Exhibit 99.1
LRS, Inc.
Table of Contents
December 31, 1998
Page
Independent Auditors' Report . . . . . . . . . . . . . . .1
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . 2
Statement of Income . . . . . . . . . . . . . . . . . . . 3
Statement of Changes in Stockholders' Equity . . . . . . .4
Statement of Cash Flows . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . .6-11
<PAGE>
Independent Auditors' Report
To the Stockholders
LRS, Inc.
Campbell, California
We have audited the accompanying balance sheet of LRS, Inc. as of December 31,
1998, and the related statements of income, changes in stockholders' equity and
cash flows for the year 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 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 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 LRS, Inc. as of December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying supplementary information contained in supplementary schedules
I and II is presented for the purpose of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
In accordance with Government Auditing Standards, we have also issued our report
dated February 22, 1999 on our consideration of LRS, Inc.'s internal control
over financial reporting and our tests of its compliance with certain provisions
of laws and regulations.
Walnut Creek, California Schoenholz & Spiegel, LLP
February 22, 1999 Certified Public Accountants
<PAGE>
LRS, Inc.
Balance Sheet
December 31, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash $ 743,602
Loan Fees Receivable 822,926
Mortgage Loans Receivable 16,582,572
Other Receivables 71,432
Prepaid Expenses 27,693
----------
Total Current Assets 18,248,225
Property and Equipment, Net 193,047
Investment Securities 580,443
Deposits 8,094
----------
Total Assets $19,029,809
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 81,283
Accrued Commissions, Wages and Payroll Taxes 458,568
Income Taxes Payable 19,000
Loan from Stockholder 3,817
Accrued Interest and Warehouse Fees 96,894
Lines of Credit 16,478,802
----------
Total Liabilities 17,138,364
----------
Stockholders' Equity:
Common Stock; No Par Value,
Authorized 1,000,000 Shares, Issued
and Outstanding 100,000 Shares 100,000
Additional Paid-In Capital 230,000
Unrealized Gain on Investment Securities 66,406
Retained Earnings 1,495,039
----------
Total Stockholders' Equity 1,891,445
----------
Total Liabilities and
Stockholders' Equity $19,029,809
==========
</TABLE>
See Notes to Financial Statements
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<PAGE>
LRS, Inc.
Statement of Income
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Loan Origination Income and Sale of Mortgages:
Loan Origination Fees $ 8,846,129
Sale of Mortgages 4,796,886
Processing Fees 843,174
Interest Income 902,018
Document Fee Income 800,065
Administration Fee Income 122,472
Other Loan Fees 127,885
-----------
Total Loan Origination Income and
Sale of Mortgages 16,438,629
-----------
Costs of Loan Origination and Sale of Mortgages:
Commissions 10,067,413
Warehouse Loan Fees 47,175
Interest Expense 1,334,703
Underwriting and Document Costs 97,669
Other Loan Costs 122,340
-----------
Total Costs of Loan Origination and
Sale of Mortgages 11,669,300
-----------
Gross Profit 4,769,329
Operating Expenses 2,653,385
-----------
Income From Operations 2,115,944
Other Income (Expenses):
Interest Income 18,502
Interest Expense ( 2,250)
Dividend Income 33,314
Gain on Sale of Investment Securities 14,670
Investment Expense ( 59)
-----------
Income Before Income Taxes 2,180,121
Provision For Income Taxes 33,911
-----------
Net Income $ 2,146,210
===========
</TABLE>
See Notes to Financial Statements
-3-
<PAGE>
LRS, Inc.
Statement of Changes in Stockholders' Equity
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Unrealized
Additional Gain (Loss)
Common Stock Paid-In on Investment Retained
Shares Amount Capital Securities Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 100,000 $100,000 230,000 ( 8,478) 723,156 1,044,678
Dividend Distributions - - - - (1,374,327) (1,374,327)
Unrealized Gain on
Investment Securities - - - 74,884 - 74,884
Net Income - - - - 2,146,210 2,146,210
------- ------- ---------- ------------- ---------- ----------
Balance at December 31, 1998 100,000 $100,000 230,000 66,406 1,495,039 1,891,445
======= ======= ========== ============= ========== ==========
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
LRS, Inc.
