<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________________________ to _________________
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 (I.R.S Employer
incorporation or organization Identification No.)
4720 200th St SW, Suite 200, Lynnwood, WA 98036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (206) 774-0386
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------------- --------------------------------------------
- -------------------------------- --------------------------------------------
- -------------------------------- --------------------------------------------
Securities registered pursuant to section 12(g) of the Act:
-------------------------------------------------------------------------------
(Title of class)
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(Title of class)
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]
1
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CLS FINANCIAL SERVICES, INC.
ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
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
2
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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 LOANS BROKERED & COMPANY LOAN
ORIGINATIONS SOLD PORTFOLIO
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1992 $11,713,731.00 $11,693,249.00 $20,482.00
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1993 $12,891,423.00 $11,087,813.00 $1,803,610.00
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1994 $22,919,838.00 $20,374,002.00 $2,545,836.00
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1995 $19,868,765.00 $16,202,907.00 $3,665,858.00
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1996 $20,962,033.00 $17,969,295.00 $2,992,738.00
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The company has generated revenue as set forth below:
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1994 1995 1996
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GROSS REVENUE $1,829,962.00 $1,778,366.00 $1,652,870.00
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OPERATING EXPENSE $997,001.00 $735,032.00 $764,622.00
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SALARY EXPENSE $952,056.00 $918,347.00 $798,868.00
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NET INCOME $89,218.00 $124,987.00 $89,380.00
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The company has been profitable since its inception.
SECURITY
As of December 31, 1996 and December 31, 1995, 98% and 89%, 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.
3
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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, 1996 are set forth
below:
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SINGLE FAMILY RESIDENCES $725,587.00
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COMMERCIAL PROPERTY $20,800.00
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RAW LAND $2,239,459.00
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OTHER $6,892.00
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TOTAL LOAN RECEIVABLE $2,992,738.00
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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
4
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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
<TABLE>
<CAPTION>
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YEAR 1993 1994 1995 1996
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<C> <C> <C> <C> <C>
REVENUE $ 1,199,670.00 $ 1,829,962.00 $ 1,778,366.00 $ 1,652,870.00
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INCOME (LOSS) $ 44,841.00 $ 80,945.00 $ 114,691.00 $ 88,805.00
OPERATIONS
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TOTAL ASSETS $ 2,099,950.00 $ 3,620,832.00 $ 4,607,563.00 $ 4,016,609.00
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LONG TERM $ 1,505,117.00 $ 2,187,066.00 $ 1,369,822.00 $ 1,111,168.00
OBLIGATIONS
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</TABLE>
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
5
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payables with similar maturity dates of 24 to 26 months. There are no other
significant commitments for capital expenditures as of December 31, 1996.
RESULTS OF OPERATIONS
The company remains profitable and has been since inception. In 1996, 1995,
1994, 1993 and 1992 the company originated 20.9, 19.9, 22.9, 12.8, 11.7 million
dollars in loans respectively. The companys revenues from operations were 1.7,
1.8, 1.8, 1.2, and .8 million dollars in 1996, 1995, 1994, 1993, 1992
respectively. The company increased its retained earnings to $394,621 as
compared to 1995 retained earnings in the amount of $317,241. Revenues remained
stable in 1996 at $1,652,870. Expenses from operations declined from 1,663,675
in 1995 to 1,564,065 in 1996. This is due to a further decline in salaries and
payroll taxes through more efficient operations. The company has not identified
any market trend that would negatively affect the profitability of the company
through 1997.
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 1997 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, 1996 and 1995. 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, 1996
and 1995.
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Year Ended December 31, 1996 1995
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Return on Assets (net income/avg total assets) 1.79% 2.26%
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Return on Equity (net income/avg equity) 14.16% 25.06%
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Equity to Assets (avg equity/avg total assets) 12.67% 8.27%
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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 15%.
The company expects to repay the debenture investments as they mature with
maturing loans receivable that are tied to these debenture notes.
