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, 1997
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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, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1: Description of Business 3
Item 2: Description of Property 4
Item 3: Legal Proceedings 4
Item 4: Submission of Matters to Security Holders 4
PART II
Item 5: Market for Common Equity & Related Stockholders 5
Matters
Item 6: Selected Financial Data 5
Item 7: Management Discussion & Analysis 5
Item 8: Financial Statements 8
Item 9: Changes in & Disagreements with Accountants on 18
Accounting & Financial Disclosure
PART III
Item 10: Directors & Executive Officers 18
Item 11: Executive Compensation 19
Item 12: Security Ownership of Certain Beneficial Owners and 19
Management
Item 13: Certain Relationships and Related Transactions 20
Item 14: Exhibits and Reports on 8-K 21
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 companys 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 companys 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 sale
of debenture investments, principle reductions and the reselling of loans to
investors provide the source of funds needed to invest in new loans
receivable.
The company has originated loans as set forth below:
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YEAR TOTAL LOAN ORIGINATIONS LOANS BROKERED & SOLD COMPANY LOAN PORTFOLIO
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1992 $11,713,731.00 $11,693,249.00 $20,482.00
1993 $12,891,423.00 $11,087,813.00 $1,803,610.00
1994 $22,919,838.00 $20,374,002.00 $2,545,836.00
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
The company has generated revenue as set forth below:
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1995 1996 1997
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GROSS REVENUE $1,778,366.00 $1,652,870.00 $1,730,865.00
OPERATING EXPENSE $735,032.00 $764,622.00 $1,001,622.00
SALARY EXPENSE $918,347.00 $798,868.00 $698,294.00
NET INCOME $124,987.00 $89,380.00 $30,949.00
The company has been profitable since its inception.
Security
As of December 31, 1997 and December 31, 1996, 98% and 98%, respectively, of
the loans in the portfolio were secured by first liens on real property.
Management expects this trend to continue. See Note 4, 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 basis for Class C loans is
not the borrowers credit worthiness, but rather the value of the collateral.
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
intends to use the proceeds of this debenture securities offering to originate
Class C loans. The market for Class C loans is competitive with lenders such
as Investors Mortgage, 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 companys principle 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 high
risk. These loans are generally secured by a first lien position on real
estate located in the Western Washington area. The majority of the loans are
in the $50,000-$100,000 range bearing interest between 12% to 18%.
Types of real property securing loans as of December 31, 1997 are set forth
below:
SINGLE FAMILY RESIDENCES $476,682.00
COMMERCIAL PROPERTY $441,987.00
RAW LAND $1,558,600.00
OTHER $9,665.00
TOTAL LOAN RECEIVABLE $2,486,934.00
ITEM 3 LEGAL PROCEEDINGS
From time to time the company will be involved in bringing foreclosure
proceedings to enforce secured obligations. The company could sometimes be
named as a defendant in foreclosures brought by the holders of superior or
junior liens and in quiet title actions. Since the company is involved in
originating, brokering and servicing loans secured by real property, it will
by its very nature always be involved in collection activities to enforce
collection on past due loans, including but not limited to Judicial and
Nonjudicial foreclosures of Deeds of Trusts, Mortgage Foreclosures, and Real
Estate Contract Forfeitures. Counsel for the company is of the opinion that
collection actions on delinquent accounts do not constitute pending or
threatening litigation under Financial Accounting Standards Board Opinion
Number 5 (FASB 5) and is properly categorized as routine litigation incidental
to its business.
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 1993 1994 1995 1996 1997
REVENUE $1,199,670 $1,829,962 $1,778,366 $1,652,870 $1,730,865
INCOME (LOSS)
OPERATIONS $ 44,841 $ 80,945 $ 114,691 $ 88,805 $ 31,188
TOTAL ASSETS $2,099,950 $3,620,832 $4,607,563 $4,016,609 $7,905,735
LONG TERM
OBLIGATIONS $1,505,117 $2,187,066 $1,369,822 $1,111,168 $5,115,992
ITEM 7 MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS
OF OPERATION
Plan of Operation & Liquidity
The sale of debenture investments, principle payments and the reselling of
loans to investors provide 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. The company has no nonearning assets due to
managements emphasis on collections as well as a clause in all Promissory
Notes which escalates a borrowers interest rate in the event of a default. In
addition, because of managements dedication to conservative collateral lending
defaulted loans generally create additional profit centers as the collateral
value is 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. There are
primarily two internal sources of liquidity, namely retained earnings and
loans receivable in the portfolio. The company relies on its ability to
resell loan receivable in sufficient amounts to generate funds needed to pay
off maturing debentures. The external sources of liquidity include a line of
credit, sale of debentures, payoff on loan receivable, and sell of loan
receivable. The company expects to continue this cash management trend.
