UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-85864-LA
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CLS FINANCIAL SERVICES, INC
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-1478196
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(State or other jurisdiction of incorporation or organization)(I.R.S. Employer
Identification No.)
4720 200th St SW, Suite 200, Lynnwood, WA 98036
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(Address of principal executive offices) (Zip Code)
(425) 744-0386
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/Yes / /No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K (X)
CLS FINANCIAL SERVICES, INC.
ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
PART I
Item 1: Description of Business 4
Item 2: Description of Property 5
Item 3: Legal Proceedings 5
Item 4: Submission of Matters to Security Holders 6
PART II
Item 5: Market for Common Equity & Related Stockholders 6
Matters
Item 6: Selected Financial Data 6
Item 7: Management Discussion & Analysis 6
Item 8: Financial Statements 9
Item 9: Changes in & Disagreements with Accountants on 21
Accounting & Financial Disclosure
PART III
Item 10: Directors & Executive Officers 21
Item 11: Executive Compensation 22
Item 12: Security Ownership of Certain Beneficial Owners and 22
Management
Item 13: Certain Relationships and Related Transactions 23
Item 14: Exhibits and Reports on 8-K 24
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Business Development and Description
CLS Financial Services, Inc. , is a Washington State Corporation (referred to
as the "company") incorporated March of 1990. The company's primary business
is to engage in the brokerage of loans and the purchase and sale of real
estate contracts, mortgages, and deeds of trust ("loans"). The company has
continued its registration with the State of Washington to sell in whole or in
part loans pursuant to its Mortgage Broker Dealer license.
The company originates loans by lending money directly to the borrower. These
loans may be held in the company's inventory or resold to investors with all
servicing rights and servicing fees retained by the company. The company also
acts as a broker retained by the borrower to find a suitable lender. The
initial sale of debenture investments, principal reductions and the reselling
of loans to investors provided the source of funds needed to invest in new
loans receivable.
The company has originated loans as set forth below:
YEAR TOTAL LOAN ORIGINATIONS LOANS BROKERED & SOLD COMPANY LOAN PORTFOLIO
1995 $19,868,765.00 $16,202,907.00 $3,665,858.00
1996 $20,962,033.00 $17,969,295.00 $2,992,738.00
1997 $15,253,345.00 $12,766,411.00 $2,486,934.00
1998 $31,718,132.00 $27,965,691.00 $3,752,441.00
1999 $29,511,957.00 $27,590,809.00 $1,921,148.00
2000 $28,577,253.00 $26,974,343.00 $1,602,910.00
The company has generated revenue as set forth below:
1998 1999 2000
GROSS REVENUE $2,206,821.00 $1,757,334.00 $2,035,395.00
OPERATING EXPENSE$2,086,107.00 $1,248,714.00 $1,406,679.00
SALARY EXPENSE $738,214.00 $491,922.00 $560,978.00
NET INCOME/(Loss) ($617,500.00) $16,698.00 $67,738.00
Security
As of December 31, 2000 and December 31, 1999, 54% and 86%, respectively, of
the loans in the portfolio were secured by first liens on real property.
Management expects this trend to continue. Loans originated by CLS and
retained as inventory decreased in 2000 due to fewer loans of this type being
funded by CLS and the high demand for these loans by investors. CLS expects
to fund more of these loans in 2001, but also expects investor demand to
remain high. See Note 3, Notes to Financial Statements.
Borrowers and Competition
The company is a full service mortgage company. The company advertises in the
local media, accepts referrals and employs loan officers. The company brokers
Class A and B loans to established lenders. Some of the primary competitors
are Beneficial Financial Services and Quality Mortgage. The company also
services more difficult to place Class C loans. The company's investment
criteria for Class C loans places emphasis on the value of the collateral and
to a lesser extent the borrower's credit worthiness. The company underwrites
these loans conservatively, with an average loan to appraised value of 65% or
loan to tax assessed value of 50%. The company used the proceeds of the
debenture securities offering to originate Class C loans. The market for
Class C loans is competitive with lenders such as Lornty Investors, and
Pacific Coast as direct competitors. The company believes it will remain
competitive based upon its history and the economic and real estate market
growth in the Snohomish, King and Pierce County areas.