6
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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, 1996.
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.
7
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ITEM 8 FINANCIAL STATEMENTS
Index to Financial Statements as of December 31, 1996
Page
Independent Auditors Statement 7
Balance Sheet 8
Statement of Income and Retained Earnings 9
Statement of Cash Flows 10
Notes to Financial Statements 11-15
8
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[LETTERHEAD]
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, 1996 and 1995, 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 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 1996 and 1995 financial statements referred to above present
fairly, in all material respects, the financial position of CLS Financial
Services, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Nelson, Watson & Erickson, LLP.
March 4, 1997
9
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CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
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Cash $ 86,160 $ 33,322
Cash-trust account 9,970 20,497
Commissions receivable 1,385 24,820
Accrued interest receivable 66,707 25,505
Loans receivable (Note 5) 2,992,738 3,713,537
Less allowance for loan losses (14,964) (18,474)
Prepaid expenses 11,653 5,458
Investments (Note 2) 37,021 21,173
Real estate held for sale 735,988 670,328
Office furniture and equipment 203,075 198,514
Less accumulated depreciation (113,124) (87,117)
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Total assets $ 4,016,609 $ 4,607,563
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----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 16,438 $ 29,040
Accrued wages and benefits 39,857 3,931
Trust account payable 9,970 20,497
Unfunded loan liabilities 79,879 536,377
Accrued interest payable 39,079 41,002
Accrued federal income tax 14,000 2,500
Loan payable to related parties 77,549 755,160
Loans payable 2,986,661 2,615,200
Deferred federal income tax 18,088 16,148
Line of credit 150,000 80,000
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Total liabilities 3,431,521 4,099,855
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STOCKHOLDERS' EQUITY
Common stock 190,467 190,467
Retained earnings 394,621 317,241
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Total stockholders' equity 585,088 507,708
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Total liabilities and stockholders' equity $ 4,016,609 $ 4,607,563
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
10
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CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
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REVENUES
Loan fees $ 926,106 $ 808,556
Interest on loans 700,938 832,670
Loan servicing and application fees 18,119 26,829
Other income 7,707 15,311
Gain on real estate sales - 95,000
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Total revenues 1,652,870 1,778,366
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OPERATING EXPENSES
Wages and payroll taxes 798,868 918,347
Commissions and referrals - 13,030
Interest expense 395,577 396,491
Provision for loan losses (3,510) 4,368
Advertising 57,787 35,312
Rent 74,611 68,657
Telephone and utilities 17,115 22,613
Office expense 15,474 17,364
License and taxes 21,764 17,458
Postage 4,601 6,187
Printing 4,317 3,202
Credit and title fees 2,706 5,391
Professional fees 23,371 39,925
Travel, entertainment and promotion 2,875 2,953
Janitorial and maintenance 10,139 8,804
Fringe benefits 83,891 52,930
Depreciation and amortization 26,007 26,503
Training and other operating costs 28,472 24,140
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Total operating expenses 1,564,065 1,663,675
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INCOME FROM OPERATIONS 88,805 114,691
OTHER INCOME (EXPENSE) - NET 575 10,296
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NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX 89,380 124,987
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PROVISION FOR FEDERAL INCOME TAX
Current 18,600 11,500
Deferred (6,600) 20,500
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Net income tax 12,000 32,000
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NET INCOME 77,380 92,987
RETAINED EARNINGS, beginning of year 317,241 224,254
RETAINED EARNINGS, end of year $ 394,621 $ 317,241
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The accompanying notes are an integral part of these statements.
11
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CLS FINANCIAL SERVICES, INC.