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 debenture payable.
The loan receivable are tied specifically to these debenture payables with
similar maturity dates of 24 to 26 months. There are no other significant
commitments for capital expenditures as of December 31, 1997.
Results of Operations
The company remains profitable and has been since inception. In 1997, 1996,
1995, 1994 and 1993 the company originated 15.3, 20.9, 19.9, 22.9, 12.8
million dollars in loans respectively. The companys revenues from operations
were 1.7, 1.7, 1.8, 1.8,and 1.2 million dollars in 1997, 1996, 1995, 1994,
1993 respectively. The company increased its retained earnings to $417,371 as
compared to 1996 retained earnings in the amount of $394,621. Revenues
remained stable in 1997 at $1,730,865. Expenses from operations increased to
1,699 677 from 1,663,677 in 1996. This is due to an increase in interest
expense from the additional debentures sold in 1997. The company has not
identified any market trend that would negatively affect the profitability of
the company through 1998.
Property Value Trends
There are no known or predicted property value downward trend, it is an
expectation that property values will continue to increase in the Puget Sound
area. Subsequently, industry reports that value of property in the western
Washington area has increased already in 1998 by 4-5%.
The Company met its Obligations to the Investors for year ending December 31,
1996 and 1995.
The company met its obligations to all investors for fiscal year ending
December 31, 1997 and 1996. The company's principle performance objective is
to meet all obligations in a timely manner and to provide an annual increase
in retained earnings. The company receives interest payments from loans
receivable sufficient to pay investor interest. The company relies on the
ability to sell loans receivable to generate the necessary cash to pay
principle to the investor. Whenever possible loan receivable maturity dates
are scheduled to correspond with the maturity date of the debenture.
Return on Asset, Equity, and Equity to Assets Ratio
The following net returns were realized during the years ended December 31,
1997 and 1996.
Year Ended December 31, 1997 1996
Return on Assets (net income/avg total assets) .38% 1.79%
Return on Equity (net income/avg equity) 2.80% 14.16%
Equity to Assets (avg equity/avg total assets) 13.62% 12.67%
Plan of Operation
The company is committed to offer debentures and loan receivable for sale to
investors for the foreseeable future. Management expects loan growth to
increase through the sale of these items by 10%. Recently, 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 expects to repay the debenture investments as they mature with
maturing loans receivable that are tied to these debenture notes.
The company has been able to invest all available funds through loan
receivable. The company expects to be able to continue to acquire similar
loans in the future. Loan purchases will be limited by available liquidity as
discussed in "Plan of Operation and Liquidity".
The company actively pursues delinquent accounts thus nonearning receivables
are minimal and generally fully collected within thirty days.
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 after December 31, 1997.
Managements strategy and policy has been to underwrite 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.
Uncertainties
The principle competition for investors' funds due to change in market rates
may result in investors choosing to change their portfolios when it comes to
loan receivable purchases. This does not affect debenture securities because
they are a preset period of time.
The loan portfolio consists of loans with maturities of one to three years.
As a loan matures and balloon payments are paid, new loans are expected to be
funded at present market rates. It is possible that a one to three year lag
could occur before the overall average of the portfolio's interest rate
increased after a rise in market rates.
