10-K 1 clsfile.txt CLS 10K 12/31/00 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, 2000 ----------------------------------------------------------------------- or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------------------------- Commission File Number: 33-85864-LA ------------------------------------------------------------------------ CLS FINANCIAL SERVICES, INC ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) WASHINGTON 91-1478196 ------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 4720 200th St SW, Suite 200, Lynnwood, WA 98036 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (425) 744-0386 ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/Yes / /No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (X) CLS FINANCIAL SERVICES, INC. ANNUAL REPORT OF FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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 6 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 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 company's 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 company's 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 initial sale of debenture investments, principal reductions and the reselling of loans to investors provided the source of funds needed to invest in new loans receivable. The company has originated loans as set forth below:

The company has generated revenue as set forth below:

Security As of December 31, 2000 and December 31, 1999, 54% and 86%, respectively, of the loans in the portfolio were secured by first liens on real property. Management expects this trend to continue. Loans originated by CLS and retained as inventory decreased in 2000 due to fewer loans of this type being funded by CLS and the high demand for these loans by investors. CLS expects to fund more of these loans in 2001, but also expects investor demand to remain high. See Note 3, Notes to Financial Statements. Borrowers and Competition The company is a full service mortgage company. The company advertises in the local media, accepts referrals and employs loan officers. The company brokers Class A and B loans to established lenders. Some of the primary competitors are Beneficial Financial Services and Quality Mortgage. The company also services more difficult to place Class C loans. The company's investment criteria for Class C loans places emphasis on the value of the collateral and to a lesser extent the borrower's credit worthiness. 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 used the proceeds of the debenture securities offering to originate Class C loans. The market for Class C loans is competitive with lenders such as 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 company's principal 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 higher risk than Class A borrowers with higher credit ratings. These loans are secured by a first lien position on real estate located in the Western Washington area. The majority of the loans are in the $80,000-$150,000 range bearing interest between 12% to 18%. Types of real property securing loans (including related party loans) as of December 31, 2000 are set forth below: SINGLE FAMILY RESIDENCES $1,338,035.00 MULTI-FAMILY RESIDENCES $1,169,110.00 RAW LAND $1,605,695.00 OTHER $45,573.00 TOTAL LOAN RECEIVABLE $4,158,413.00 ITEM 3 LEGAL PROCEEDINGS In 1998, the company was involved in a lawsuit that initially began as a foreclosure action. The borrower defaulted and subsequently filed a petition in the Bankruptcy Court in the Western District of Washington (Cause #A98-01561). The debtor initiated an adversary action against CLS and the investors (Cause #A98-01561) claiming that the Defendants had violated the Washington Consumer Protection Act and proceeded on multiple theories and damage claims. The Court agreed with the Plaintiff's that the loan essentially masked the intent of the Defendants, which was to own the property for substantial gain. The company disagreed, however, based on the potential adverse ruling from the Court, CLS and the Debtor entered into a settlement agreement, which resulted in the loss set forth in the audited financial statements in 1998. See Note 3, Loss on Legal Settlement. As a result of the lawsuit, CLS was compelled to restructure its debt, primarily to debenture holders. The company proposed to investors, mainly the debenture holders, that the interest rate would be reduced by 50% and the term increased by 5 years. In early 1999, CLS circulated the proposal to the investors. At least one investor complained to the State of Washington Securities Director, for the Department of Financial Institutions. The complaint, the adverse court ruling and following settlement resulted in a Consent Order (SDO 99-10) entered into by CLS with the State of Washington Securities Division. CLS had previously discontinued the offering of debentures and formally notified the State of Washington and the SEC. Two investors promptly filed a lawsuit, captioned, Evergreen et.al. vs. CLS in the Western District of Washington Federal Court, cause number C99-0309L. That case was settled out of court, on terms favorable to CLS and the remaining debenture holders, primarily due to the unique secured position of the plaintiff's in property in which one of the plaintiff's was in a first lien that was sold. Also during 1998, CLS was the subject of a nationwide Federal Trade Commission investigation. Based on a series of relatively minor FTC violations, CLS agreed to settle the matter on terms financially favorable to the company. In so doing, CLS deposited $60,000 in an escrow account to pay redress to borrowers, who never did complain to CLS directly. The amount was deposited in 1999 in an escrow account and is reflected in the audited financial statements as Note 2, FTC Regulations. As of year end 2000, the company has not been informed that any borrower has been allowed by the FTC to withdraw any funds from the settlement proceeds in escrow. CLS did circulate the order and initial 1998 financial statements. The 1998 audited statements were prepared late because the original auditor did not complete the 1998 engagement, requiring CLS to hire another CPA firm to audit the 1998 records. CLS held a meeting with investors in April of 1999 and several times during the year, particularly when the compiled 1999 quarterly financial statements were available. Investor participation in the meetings steadily declined, to a level of approximately ten investors each quarter. The company circulated continuing questions and answers from each meeting to all investors. The company continued this communication process in 2000, at the end of each quarter. The company plans to continue quarterly meetings with the investors in 2001. During the third quarter of 2000, the company circulated amended debenture agreements and certificates to the debenture holders, seeking their written agreement and affirmation of the restructuring. The company has received an overwhelming acceptance by the debenture holders. As of December 31, 2000, a total of 72 out of 82 debenture holders returned their written agreements and were issued restructured debenture certificates. This represented 88% of the debenture holders in number and 93% of the dollars. The company expects that 2 more debenture holders will agree to the restructuring which will bring the number of investors to 74 representing 90% of the investors and 95% of the dollars in the later part of the first quarter of 2001 or in the second quarter. None of the other 8 investors have threatened to initiate litigation against the company, nor have they retained counsel to initiate any action to the knowledge of the company. In the event of a liquidation sale in 2001 of the company assets, the investors would most likely lose a substantial portion of their principal, since the value of the property is represented in the market equity of the real estate. If the property was sold at auction, the yield would be substantially less than the book value, because much of the secured investment in real estate is in developing property (or property under construction) that the company intends to sell at market prices, not bargain prices. This represents the last impediment in the successful restructuring of the company. In the event that any remaining debenture holder refuses to accept the terms of the financial restructuring, there is no legal basis to impose the restructuring terms on those 10 remaining debenture holders under state or federal law excepting an approved reorganization under Chapter 11 of the Bankruptcy Code. This liquidation scenario represents the major risk to investors, and the company. The company initiated the restructuring to protect all debenture holders, with a special emphasis of insuring that debenture holders who agreed to the restructuring were not unfairly prejudiced by debenture holders who held out. In the first quarter of 2000, based on improved financial condition of the company, the interest rate of return to the debenture holders was increased. The company plans to increase the return during 2001 as the financial condition permits. At present, the company is not involved in any adverse litigation against it by the investors. The company is involved in two other lawsuits as party defendants arising out of alleged actions of an affiliate company. One action is a landlord tenant action and the other involves a sale of property owned by an affiliated company. One action is defended by the insurance carrier and the other has little likelihood of success against the company, in the opinion of counsel. All other litigation involves routine collection activities. CLS continues to correct potential securities issues related to the restructuring of the company and is cooperating fully with the Securities Division of the Department of Financial Institutions for the State of Washington. Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5 MARKET FOR COMMON EQUITY & RELATED MATTERS Market Information There is no public market for the company's investment debentures, nor is one likely to develop. The investment debentures are not expected to be listed on any formal exchange. ITEM 6 SELECTED FINANCIAL DATA