COMPARATIVE STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,380 $ 92,987
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 26,007 26,503
Allowance for loan losses (3,510) 4,368
Deferred income taxes 1,940 10,546
Decrease (increase) in commissions receivable 23,435 (7,369)
Decrease (increase) in interest receivable (41,202) (8,619)
Decrease (increase) in prepaid expenses (6,195) (353)
Increase (decrease) in accounts payable (12,602) 20,734
Increase (decrease) in accrued wages and benefits 35,926 (22,860)
Increase (decrease) in interest payable (1,923) 12,853
Increase (decrease) in other payables 11,500 (4,109)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATIONS 110,756 124,681
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,561) (13,526)
Increase (decrease) in related party loans (677,611) 358,590
(Increase) decrease in loans receivable 720,799 (1,167,701)
(Increase) decrease in real estate held for sale (65,660) (415,328)
Increase (decrease) in loans payable 371,461 198,111
Increase (decrease) in line of credit 70,000 80,000
Increase (decrease) in unfunded loan liabilities (456,498) 53,955
Purchase of investments (15,848) (15,783)
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NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES (57,918) (921,682)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued - 180,467
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES - 180,467
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NET INCREASE (DECREASE) IN CASH 52,838 (616,534)
CASH BALANCE - BEGINNING OF PERIOD 33,322 649,856
----------- -----------
CASH BALANCE - END OF PERIOD $ 86,160 $ 33,322
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
12
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CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
C.L.S. 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 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 collectability 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 $10 per
month over the servicing of the loan. Loan fees are paid by the borrower. Loan
fees vary from two up to eight percent dependent upon collateral and the credit
history of the borrower.
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. $9,970 and $20,447 were held in trust at December 31, 1996 and 1995
respectively.
CASH
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
13
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CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT.
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 the
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.
NOTE 2 - INVESTMENTS
Short term investments consist of marketable securities and are shown at the
lower of cost or market value.
NOTE 3 - COMMITMENTS
The Company leases office space under terms of an operating lease. Future years
lease payments under the lease are as follows:
December 31, 1997 $ 113,820
December 31, 1998 113,820
December 31, 1999 18,970
----------
$ 246,610
----------
----------
NOTE 4 - LOANS RECEIVABLE
Principal payments over the next five years are as follows:
December 31, 1997 $ 762,945
December 31, 1998 1,795,273
December 31, 1999 -
December 31, 2000 99,952
December 31, 2001 184,568
Thereafter 150,000
------------
$ 2,992,738
------------
------------
14
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CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 4 - LOANS RECEIVABLE CONT.
Types of real and other property securing loans receivable at December 31, 1996
and 1995 are as follows:
1996 1995
------------ ------------
Single family residential $ 725,587 $ 1,839,527
Multiple family residential - 105,000
Commercial property 20,800 843,950
Developed land - -
Undeveloped land 2,239,459 914,435
Automobile 6,892 10,625
------------ ------------
$ 3,713,537 $ 2,992,738
------------ ------------
------------ ------------
Security positions on loans receivable are as follows:
1996 1995
------------ ------------
First lien position $ 2,928,502 $ 3,291,867
Second lien position 64,236 331,670
Other - 90,000
------------ ------------
$ 3,713,537 $ 2,992,738
------------ ------------
------------ ------------
A concentration of credit exists as substantially all of the loans are secured
by real property in the State of Washington.
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 December 31, 1996 and 1995 the balance of unfunded loan
liabilities was $79,879 and $536,377 respectively.
NOTE 6 - LOANS PAYABLE
Loans payable are made up of amounts due to investors with varying terms.
Principal payments on these loans are payable as follows:
December 31, 1997 $ 1,875,493
December 31, 1998 163,420
December 31, 1999 341,305
December 31, 2000 12,480
December 31, 2001 593,963
-------------
$ 2,986,661
-------------
-------------
The Company is registered as a securities broker dealer with the State of
Washington. As of December 31, 1996 the Company has issued $3,188,572 in
debenture certificates under this program. Of this total $2,846,714 in
debenture certificates are outstanding at year end. This amount is included in
the loans payable balance.
