SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File Number 0-28375
SILVERADO FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Nevada 86-0824125
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5976 W. Las Positas Boulevard. Suite 116, Pleasanton, CA 94588
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(Address of principal executive offices) (Zip Code)
Telephone Number: (925) 227-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
--------------------------------- ---------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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. Yes |X| No
|_|
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. |_|
The Registrant's revenues for the year ended December 31, 2004 were $919,930
The approximate aggregate market value of Common Stock shares held by
non-affiliates of the Registrant on December 31, 2004 was based on 17,493,963
total outstanding shares less shares held by affiliates for a total of
non-affiliated shares and a closing price of $0.25 per share on December 31,
2004.
On December 31, 2004, the Registrant had outstanding 18,216,697 shares of Common
Stock, $0.001 par value.
silveradofinancial
5976 West Las Positas Boulevard, Suite 116
Pleasanton, California 94588-8506
PH: 925.227.1500 FX: 925-227-1501
To the Shareholders of Silverado Financial, Inc,
It has been a busy year for all of us here at Silverado Financial and Silverado
Mortgage.
We doubled the size of our Campbell, California office when we relocated our
Corporate offices to Pleasanton, California and are already out of space. The
new Phoenix, Arizona office is open with ten Advisors and eight telemarketers
and Duane Sherry is hiring new salespeople as quickly as he can.
Silverado is currently lending in California, brokering loans in Colorado and is
working to complete licensing in the Western United States.
The first loans have been submitted and closed on the warehouse line. Management
has cleaned up the balance sheet and added to the book value of the firm.
Revenue for 2004 was significantly higher than 2003 and 2005 looks extremely
strong.
The warehouse line represents a significant achievement for the management of
Silverado and completes the foundation for future growth. Silverado, as lender,
anticipates generating even greater revenue stability and increased EPS through
the additional fees attributable to each transaction.
Silverado's licensing doesn't sound exciting but it really is! Every new license
Silverado is approved for is a new market with which it can begin marketing its
products. To prepare the Company for the rapid growth projected in 2005
Management has been preparing mortgage banking licensing applications for
Arizona, Colorado, Nevada, Utah, Washington and Oregon. It is anticipated that
these applications will be approved by the end of the first quarter of 2005.
The board of directors has approved the 2005-operating plan and the Company
anticipates growth on a level with 2004.
All in all it's been a good year for the Company and we look forward to 2005.
My sincere hope is that you will remain shareholders and spread the word about
Silverado.
Cordially,
John E. Hartman
Chief Executive Officer
Silverado Financial, Inc.
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TABLE OF CONTENTS PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS ......................................................4
ITEM 2. PROPERTIES ..................................................................18
ITEM 3. LEGAL PROCEEDINGS ...........................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........................19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...19
ITEM 6. MANAGEMENT'S PLAN OF OPERATION ..............................................21
ITEM 7. FINANCIAL STATEMENTS ........................................................23
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ......................................40
ITEM 8A. CONTROLS AND PROCEDURES .....................................................40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...................40
ITEM 10. EXECUTIVE COMPENSATION ......................................................42
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ........................43
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ............................................43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ......................................44
ITEM 15. SIGNATURES ..................................................................45
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background of the Company
Silverado Financial, Inc. (the "Company", "We", "Us" and "Our") is incorporated
under the laws of the State of Nevada and based in Pleasanton, California in the
East San Francisco Bay Area. The Company provides first and second mortgage
products to borrowers in California and Colorado through its operating
subsidiary, Silverado Mortgage Corporation (SMC).
The corporation was initially formed on February 26, 1987 as Toledo Medical
Corporation. The name was changed to Almaz Space Corporation on February 9, 1991
and to Ready When You Are Funwear, Inc. on April 14, 1992. On December 30, 1994
a group of individuals acquired control of the Company. On February 17, 1995,
they changed the name to Rhombic Corporation. On March 19, 2003, the company
changed its name to Silverado Financial, Inc.
In November 2002, the Company acquired Financial Software, Inc. as the first
part of its strategy to enter the lucrative consumer finance sector. In May of
2003 the Company acquired Realty Capital Corporation, a California based
mortgage brokerage, and renamed the wholly owned subsidiary Silverado Mortgage
Corporation in August of 2004.
During 2004 the company had two wholly owned subsidiaries.
* Financial Software, Inc. ("FSI");
* Silverado Mortgage Corporation ("SMC");
Silverado acquired Financial Software, Inc. on November 19, 2002 in a share for
share exchange basis for 4,400,000 shares of common stock. Financial Software,
Inc. (FSI), a New Jersey corporation engaged in the development of Internet and
Intranet financial software in addition to operating several financial industry
publishing websites. Silverado acquired FSI in order to gain access to certain
proprietary software products owned by FSI which we intend to further develop
and extend into a comprehensive back office platform necessary to accomplish
managements business objectives.
On May 9, 2003, Silverado acquired Realty Capital Corporation in exchange for
729,452 shares of restricted common stock from John E. Hartman, the President
and Chief Executive Officer of the Company and a director. The Company was
renamed Silverado Mortgage Corporation in August of 2004. SMC operates as a
mortgage brokerage and mortgage banking company licensed by the California
Department of Real Estate and by the California Department of Corporations as a
Consumer Finance Lender. SMC generated all of the Company's 2004 revenue through
its offices in Campbell and Pleasanton, California and Phoenix Arizona.
In addition to continuing, and expanding, the operation of SMC, other activities
have consisted of developing the business plan, obtaining a warehouse line of
credit, raising capital, business plan implementation and recruiting and
training sales people. For the year ending December 31, 2004, the Company had
revenues of $919,930, and has expensed operating costs in the amount of
$1,590,650. Historically, the Company has had nominal cash resources and has
been largely dependent on the direct financial support from a few shareholders,
directors and officers along with limited revenue to pay for cash expenditures.
In addition, the Company has been dependent on its officers, directors and
certain key vendors accepting restricted common stock for their services.