ITEM 8 FINANCIAL STATEMENTS
Index to Financial Statements as of December 31, 1997
Page
Independent Auditors Statement 9
Balance Sheet 10
Statement of Income and Retained Earnings 11
Statement of Cash Flows 12
Notes to Financial Statements 13-17
(LETTERHEAD)
To the Stockholders
CLS Financial Services, Inc
Lynnwood, Washington
We have audited the accompanying balance sheets of CLS Financial Services,
Inc. as of December 31, 1997 and 1996, and the related statements of income,
retained earnings, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 aidnificant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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, 1997 and 1996, and the results of operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Nelson, Watson, & Erickson, LLP
February 26, 1998
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
December 31, 1997 AND 1996
1997 1996
ASSETS -------- ---------
Cash $ 39,504 $ 86,160
Cash - trust account 12,213 9,970
Accrued commission receivable 27,834 1,385
Accrued interest receivable 39,050 66,707
Loans receivable - (note 4) 2,486,934 2,992,738
Loans receivable - related party (note 8) 3,700,546 -
Less allowance for loan losses (14,964) (14,964)
Real estate held for sale 797,730 735,988
Prepaid expenses 20,080 11,653
Other receivables 103,221 -
Investments (note 2) 6,713 37,021
Land/New Building 600,897 -
Office furniture and equipment 219,663 203,075
Less accumulated depreciation (133,686) (113,124)
--------- ---------
Total Assets $7,905,735 $4,016,609
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 24,795 16,438
Accrued wages and benefits 39,080 39,857
Trust account payable 12,213 9,970
Unfunded loan liabilities (note 5) - 79,879
Accrued interest payable 50,264 39,079
Accrued federal income tax - 14,000
Loans payable (note 6) 5,318,214 2,986,661
Loan payable related party 244,123 77,549
Line of credit - 150,000
Deferred federal income tax 17,413 18,088
Other payables 1,795 -
Note payable land purchase 590,000 -
-------- ---------
Total Liabilities 6,297,897 3,431,521
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STOCKHOLDERS' EQUITY
Common stock, no par value, 500 shares 10,000 10,000
Common stock, no par value, nonvoting 1,180,467 180,467
Retained earnings 394,622 317,242
Net income (loss) 22,749 77,380
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Total Stockholders' Equity 1,607,838 585,088
---------- ---------
Total Liabilities & Stockholders' Equity $7,905,735 $4,016,609
======== ========
The accompanying notes are an integral part of these statements.
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
December 31, 1997 AND 1996
1997 1996
REVENUES ---- ----
Loan fees $839,720 $926,106
Interest on loans 757,094 700,938
Loan servicing and application fees 133,706 18,119
Other income 345 7,707
------- -------
1,730,865 1,652,870
OPERATING EXPENSES
Wage and payroll taxes 698,294 798,868
Commissions and referrals 100,056 -
Interest expense 570,688 395,577
Provision for loan losses - (3,510)
Advertising 42,889 57,787
Rent 76,744 74,611
Telephone and utilities 16,117 17,115
Office expense 45,246 15,474
License and taxes 3,583 21,764
Postage 4,905 4,601
Printing 3,908 4,317
Credit and title fees 21,793 2,706
Professional fees 23,137 23,371
Travel, entertainment, promotion 6,444 2,875
Janitorial and maintenance 5,942 10,139
Fringe benefits 48,639 83,891
Depreciation and amortization 25,099 26,007
Training and other operating costs 6,193 28,472
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Total operating costs 1,699,677 1,564,065
INCOME (LOSS) FROM OPERATIONS 31,188 88,805
OTHER INCOME (EXPENSE) (239) 575
------- -------
NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX - -
PROVISION FOR FEDERAL INCOME TAX 8,200 12,000
------ ------
NET INCOME (LOSS) 22,749 77,380
RETAINED EARNINGS, beginning of year 394,622 317,241
-------- --------
RETAINED EARNINGS, ending $417,371 $394,621
======= =======
The accompanying notes are an integral part of these statements.