Statement of Cash Flows
Year Ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Cash Flows From Operating Activities:
Net Income $ 2,146,210
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 43,593
Gain on Sale of Investment Securities ( 14,670)
Increase in Loan Fees Receivable ( 252,532)
Increase in Other Receivables ( 65,245)
Increase in Mortgage Loans Receivable, Net of
Changes in Advances Under Lines of Credit ( 47,566)
Increase in Prepaid Expenses ( 231)
Increase in Deposits ( 1,990)
Increase in Accounts Payable 12,307
Increase in Income Taxes Payable 6,737
Increase in Accrued Interest and Warehouse Fees 58,167
Increase in Accrued Commissions, Wages and
Payroll Taxes 127,495
----------
Net Cash Provided by Operating Activities 2,012,275
----------
Cash Flows From Investing Activities:
Purchases of Investment Securities (4,407,209)
Proceeds from Sales of Investment Securities 4,172,982
Collection on Note Receivable from Stockholder 15,900
Purchases of Property and Equipment ( 102,800)
----------
Net Cash Used in Investing Activities ( 321,127)
----------
Cash Flows From Financing Activities:
Repayment of Note Payable to Stockholder ( 90,000)
Dividend Distributions (1,374,327)
----------
Net Cash Used in Financing Activities (1,464,327)
----------
Net Increase in Cash and Cash Equivalents 226,821
Cash and Cash Equivalents - December 31, 1997 516,781
----------
Cash and Cash Equivalents - December 31, 1998 $ 743,602
==========
Supplemental Disclosure of Cash Flow Information:
Cash Paid during the Year for:
Interest 1,342,400
Income Taxes 27,174
</TABLE>
See Notes to Financial Statements
-5-
<PAGE>
LRS, Inc.
Notes To Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
LRS, Inc., (the "Company") was incorporated on December 18,
1995, in the state of California and operates under the names
Amerimac Cal-West Financial, First Intercity Mortgage and Bay
Cities Relocation. The Company is licensed by the California
Department of Real Estate. The Company is principally engaged
in the origination and purchase of residential mortgage loans.
Generally, such loans are subsequently sold to financial
institutions or to other entities who sell such loans to
investors. The Company has obtained approval from the
Department of Housing and Urban Development (HUD) to act as a
loan correspondent sponsored by a HUD approved non-supervised
mortgagee.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include money market accounts.
Mortgage Loans Receivable
Mortgage loans receivable are held for sale and are recorded
at the aggregate lower of cost or market. All mortgage loans
are collateralized by residential property. Management
believes that the value of such collateral is in excess of the
mortgage loans receivable as of December 31, 1998 and,
therefore, no allowance has been provided.
Revenues associated with closing fees received by the Company
and costs associated with obtaining mortgage loans are
deferred and recognized upon sale of the related mortgage
loans. Amounts deferred at December 31, 1998 were $65,347.
Mortgage loans receivable are reported net of such deferred
revenues and costs in the accompanying balance sheet.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the related assets ranging from five to seven
years.
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<PAGE>
LRS, Inc.
Notes To Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 115 - "Accounting For
Certain Debt and Equity Securities". In accordance with this
statement securities are classified as held-to-maturity,
available-for-sale or trading.
Securities classified as available-for-sale may be sold in
response to changes in interest rates, liquidity needs and for
other purposes. Available-for-sale securities are carried at
fair value and include all equity securities not classified as
held-to-maturity or trading. Trading securities are those held
principally for the purpose of selling in the near future and
are carried at fair value. The Company does not have any
trading securities.
Unrealized holding gains and losses for available-for-sale
securities are excluded from earnings and reported, net of any
income tax effect, as a separate component of stockholders'
equity. Any gains and losses realized upon sale are reported
in earnings based on the average cost of the specific fund
sold.
Revenue Recognition
Loan origination and other fees earned on loans brokered are
recorded as income when the related loan is funded.
Income Taxes
The Company, with the consent of its stockholders, has elected
to be an "S" corporation under the Internal Revenue Code and
similar state law. In lieu of corporation income taxes, the
stockholders of an S corporation are taxed on their
proportionate share of the Company's taxable income.