ITEM 7 MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION Plan of Operation & Liquidity Principal payments and the reselling of loans to investors provided 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 has established a policy of conservative collateral lending. As a result, defaulted loans generally create additional profit centers as the collateral value has been 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 loans receivable or real estate in sufficient amounts to generate funds needed to pay off maturing debentures under the restructuring plan. The external sources of liquidity include a line of credit, sale of debentures, payoff on loans receivable, sales of loan receivable, and sales of real estate. 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 debentures payable. The loans receivable are tied specifically to these debentures payable with similar maturity over the next five year. There are no other significant commitments for capital expenditures as of December 31, 2000. Results of Operations In 2000, 1999, 1998, 1997 and 1996, the company originated 28.6, 29.5, 31.7, 15.3, 20.9 million dollars in loans, respectively. The company's revenues from operations were 2.0, 1.76, 2.2, 1.7, 1.7, million dollars in 2000, 1999, 1998, 1997, 1996, respectively. Expenses from operations increased to $1,967,657 from $1,771,632 in 1999. At the end of the first quarter 2000, the interest rate paid to debenture holders was increased. Also, the marketing department was expanded to take advantage of investors seeking alternatives to the stock market. Property Value Trends There are no known or predicted property value downward trends. Management expects that property values will continue to increase in the Puget Sound area. Management bases this prediction on industry reports that value of property in the western Washington area has increased in 2000 and shows no downward trends in the foreseeable future. Obligations In order to protect the debenture holder's principle, in early 1999 the company reduced the interest rate be by 50%, and the maturity was extended by 5 years. In the first quarter of 2000, the interest rates on the debenture accounts were increased based on the financial success of the restructuring. The company plans to increase the return in 2001 and beyond, provided there is sufficient income to pay for the increases. The company's principle performance objective is to meet all restructuring obligations and to provide an annual increase in retained earnings. As of year end 2000, the company has done so. The company receives interest payments from loans receivable sufficient to pay debenture investor interest. The company relies on its ability to sell loans receivable to generate the necessary cash to pay principal to the investor. The company has developed a five year plan to schedule loan maturity dates and real estate marketing efforts to correspond with the restructured maturity dates of the debentures. Return on Asset, Equity, and Equity to Assets Ratio The following net returns were realized during the years ended December 31, 2000 and 1999.