ITEM 2 DESCRIPTION OF PROPERTY
The company's principal investment objective is to acquire a portfolio of real
estate collateralized loans at 2-4% over the cost of capital. In order to do
so the company must acquire loans in which the borrowers are considered a
higher risk than Class A borrowers with higher credit ratings. These loans are
secured by a first lien position on real estate located in the Western
Washington area. The majority of the loans are in the $80,000-$150,000 range
bearing interest between 12% to 18%. Types of real property securing loans
(including related party loans) as of December 31, 2000 are set forth below:
SINGLE FAMILY RESIDENCES $1,338,035.00
MULTI-FAMILY RESIDENCES $1,169,110.00
RAW LAND $1,605,695.00
OTHER $45,573.00
TOTAL LOAN RECEIVABLE $4,158,413.00
ITEM 3 LEGAL PROCEEDINGS
In 1998, the company was involved in a lawsuit that initially began as a
foreclosure action. The borrower defaulted and subsequently filed a petition
in the Bankruptcy Court in the Western District of Washington (Cause
#A98-01561). The debtor initiated an adversary action against CLS and the
investors (Cause #A98-01561) claiming that the Defendants had violated the
Washington Consumer Protection Act and proceeded on multiple theories and
damage claims. The Court agreed with the Plaintiff's that the loan essentially
masked the intent of the Defendants, which was to own the property for
substantial gain. The company disagreed, however, based on the potential
adverse ruling from the Court, CLS and the Debtor entered into a settlement
agreement, which resulted in the loss set forth in the audited financial
statements in 1998. See Note 3, Loss on Legal Settlement.
As a result of the lawsuit, CLS was compelled to restructure its debt,
primarily to debenture holders. The company proposed to investors, mainly the
debenture holders, that the interest rate would be reduced by 50% and the term
increased by 5 years. In early 1999, CLS circulated the proposal to the
investors. At least one investor complained to the State of Washington
Securities Director, for the Department of Financial Institutions. The
complaint, the adverse court ruling and following settlement resulted in a
Consent Order (SDO 99-10) entered into by CLS with the State of Washington
Securities Division. CLS had previously discontinued the offering of
debentures and formally notified the State of Washington and the SEC. Two
investors promptly filed a lawsuit, captioned, Evergreen et.al. vs. CLS in the
Western District of Washington Federal Court, cause number C99-0309L. That
case was settled out of court, on terms favorable to CLS and the remaining
debenture holders, primarily due to the unique secured position of the
plaintiff's in property in which one of the plaintiff's was in a first lien
that was sold.
Also during 1998, CLS was the subject of a nationwide Federal Trade Commission
investigation. Based on a series of relatively minor FTC violations, CLS
agreed to settle the matter on terms financially favorable to the company. In
so doing, CLS deposited $60,000 in an escrow account to pay redress to
borrowers, who never did complain to CLS directly. The amount was deposited
in 1999 in an escrow account and is reflected in the audited financial
statements as Note 2, FTC Regulations. As of year end 2000, the company has
not been informed that any borrower has been allowed by the FTC to withdraw
any funds from the settlement proceeds in escrow.
CLS did circulate the order and initial 1998 financial statements. The 1998
audited statements were prepared late because the original auditor did not
complete the 1998 engagement, requiring CLS to hire another CPA firm to audit
the 1998 records. CLS held a meeting with investors in April of 1999 and
several times during the year, particularly when the compiled 1999 quarterly
financial statements were available. Investor participation in the meetings
steadily declined, to a level of approximately ten investors each quarter.
The company circulated continuing questions and answers from each meeting to
all investors. The company continued this communication process in 2000, at
the end of each quarter. The company plans to continue quarterly meetings
with the investors in 2001.
During the third quarter of 2000, the company circulated amended debenture
agreements and certificates to the debenture holders, seeking their written
agreement and affirmation of the restructuring. The company has received an
overwhelming acceptance by the debenture holders. As of December 31, 2000, a
total of 72 out of 82 debenture holders returned their written agreements and
were issued restructured debenture certificates. This represented 88% of the
debenture holders in number and 93% of the dollars. The company expects that
2 more debenture holders will agree to the restructuring which will bring the
number of investors to 74 representing 90% of the investors and 95% of the
dollars in the later part of the first quarter of 2001 or in the second
quarter. None of the other 8 investors have threatened to initiate litigation
against the company, nor have they retained counsel to initiate any action to
the knowledge of the company.
In the event of a liquidation sale in 2001 of the company assets, the
investors would most likely lose a substantial portion of their principal,
since the value of the property is represented in the market equity of the
real estate. If the property was sold at auction, the yield would be
substantially less than the book value, because much of the secured
investment
in real estate is in developing property (or property under construction) that
the company intends to sell at market prices, not bargain prices. This
represents the last impediment in the successful restructuring of the company.