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
December 31, 1997 AND 1996
1997 1996
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $22,749 $ 77,380
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 25,099 26,007
Loss on sale of equipment 1,239 -
Allowance for loan losses (3,510)
Deferred income taxes (675) 1,940
Decrease (increase) in commissions receivable (26,449) 23,435
Decrease (increase) in interest receivable 27,657 (41,202)
Decrease (increase) in prepaid expenses (8,427) (6,195)
Increase (decrease) in accounts payable 8,357 (12,602)
Increase (decrease) in accrued wages and benefits (777) 35,926
Increase (decrease) in other payables (12,205) 11,500
Decrease (increase) in other receivables (103,221) -
Increase (decrease) in interest payable 11,185 (1,923)
----------- ---------
NET CASH PROVIDED (USED) BY OPERATIONS (55,468) 110,756
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (623,260) (4,561)
Increase (decrease) in related party loans (3,533,972) (677,611)
Decrease (increase) in loans receivable 505,804 720,799
Decrease (increase) in real estate held for sale (61,742) (65,660)
Increase (decrease) in loans payable 2,921,553 371,461
Increase (decrease) in unfunded loan liabilities (79,879) (456,498)
Purchase of investments 30,308 (15,848)
Increase (decrease) in line of credit (150,000) 70,000
Increase (decrease) in deferred revenue - -
Increase (decrease) in retained earnings - -
Increase (decrease) in stock issued 1,000,000 -
---------- --------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 8,812 (57,918)
---------- --------
NET INCREASE (DECREASE) IN CASH 86,160 52,838
CASH BALANCE - BEGINNING OF PERIOD (46,656) 33,322
-------- -------
CASH BALANCE - END OF PERIOD $ 39,504 $ 86,160
======= =======
The accompanying notes are an integral part of these statements.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS
CLS FINANCIAL SERVICES, INC. is incorporated under the laws of the State of
Washington. The Company's primary business purpose is to engage in the
brokerage of loans and the purchase and sale of real estate contracts,
mortgages and deeds of trust. The company is also registered with the State
of Washington to sell securities involving mortgages, trust deeds and real
estate contracts.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
The Company utilizes the allowance method of providing for losses on
uncollectible loans on overvalued real estate. Specific valuation of
allowances are provided for loans receivable when repayment becomes doubtful
and the amounts expected to be received in settlement of the loan are less
than the amount due.
Loans are placed in a nonaccrual status 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 to principal and interest. Interest previously accrued but not
collected is charged against income at the time the loan is placed on
nonaccrual status.
Valuation allowances are provided for real estate loans held for sale when the
net realizable value of the property is less than its costs. Foreclosed
assets that are held for sale are carried at the lower of cost (recorded
amount at the date of foreclosure) or fair value less disposition costs.
Additions to the allowance are charged to expense.
SALES OF REAL ESTATE
Sales of real estate generally are accounted for under the full accrual
method. Under that method, gain is not recognized until the 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 accounted for
under two methods. For loans held as investment the loan fees and direct
costs are amortized over the life of the loan. For loans which are held for
sale loan fees and direct costs are not recorded until the loans are sold by
the company.
Loan servicing fees are charged at a flat rate of $250 per loan and $20 per
month over the servicing of the loan. Loan fees are paid by the borrower.
Loan fees vary from two up to eight percent depending upon collateral and the
credit history of the borrower.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES cont'd.
TRUST ACCOUNT
The Company holds money in trust for real estate transactions in process. The
amount held is shown as a current asset and current liability on the balance
sheet. $12,213 and $ 9,970 were held in trust at Dec. 31, 1997 and Dec. 31,
1996.
CASH
For purposes of the statement of cash flow, the Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents.
DEPRECIATION
Furniture and equipment is stated at cost and is depreciated using the
straight line method for financial reporting purposes. Estimated useful lives
are as follows:
Office Equipment 7 years
Computer Equipment 5 years
Expenditures for major renewals, additions and betterments which extend useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
FEDERAL INCOME TAX
The Company provides for income taxes based on its income for financial
reporting purposes, which is accounted for using the accrual method. For
federal income tax purposes, the Company uses the cash method of accounting.
The Company also records depreciation under two separate methods for financial
reporting and federal tax purposes. Deferred income taxes are provided
for timing differences created by these two reporting methods.
USE 0F ACCOUNTING 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
disclosures. Accordingly, the actual amounts could differ from those
estimates. Any adjustment applied to estimated amounts are recognized in the
year which such adjustments are determined.