BUSINESS OF THE ISSUER
General
Silverado Financial Incorporated is a mortgage banking company focused on
providing non-prime borrowers, individuals who generally do not satisfy the
credit, documentation or other underwriting standards set by more traditional
sources of mortgage credit, with access to capital for the purchase and
refinancing of one to four-family residential properties. The Company originates
mortgage loans, which include fixed and adjustable-rate loans, for purposes such
as debt consolidation, refinancing, education, home improvement and real estate
purchase.
As the primary aspect of the Company's business and finance strategy, Silverado
sells its loans to third-party investors (correspondent investors) in the
secondary mortgage market. Presently the Company sells its loans through whole
loan sales to correspondent investors, but as the Company grows it will dispose
of its loan production through a combination of whole loan sales and
securitization.
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The Company's mortgage business has two principal components. First, Silverado
makes mortgage loans to individual borrowers. Each loan is a cash and expense
outlay for the Company, because its total cost incurred in originating a loan
exceeds the fees it collects at the time it originates the loan. At the time of
origination, Silverado either finances the loan by borrowing under a warehouse
line of credit, or acts as an agent and brokers the loan to another mortgage
lender. Second, the Company sells the loans on a whole-loan basis, and uses the
net proceeds from these transactions to repay its warehouse lines of credit and
for working capital.
Silverado currently operates 2 offices in California, corporate headquarters and
retail sales office in Pleasanton, California, a sales office in Campbell,
California and a sales office in Phoenix, Arizona.
Additionally, management is in negotiations with several groups of Lending
Advisors in Los Angeles, California, Denver, Colorado and Boise, Idaho.
Silverado is currently applying for licensure as a mortgage banker in the
following states: Arizona, Colorado, Utah, Nevada, Washington, Oregon and Idaho.
Because of Silverado's focus on the Non-Prime borrower, and the subsequent
growth of that market segment, the Company is largely insulated from interest
rate increases unlike many of its competitors in the highly sensitive Prime "A"
paper market segment.
Warehouse Facility
On August 11, 2004 the Company's wholly owned subsidiary, Silverado Mortgage
Corporation (formerly Realty Capital Corporation) received approval for a
$2,000,000 Mortgage Warehouse and Security Facility. A signed agreement was
executed on September 3, 2004 and SMC began utilizing the warehouse and security
facility on November 22, 2004.
Along with the Warehouse Facility comes a Demand Note. The Demand Note, in the
event of a default, stipulates that any outstanding balance of warehouse
facility can be called at any time inclusive of interest. Per the terms in the
Warehouse agreement the Note is subject to mandatory prepayments and is
collateralized by the mortgage loans and other predetermined assets.
The $2 million warehouse line provides Silverado with the ability to potentially
fund more than $10 million per month in loans and in excess of $120 million per
year. The number of times that Silverado is able to "roll" its warehouse line is
a critical metric with which to measure efficiency of the underlying operation.
By having a more efficient loan process, through the use of a technology
backbone, Silverado is able to streamline the packaging, submission,
underwriting and funding and thereby decrease the "dwell time" of the loan on
the warehouse line. The "dwell time" is the number of days that a loan is on the
line and not sold to a third party investor. The lower the dwell time the lower
the interest expense for using the warehouse line capital, this translates into
a higher profit on a per-loan-basis.
Recent Operating Highlights
Management achieved several significant operational milestones during 2004,
including the following:
o Grew revenue to approximately $1mm approximately 10 x 2003 revenue
o Established Silverado as a Mortgage Bank with a $2mm Warehouse Line
o Tripled the size of the Campbell office
o Expanded into Pleasanton, California
o Created a Spanish/Latino hub operation
o Expanded into Phoenix, Arizona
o Established 12 new Correspondent Relationships
o Continual Quarter-Over-Quarter growth in excess of 1.5x
o Acquired Software Platform Upgraded and Operational
o Developed and Implemented proprietary training program
o Hired and trained 50+ new Lending Associates
o Year-End 2004 Originations of approximately $75mm
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Strengths and Competitive Advantages
We believe that we have several strengths and competitive advantages that allow
us to compete effectively in our business, including:
o Low Interest Rate Sensitivity: Due to Silverado's focus on the
non-prime borrower, and the subsequent growth of that market,
Silverado is largely insulated from increases in interest rates.
o Performance-Based Compensation Structure. Our compensation structure
helps keep fixed costs at a minimum and allows us to weather
industry down-turns.
o Proprietary Training Program. We have developed and implemented a
proprietary training program, which broadens the hiring pool and
helps to accelerate internal growth.
o Position as a Direct Lender. As the industry consolidates
Silverado's position as a direct lender helps it to attract
employees and insulates it against the proposed regulatory changes
Competition
We face competition in the business of originating, purchasing and selling
mortgage loans. Our competitors include other consumer finance companies,
mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and insurance finance companies. Other
financial institutions have gradually expanded their lending capabilities. Many
of these companies have greater access to capital at a cost lower than our cost
of capital under our warehouse, aggregation, and asset backed commercial paper
facilities. Federally chartered banks and thrifts can preempt some of the state
and local lending laws to which we are subject, thereby giving them a
competitive advantage. In addition, many of these competitors have considerably
greater technical and marketing resources than we have.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
Additional competition may lower the rates we can charge borrowers, thereby
potentially lowering gain on future loan sales and securitizations. In 2004, the
most significant form of competition was pricing pressure among mortgage
originators. Some of our competitors lowered rates and fees to preserve or
expand their market share.
Our results of operations, financial condition and business prospects could be
materially adversely affected if competition intensifies or if any of our
competitors significantly expands its activities in our markets. Fluctuations in
interest rates and general economic conditions may also affect our competitive
position. During periods of rising rates, competitors that have locked in low
borrowing costs may have a competitive advantage. During periods of declining
rates, competitors may solicit our customers to refinance their loans.
Regulation
Our business is regulated by federal, state, and local government authorities
and is subject to extensive federal, state and local laws, rules and
regulations. We are also subject to judicial and administrative decisions that
impose requirements, and restrictions on our business.
