<PAGE>
<PAGE>
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, 1998
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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)
<PAGE>
CLS FINANCIAL SERVICES, INC.
ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I
Item 1: Description of Business 4
Item 2: Description of Property 5
Item 3: Legal Proceedings 5
Item 4: Submission of Matters to Security Holders 5
PART II
Item 5: Market for Common Equity & Related Stockholders 6
Matters
Item 6: Selected Financial Data 6
Item 7: Management Discussion & Analysis 6
Item 8: Financial Statements 9
Item 9: Changes in & Disagreements with Accountants on 21
Accounting & Financial Disclosure
PART III
Item 10: Directors & Executive Officers 21
Item 11: Executive Compensation 22
Item 12: Security Ownership of Certain Beneficial Owners and 22
Management
Item 13: Certain Relationships and Related Transactions 23
Item 14: Exhibits and Reports on 8-K 24
<PAGE>
<PAGE>
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
- -----------------------------------------------------------------------------
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
1998 $31,718,132.00 $27,965,691.00 $3,752,441.00
The company has generated revenue as set forth below:
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1996 1997 1998
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GROSS REVENUE $1,652,870.00 $1,730,865.00 $2,206,821.00
OPERATING EXPENSE $764,622.00 $1,001,622.00 $2,086,107.00
SALARY EXPENSE $798,868.00 $698,294.00 $738,214.00
NET INCOME/(Loss) $ 89,380.00 $30,949.00 ($617,500.00)
Security
As of December 31, 1998 and December 31, 1997, 82% 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.
<PAGE>
<PAGE>
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, 1998 are set forth
below:
SINGLE FAMILY RESIDENCES $976,580.00
COMMERCIAL PROPERTY $497,925.00
RAW LAND $1,966,169.00
OTHER $40,527.00
TOTAL LOAN RECEIVABLE $3,481,201.00
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. See also Management Discussion of Financial Condition.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None<PAGE>
<PAGE>
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>
YEAR 1994 1995 1996 1997 1998
<C> <C> <C> <C> <C> <C>
REVENUE $1,829,962 $1,778,366 $1,652,870 $1,730,865 $2,206,821
INCOME (LOSS)
OPERATIONS $ 80,945 $ 114,691 $ 88,805 $ 31,188 ($ 617,500)
TOTAL ASSETS $3,620,832 $4,607,563 $4,016,609 $7,905,735 $10,640,650
LONG TERM
OBLIGATIONS $2,187,066 $1,369,822 $1,111,168 $5,115,992 $7,981,976
</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. Management is dedicated to conservative collateral
lending thus 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.
The company relies on its ability to resell loan receivable or real estate 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. Also, due
to a lawsuit settlement in 1998, the company has had difficulty in obtaining a
timely audited year end statement thus the 10-K filing is being submitted late
and will be updated via an amended 10-K at a later date as soon as the final
information is made available to the company and it's attorneys.
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, 1998.
<PAGE>
Results of Operations
The company remains profitable and has been since inception. In 1998, 1997,
1996, 1995 and 1994 the company originated 31.7, 15.3, 20.9, 19.9, 22.9
million dollars in loans respectively. The companys revenues from operations
were 2.2, 1.7, 1.7, 1.8, and 1.8 million dollars in 1998, 1997, 1996, 1995
1994 respectively. Revenues remained stable in 1998 at $2,206,821. Expenses
from operations increased to 2,824 321 from 1,699,916 in 1997. This is due to
a loss recorded in 1998 from a lawsuit settlement in the amount of 645,151.
Further discussion of this lawsuit and its impact on the company will be
forthcoming as we review the audited financials and exam subsequent events
since the closing year ending period 1998. An amended 10-K will be filed as
soon as we have reviewed this information more thoroughly.
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 1999 by 10%.
The Company met its Obligations to the Investors for year ending December 31,
1997 and 1998.
The company met its obligations to all investors for fiscal year ending
December 31, 1998 and 1997. 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,
1998 and 1997.
Year Ended December 31, 1998 1997
Return on Assets (net income/avg total assets) (.15%) .38%
Return on Equity (net income/avg equity) (2.84%) 2.80%
Equity to Assets (avg equity/avg total assets) .05% 13.62%
Plan of Operation
The company is committed to offer Real Estate and loan receivable for sale to
investors for the foreseeable future. Management expects loan growth to
remain constant, with little change from 1997. 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 or real estate 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".
