendants arecollectively engaged in a conspiracy to illegally compete against LaborReady.  The complaint, in large partdepends on allegations that TFS and affiliated companies were founded and arecontrolled by Glenn Welstad.  GlennWelstad is an owner of less than 5% of the outstanding shares of TFS, is not anofficer, director, founder or promoter of the Company, and has no controlrelationship with the business.  LaborReady includes allegations of misappropriation of trade secrets, unfaircompetition, aiding and abetting conspiracy, and tortuous interference withcontract.  Relief sought includesissuance of injunctions prohibiting the actionable conduct, damages, andattorney fees.

 

It is theposition of Management of TFS that the complaint is groundless.  Many of the factual allegations made in supportof the claims are inaccurate, and the legal bases for the claims against TFSand affiliates are without merit.  Atthe time the complaint was filed, Labor Ready had constructive and actualknowledge of facts that are blatantly misstated and/or misrepresented in theaction.  In Management’s opinion, LaborReady is improperly pursuing a course of action that will damage the ability ofTFS to pursue its chosen lines of business. TFS intends to vigorously defend the action, and is evaluating damagesthat TFS will suffer as a result of the misrepresentations and falsehoodsincluded in the complaint for the purpose of filing a counterclaim.

 

**Part II, Item 2. Changesin securities. None**

 

**PartII, Item 3. Defaults upon senior securities.  None**

 

**PartII, Item 4. Submission of matters to a vote of securityholders.**

 

On August 1,2002, the Company held its annual meeting of shareholders.  The meeting involved election of the slateof Directors nominated by the prior Board. At the meeting, John R. Coghlan, Brad E. Herr, Michael Kirk, GregoryLipsker, and C. Eugene Olsen were elected to serve as directors for the comingyear and until their successors are elected and qualified.  A total of 449,790 shares (61%) of the737,280 shares issued and outstanding were represented at the meeting andconstituted a valid quorum.  All sharesrepresented voted for John Coghlan as director.  A total of 600 shares abstained from voting for the other directorsand the remaining 449,190 shares (61%) were voted in favor of the remainingslate.  The shareholders also approved aresolution authorizing the officers of the Company, subject to board approval,to pursue reorganization of the Minnesota and Nebraska temporary laborinvestments with the objective of reducing or eliminating the company’s

 

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interests in thoseoperations.  No other matters camebefore the shareholders 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 theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, each of the undersigned certifies that this periodic report fullycomplies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that the information contained in this periodic reportfairly presents, in all material respects, the financial condition and resultsof operations of the Company.

 

TEMPORARY FINANCIAL SERVICES, INC.

 

 
| /s/John R. Coghlan |   | President                               |   | John R. Coghlan |   | November 5, 2002 |   |
|--------------------|--------|-----------------------------------------|--------|-----------------|--------|------------------|--------|
| Signature          |   | Title                                   |   | Printed Name    |   | Date             |   |
|               |   |                                    |   |            |   |             |   |
|               |   |                                    |   |            |   |             |   |
| /s/Brad E. Herr    |   | Secretary, Principal Financial  Officer |   | Brad E. Herr    |   | November 5, 2002 |   |
| Signature          |   | Title                                   |   | Printed Name    |   | Date             |   |

 

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**** ****

**** ****

****CERTIFICATIONS****

I, John R. Coghlan,President, certify that:

1. I have reviewed thisquarterly report on Form 10-QSB of Temporary Financial Services, Inc.;

2. Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3. Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4. The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c) presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

5. The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b) any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6. The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: November 5, 2002
| /s/ John R. Coghlan |
|---------------------|

John R. Coghlan, President

 

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**** ****

**** ****

****CERTIFICATIONS****

I, Brad E. Herr, ChiefFinancial Officer, certify that:

1. I have reviewed thisquarterly report on Form 10-QSB of Temporary Financial Services, Inc.;

2. Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3. Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4. The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b) any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6. The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

Date: November 5, 2002
| /s/ Brad E. Herr |
|------------------|

Brad E. Herr, Chief Financial Officer

 

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