At the federal level, these laws and regulations include the:
o Equal Credit Opportunity Act;
o Federal Truth and Lending Act and Regulation Z;
o Home Ownership and Equity Protection Act;
o Real Estate Settlement Procedures Act;
o Fair Credit Reporting Act;
6
o Fair Debt Collection Practices Act;
o Home Mortgage Disclosure Act;
o Fair Housing Act;
o Telephone Consumer Protection Act;
o Gramm-Leach-Bliley Act;
o Fair and Accurate Credit Transactions Act;
o CAN-SPAM Act;
o Sarbanes-Oxley Act; and
o USA PATRIOT Act.
These laws, rules and regulations, among other things:
o impose licensing obligations and financial requirements on us;
o limit the interest rates, finance charges, and other fees that we
may charge;
o prohibit discrimination;
o impose underwriting requirements;
o mandate disclosures and notices to consumers;
o mandate the collection and reporting of statistical data regarding
our customers;
o regulate our marketing techniques and practices;
o require us to safeguard non-public information about our customers;
o regulate our collection practices;
o require us to prevent money-laundering or doing business with
suspected terrorists; and
o impose corporate governance, internal control and financial
reporting obligations and standards.
Our failure to comply with these laws can lead to:
o civil and criminal liability;
o loss of approved status;
o demands for indemnification or loan repurchases from buyers of our
loans;
o class action lawsuits; and
o administrative enforcement actions.
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Compliance, Quality Control and Quality Assurance
We regularly monitor the laws, rules and regulations that apply to our business
and analyze any changes to them. We also maintain policies and procedures,
summaries and checklists to help our origination personnel comply with these
laws.
Licensing
As of December 31, 2004, we were licensed in California under the California
Department of Real Estate (DRE) and under the California Department of
Corporations (DOC) as a Consumer Finance Lender (CFL). This approval by the
Department of Corporations has enabled Silverado to hire W-2 employees to act as
Lending Advisors instead of licensed real estate agents. This will allow us to
pay lower commissions and hire from the significantly larger pool of available
sales professionals who are not licensed by the DRE.
We are currently in the process of gaining licensure in Arizona and anticipate
completing licensing in the Western United States by the end of fiscal 2005.
Regulatory Developments
During 2004, federal and state legislators and regulators adopted a variety of
new or expanded regulations, particularly in the areas of privacy and consumer
protection.
Privacy
The federal Gramm-Leach-Bliley financial reform legislation imposes additional
obligations on us to safeguard the information we maintain on our borrowers.
Regulations have been proposed by several agencies that may affect our
obligations to safeguard information. In addition, regulations that could affect
the content of our notices are being considered by several federal agencies.
Also, several states are considering even more stringent privacy legislation.
California has passed legislation known as the California Financial Information
Privacy Act and the California On-Line Privacy Protection Act. Both pieces of
legislation are effective July 1, 2004, and will impose additional notification
obligations on us that are not pre-empted by existing federal law. If other
states choose to follow California and adopt a variety of inconsistent state
privacy legislation, our compliance costs could substantially increase.
Fair Credit Reporting Act
The Fair Credit Reporting Act provides federal preemption for lenders to share
information with affiliates and certain third parties and to provide
pre-approved offers of credit to consumers. Congress acted in late 2003 to make
this preemption permanent, otherwise it would have expired at the end of the
year and states could have imposed more stringent and inconsistent regulations
regarding the use of pre-approved offers of credit and other information
sharing. Congress also amended the Fair Credit Reporting Act to place further
restrictions on the use of information shared between affiliates, to provide new
disclosures to consumers when risk based pricing is used in the credit decision,
and to help protect consumers from identity theft. All of these new provisions
impose additional regulatory compliance costs on us and reduce the effectiveness
of our marketing programs.
Home Mortgage Disclosure Act
In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated
under the Home Mortgage Disclosure Act ("HMDA"). Among other things, the new
regulations require lenders to report pricing data on loans with annual
percentage rates that exceed the yield on treasury bills with comparable
maturities by 3%. The expanded reporting takes effect in 2004 for reports filed
in 2005. We anticipate that a majority of our loans would be subject to the
expanded reporting requirements.
The expanded reporting does not provide for additional loan information such as
credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or
other salient loan features. As a result, lenders like us are concerned that the
reported information may lead to increased litigation as the information could
be misinterpreted by third parties.
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Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003
The CAN-SPAM Act of 2003 applies to businesses, such as ours, that use
electronic mail for advertising and solicitation. This law, generally
administered by the Federal Trade Commission, preempts state laws to the
contrary, and establishes, among other things, a national uniform standard that
gives consumers the right to stop unwanted emails. New requirements are imposed
for the header caption in emails, as well as return email addresses, and
consumers are granted the right to `opt out' from receiving further emails from
the sender. These new provisions impose additional regulatory and compliance
costs on us and reduce the effectiveness of our marketing programs.
The Alternative Mortgage Transaction Parity Act
This law was enacted to enable state chartered housing creditors to make,
purchase and enforce alternative mortgage transactions (i.e., loans that are not
fixed rate, fully amortized) without regard to any state law on the subject, so
long as these creditors complied with the same regulatory guidelines as
federally chartered housing lenders. The Office of Thrift Supervision, under
whose guidelines we operate, amended its regulations, effective July 1, 2003, to
eliminate from the preemptive effect of the Act the regulation of prepayment and
late charges on alternative mortgage loans. States can now regulate prepayment
penalty and late charge provisions on alternative mortgage loans, and so on July
1, 2003, in less than a dozen states, we became subject to more restrictive
state laws as to these issues.