In the event that any remaining debenture holder refuses to accept the terms
of the financial restructuring, there is no legal basis to impose the
restructuring terms on those 10 remaining debenture holders under state or
federal law excepting an approved reorganization under Chapter 11 of the
Bankruptcy Code. This liquidation scenario represents the major risk to
investors, and the company.
The company initiated the restructuring to protect all debenture holders, with
a special emphasis of insuring that debenture holders who agreed to the
restructuring were not unfairly prejudiced by debenture holders who held out.
In the first quarter of 2000, based on improved financial condition of the
company, the interest rate of return to the debenture holders was increased.
The company plans to increase the return during 2001 as the financial
condition permits.
At present, the company is not involved in any adverse litigation against it
by the investors. The company is involved in two other lawsuits as party
defendants arising out of alleged actions of an affiliate company. One action
is a landlord tenant action and the other involves a sale of property owned by
an affiliated company. One action is defended by the insurance carrier and
the other has little likelihood of success against the company, in the opinion
of counsel. All other litigation involves routine collection activities. CLS
continues to correct potential securities issues related to the restructuring
of the company and is cooperating fully with the Securities Division of the
Department of Financial Institutions for the State of Washington.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR COMMON EQUITY & RELATED MATTERS
Market Information
There is no public market for the company's investment debentures, nor is one
likely to develop. The investment debentures are not expected to be listed on
any formal exchange.
ITEM 6 SELECTED FINANCIAL DATA
YEAR 1996 1997 1998 1999 2000
REVENUE $1,652,870 $1,730,865 $2,206,821 $ 1,757,334 $ 2,035,395
INCOME (LOSS)
OPERATIONS $ 88,805 $ 31,188 ($ 617,500) $ 16,698 $ 67,738
TOTAL ASSETS $4,016,609 $7,905,735 $10,640,650 $11,163,177 $10,261,763
LONG TERM
OBLIGATIONS $1,111,168 $5,115,992 $7,981,976 $ 7,979,131 $ 7,409,031
ITEM 7 MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
RESULTS
OF OPERATION
Plan of Operation & Liquidity
Principal payments and the reselling of loans to investors provided the source
of funds to invest in loans receivable. Available liquidity will dictate the
volume of loan purchases that may be acquired by the company. Management has
established a policy of conservative collateral lending. As a result,
defaulted loans generally create additional profit centers as the collateral
value has been sufficient to sustain the increased yield created by the
company servicing the debt on behalf of the borrower but retaining the
increased default rate when the borrower cures the loan. The company manages
cash by reselling the loan to other investors in order to recapture original
debenture investments which will then in turn be used to fund other loans.
The
company relies on its ability to resell loans receivable or real estate in
sufficient amounts to generate funds needed to pay off maturing debentures
under the restructuring plan. The external sources of liquidity include a line
of credit, sale of debentures, payoff on loans receivable, sales of loan
receivable, and sales of real estate.
Capital Resources
Interest received on loans funded and servicing fees provide the funds for
expenses and interest due to investors on debenture purchases. Principle on
loans receivable due will provide the funds to repay the debentures payable.
The loans receivable are tied specifically to these debentures payable with
similar maturity over the next five year. There are no other significant
commitments for capital expenditures as of December 31, 2000.
Results of Operations
In 2000, 1999, 1998, 1997 and 1996, the company originated 28.6, 29.5, 31.7,
15.3, 20.9 million dollars in loans, respectively. The company's revenues
from operations were 2.0, 1.76, 2.2, 1.7, 1.7, million dollars in 2000, 1999,
1998, 1997, 1996, respectively. Expenses from operations increased to
$1,967,657 from $1,771,632 in 1999. At the end of the first quarter 2000, the
interest rate paid to debenture holders was increased. Also, the marketing
department was expanded to take advantage of investors seeking alternatives to
the stock market.
Property Value Trends
There are no known or predicted property value downward trends. Management
expects that property values will continue to increase in the Puget Sound
area. Management bases this prediction on industry reports that value of
property in the western Washington area has increased in 2000 and shows no
downward trends in the foreseeable future.
Obligations
In order to protect the debenture holder's principle, in early 1999 the
company reduced the interest rate be by 50%, and the maturity was extended by
5 years. In the first quarter of 2000, the interest rates on the debenture
accounts were increased based on the financial success of the restructuring.