Plan of Operation The company is committed to offer Real Estate and loans receivable for sale to investors for the foreseeable future. Management expects loan growth to exceed 2000 due to the current refinancing trend. 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's cash management goal is to invest all available funds through loans receivable or real estate. There has been no shortage of investment options that meet the company investment criteria. The company expects to be able to continue to acquire similar loans in the future. Loan purchases will be limited by available liquidity as previously discussed. The company actively pursues delinquent accounts. As a result, nonearning receivables are minimal and generally fully collected within thirty to sixty days. Management's strategy and policy has been to underwrite loans 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. 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. Uncertainties The restructuring plan has been accepted by the clear majority (88% as of year end) of the debenture investors as set forth above. However, there is no guarantee that the company will be able to reorganize if all of the investors do not agree. In the case a debenture holder, with investments in an amount material in relation to the company's net worth, proceeds with litigation, the company will be forced to litigate to protect investors who agreed to the restructuring. In the alternative, and in a worst case scenario, the company could be forced to liquidate or perhaps file for a formal reorganization under Chapter 11 of the Bankruptcy Code. Management believes that after the investors study the audited financial statements, the information contained in this 10K, reviews the real estate portfolio and loan portfolio and reviews the industry predictions, that they will agree that it is their collective best interests to support the restructuring plan initiated by management. The savings of administration costs, court hearings, and compliance with the Bankruptcy Code, rules and United States Trustee directives, will ultimately inure to the investors, rather than counsel, accountants and the Trustee office. ITEM 8 FINANCIAL STATEMENTS Index to Financial Statements as of December 31, 2000 Page Independent Auditors Statement 9 Balance Sheets 11 Statements of Operations and Retained Earnings (Deficit) 12 Statements of Cash Flows 13 Notes to Financial Statements 14-18 (LETTERHEAD) INDEPENDENT AUDITORS' REPORT 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, 2000 and 1999, and the related statements of operations and retained earnings (deficit), 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 audits. We conducted our audits in accordance with auditing standards generally accepted in 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CLS Financial Services, Inc. as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ Peterson Sullivan PLLC Seattle, Washington February 22, 2001 CLS FINANCIAL SERVICES, INC. BALANCE SHEETS December 31, 2000 AND 1999

See Notes to Financial Statements CLS FINANCIAL SERVICES, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT) Years Ended December 31, 2000 AND 1999

See Notes to Financial Statements CLS FINANCIAL SERVICES, INC. STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 AND 1999