Telephone Consumer Protection Act and Telemarketing Consumer Fraud and Abuse
Prevention Act
These laws, enacted in 1991 and 1994, respectively, are designed to restrict
unsolicited advertising using the telephone and facsimile machine. Since they
were enacted, however, telemarketing practices have changed significantly due to
new technologies that make it easier to target potential customers while at the
same time making it more cost effective to do so. The Federal Communications
Commission and the Federal Trade Commission have responsibility for regulating
various aspects of these laws; such as regulating unwanted telephone
solicitations and the use of automated telephone dialing systems, prerecorded or
artificial voice messages, and telephone facsimile machines. In 2003, both
agencies adopted `do-not-call' registry requirements, which, in part, mandate
that companies such as us maintain and regularly update lists of consumers who
have chosen not to be called. These requirements also mandate that we do not
call consumers who have chosen to be on the list. During this same time, over 25
states have also adopted similar laws, with which we also comply. As with other
regulatory requirements, these provisions impose additional regulatory and
compliance costs on us and reduce the effectiveness of our marketing programs.
Predatory Lending Legislation
The Home Ownership and Equity Protection Act of 1994 ("HOEPA") identifies a
category of mortgage loans and subjects them to more stringent restrictions and
disclosure requirements. In addition, liability for violations of applicable law
for loans covered by HOEPA extends not only to the originator, but also to the
purchaser of the loans. HOEPA generally covers loans with either (i) total
points and fees upon origination in excess of the greater of eight percent of
the loan amount or $499 (an annually adjusted dollar amount), or (ii) an annual
percentage rate (APR) of more than eight percentage points higher than United
States Treasury securities of comparable maturity on first mortgage loans, and
ten percentage points above Treasuries of comparable maturity for junior
mortgage loans.
We do not originate loans covered by HOEPA because of the higher legal risks as
well as the potential negative perception of originating loans that are
considered to be "high cost" under federal law.
Several federal, state and local laws and regulations have been adopted or are
under consideration that are intended to eliminate so-called "predatory" lending
practices. Many of these laws and regulations go beyond targeting abusive
practices by imposing broad restrictions on certain commonly accepted lending
practices, including some of our practices. In addition, some of these laws
impose liability on assignees of mortgage loans such as loan buyers, lenders and
securitization trusts. Such provisions deter loan buyers from purchasing loans
covered by the applicable law. For example, after the October 1, 2002 effective
date of the Georgia Fair Lending Act, many lenders and secondary market buyers
refused to finance or purchase Georgia loans. As a result, many companies were
forced to cease providing mortgages in Georgia until the law's amendment a few
months later. Similar laws have gone into effect in New Jersey, as of November
27, 2003 ("New Jersey Home Ownership Act of 2002"), and in New Mexico, as of
January 1, 2004 ("New Mexico Home Loan Protection Act"), that have impacted
origination of loans in those states.
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However, there can be no assurance that other similar laws, rules or
regulations, won't be adopted in the future. Adoption of these laws and
regulations could have a material adverse impact on our business by
substantially increasing the costs of compliance with a variety of inconsistent
federal, state and local rules, or by restricting our ability to charge rates
and fees adequate to compensate us for the risk associated with certain loans.
Adoption of these laws could also have a material adverse effect on our loan
origination volume, especially if our lenders and secondary market buyers elect
not to finance or purchase loans covered by the new laws.
Efforts to Avoid Abusive Lending Practices
In an effort to prevent the origination of loans containing unfair terms or
involving predatory practices, we have adopted many policies and procedures,
including the following:
Product Policies
O We do not originate "high cost loans" as defined by HOEPA.
o We do not originate loans containing single premium credit life,
disability or accident insurance.
o We do not originate loans containing balloon payments, negative
amortization, mandatory arbitration clauses or interest rate
increases triggered by borrower default.
o We offer loans with and without prepayment penalties. When a
borrower opts for a loan with a prepayment charge, the borrower
benefits from a lower interest rate or pays lower upfront fees.
o Prepayment penalties do not extend beyond three years from the
origination date. On fixed rate loans, the maximum prepayment
penalty term is three years. Prepayment penalties on adjustable rate
loans do not extend beyond the first adjustment date.
o We do not originate loans that pay off zero interest rate mortgages
provided by charitable organizations or the government without
borrower third-party counseling.
Loan Processing Policies
o We only originate loans from applications that evidence a borrower's
ability to repay the loan.
o We consider whether the loan terms are in the borrower's best
interests.
o We do not solicit our loan portfolio within twelve months of loan
origination.
o We do not ask appraisers to report a predetermined value or withhold
disclosure of adverse features. Appraisers are paid by the borrower
either at closing or from the borrowers own funds regardless of
whether or not the loans are closed.
We plan to continue to review, revise and improve our practices to enhance our
fair lending efforts and support the goal of eliminating predatory lending
practices.
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Environmental
In the course of our business, we may acquire properties securing loans that are
in default. There is a risk that hazardous or toxic waste could be found on such
properties. If this occurs, we could be held responsible under applicable law
for the cost of cleaning up or removing the hazardous waste. This cost could
exceed the value of the underlying properties.
Employees
At December 31, 2004, Silverado Financial and its subsidiary companies employed
approximately 100 individuals and contract employees. As is standard practice in
the industry, we also have Lending Advisors working outside the company offices
as independent contractors. We have no collective bargaining agreements. We
believe that our relations with our employees are satisfactory.
Available Information
We make available, free of charge, on the Investor Relations Section of our
Website (http:/www.silveradofinancial.com/investors.htm) a link to the
Securities and Exchange Commission Web Site where all of the Company's filings
may be found.
RISK FACTORS
Stockholders and prospective purchasers of our common stock should carefully
consider the risks described below before making a decision to buy our common
stock. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. When determining whether to buy our
common stock, stockholders and prospective purchasers should also refer to the
other information in this Form 10-K, including our financial statements and the
related notes.
A prolonged economic slowdown or a lengthy or severe recession could hurt our
operations, particularly if it results in a decline in the real estate market.