The company plans to increase the return in 2001 and beyond, provided there is
sufficient income to pay for the increases. The company's principle
performance objective is to meet all restructuring obligations and to provide
an annual increase in retained earnings. As of year end 2000, the company has
done so. The company receives interest payments from loans receivable
sufficient to pay debenture investor interest. The company relies on its
ability to sell loans receivable to generate the necessary cash to pay
principal to the investor. The company has developed a five year plan to
schedule loan maturity dates and real estate marketing efforts to correspond
with the restructured maturity dates of the debentures.
Return on Asset, Equity, and Equity to Assets Ratio
The following net returns were realized during the years ended December 31,
2000 and 1999.
Year Ended December 31, 2000 1999
Return on Assets (net income/avg total assets) .63% .15%
Return on Equity (net income/avg equity) 7.87% 2.04%
Equity to Assets (avg equity/avg total assets) 8.03% 7.50%
Plan of Operation
The company is committed to offer Real Estate and loans receivable for sale to
investors for the foreseeable future. Management expects loan growth to
exceed 2000 due to the current refinancing trend. More effort has been placed
on the loan department to obtain A & B type loans to sell to brokers which
will generate more income based on the volume alone.
The company's cash management goal is to invest all available funds through
loans receivable or real estate. There has been no shortage of investment
options that meet the company investment criteria. The company expects to be
able to continue to acquire similar loans in the future. Loan purchases will
be limited by available liquidity as previously discussed.
The company actively pursues delinquent accounts. As a result, nonearning
receivables are minimal and generally fully collected within thirty to sixty
days. Management's strategy and policy has been to underwrite loans
conservatively. This strategy will continue with a loan to value ratio
average of 65%. Every effort is made to assure profitability even in the
event of a foreclosure sale.
The company forecasts a stable demand for its services in the foreseeable
future, evidenced by the daily loan inquiries, portfolio performance, external
predications and subsequent loans funded.
Uncertainties
The restructuring plan has been accepted by the clear majority (88% as of year
end) of the debenture investors as set forth above. However, there is no
guarantee that the company will be able to reorganize if all of the investors
do not agree. In the case a debenture holder, with investments in an amount
material in relation to the company's net worth, proceeds with litigation, the
company will be forced to litigate to protect investors who agreed to the
restructuring. In the alternative, and in a worst case scenario, the company
could be forced to liquidate or perhaps file for a formal reorganization under
Chapter 11 of the Bankruptcy Code. Management believes that after the
investors study the audited financial statements, the information contained in
this 10K, reviews the real estate portfolio and loan portfolio and reviews the
industry predictions, that they will agree that it is their collective best
interests to support the restructuring plan initiated by management. The
savings of administration costs, court hearings, and compliance with the
Bankruptcy Code, rules and United States Trustee directives, will ultimately
inure to the investors, rather than counsel, accountants and the Trustee
office.
ITEM 8 FINANCIAL STATEMENTS
Index to Financial Statements as of December 31, 2000
Page
Independent Auditors Statement 9
Balance Sheets 11
Statements of Operations and Retained Earnings (Deficit) 12
Statements of Cash Flows 13
Notes to Financial Statements 14-18
(LETTERHEAD)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CLS Financial Services, Inc
Lynnwood, Washington
We have audited the accompanying balance sheets of CLS Financial Services,
Inc. as of December 31, 2000 and 1999, and the related statements of
operations and retained earnings (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CLS Financial Services, Inc.
as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Peterson Sullivan PLLC
Seattle, Washington
February 22, 2001
CLS FINANCIAL SERVICES, INC.
