Per our previous submission on March 20, 1998 Accession Number 0001051718-
98-000001, we are attaching Exhibit 23, Consent of Experts
and Exhibit 27, Financial Statements.
John Nelson, C.P.A. Nelson, Watson & Erickson, L.L.P. Dan Watson, C.P.A.
Charles Steele, E.A CERTIFIED PUBLIC ACCOUNTANTS Curtis Erickson, C.P.A.
Consent of Independent Auditor
We consent to the inclusion in and incorporation by
reference in the Registration Statement on Form SB of CLS
Financial Services, Inc., our Independent Auditor's Report
dated February 26, 1998, on our audits of the financial
statement of C.L.S. Mortgage of Lynnwood, Inc. as of
December 31, 1997 and 1996. We also consent to the
reference to our firm under the caption, "Interest of Named
Experts and Counsel".
Nelson, Watson & Erickson, PS
Dan Watson CPA
February 26, 1998
First West Building
200 First Avenue West Suite 401
Seattle, Washington 98119-4299
(206) 284-9900
Fax (206) 284-3360
John Nelson, P.S. Nelson, Watson & Erickson, L.L.P. Dan Watson, P.S.
CERTIFIED PUBLIC ACCOUNTANTS Curtis Erickson, P.S.
INDEPENDENT AUDITOR'S REPORT
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, and government auditing standards issued by the Comptroller
General of 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 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 its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
February 26, 1998
First West Building
200 First Avenue West Suite 401
Seattle, Washington 98119-4299
(206) 284-9900
Fax (206) 284-3360
<PAGE>
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
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 bldg 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
Loans 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
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 394,622 317,241
Net income (loss) 22,749 77,380
Total Stockholders' Equity 1,607,838 585,088
Total Liability & Stockholders' Equity $7,905,735 $4,016,609
The accompanying notes are an integral part of these statements.
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES 1997 1996
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
Total revenues 1,730,865 1,652,870
OPERATING EXPENSES
Wages and payroll taxes 698,294 798,868
Commission 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, and promotion 6,444 2,875
Janitorial and maintenance 5,942 10,139
Fringe benefits 48,639 83,891
Depreciation and amoritization 25,099 26,007
Training and other operating expenses 6,193 28,472
Total operating expenses 1,699,677 1,564,065
INCOME FROM OPERATIONS 31,188 88,805
OTHER INCOME (EXPENSE) - NET (239) 575
NET INCOME BEFORE PROVISION
FOR FEDERAL INCOME TAX 30,949 89,380
PROVISION FOR FEDERAL INCOME TAX
Current 8,200 18,600
Deferred - (6,600)
Net income tax 8,200 12,000
NET INCOME 22,749 77,380
RETAINED EARNINGS, beginning of year 394,622 317,241
RETAINED EARNINGS, end of year $417,371 $394,621
<PAGE>
CLS FINANCIAL SERVICES, INC.
COMPARATIVE STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CASH FLOWS FROM OPERTING ACTIVITIES 1997 1996
Net income $22,749 $77,380
Adjustments to reconcile net income to net cash from operations:
Depreciation and amoritization 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 other receivables (103,221) -
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 interest payable 11,185 (1,923)
Increase (decrease) in other payables (12,205) 11,500
NET CASH PROVIDED (USED) BY OPERATIONS (55,468) 110,756
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (623,260) (4,561)
Increase (decrease) in related party loans (3,533,972) (677,611)
(Increase) decrease in loans receivable 505,804 720,799
(Increase) decrease in real estate held for sale (61,742) (65,660)
Increase (decrease) in loans payable 2,921,553 371,461
Increase (decrease) in line of credit (150,000) 70,000
Increase (decrease) in unfunded loan liabilities (79,879) (456,498)
Purchase of investments 30,308 (15,848)
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (991,188) (57,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common Stock issued 1,000,000 -
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,000,000 --
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 stmts.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
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.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
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 OF 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.
<PAGE>
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.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
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
$150,000 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 0.
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.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
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.
During the year, PSIG - One LP purchased 1,000 shares of Class Two Common
Stock from the Company in the amount of $1,000,000.
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.