The risks associated with our business are more acute during periods of economic
slowdown or recession because these periods may be accompanied by decreased
demand for consumer credit and declining real estate values. Declining real
estate values reduce the ability of borrowers to use home equity to support
borrowings because they negatively affect loan-to-value ratios of the home
equity collateral. In addition, because we make a substantial number of loans to
credit-impaired borrowers, the actual rates of delinquencies, foreclosures and
losses on these loans could be higher during economic slowdowns. Any sustained
period of increased delinquencies, foreclosures or losses could adversely affect
our ability to sell loans, the prices we receive for our loans, the value of our
mortgage loans held for investment or our residual interests in securitizations,
which could have a material adverse effect on our results of operations,
financial condition and business prospects.
Silverado's earnings may decrease because of increases or decreases in interest
rates.
Our profitability may be directly affected by changes in interest rates. The
following are some of the risks we face related to an increase in interest
rates:
o An interest rate increase may affect our earnings by reducing the
spread between the interest we receive on our loans and our funding
costs.
o A substantial and sustained increase in interest rates could
adversely affect our loan origination volume because refinancing an
existing loan would be less attractive and qualifying for a purchase
loan may be more difficult.
o During periods of rising interest rates, the value and profitability
of our loans may be negatively affected between the date of
origination or purchase and the date we sell or securitize the loan.
o When and if we securitize loans, the value of residual interests we
retain and the income we receive from the securitizations structured
as financings are based primarily on the London Inter-Bank Offered
Rate ("LIBOR"). This is because the interest on the underlying
mortgage loans is based on fixed rates payable on the loans for the
first o two or three years while the bondholders are generally paid
based on an adjustable LIBOR-based yield. An increase in LIBOR
reduces the net income we would receive from, and the value of,
these mortgage loans and residual interests.
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o Our adjustable-rate mortgage loans have periodic and lifetime
interest rate caps above which the interest rate on the loans may
not rise. In the event of general interest rate increases, the rate
of interest on these mortgage loans could be limited, while the rate
payable on the senior certificates representing interests in a
securitization trust into which these loans are sold may be
uncapped. This would reduce the amount of cash we receive over the
life of the loans in securitizations structured as financings and
our residual interests, and could require us to reduce the carrying
value of our residual interests.
We are also subject to risks from decreasing interest rates. For example, a
significant decrease in interest rates could increase the rate at which loans
are prepaid, which also could require us to reduce the carrying value of any
residual interests. If prepayments were greater than expected, the cash we would
receive over the life of our residual interests would be reduced.
Higher-than-expected prepayments could also have a negative effect on the value
of any servicing portfolio.
Any such changes in interest rates could have a material adverse effect on our
results of operations, financial condition and business prospects.
An interruption or reduction in the securitization and whole loan markets could
hurt our financial position.
As we implement our plan to become a full service mortgage banking company, we
will become increasingly dependent on the securitization market for the sale of
our loans because we intend to securitize loans directly in the future and many
of the whole loan buyers who purchase loans do so with the intention to
securitize them. The securitization market is dependent upon a number of
factors, including general economic conditions, conditions in the securities
market generally and conditions in the asset-backed securities market
specifically. In addition, poor performance of previously securitized loans
could harm our access to the securitization market. Accordingly, a decline in
the securitization market or a change in the market's demand for loans could
have a material adverse effect on our results of operations, financial condition
and business prospects.
If we are unable to maintain adequate financing sources, our earnings and our
financial position will suffer and jeopardize our ability to continue
operations.
We require substantial cash to support our operating activities and growth
plans. Our primary sources of cash are profits generated by sales of mortgage
products and the sale of our capital stock; however, we intend to generate
income from warehouse and aggregation credit facilities, asset-backed commercial
paper and the proceeds from the sales and securitizations of loans. We also
intend to finance residual interests in securitization transactions using Net
Interest Margin, or NIM, structures. As of December 31, 2003, we had no
short-term warehouse and aggregation credit facilities or asset-backed
commercial paper providing us with any committed or uncommitted borrowing
capacity to fund loan originations and purchases pending the pooling and sale of
such loans.
On August 11, 2004 our wholly owned subsidiary, Silverado Mortgage Corporation
(formerly Realty Capital Corporation) received approval for a $2,000,000
Mortgage Warehouse and Security Facility. A signed agreement was executed on
September 3, 2004 and we started utilizing the warehouse and security facility
on November 22, 2004.
During volatile times in the capital and secondary markets, access to warehouse,
aggregation and residual financing as well as access to the securitization and
secondary markets for the sale of loans has been severely constricted. If we are
unable to maintain adequate financing or other sources of capital are not
available, we would be forced to suspend or curtail our operations, which could
have a material adverse effect on our results of operations, financial condition
and business prospects.
New legislation could restrict our ability to make mortgage loans, which could
adversely impact our earnings.
Several states and cities are considering or have passed laws, regulations or
ordinances aimed at curbing predatory lending practices. The federal government
is also considering legislative and regulatory proposals in this regard. In
general, these proposals involve lowering the existing federal Homeownership and
Equity Protection Act thresholds for defining a "high-cost" loan, and
establishing enhanced protections and remedies for borrowers who receive such
loans. However, many of these laws and rules extend beyond curbing predatory
lending practices to restrict commonly accepted lending activities, including
some of our planned activities. For example, some of these laws and rules
prohibit any form of prepayment charge or severely restrict a borrower's ability
to finance the points and fees charged in connection with his or her loan. In
addition, some of these laws and regulations provide for extensive assignee
liability for warehouse lenders, whole loan buyers and securitization trusts.