Therefore, no provision or liability for federal income taxes
has been included in the financial statements. The Company is,
however, required to pay 1-1/2 percent income tax on taxable
income to the State of California.
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<PAGE>
LRS, Inc
Notes to Financial Statements
December 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of
December 31, 1998:
Furniture and fixtures $ 36,200
Computer equipment 159,338
Office equipment 63,280
Leasehold improvements 23,652
-------
Total property and equipment 282,470
Less: accumulated depreciation 89,423
-------
Property and equipment, net $193,047
=======
Depreciation expense charged to operations was $43,593 for the
year ended December 31, 1998.
NOTE 3 - INVESTMENT SECURITIES
The Company's investment in marketable equity securities are
held for an indefinite period and thus are classified as
available-for-sale. Unrealized holding gains on such
securities, which were added to stockholders' equity for the
year ended December 31, 1998 were $74,884.
The following is a summary of investment securities at
December 31, 1998:
Mutual funds, at cost $514,037
Gross unrealized gain 66,406
-------
Mutual funds, at fair value $580,443
=======
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<PAGE>
LRS, Inc.
Notes to Financial Statements
December 31, 1998
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following is a summary of investment earnings recognized
in income for the year ended December 31, 1998:
Realized gain $ 14,670
Dividends earned 33,314
-------
Gain on investment securities $ 47,984
=======
NOTE 4 - LINES OF CREDIT
The Company has four warehouse line of credit agreements with
separate financial institutions subject to annual renewals.
Advances are received by the Company under the agreements, up
to a maximum of 28 million in total, based upon a specified
percentage of mortgage loans which are pledged as collateral
against the advances received. Advances are due to be repaid
upon the earlier of the sale of the mortgage loans that are
pledged as collateral or a specified period of time from the
date on which the advance is received. Interest accrues at
rates that fluctuates with prime. Borrowings under the lines
of credit are guaranteed by the stockholders of the Company.
The agreements contain certain financial covenants concerning
maximum debt to equity and minimum net worth and working
capital requirements, all of which have been met. The
outstanding balance on the lines at December 31, 1998 was
$16,478,802.
NOTE 5 - CONCENTRATION OF CREDIT RISK FOR CASH HELD AT BANKS
The Company maintains cash deposits at a financial institution
in excess of the $100,000 insured by agencies of the federal
government at December 31, 1998.
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<PAGE>
LRS, Inc.
Notes to Financial Statements
December 31, 1998
NOTE 6 - OPERATING LEASES
The Company leases office facilities, automobiles and office
equipment under non-cancelable operating leases. The Company
also leases office facilities on a month to month basis. The
office leases require the Company to pay for taxes, insurance,
and maintenance. Rent expense charged to operations for the
year ended December 31, 1998, was $177,250. At December 31,
1998, future minimum lease payments are as follows:
December 31 Amount
1999 $ 96,014
2000 52,637
2001 24,822
-------
Total $173,473
=======
NOTE 7 - TRUST LIABILITY
The Company collects funds from borrowers in advance for
payment of credit reports and appraisals. The Company is
required to maintain these funds in a separate trust account
for the benefit of these borrowers. Total funds held in trust
for others at December 31, 1998 were $45,258.
NOTE 8 - CONTINGENCIES
The Company has mortgage loan purchase agreements with various
mortgage bankers. The Company is obligated to perform certain
procedures in accordance with these agreements. The agreements
provide for conditions whereby the Company may be required to
repurchase mortgage loans for various reasons among which are
either (1) a mortgage loan is originated in violation of the
mortgage banker's requirements, (2) the Company breaches any
term of the agreement and (3) an early payment default occurs
from a mortgage originated by the Company. The Company has not
been required to repurchase any loans for the year ended
December 31, 1998.
-10-
<PAGE>
LRS, Inc.
Notes to Financial Statements
December 31, 1998
NOTE 9 - LITIGATION
The Company is involved in a lawsuit arising in the ordinary
course of business. In the opinion of the Company's legal
counsel and management, the Company will prevail in the case.
Accordingly, no provision for any liability that might result
has been made in the accompanying financial statements.
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