<PAGE>
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, 1998.
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.<PAGE>
<PAGE>
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
<PAGE>
<PAGE>
(LETTERHEAD)
To the Board of Directors
CLS Financial Services, Inc
Lynnwood, Washington
We have audited the accompanying balance sheets of CLS Financial Services,
Inc. as of December 31, 1998 and the related statements of operations and
retained earnings (deficit), 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. The financial statements of CLS Financial Services, Inc. As of
December 31, 1997, were audited by other auditors whose report dated February
26, 1998, expressed and unqualified opinion on those statements.
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 1998 financial statements referred to above present
fairly, in all material respects, the financial position of CLS Financial
Services, Inc. as of December 31, 1998 and the results of operations and its
cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Peterson Sullivan PLLC
April 26, 1999<PAGE>
<PAGE>
CLS FINANCIAL SERVICES, INC.
BALANCE SHEET
December 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
ASSETS -------- ---------
Cash $ 42,367 $ 39,504
Cash - trust account 31,218 12,213
Loans Receivable from related party 3,888,322 4,600,707
Other Loans Receivable 320,362 1,571,809
Other receivable 164,267 170,105
Real estate owned 6,070,756 797,730
Property and equipment, at cost, less
accumulated depreciation of $161,477
in 1998 and $133,686 in 1997 104,886 96,874
Other 18,472 26,793
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Total Assets $10,640,650 $7,315,735
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 109,456 133,347
Trust account payable 31,218 12,213
Loans payable related party - 244,123
Loans payable other 9,475,105 5,318,214
Notes payable 215,000 -
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Total Liabilities 9,830,779 5,707,897
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STOCKHOLDERS' EQUITY
Common stock, Class one, no par value, 500 shares 10,000 10,000
authorized, issued and outstanding
Common stock, Class Two, $1000 par value 1,180,467 1,180,467
2,500 shares authorized, 1000 issued and
outstanding at December 31, 1998 and 1180 and
one half shares issued and outstanding at December
31, 1997.
Retained earnings (deficit) (200,129) 417,371
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Total Stockholders' Equity 809,871 1,607,838
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Total Liabilities & Stockholders' Equity $10,640,650 $7,315,735
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
December 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
REVENUES ---- ----
Loan fees $980,701 $839,720
Interest on loans 801,408 757,094
Loan servicing and application fees 424,225 133,706
Other income 487 345
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2,206,821 1,730,865
OPERATING EXPENSES
Wage and payroll taxes 738,214 698,294
Commissions and referrals 318,238 100,056
Interest expense 714,807 570,688
Advertising 98,662 42,889
Rent 79,043 76,744
Office and utilities 138,539 163,009
Professional fees 63,876 23,137
Depreciation and amortization 27,791 25,099
Loss on legal settlement 645,151 -
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Total operating costs 2,824,321 1,699,916
INCOME (LOSS) FROM OPERATIONS (617,500) 30,949
------- -------
NET INCOME BEFORE PROVISION FOR
FEDERAL INCOME TAX (617,500) 30,949
PROVISION FOR FEDERAL INCOME TAX - 8,200
------ ------
NET INCOME (LOSS) (617,500) 22,749
RETAINED EARNINGS, beginning of year 417,371 394,622
-------- --------
RETAINED EARNINGS (deficit),ending ($200,129) $417,371
======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES, INC.