BALANCE SHEETS
December 31, 2000 AND 1999
2000 1999
ASSETS -------- --------
Cash $ 69,320 $ 73,436
Cash - trust account 13,087 14,556
Loans Receivable from related party 4,094,588
3,904,309 Loans Receivable
270,525 680,186
Receivables 281,442
223,048
Real estate held for sale 5,373,331
6,134,167 Property and equipment, at cost,
less
accumulated depreciation of $211,683
in 2000 and $189,692 in 1999 114,802
78,838
Other 44,668
54,637 ----------
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Total Assets $10,261,763 $11,163,177
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LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 129,796 $
102,095
Trust account payable 13,087 14,556
Loans payable 8,689,073 9,520,600
Notes payable 535,500
699,357
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Total Liabilities 9,367,456
10,336,608
STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares
authorized, issued and outstanding 10,000 10,000
Common stock, Class Two, $1000 par value
2,500 shares authorized, 1000 issued and
outstanding at December 31, 2000 and 1999 1,000,000 1,000,000
Retained earnings (deficit) (115,693)
(183,431)
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- --------- Total Stockholders' Equity 894,307
826,569
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Total Liabilities & Stockholders' Equity $10,261,763
$11,163,177
==========
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See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Years Ended December 31, 2000 AND 1999
2000 1999
REVENUES ---- ----
Loan fees $ 738,325 $ 879,657
Interest on loans 897,167 739,867
Loan servicing and other fees 85,287 101,650
Management fees 292,276
Real estate sales, net of cost of real estate of
$1,343,226 in 2000 and $231,606 in 1999
26,394 Other income
22,340 9,766
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Total Revenues 2,035,395 1,757,334
OPERATING EXPENSES
Wage and payroll taxes 560,978 491,922
Commissions and referrals 464,402 411,487
Interest expense 555,447 491,368
Advertising 81,167 16,786
Rent 50,873 78,683
Office and utilities 124,683 161,536
Professional fees 108,116 91,635
Depreciation 21,991 28,215
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Total expenses 1,967,657 1,771,632
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Income (loss) before provision for income tax 67,738 (14,298)
Income tax benefit 30,996
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Net income 67,738 16,698
RETAINED EARNINGS (deficit), beginning of year (183,431) (200,129)
--------- ---------
RETAINED EARNINGS (deficit),ending $ (115,693) $ (183,431)
========= =========
See Notes to Financial Statements
CLS FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 AND 1999
2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 67,738 $ 16,698
Adjustments to reconcile net income to net cash
flows from operations
Depreciation 21,991 28,215
Gain on Sale of Real Estate (26,394)
Proceeds from real estate held for sale 1,399,450 258,000
Purchase of real estate held for sale (638,614) (295,017)
Change in other operating assets and liabilities
Receivables, other than loans receivable (58,394) (58,781)
Accounts payable and accrued expenses 27,701 (7,361)
Other 9,969 (36,165)
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NET CASH FLOWS FROM OPERATING ACTIVITIES 829,841 (120,805)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (57,955) (2,167)
Change in related party loans (190,279) (15,987)
Change in loans receivable 409,661 (359,824)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES 161,427 (377,978)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in loans payable (831,527) 45,495
Borrowings (payments) on line of credit (163,857) 484,357
---------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES (995,384) 529,852
---------- ---------
NET INCREASE (DECREASE) IN CASH (4,116) 31,069
CASH BALANCE - BEGINNING OF YEAR 73,436 42,367
---------- ---------
CASH BALANCE - END OF YEAR $ 69,320 $ 73,436
========== =========
Interest paid on a cash basis $ 555,447 $ 491,368
========== =========
Income taxes paid on a cash basis $ - $ -
========== =========
See Notes to Financial Statements
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
AUDITED
December 31, 2000
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CLS FINANCIAL SERVICES, INC. ("CLS") earns fees from the origination of real
estate loans and purchases and sells real estate contracts, mortgages and
deeds of trust, and real estate. As such, CLS is subject to regulations in
the state of Washington with respect to mortgage broker dealers.
CLS is related to a series of other companies that provide services to CLS
customers as follows:
Puget Sound Investment Group, Inc. ("PSIG"). PSIG owns and manages real
estate, and develops real estate for sale. PSIG borrows funds in its own
name, acquires property in its own name and has, in the past, borrowed funds
from investors on loans that were brokered by CLS. PSIG has, in the past,
acquired title to properties through the foreclosure process on loans
originated by CLS.
PSIG also provides CLS marketing services related to certain parcels of CLS's
real estate. As compensation for these services, CLS allows PSIG to retain
any gains or losses for the eventual sales of this real estate. As a result
of this relationship, gains of $56,224 were transferred to PSIG in 2000.
CLS earned management fees from PSIG of $292,276 in 2000 for oversight of
certain PSIG operations. In addition, CLS services some loans held by PSIG.
Puget Sound Appraisal Group, Inc. (PSAG). PSAG provided appraisal services for
loans originated by CLS. This corporation was liquidated in 2000.
Puget Sound Real Estate Services Group, Inc. (PSRESG). PSRESG provides real
estate closing services for loans originated by CLS . PSRESG charges CLS
customers directly for these services.