See Notes to Financial Statements CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS AUDITED December 31, 2000 NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Organization 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, and real estate. 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"). PSIG owns and manages real estate, and develops real estate for sale. PSIG borrows funds in its own name, acquires property in its own name and has, in the past, borrowed funds from investors on loans that were brokered by CLS. PSIG has, in the past, acquired title to properties through the foreclosure process on loans originated by CLS. PSIG also provides CLS marketing services related to certain parcels of CLS's real estate. As compensation for these services, CLS allows PSIG to retain any gains or losses for the eventual sales of this real estate. As a result of this relationship, gains of $56,224 were transferred to PSIG in 2000. CLS earned management fees from PSIG of $292,276 in 2000 for oversight of certain PSIG operations. In addition, CLS services some loans held by PSIG. Puget Sound Appraisal Group, Inc. (PSAG). PSAG provided appraisal services for loans originated by CLS. This corporation was liquidated in 2000. 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. PSCW charges CLS directly for these services. The Class One stockholders of CLS are the stockholders in the companies listed above. CLS and its affiliated companies allocate rent based on space used, management and labor costs based on time, telephone expenses based on number of employees, computers and equipment based on usage and other overhead costs based on reasonable estimates of use. CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS AUDITED December 31, 2000 NOTE 1 - (continued) Loan interest Generally, interest on loans is recognized when earned using the interest method. 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. Sales of real estate Real estate held for sale is stated at cost (specific identification), unless the estimated future undiscounted cash proceeds expected to result from this position is less than the carrying value in which case a loss is recognized. 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. Allowance for Losses Any allowances for losses on notes receivable will include amounts for estimated probable losses on receivables determined in accordance with the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended. Specific allowances will be established for delinquent receivables, as necessary. Additionally, the Company will establish allowances, based on prior delinquency and loss experience, for currently performing receivables and smaller delinquent receivables. Allowances for losses will be based on the net carrying values of the receivables, including accrued interest. 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. CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 Audited NOTE 1 - (continued) 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. Income Taxes CLS accounts for income taxes under the asset 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 income tax benefit of $30,996 in 1999 resulted from a refund received by carrying back prior year tax losses to years when income taxes were paid. This refund had not been recognized as a receivable at December 31, 1998. At December 31, 2000, CLS has a deferred tax asset that primarily results from net operating loss carryforwards and future tax deductions resulting from reporting on the cash basis for income tax purposes. The net operating loss carryforwards amount to $81,119 and expire in 2019. The future tax deductions resulting from reporting on the cash basis of accounting for income tax purposes amount to $478,780. The asset resulting from these items amounts to $190,366 and has been fully reserved. Advertising Advertising costs are expensed 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. CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 Audited Note 2. Loans Receivable From Related Parties CLS has loans receivable from related parties as follows:

Of the total loan receivable from PSIG and affiliates, $3,581,594 is due on demand and bears interest at 12%, at December 31, 2000. Interest income earned from PSIG was $590,483 in 2000 and $481,110 in 1999. Interest receivable from PSIG amounted to $187,992 and $288,509 at December 31, 2000 and 1999, respectively, and is included in other receivables. At December 31, 2000, this portion of the loan is secured by real property as follows (amounts are as represented by PSIG): Single Family Residential $1,142,693 Multi-Family Residential 1,169,110 Undeveloped Land 1,576,085 ----------- $3,887,888 ===========

The remaining amount due from PSIG and affiliates ($234,598 at December 31, 2000) is due on demand, bears no interest, and is unsecured. These amounts are expected to be repaid in the near term. Combined in the receivable from the first partnership is a loan in the amount of $235,200 which is due on demand, bears interest at 12%, and is secured by multi-family residential property, at December 31, 2000. The other related party loans receivable are due on demand, bear no interest, and are unsecured. CLS FINANCIAL SERVICES, INC NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AUDITED Note 3. Loans Receivable CLS's 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, 2000 and 1999, are as follows:

Security positions on loans receivable are as follows:

Principal payments to be received for the years ending December 31 are as follows: 2001 $ 34,223 2002 123,601 2003 85,910 2004 26,791 ----------- 270,525 ===========

These loans have interest rates ranging from 10% to 14% CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE 4. Loans Payable Loans payable include loans and debentures payable made up of amounts due to investors with varying terms. Interest rates vary from 5% to 14%. Principal payments on loans and debentures payable for the years ending December 31 are as follows: 2001 $1,280,042 2002 127,790 2003 452,413 2004 704,746 2005 1,479,325 Thereafter 4,644,757 ---------- $8,689,073 ==========

As of December 31, 2000, the Company had outstanding $5,200,000 in unsecured debenture certificates. Debenture certificates plus accrued interest amounting to a total of $5,884,555 are outstanding at December 31,2000. Other loans payable consists of numerous small loans that are secured by real estate. Included in this balance is $95,610 and $87,815 due to a family member of a stockholder at December 31, 2000 and 1999, respectively. NOTE 5. Notes Payable