Because of enhanced risk and for reputational reasons, many whole loan buyers
elect not to purchase any loan labeled as a "high cost" loan under any local,
state or federal law or regulation. Accordingly, these laws and rules could
severely constrict the secondary market for a significant portion of our loan
production. This would effectively preclude us from continuing to originate
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loans that fit within the newly defined thresholds. For example, after the
October 1, 2002 effective date of the Georgia Fair Lending Act, many lenders and
secondary market buyers refused to finance or purchase Georgia loans. As a
result, many companies were forced to cease providing mortgages in Georgia until
the law's amendment a few months later. Similar laws have gone into effect in
New Jersey, as of November 27, 2003 ("New Jersey Home Ownership Act of 2002"),
and in New Mexico, as of January 1, 2004 ("New Mexico Home Loan Protection
Act"), that have impacted origination of loans in those states. The potential
long-term reduction in loans in New Jersey and in New Mexico could be quite
severe. Moreover, some of our competitors who are national banks or federally
chartered thrifts may not be subject to these laws and may as a consequence be
able to capture market share from us and other lenders. For example, the Office
of the Comptroller of the Currency recently issued regulations effective January
7, 2004 that preempt state and local laws that seek to regulate mortgage-lending
practices. Passage of such laws could increase compliance costs, reduce fee
income and reduce origination volume, all of which would have a material adverse
effect on our results of operations, financial condition and business prospects.
We are no longer able to rely on the Alternative Mortgage Transactions Parity
Act to preempt certain state law restrictions on prepayment penalties, which
could adversely impact our earnings.
The value of a mortgage loan depends, in part, upon the expected period of time
that the mortgage loan will be outstanding. If a borrower pays off a mortgage
loan in advance of this expected period, the holder of the mortgage loan does
not realize the full value expected to be received from the loan. A prepayment
penalty payable by a borrower who repays a loan earlier than expected helps
offset the reduction in value resulting from the early payoff. Consequently, the
value of a mortgage loan is enhanced to the extent the loan includes a
prepayment penalty, and a mortgage lender can offer a lower interest rate and/or
lower loan fees on a loan which has a prepayment penalty. Prepayment penalties
are an important feature used to obtain value on loans.
Certain state laws restrict or prohibit prepayment penalties on mortgage loans,
and until July 2003, lenders could rely on the federal Alternative Mortgage
Transactions Parity Act (the "Parity Act") and related rules issued in the past
by the Office of Thrift Supervision (the "OTS") to preempt state limitations on
prepayment penalties. The Parity Act was enacted to extend to financial
institutions, other than federally chartered depository institutions, the
federal preemption that federally chartered depository institutions enjoy.
However, on September 25, 2002, the OTS released a new rule that reduced the
scope of the Parity Act preemption and, as a result; we are not able to rely on
the Parity Act to preempt state restrictions on prepayment penalties. The
effective date of the new rule, originally January 1, 2003, was subsequently
extended by the OTS until July 1, 2003 in response to concerns from interested
parties about the burdens associated with compliance. The elimination of this
federal preemption requires us to comply with state restrictions on prepayment
penalties. These restrictions prohibit us from charging any prepayment penalty
in eight states and limit the amount or other terms and conditions of our
prepayment penalties in several other states. This may place us at a competitive
disadvantage relative to financial institutions that continue to enjoy federal
preemption of such state restrictions. Such institutions are able to charge
prepayment penalties without regard to state restrictions and, as a result, may
be able to offer loans with interest rate and loan fee structures that are more
attractive than the interest rate and loan fee structures that we are able to
offer.
The scope of our lending operations exposes us to risks of noncompliance with an
increasing and inconsistent body of complex laws and regulations at the federal,
state and local levels.
Currently, we are licensed to originate mortgage loans only in California,
however we are in the process of applying for licenses to generate loans in
Arizona, Nevada, Utah, Idaho, Oregon and Washington, and when licensed we will
be forced to comply with the laws and regulations, as well as judicial and
administrative decisions, for all of these jurisdictions, as well as an
extensive body of federal law and regulations. The volume of new or modified
laws and regulations has increased in recent years, and, individual cities and
counties have begun to enact laws that restrict non-prime loan origination
activities in those cities and counties. The laws and regulations of each of
these jurisdictions are different, complex and, in some cases, in direct
conflict with each other. As our operations continue to grow, it may be more
difficult to comprehensively identify, to accurately interpret and to properly
program our technology systems and effectively train our personnel with respect
to all of these laws and regulations, thereby potentially increasing our
exposure to the risks of noncompliance with these laws and regulations.
Our failure to comply with these laws can lead to:
o civil and criminal liability;
o loss of approved status;
o demands for indemnification or loan repurchases from purchasers of
our loans;
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o class action lawsuits; or
o administrative enforcement actions.
Any of these results could have a material adverse effect on our results of
operations, financial condition and business prospects.
If warehouse lenders and securitization underwriters face exposure stemming from
legal violations committed by the companies to whom they provide financing or
underwriting services, this could increase our borrowing costs and negatively
affect the market for whole loans and mortgage-backed securities.
In June 2003, a California jury found a warehouse lender and securitization
underwriter liable in part for fraud on consumers committed by a lender to whom
it provided financing and underwriting services. The jury found that the
investment bank was aware of the fraud and substantially assisted the lender in
perpetrating the fraud by providing financing and underwriting services that
allowed the lender to continue to operate, and held the bank liable for 10% of
the plaintiff's damages. This is the first case we know of in which an
investment bank was held partly responsible for violations committed by the
bank's mortgage lender customer. If other courts or regulators adopt this
theory, investment banks may face increased litigation as they are named as
defendants in lawsuits and regulatory actions against the mortgage companies
with which they do business. Some investment banks may exit the business, charge
more for warehouse lending or reduce the prices they pay for whole loans in
order to build in the costs of this potential litigation. This could, in turn,
have a negative effect on our results of operations, financial condition and
business prospects.
High delinquencies or losses on mortgage loans in securitizations may decrease
cash flows or impair our ability to sell or securitize loans in the future.
Loans made to lower credit grade borrowers, including credit-impaired borrowers,
entail a higher risk of delinquency and higher losses than loans made to
borrowers with better credit. We plan to make a substantial portion of our loans
to borrowers who do not qualify for loans from conventional mortgage lenders. No
assurance can be given that our underwriting criteria or methods will afford
adequate protection against the higher risks associated with loans made to lower
credit grade borrowers. We will be subject to risks of default and foreclosure
following the sale of loans through securitization. To the extent such losses
are greater than expected; the cash flows received through residual interests
and from securitizations structured as financings would be reduced. Increased
delinquencies or losses may also reduce or eliminate our ability to sell or
securitize loans in the future and could have a substantial, material adverse
effect on our operations, financial condition and business prospects.