NOTE 2 - INVESTMENTS
Short term investments consist of marketable securities and are at the lower
of cost or market value.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 3 - COMMITMENTS
The Company leases office space under terms of an operating lease. Future
years lease payments under the lease are as follows:
Dec. 31, 1998 $113,820
Dec. 31, 1999 18,970
--------
$132,790
=======
NOTE 4 - LOANS RECEIVABLE
Principal payments over the next five years are as follows:
Dec 31, 1998 $ 1,044,896
Dec 31, 1999 1,269,422
Dec 31, 2000 71,484
Dec 31, 2001 30,384
Dec 31, 2002 42,106
Dec 31, 2003 29,707
---------
$ 2,486,934
=========
Types of real and other property securing loan receivable at Dec 31, 1997
and Dec 31, 1996 are as follows:
1997 1996
---- ----
Single Family Residential $ 476,682 $ 725,587
Multi Family Residential - -
Commercial Property 441,987 20,800
Undeveloped Land 1,558,600 2,239,459
Automobile 9,665 6,892
Unsecured - -
--------- ---------
$ 2,486,934 $ 2,992,738
========= =========
Security positions on loans receivable are as follows:
1997 1996
---- ----
First lien position $ 2,436,426 $ 2,928,502
Second lien position 50,508 64,236
Other - -
--------- ----------
$ 2,486,934 $ 2,992,738
========= =========
A concentration of credit exists as substantially all of the loans are secured
by real property in the State of Washington.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATMENTS
DECEMBER 31, 1997
NOTE 5 - UNFUNDED LOAN LIABILITIES
The unfunded loan liabilities account represents the unfunded portion of loans
which are generally payable to a third party contractor upon certification of
completion of construction or other condition.
Upon completion of the condition the Company funds the remaining portion of
the loans from its line of credit or funds available from the sale of debt
securities. At Dec. 31, 1997 and 1996 the balance of unfunded loan
liabilities were $0 and $79,879 respectively.
NOTE 6 - LOANS PAYABLE AND DEBENTURES PAYABLE
Loans payable and debenture payable are made up of amounts due to investors
with varying terms. Obligations on these loans and debentures are classified
as short or long term based upon their maturity dates.
Principal payments on loans and debenture payable are as follows:
Dec. 31, 1998 $ 202,222
Dec. 31, 1999 500,003
Dec. 31, 2000 837,483
Dec. 31, 2001 888,144
Dec. 31, 2002 2,790,362
Dec. 31, 2003 100,000
---------
$ 5,318,214
=========
The company is registered as a securities broker dealer with the State of
Washington. As of Dec. 31, 1997 the Company has issued $5,150,000 in
debenture certificates under this program. Of this total $5,082,688 in
debenture certificates are outstanding at Dec. 31, 1997.
NOTE 7 - LINE OF CREDIT
The Company has a $650,000 line of credit. The Company pays $2,200 per month
in addition to 12% interest on funds borrowed. At Dec. 31, 1997 the amount
owing on this line of credit is $00. The Company also has a $100,000 line of
credit with US Bank. The interest rate is prime plus 2% on borrowed. At Dec.
31, 1997 the amount due on this line is $00.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Stockholders of the Company also own 100% of the stock in Puget Sound
Investment Group, Inc. (PSIG), Puget Sound Appraisal Group, Inc. (PSAG), Puget
Sound Real Estate Services Group, Inc. (PSRESG), and Puget Sound Construction
of Washington, Inc. (PSCW). The Stockholders and PSIG also own 100%
partnership units of PSIG - ONE LP.
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
December 31, 1997
NOTE 8 - RELATED PARTY TRANSACTIONS cont'd.
PSIG assumes the payment obligations on real estate loans which have gone into
foreclosure. Once a loan has gone into foreclosure the loan interest escalates
and PSIG will collect the higher interest upon disposition of the property.
These loans are retained by the Company and no revenues are recorded until the
loan balance has been paid. The Company and PSIG lends funds to each other to
meet short term working capital needs. At Dec. 31, 1997 PSIG owes the company
$3,700,546. PSIG is charged rent by the Company for office space. For the
twelve months ended Dec 31, 1997 the Company has charged PSIG $7,350.00 for
rent.
PSAG provides appraisal services for loans originated by the Company. PSAG is
charged rent by the Company for office space. For the twelve months ended Dec.
31, 1997 the Company has charged PSAG $6,600 for rent.