CLS also has a line of credit with a bank for a maximum of $150,000 that it shares with PSIG. This line of credit is secured by personal guarantees of the Class One CLS stockholders, and expires November 24, 2002. PSIG has drawn $145,947 on the line and that amount is recorded on PSIG's books. CLS FINANCIAL SERVICES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 Note 6. 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 dissolution preference over Class One to the extent of the Class Two capital contributions. Note 7. Commitments CLS leases office space under a non-cancelable operating lease. Approximate minimum lease payments under this lease for the years ending December 31 are as follows: 2001 $ 79,000 2002 79,000 2003 79,000 2004 79,000 2005 13,000 ---------- $ 329,000 ==========

Rent expense under this lease was $50,873 in 2000 and $78,683 in 1999. These amounts are net of amounts allocated to affiliates. 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:

1) Gerald C. Vanhook, (Jerry, 52) 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, 54) 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, 43) 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, 43) 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 Supervisor with ITT Financial Services. She graduated from Willamette University with a degree in Public Policy and Speech in 1980. Family Relationships Mr. Gerald C. Vanhook, the President, is married to Lorrie Vanhook, the Secretary. They own 67% of the companys outstanding and issued stock in Joint Tenancy with the Right of Survivorship. Involvement in certain legal proceedings See Item 3 and Item 7. ITEM 11 EXECUTIVE COMPENSATION Summary Compensation Table

The company pays it officers a salary based upon performance. The company pays for health insurance and reimburses officers for expenses incurred in the normal course of business. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The company is a closely held corporation. The company originates loans to high risk borrowers and generally services these loans in its servicing department. The company is attempting to build a mid-level management team capable of carrying on the business. The President and the Secretary of the Company are married, namely Gerald C. Vanhook and Lorrie Vanhook, who own 67%. The other owner of the business is Melvin Johnson, Jr and his wife Deidre, who own 17% of the Company. In addition, 16% of the Company is owned by Puget Sound Investment Group, Inc., which is also owned 50% by the Vanhooks and 50% by the Johnsons. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Business Relationships The role of Puget Sound Real Estate Services Group (referred to as "PSRESG") was to close the Company loans and to service loans. The amount of closing fees paid to PSRESG in 2000 was 114,467.00 as compared to 1999 at 175,997.00. PSRESG also collected the late fees associated with the loans, late fees collected in 2000 were 13,956.00. PSRESG also handled miscellaneous litigation, including collection litigation, for all companies as needed. Management closed this operation in December, 2000. CLS will continue to service it's own loans, including collections. Litigation services, when needed, will be out-sourced. The role of Puget Sound Investment Group (referred to as "PSIG") is varied. PSIG purchases distressed properties or raw land generally for much less than market value and repairs property for resell or rent or builds new structures. In addition, PSIG has two wholly owned subsidiaries, PSRESG and Puget Sound Construction, Inc. ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & REPORTS ON 8-K Exhibits The following exhibits are filed as part of this report. Exhibits previously filed are incorporated by reference as noted. Exhibit Number Exhibit Page 2 Plan of acquisition, reorganization, arrangement, liquidation, or succession* 3 Articles of incorporation, by-laws* 4 Instruments defining the rights of security holders, including indentures* 9 Voting Trust agreement* 10 Material contracts* 11 Statement recomputation of per share earnings* 12 Statement recomputation of ratios* 13 Annual report to security holders, Form 10-Q or quarterly report to security holders* 16 Letter change in certifying accountant* 18 Letter change in accounting principles* 21 Subsidiaries of the registrant* 22 Published report regarding matters submitted to vote of security holders* 23 Counsel of experts and counsel* 24 Power of Attorney* 27 Financial Data Schedule 24 28 Information from reports furnished to state insurance regulatory authorities* 99 Additional exhibits * Items denoted by an asterisk have either been omitted or are not applicable. Reports on Form 8-K The company did not file any reports on Form 8-K in the year 2000. 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 _______________________________________ ___________________ Gerald C. Vanhook, President Date /s/ MELVIN JOHNSON _______________________________________ _____________________ Melvin Johnson, Jr. Vice-President Date /s/ LORRIE VANHOOK _______________________________________ _____________________ Lorrie Vanhook, Secretary Date /s/ DEBBIE LITTLE _______________________________________ _____________________ Debbie Little, Asst. Vice-President Date

CLS FINANCIAL SERVICES INC 10-K