Puget Sound Construction of Washington, Inc. (PSCW). PSCW provides
residential repair services to properties owned by PSIG and CLS. PSCW charges
CLS directly for these services.
The Class One stockholders of CLS are the stockholders in the companies listed
above.
CLS and its affiliated companies allocate rent based on space used, management
and labor costs based on time, telephone expenses based on number of
employees, computers and equipment based on usage and other overhead costs
based on reasonable estimates of use.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
AUDITED
December 31, 2000
NOTE 1 - (continued)
Loan interest
Generally, interest on loans is recognized when earned using the interest
method. Interest on loans is not recognized when loans become ninety days
delinquent. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments. Interest previously accrued but not collected is charged against
income at the time the loan becomes ninety days delinquent.
Sales of real estate
Real estate held for sale is stated at cost (specific identification), unless
the estimated future undiscounted cash proceeds expected to result from this
position is less than the carrying value in which case a loss is recognized.
Sales of real estate generally are accounted for under the full accrual
method. Under that method, a gain is not recognized until collectibility of
the sales price is reasonably assured and the earnings process is virtually
complete. When a sale does not meet the requirements for income recognition,
gain is deferred until those requirements are met.
Loan origination and servicing fees
Loan origination fees and direct loan origination costs are recognized when
the loans are sold by CLS.
Loan servicing fees are charged at a rate of $20 per month over the servicing
of the loan. Loan servicing fees are paid by the borrower and are recognized
as revenue as the services are provided.
Allowance for Losses
Any allowances for losses on notes receivable will include amounts for
estimated probable losses on receivables determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended. Specific allowances will
be established for delinquent receivables, as necessary. Additionally, the
Company will establish allowances, based on prior delinquency and loss
experience, for currently performing receivables and smaller delinquent
receivables. Allowances for losses will be based on the net carrying values
of the receivables, including accrued interest.
Cash
For purposes of the statement of cash flow, CLS considers all highly
liquid investments with an original maturity of three months or less to be
cash. From time to time, CLS has cash balances in excess of federally insured
limits.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
Audited
NOTE 1 - (continued)
Trust Accounts
CLS holds money in trust for real estate transactions in process. The amount
held is shown as an asset and a liability on the balance sheet.
Depreciation
Property and equipment are depreciated using the straight line method over the
estimated useful life of the assets.
Income Taxes
CLS accounts for income taxes under the asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
CLS financial statements or income tax returns. The income tax benefit of
$30,996 in 1999 resulted from a refund received by carrying back prior year
tax losses to years when income taxes were paid. This refund had not been
recognized as a receivable at December 31, 1998.
At December 31, 2000, CLS has a deferred tax asset that primarily results from
net operating loss carryforwards and future tax deductions resulting from
reporting on the cash basis for income tax purposes. The net operating loss
carryforwards amount to $81,119 and expire in 2019. The future tax deductions
resulting from reporting on the cash basis of accounting for income tax
purposes amount to $478,780. The asset resulting from these items amounts to
$190,366 and has been fully reserved.
Advertising
Advertising costs are expensed as incurred.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and related
disclosures. Accordingly, the actual amounts could differ from those
estimates.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
Audited
Note 2. Loans Receivable From Related Parties
CLS has loans receivable from related parties as follows:
2000 1999
----------- ----------
PSIG and affilites $3,816,192 $3,836,509
A limited partnership in which PSIG is a partner 278,396 67,800
----------- ----------
$4,094,588 $3,904,309
=========== ==========
Of the total loan receivable from PSIG and affiliates, $3,581,594 is due on
demand and bears interest at 12%, at December 31, 2000. Interest income
earned from PSIG was $590,483 in 2000 and $481,110 in 1999. Interest
receivable from PSIG amounted to $187,992 and $288,509 at December 31, 2000
and 1999, respectively, and is included in other receivables. At December 31,
2000, this portion of the loan is secured by real property as follows (amounts
are as represented by PSIG):
Single Family Residential $1,142,693
Multi-Family Residential 1,169,110
Undeveloped Land 1,576,085
-----------
$3,887,888
===========
The remaining amount due from PSIG and affiliates ($234,598 at December 31,
2000) is due on demand, bears no interest, and is unsecured. These amounts
are expected to be repaid in the near term.
Combined in the receivable from the first partnership is a loan in the amount
of $235,200 which is due on demand, bears interest at 12%, and is secured by
multi-family residential property, at December 31, 2000.
The other related party loans receivable are due on demand, bear no interest,
and are unsecured.