Our inability to realize cash proceeds from loan sales and securitizations in
excess of the loan acquisition cost could adversely affect our financial
position.
The net cash proceeds received from loan sales consist of the premiums received
on sales of loans in excess of the outstanding principal balance, plus the cash
proceeds received from securitizations, minus the discounts on any loans that
are sold for less than the outstanding principal balance. If we are unable to
originate loans at a cost lower than the cash proceeds realized from loan sales,
our results of operations, financial condition and business prospects could be
materially adversely affected.
Warehouse and aggregation financing is subject to margin calls based on the
lender's opinion of the value of loan collateral. An unanticipated large margin
call could adversely affect our liquidity.
The amount of financing we may receive under any warehouse and
aggregation-financing agreements depends in large part on the lender's valuation
of the mortgage loans that secure the financings. Asset-backed commercial paper
facilities have similar provisions. Each such facility provides the lender the
right, under certain circumstances, to reevaluate the loan collateral that
secures outstanding borrowings at any time. In the event the lender determines
that the value of the loan collateral has decreased, it has the right to
initiate a margin call. A margin call would require us to provide the lender
with additional collateral or to repay a portion of the outstanding borrowings.
Any such margin call could have a material adverse effect on our results of
operations, financial condition and business prospects.
We face competition that could adversely affect our market share and our
revenues.
We face intense competition from finance and mortgage banking companies and from
Internet-based lending companies. In addition, certain government-sponsored
entities, such as Fannie Mae and Freddie Mac, are also expanding their
participation in the non-prime mortgage industry. These government-sponsored
14
entities have a size and cost-of-funds advantage that allows them to purchase
loans with lower rates or fees than we are willing to offer. While the
government-sponsored entities presently do not have the legal authority to
originate mortgage loans, including non-prime loans, they do have the authority
to buy loans. A material expansion of their involvement in the market to
purchase non-prime loans could change the dynamics of the industry by virtue of
their sheer size, pricing power and the inherent advantages of a government
charter. In addition, if as a result of there purchasing practices, these
government-sponsored entities experience significantly higher-than-expected
losses, such experience could adversely affect the overall investor perception
of the non-prime mortgage industry.
Competitors with lower costs of capital have a competitive advantage over us. In
addition, establishing a lending operation such as ours requires a relatively
small commitment of capital and human resources. This low barrier to entry
permits new competitors to enter our markets quickly and compete with us. This
could have a material adverse effect on our results of operations, financial
condition and business prospects.
Some Thrifts, national banks and their operating subsidiaries are also expanding
their lending activities. By virtue of their charters, these institutions are
exempt from complying with many of the state and local laws that affect our
operations. For example, they can offer loans with prepayment charges in many
jurisdictions where we cannot. If more of these federally chartered institutions
are able to use their preemptive ability to provide more competitive pricing and
terms than we can offer, it could have a material adverse effect on our results
of operations, financial condition and business prospects.
The intense competition in the mortgage industry has also led to rapid
technological developments, evolving industry standards and frequent releases of
new products and enhancements. As mortgage products are offered more widely
through alternative distribution channels, such as the Internet, we may be
required to make significant changes to our information systems to compete
effectively. Our inability to continue enhancing our current capabilities, or to
adapt to other technological changes in the industry, could have a material
adverse effect on our results of operations, financial condition and business
prospects.
Our hedging strategies may not be successful in mitigating our risks associated
with changes in interest rates.
We may intend to use various derivative financial instruments to provide a level
of protection against changes in interest rates, but no hedging strategy can
protect us completely. When rates change we expect to record a gain or loss on
derivatives, which would be offset by an inverse change in the value of loans or
residual interests. We cannot assure you, however, that our use of derivatives
will offset the risks related to changes in interest rates. It is likely that
there will be periods in the future, during which we will incur losses after
accounting for our derivative financial instruments. The derivative financial
instruments we select may not have the effect of reducing our interest rate
risk. In addition, the nature and timing of hedging transactions may influence
the effectiveness of these strategies. Poorly designed strategies or improperly
executed transactions could actually increase our risk and losses. In addition,
hedging strategies involve transaction and other costs. We cannot assure you
that our hedging strategy and the derivatives that we may use will adequately
offset the risk of interest rate volatility or that our hedging transactions
will not result in losses.
The complex federal, state and municipal laws governing loan-servicing
activities could increase our exposure to the risk of noncompliance.
We intend to service the loans we originate on a nationwide basis. Therefore, we
must comply with the laws and regulations, as well as judicial and
administrative decisions, of all relevant jurisdictions pertaining to loan
servicing, as well as an extensive body of federal laws and regulations. The
volume of new or modified laws and regulations has increased in recent years,
and, in addition, some individual municipalities have begun to enact laws that
restrict loan-servicing activities. The laws and regulations of each of these
jurisdictions are different, complex and, in some cases, in direct conflict with
each other. As our servicing operations continue to grow, it may be more
difficult to comprehensively identify, to accurately interpret and to properly
program our technology systems and effectively train our personnel with respect
to all of these laws and regulations, thereby potentially increasing our
exposure to the risks of noncompliance with the laws and regulations pertaining
to loan servicing. Our failure to comply with these laws could lead to, among
other things: (i) civil and criminal liability, including potential monetary
penalties; (ii) legal defenses causing delaying or otherwise adversely affecting
the servicer's ability to enforce loans, or giving the borrower the right to
rescind or cancel the loan transaction; (iii) class action lawsuits; and (iv)
administrative enforcement actions. This could result in a material adverse
effect on our results of operations, financial condition and business prospects.
Any non-prime loans we originate will generally have higher delinquency and
default rates, which could result in losses on loans that we are required to
repurchase.