PSRESG provides real estate closing services for loans originated by the
Company. For the twelve months ending Dec. 31, 1997 the Company has charged
PSRESG $23,100 for rent.
PSCW provides residential repair on properties owned by the affiliate PSIG.
For the twelve months ending Dec 31, 1997 the Company has charged PSCW $3,300
for rent.
NOTE 9 - COMMON STOCK
As of Dec 31, 1997 Common Stock consists of the following:
Class One - Common Stock
No Par Value, 500 shares
Authorized and outstanding $ 10,000
Class Two - Common Stock
$1,000 Par Value, 2,500 shares
authorized and outstanding 1180 1/2 shares 1,180,500
---------
Total Common Stock issued and outstanding $1,190,500
=========
Class One common stock has non cumulative voting rights.
Class Two common stock has no voting rights or conversion privileges. Class
Two shares have preference as to dividend distributions to the extent of 80%
of dividend distributions paid and preference upon dissolution to the extent
of book value attributable to Class Two capital contributions.
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 49 President Mill Creek, WA
Lorrie Vanhook 51 Secretary Mill Creek, WA
Melvin Johnson, Jr 40 Vice President Edmonds, WA
Debbie Little 40 Asst Vice President Lynnwood, WA
1) Gerald C. Vanhook, (Jerry, 49) 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, 51) 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, 40) 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, 40) 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 Supervisors 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
The company, its officers and directors, its advisors and affiliates have
never filed a petition in Bankruptcy or Insolvency of any kind. No officer or
director has been convicted in a criminal proceedings or is the subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses). No officer or director is subject to any order, judgement, or
decree limiting his involvement in any type of business, securities or banking
activity. No officer or director has been found to have violated any federal
or state securities or commodities law.
ITEM 11 EXECUTIVE COMPENSATION
Summary Compensation Table
A B C D E
Name & Position Year Salary Bonus Other Salary
- ------------------------------------------------------------------------------
Gerald Vanhook 1995 $150,264.17 0 0
President 1996 154,152.00 0 0
1997 154,152.00 0 0
- ------------------------------------------------------------------------------
Lorrie Vanhook 1995 82,335.33 0 0
Secretary 1996 46,155.00 0 0
1997 52,152.00 0 0
- ------------------------------------------------------------------------------
Melvin Johnson 1995 147,619.65 0 0
Vice-President 1996 154,152.00 0 0
1997 154,152.00 0 0
- ------------------------------------------------------------------------------
Debbie Little 1995 41,748.84 0 0
Asst. Vice Pres. 1996 44,654.50 0 0
1997 44,400.00 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")
is to close the Company loans and to service loans. The amount of closing
fees paid to PSRESG in 1997 was 158,123.00 as compared to 1996 at 109,477.06.
PSRESG also collects the late fees associated with the loans, late fees
collected in 1997 were 31,437.00. PSRESG also handles miscellaneous litigation
for all companies has needed.
The role of Puget Sound Appraisal Group (referred to as "PSAG") is to appraise
some of the properties or at minimum review and conduct a visual inspection of
the property if appraised by a third party. PSAG also has began to conduct
appraisals for outside mortgage companies, in 1997 PSAG appraisal fees were
82,187.00 compared to 1996 of 70,895.00. PSAG's operations are limited to
appraisal services only.
The role of Puget Sound Investment Group (referred to as "PSIG") is varied.
Specifically, how PSIG relates to the Company, is by servicing the default
loan. PSIG keeps investors current at the borrower rate while a borrower is
in default. Once the borrower cures the loan by paying the additional default
rate PSIG is repaid and retains the additional interest paid by the borrower
at the default rate. PSIG also purchases distressed properties generally for
much less than market value and repairs property for resell or rent. In
addition, PSIG has three wholly owned subsidiaries, PSAG, 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 fourth quarter of
1997.
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.
_______________________________________ ___________________
Gerald C. Vanhook, President Date
_______________________________________ _____________________
Melvin Johnson, Jr. Vice-President Date
_______________________________________ _____________________
Lorrie Vanhook, Secretary Date
_______________________________________ _____________________
Debbie Little, Asst. Vice-President Date