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
AUDITED
Note 3. Loans Receivable
CLS's loans receivable are concentrated in the state of Washington and are
generally secured by real estate. Types of real property securing loans
receivable at December 31, 2000 and 1999, are as follows:
2000 1999
--------- ---------
Single Family Residential $195,342 $665,056
Undeveloped Land 29,610
Other 45,573 15,130
--------- ---------
$270,525 $680,186
========= =========
Security positions on loans receivable are as follows:
2000 1999
--------- ---------
First Lien Position $145,369 590,799
Second Lien Position 52,007 42,407
Third Lien Position 31,850 31,850
Other 41,299 15,130
--------- ---------
$270,525 $680,186
========= =========
Principal payments to be received for the years ending December 31 are as
follows:
2001 $ 34,223
2002 123,601
2003 85,910
2004 26,791
-----------
270,525
===========
These loans have interest rates ranging from 10% to 14%
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 4. Loans Payable
Loans payable include loans and debentures payable made up of amounts due to
investors with varying terms. Interest rates vary from 5% to 14%.
Principal payments on loans and debentures payable for the years ending
December 31 are as follows:
2001 $1,280,042
2002 127,790
2003 452,413
2004 704,746
2005 1,479,325
Thereafter 4,644,757
----------
$8,689,073
==========
As of December 31, 2000, the Company had outstanding $5,200,000 in unsecured
debenture certificates. Debenture certificates plus accrued interest
amounting to a total of $5,884,555 are outstanding at December 31,2000.
Other loans payable consists of numerous small loans that are secured by real
estate. Included in this balance is $95,610 and $87,815 due to a family
member of a stockholder at December 31, 2000 and 1999, respectively.
NOTE 5. Notes Payable
2000 1999
--------- ---------
Line of credit with an individual for a maximum
of $700,000 due October 8, 2001. Interest at 12%
annually is to be paid monthly. In addition, CLS
is to pay a loan service fee of $2,300 per month
when there are outstanding balances. The line of
credit is secured by a blanket assignment of notes
and related deeds of trust as draws are made.
Some deeds of trust securing this line of credit
are owned by PSIG. $535,500 $699,357
======== ========
CLS also has a line of credit with a bank for a maximum of $150,000 that it
shares with PSIG. This line of credit is secured by personal guarantees of
the Class One CLS stockholders, and expires November 24, 2002. PSIG has drawn
$145,947 on the line and that amount is recorded on PSIG's books.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
Note 6. Common Stock
Class One shares of common stock are voting shares. Class Two shares are
nonvoting. Class Two shares are to receive 80% of any dividends paid, and
have dissolution preference over Class One to the extent of the Class Two
capital contributions.
Note 7. Commitments
CLS leases office space under a non-cancelable operating lease. Approximate
minimum lease payments under this lease for the years ending December 31 are
as follows:
2001 $ 79,000
2002 79,000
2003 79,000
2004 79,000
2005 13,000
----------
$ 329,000
==========
Rent expense under this lease was $50,873 in 2000 and $78,683 in 1999. These
amounts are net of amounts allocated to affiliates.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT.
The following are the officers of the company:
Name Age Title Address
Gerald C. Vanhook 52 President Mill Creek, WA
Lorrie Vanhook 54 Secretary Mill Creek, WA
Melvin Johnson, Jr 43 Vice President Edmonds, WA
Debbie Little 43 Asst Vice President Lynnwood, WA
1) Gerald C. Vanhook, (Jerry, 52) is and has been the President of the company
since its inception in 1990. Prior to that, he worked for CLS Mortgage, Inc.,
in Spokane from February 1984 until November 1989, in which he was responsible
for acquiring and selling similar securities. He has been employed in several
management positions with Consumer Financial Companies, Mortgage Banks, and
Credit Unions since 1969.
2) Lorrie Vanhook, (Lorrie, 54) is and has been the corporate
Secretary/Treasurer and is the Department Manager for loan processing. She
joined the company in July of 1990, and performed duties as a loan officer.
She is the wife of Jerry Vanhook. She has been employed in a variety of
positions with GTE over the past 20 years.
3) Melvin Johnson, Jr., (Mel, 43) is and has been the Loan Officer/Investment
Officer since joining the company in April of 1989. He became a stockholder
and Vice-President on March 1, 1994. He has been employed in a variety of
banking positions with First Interstate Bank from 1981-1989. He graduated
with a degree in Education from Central Washington University in 1980.