STATEMENT OF CASH FLOWS
December 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) ($617,500) $ 22,749
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 27,791 25,099
Loss on legal settlement 645,151
Change in Operating assets and liabilities
Receivables, other than loan receivable 5,838 (102,013)
Accounts payable and accrued expenses (23,891) 6,560
Other 19,217 (7,863)
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NET CASH PROVIDED (USED) BY OPERATIONS 56,606 (55,468)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (46,699) (33,260)
Change in related party loans (2,513,831) (3,533,972)
Change in loans receivable related party 1,251,447 505,804
Change in real estate owned (61,742)
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NET CASH FROM INVESTING ACTIVITIES (1,309,083) (3,123,170)
---------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in loans payable 1,040,340 2,331,553
Borrowings (payments) on line of credit 215,000 (150,000)
Common stock issued 1,000,000
Other (49,571)
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NET CASH FROM FINANCING ACTIVITIES 1,255,340 3,131,982
---------- ----------
NET INCREASE (DECREASE) IN CASH 2,863 (46,656)
CASH BALANCE - BEGINNING OF PERIOD 39,504 86,160
-------- -------
CASH BALANCE - END OF PERIOD $ 42,367 $39,504
======= =======
Interest paid on a cash basis $765,071 $559,503
======== ========
Income taxes paid on a cash basis $ 6,300 $ 22,200
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
AUDITED
December 31, 1998
NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
CLS FINANCIAL SERVICES, INC. ("CLS") earns fees from the origination of real
estate loans, and purchases and sells real estate contracts, mortgages and
deeds of trust. As such, CLS is subject to regulations in the state of
Washington with respect to mortgage broker dealers.
CLS is related to a series of other companies that provide services to CLS
customers as follows:
Puget Sound Investment Group, Inc. (PSIG). When a real estate loan made by
CLS goes into foreclosure, PSIG assumes the payment obligation on the loan.
Foreclosed loans which have been assumed by PSIG amounted to $430,284 and
$900,161 at December 31, 1998 and 1997, respectively, and are included in
loans receivable from related party. Any gain or loss recognized as part of
the foreclosure and eventual disposition of the collateral is recorded by
PSIG. In addition, CLS earned management fees from PSIG of $346,.000 in 1998
(none in 1997) for oversight of certain PSIG operations. Finally, during
1998, PSIG transferred real property to CLS with a book value of $6,070,756.
Related mortgages on these properties of $3,554,051 were also transferred to
CLS. These transfers were made pursuant to regulations of the State of
Washington. PSIG originally acquired these properties with cash advances made
by CLS.
Puget Sound Appraisal Group, Inc. (PSAG). PSAG provides appraisal services for
loans originated by CLS. PSAG charges CLS customers directly for these
services.
Puget Sound Real Estate Services Group, Inc. (PSRESG). PSRESG provides real
estate closing services for loans originated by CLS . PSRESG charges CLS
customers directly for these services.
Puget Sound Construction of Washington, Inc. (PSCW). PSCW provides
residential repair services to properties owned by PSIG and CLS. There were
no transactions between CLS and PSCW in 1998.
The Class One stockholders of CLS are the stockholders int he companies listed
above.
CLS rents the office facilities where it operates under a month-to-month
lease. The other entities pay a portion of the office facilities' rent.
Loan interest accrual and loan losses
Interest on loans is not recognized when loans become ninety days delinquent.
Thereafter, no interest is taken into income unless received in cash or until
such time as the borrower demonstrates the ability to resume payments.
Interest previously accrued but not collected is charged against income at the
time the loan becomes ninety days delinquent.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
AUDITED
December 31, 1998
NOTE 1 - (continued)
As noted above, PSIG assumes the payment obligation on foreclosed loans. PSIG
also recognizes any gain or loss on the eventual disposition of loan
collateral. Accordingly, an allowance for loan losses is not considered
necessary by CLS.
Sales of real estate
Real estate held for sale is stated at the lower of cost (specific
identification) or market. Sales of real estate generally are accounted for
under the full accrual method. Under that method, a gain is not recognized
until collectibility of the sales price is reasonably assured and the earnings
process is virtually complete. When a sale does not meet the requirements for
income recognition, gain is deferred until those requirements are met.
Loan origination and servicing fees
Loan origination fees and direct loan origination costs are recognized when
the loans are sold by CLS.
Loan servicing fees are charged at a rate of $20 per month over the servicing
of the loan. Loan servicing fees are paid by the borrower and are recognized
as revenue as the services are provided.
Cash
For purposes of the statement of cash flow, CLS considers all highly
liquid investments with an original maturity of three months or less to be
cash. From time to time, CLS has cash balances in excess of federally insured
limits.
Trust Accounts
CLS holds money in trust for real estate transactions in process. The amount
held is shown as an asset and a liability on the balance sheet.