15
<PAGE>
CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - LINES OF CREDIT
The Company has a $400,000 line of credit which is pays $1,800 per month in
addition to 12% interest on borrowed funds. $150,000 is due on this line of
credit at December 31, 1996.
The Company also has a $100,000 line of credit with US Bank. The interest rate
is prime plus 2% on borrowed funds. No amount is due on this line of credit at
December 31, 1996.
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 Investment Group, Inc. owns 100% of
the stock in Puget Sound Appraisal Group, Inc. (PSAG), Puget Sound Real Estate
Services Group, Inc. (PSRESG) and Puget Sound Construction of Washington, Inc.
(PSCW). PSIG also owns 17% of the class one common stock and 100% of the class
two common stock of CLS Financial Services, Inc.
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 rate 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 lend funds to each other to meet short term working capital
needs. At December 31, 1996 the Company owed PSIG $755,160. PSIG is charged
rent by the Company for office space. For the year ended December 31, 1995 the
Company has charged PSIG $7,350 for rent.
PSAG provides appraisal services for loans originated by the Company. PSAG is
charged rent by the Company for office space. For the year ended December 31,
1996 the Company has charged PSAG $6,600 for rent.
PSRESG provides real estate closing services for loans originated by the
Company. For the year ending December 31, 1996 the Company has charged PSRESG
$23,100 for rent.
PSCW provides improvement and repair work on properties owned by the affiliate
PSIG. For the year ending December 31, 1996 the Company charged PSCW $3,300 for
rent.
16
<PAGE>
CLS FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - COMMON STOCK
As of December 31, 1996 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, shares 180.467
issued and outstanding 180,467
-------------
Total Common Stock issued and outstanding $ 190,467
-------------
-------------
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.
17
<PAGE>
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 47 President Mill Creek, WA
- --------------------------------------------------------------------------------
Lorrie Vanhook 49 Secretary Mill Creek, WA
- --------------------------------------------------------------------------------
Melvin Johnson, Jr 38 Vice President Edmonds, WA
- --------------------------------------------------------------------------------
Debbie Little 38 Asst Vice President Lynnwood, WA
- --------------------------------------------------------------------------------
1) Gerald C. Vanhook, (Jerry, 47) 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, 49) 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, 38) 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, 38) 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.
18
<PAGE>
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 Annual
Salary
- --------------------------------------------------------------------------------
Gerald Vanhook 1994 $ 164,171.46 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
President 1995 $ 150,264.17 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
1996 $ 154,152.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Lorrie Vanhook 1994 $ 82,335.33 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Secretary 1995 $ 46,155.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
1996 $ 52,152.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Melvin Johnson 1994 $ 136,810.63 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Vice President 1995 $ 147,619.65 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
1996 $ 154,152.00 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Debbie Little 1994 $ 38,248.84 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
Asst Vice Pres. 1995 $ 41,748.84 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
1996 $ 44,654.50 $ 0.00 $ 0.00
- --------------------------------------------------------------------------------
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
19
<PAGE>
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 1996 was 109,477.06 as compared to 1995 at 101,689.08. PSRESG
also collects the late fees associated with the loans, late fees collected in
1996 were 49,258.73. 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 1996 PSAG appraisal fees were
70,895.00 compared to 1995 of 67,234.85. 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.
20
<PAGE>
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*
- --------------------------------------------------------------------------------
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 1996.
21
<PAGE>
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 March 19, 1997
- ------------------------------------ --------------------
Gerald C. Vanhook, President Date
/s/ Melvin Johnson, Jr. March 19, 1997
- ------------------------------------ --------------------
Melvin Johnson, Jr. Vice-President Date
/s/ Lorrie Vanhook March 19, 1997
- ------------------------------------ --------------------
Lorrie Vanhook, Secretary Date
/s/ Debbie Little March 19, 1997
- ------------------------------------ --------------------
Debbie Little, Asst. Vice-President Date
22
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