4) Debbie Little, (Debbie, 43) is and has been employed as the Office Manager.
She joined the company in February of 1993. She became Assistant Vice
President of Operations on October 1, 1996. She is not a stockholder. She
has been employed as a Field Supervisor with ITT Financial Services. She
graduated from Willamette University with a degree in Public Policy
and Speech in 1980.
Family Relationships
Mr. Gerald C. Vanhook, the President, is married to Lorrie Vanhook, the
Secretary. They own 67% of the companys outstanding and issued stock in Joint
Tenancy with the Right of Survivorship.
Involvement in certain legal proceedings
See Item 3 and Item 7.
ITEM 11 EXECUTIVE COMPENSATION
Summary Compensation Table
A B C D E
Name & Position Year Salary Bonus Other Salary
Gerald Vanhook 1998 $154,152.00 0 0
President 1999 85,402.00 0 0
2000 95,476.00 0 0
Lorrie Vanhook 1998 52,152.00 0 0
Secretary 1999 52,152.00 0 0
2000 52,152.00 0 0
Melvin Johnson 1998 154,152.00 0 0
Vice-President 1999 108,467.00 0 0
2000 99,286.00 0 0
Debbie Little 1998 44,400.00 0 0
Asst. Vice Pres. 1999 48,948.00 0 0
2000 49,631.00 0 0
The company pays it officers a salary based upon performance. The company
pays for health insurance and reimburses officers for expenses incurred in the
normal course of business.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND
MANAGEMENT
The company is a closely held corporation. The company originates loans to
high risk borrowers and generally services these loans in its servicing
department. The company is attempting to build a mid-level management team
capable of carrying on the business. The President and the Secretary of the
Company are married, namely Gerald C. Vanhook and Lorrie Vanhook, who own
67%.
The other owner of the business is Melvin Johnson, Jr and his wife Deidre, who
own 17% of the Company. In addition, 16% of the Company is owned by Puget
Sound Investment Group, Inc., which is also owned 50% by the Vanhooks and 50%
by the Johnsons.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
The role of Puget Sound Real Estate Services Group (referred to as "PSRESG")
was to close the Company loans and to service loans. The amount of closing
fees paid to PSRESG in 2000 was 114,467.00 as compared to 1999 at 175,997.00.
PSRESG also collected the late fees associated with the loans, late fees
collected in 2000 were 13,956.00. PSRESG also handled miscellaneous
litigation, including collection litigation, for all companies as needed.
Management closed this operation in December, 2000. CLS will continue to
service it's own loans, including collections. Litigation services, when
needed, will be out-sourced.
The role of Puget Sound Investment Group (referred to as "PSIG") is varied.
PSIG purchases distressed properties or raw land generally for much less than
market value and repairs property for resell or rent or builds new
structures. In addition, PSIG has two wholly owned subsidiaries, PSRESG and
Puget Sound Construction, Inc.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & REPORTS ON 8-K
Exhibits
The following exhibits are filed as part of this report. Exhibits previously
filed are incorporated by reference as noted.
Exhibit
Number Exhibit Page
2 Plan of acquisition, reorganization, arrangement, liquidation,
or
succession*
3 Articles of incorporation, by-laws*
4 Instruments defining the rights of security holders,
including
indentures*
9 Voting Trust agreement*
10 Material contracts*
11 Statement recomputation of per share earnings*
12 Statement recomputation of ratios*
13 Annual report to security holders, Form 10-Q or quarterly report
to
security holders*
16 Letter change in certifying accountant*
18 Letter change in accounting principles*
21 Subsidiaries of the registrant*
22 Published report regarding matters submitted to vote of
security
holders*
23 Counsel of experts and counsel*
24 Power of Attorney*
27 Financial Data Schedule 24
28 Information from reports furnished to state insurance
regulatory
authorities*
99 Additional exhibits
* Items denoted by an asterisk have either been omitted or are not applicable.
Reports on Form 8-K
The company did not file any reports on Form 8-K in the year 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
/s/ GERALD C. VANHOOK
_______________________________________ ___________________
Gerald C. Vanhook, President Date
/s/ MELVIN JOHNSON
_______________________________________ _____________________
Melvin Johnson, Jr. Vice-President Date
/s/ LORRIE VANHOOK
_______________________________________ _____________________
Lorrie Vanhook, Secretary Date
/s/ DEBBIE LITTLE
_______________________________________ _____________________
Debbie Little, Asst. Vice-President Date