Depreciation
Property and equipment are depreciated using the straight line method over the
estimated useful life of the assets.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Audited
NOTE 1 - (continued)
Income Taxes
CLS accounts for income taxes under the assets and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
CLS financial statements or income tax returns. The significant component of
the CLS deferred tax asset at December 31, 1998, results from a loss on a
legal settlement recognized in 1998 for financial statement purposed but not
recognized until 1999 for income tax purposes. The resulting asset of
$194,000 has been fully reserved. The statutory tax rate is different than
what is shown in these financial statements for 1998 because of the increase
in the reserve of $194,000.
Advertising
Advertising costs are expended as incurred.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and related
disclosures. Accordingly, the actual amounts could differ from those
estimates.
Reclassifications
Certain items from the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Note 2. Loss on Legal Settlement
During 1998, CLS, along with PSIG, were named defendants in a lawsuit brought
by a customer. The suit settled in February 1999 which resulted in a non-cash
loss of $1,949,777. Investors funds were originally used in loans to the
customer may also be able to recover their investments because of the nature
of the lawsuit. CLS determined that the net present value of this potential
liability is a loss of approximately $616,500. CLS and PSIG agreed that
$645,151 of the total loss amount is attributable to CLS. Thereafter, CLS
recorded $645,151 as its agreed share of the loss in its December 31, 1998,
financial statements. However, the estimated amount potentially due to
investors may be subject to further refinement in the near term.
In addition, CLS is subject to various Federal Trade Commission (FTC)
<PAGE>
CLS FINANCIAL SERVICES, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
AUDITED
Note 2 (continued)
regulation. Based on a series of relatively minor FTC violations, CLS is
required to deposit $60,000 in an escrow account to pay redress. As of
December 31, 1998, this amount had not yet been requested by FTC or deposited
into the escrow account.
NOTE 3. Loans Receivable From Related Party and Payable to Related Party
CLS has loans receivable from related parties as follows:
1998 1997
----------- ------------
PSIG $3,684,228 $4,547,535
PSRESG 40,817 52,500
PSAG 4,122 672
A partnership which PSIG is a partner 159,155 -
----------- -----------
$3,888,322 $4,600,707
=========== ===========
The loan receivable from PSIG at December 31, 1998, is due on demand, bears
interest at 12% and is secured by real property as follows (amounts are as
represented by PSIG):
Single Family Residential $ 776,886
Multi-Family Residential 497,925
Undeveloped Land 1,886,028
----------
$3,160,839
==========
The other related party loans receivable are due on demand, bear no interest
and are unsecured. Also, CLS occasionally has loans payable to related
parties which are generally due on demand, bears no interest, and are
unsecured.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 4. Other Loans Receivable
CLS's other loans receivable are concentrated in the State of Washington and
are generally secured by real estate. Types of real property securing loans
receivable at December 31, 1998 and 1997 are as follows:
1998 1997
-------------- --------------
Single Family Residential $ 199,694 $ 301,632
Commercial Property 22,408
Undeveloped Land 80,141 1,238,104
Other 40,527 9,665
-------------- --------------
$ 320,362 $1,571,809
============== ==============
Security positions on loans receivable are as follows:
1998 1997
------------ ----------
First lien position $ 287,913 $1,521,301
Second lien position - 50,508
Other 32,449 -
------------ ----------
$ 320,362 $1,571,809
============ ==========
Principal payments to be received for the years ending December 31 are as
follows:
1999 $ 75,646
2000 100,000
2001 7,641
2002 35,181
2003 50,848
Thereafter 51,046
----------
$ 320,362
These loans have interest rates ranging from 10% to 14%.
Note 5. Other Loans Payable
Other loans payable include loans and debenture payable made up of amounts due
to investors with varying terms. Interest rates vary from 10% to 14%.
<PAGE>
CLS FINANCIAL SERVICES
NOTES TO FINANCIAL STATEMENTS
AUDITED
December 31, 1998
Note 5. (Continued)
Principal payments on loans and debentures payable for the years ending
December 31 are as follows:
1999 $ 1,493,129
2000 2,008,564
2001 1,635,113
2002 2,844,128
2003 544,814
Thereafter 949,357
------------
$ 9,475,105
============
As of December 31, 1998, CLS had issued $5,250,000 in unsecured debenture
certificates. Debenture certificates plus accrued interest amounting to a
total of $5,882,806 are outstanding at December 31, 1998. Management is
presently attempting to extend maturity dates and reduce the rate of interest
on these debentures. However, there is no assurance that management's effort
will be successful. Additional debentures are not allowed since CLS has
violated certain regulations in the state of Washington.
Management is also attempting to reduce the interest rate on CLS's secured
debt. However, there can be no assurance that any creditors will agree to a
reduction.
If the attempts to restructure the debentures and secured debt described above
are not successful, management expects to address its potential liquidity
issues by selling certain real estate.
Note 6. Notes Payable
1998 1997
-------------- -------------
Line of credit with an individual for a
maximum of $700,000 due Nov 15, 2000.
Interest at 12% annually is to be paid
monthly. In addition. CLS is to pay
a loan service fee of $2300 per month
when there are outstanding balances. The
line of credit is secured by a blanket
assignment of notes and related deeds of
trust as draws are made. $215,000 $ -
=============== ==============
<PAGE>
<PAGE>
Note 6. (Continued)
CLS also has a line of credit with a bank for a maximum of $150,000. This line
of credit is secured by personal guarantees of the Class One CLS stockholders,
and expires November 24, 2002.
Note 7. Common Stock
Class One shares of common stock are voting shares. Class Two shares are
nonvoting. Class Two shares are to receive 80% of any dividends paid, and
have a dissolution preference over Class One to the extent of the Class Two
capital contributions.
During 1998, CLS redeemed 180 and one half share of Class Two common stock in
exchange for real property with a book value (after deducting related loans
payable) approximately equal to the par value of the stock. During 1997, CLS
issued 1,000 shares for cash of Class Two common stock to a partnership in
which PSIG is a partner. <PAGE>
<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 50 President Mill Creek, WA
Lorrie Vanhook 52 Secretary Mill Creek, WA
Melvin Johnson, Jr 41 Vice President Edmonds, WA
Debbie Little 41 Asst Vice President Lynnwood, WA
1) Gerald C. Vanhook, (Jerry, 50) 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, 52) 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, 41) 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, 41) 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.
<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. Further information will be provided in regards to the settlement
with a borrower in 1998 after the attorney has reviewed all final documents.
ITEM 11 EXECUTIVE COMPENSATION
Summary Compensation Table
A B C D E
Name & Position Year Salary Bonus Other Salary
- ------------------------------------------------------------------------------
Gerald Vanhook 1996 $154,152.00 0 0
President 1997 154,152.00 0 0
1998 154,152.00 0 0
- ------------------------------------------------------------------------------
Lorrie Vanhook 1996 46,155.00 0 0
Secretary 1997 52,152.00 0 0
1998 52,152.00 0 0
- ------------------------------------------------------------------------------
Melvin Johnson 1996 154,152.00 0 0
Vice-President 1997 154,152.00 0 0
1998 154,152.00 0 0
- ------------------------------------------------------------------------------
Debbie Little 1996 44,654.50 0 0
Asst. Vice Pres. 1997 44,400.00 0 0
1998 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. Subsequent to 1998, Gerald Vanhook and Melvin
Johnson reduced their salaries by 50%.
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.
<PAGE>
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 1998 was 140,285.00 as compared to 1997 at 158,123.00.
PSRESG also collects the late fees associated with the loans, late fees
collected in 1998 were 28,232.00. 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 1998 PSAG appraisal fees were
55,425.00 compared to 1997 of 82,187.00. 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.
<PAGE>
<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 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.<PAGE>
<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, President Date
/s/
_______________________________________ _____________________
Melvin Johnson, Jr. Vice-President Date
/s/
_______________________________________ _____________________
Lorrie Vanhook, Secretary Date
/s/
_______________________________________ _____________________
Debbie Little, Asst. Vice-President Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,367
<SECURITIES> 18,472
<RECEIVABLES> 4,372,951
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,465,008
<PP&E> 6,337,119
<DEPRECIATION> (161,477)
<TOTAL-ASSETS> 10,640,650
<CURRENT-LIABILITIES> 355,674
<BONDS> 9,475,105
0
0
<COMMON> 1,010,000
<OTHER-SE> (200,129)
<TOTAL-LIABILITY-AND-EQUITY> 10,640,650
<SALES> 0
<TOTAL-REVENUES> 2,206,821
<CGS> 0
<TOTAL-COSTS> 2,109,514
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 714,807
<INCOME-PRETAX> (617,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (617,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (617,500)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>