Non-prime mortgage loans generally have higher delinquency and default rates
than prime mortgage loans. Delinquency interrupts the flow of projected interest
15
income from a mortgage loan, and default can ultimately lead to a loss if the
net realizable value of the real property securing the mortgage loan is
insufficient to cover the principal and interest due on the loan. Also, our cost
of financing and servicing a delinquent or defaulted loan is generally higher
than for a performing loan. We bear the risk of delinquency and default on loans
beginning when we originate them. In whole loan sales our risk of delinquency
typically only extends to the first payment, but when we securitize we continue
to bear some exposure to delinquencies and losses through our residual interests
and the loans underlying our on-balance sheet securitization transactions. We
are required to establish reserves based on our anticipated delinquencies and
losses. We also re-acquire the risks of delinquency and default for loans that
we are obligated to repurchase. We attempt to manage these risks with risk-based
loan pricing and appropriate underwriting policies and loan collection methods.
However, if such policies and methods are insufficient to control our
delinquency and default risks and do not result in appropriate loan pricing and
appropriate loss reserves, our business, financial condition, liquidity and
results of operations could be materially harmed.
We are subject to losses due to fraudulent and negligent acts on the part of
loan applicants, mortgage brokers, other vendors and our employees.
When we originate mortgage loans, we rely heavily upon information supplied by
third parties including the information contained in the loan application,
property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and
such misrepresentation is not detected prior to loan funding, the value of the
loan may be significantly lower than expected. Whether a misrepresentation is
made by the loan applicant, the mortgage broker, another third party, or one of
our employees, we generally bear the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically
unsaleable or subject to repurchase if it is sold prior to detection of the
misrepresentation, and the persons and entities involved are often difficult to
locate and it is often difficult to collect any monetary losses that we have
suffered from them.
There are controls and processes designed to help us identify misrepresented
information in our loan origination operations. We cannot assure you, however,
that we have detected or will detect all misrepresented information in our loan
originations.
We may be subject to fines or other penalties based upon the conduct of our
independent brokers.
The mortgage brokers from whom we obtain loans have parallel and separate legal
obligations to which they are subject. While these laws may not explicitly hold
the originating lenders responsible for the legal violations of mortgage
brokers, increasingly federal and state agencies have sought to impose such
assignee liability. Recently, for example, the United States Federal Trade
Commission ("FTC") entered into a settlement agreement with a mortgage lender
where the FTC characterized a broker that had placed all of its loan production
with a single lender as the "agent" of the lender. The FTC imposed a fine on the
lender in part because, as "principal," the lender was legally responsible for
the mortgage broker's unfair and deceptive acts and practices. The United States
Justice Department in the past has sought to hold a non-prime mortgage lender
responsible for the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly responsible for the total fees and charges paid by
the borrower under the Fair Housing Act even if the lender neither dictated what
the mortgage broker could charge nor kept the money for its own account.
Accordingly, we may be subject to fines or other penalties based upon the
conduct of our independent mortgage brokers.
Our business is dependent upon conditions in California where we conduct a
significant amount of our business.
In 2003, 100% of the mortgage loans we originated were secured by property in
California. An overall decline in the economy or the residential real estate
market, or the occurrence of a natural disaster, such as an earthquake, or a
major terrorist attack in California could adversely affect the value of the
mortgaged properties in California and increase the risk of delinquency,
foreclosure, bankruptcy, or loss on mortgage loans in our portfolio. This would
negatively affect our ability to purchase, originate and securitize mortgage
loans, which could have a material adverse effect on our business, financial
condition and results of operations.
If many of our borrowers become subject to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended our cash flows from our residual securities and
our securitizations structured as financings may be adversely affected.
Under the Soldiers' and Sailors' Civil Relief Act of 1940, a borrower who enters
military service after the origination of his or her mortgage loan generally may
not be charged interest above an annual rate of 6% during the period of the
borrower's active duty status. The Act also applies to a borrower who was on
reserve status and is called to active duty after origination of the mortgage
loan. A prolonged, significant military mobilization as part of the war on
terrorism or the war in Iraq could increase the number of the borrowers in our
securitized pools who are subject to this Act and thereby reduce the interest
16
payments collected from those borrowers. To the extent the number of borrowers
who are subject to this Act is significant, the cash flows we receive from loans
underlying our on-balance sheet securitizations and from our residual interests
would be reduced, which could cause us to reduce the carrying value of our
residual interests and would decrease our earnings. In addition, the Soldiers'
and Sailors' Civil Relief Act of 1940, imposes limitations that would impair the
ability of the servicer to foreclose on an affected mortgage loan during the
borrower's period of active duty status, and under certain circumstances, during
an additional three month period thereafter. Any such reduction in our cash
flows or impairment in our performance could have a material adverse effect on
our results of operations, financial condition and business prospects.
The inability to attract and retain qualified employees could significantly harm
our business.
We are dependent on our account executives and retail loan officers to attract
borrowers by, among other things, developing relationships with financial
institutions, other mortgage companies and brokers, real estate agents,
borrowers and others. We believe that these relationships lead to repeat and
referral business. The market for skilled account executives and loan officers
is highly competitive and historically has experienced a high rate of turnover.
In addition, if a manager leaves Silverado, there is an increased likelihood
that other members of his or her team will follow. Competition for qualified
account executives and loan officers may lead to increased hiring and retention
costs. If we are unable to attract or retain a sufficient number of skilled
account executives at manageable costs, we will be unable to continue to
originate quality mortgage loans that we are able to sell for a profit, which
would have a material adverse effect on our results of operations, financial
condition and business prospects.
An interruption in or breach of our information systems may result in lost
business.
We rely heavily upon communications and information systems to conduct our
business. Any failure or interruption or breach in security of our information
systems or the third-party information systems on which we rely could cause
underwriting or other delays and could result in fewer loan applications being
received, slower processing of applications and reduced efficiency in loan
servicing. We are required to comply with significant federal and state
regulations with respect to the handling of customer information, and a failure,
interruption or breach of our information systems could result in regulatory
action and litigation against us. We cannot assure you that such failures or
interruptions will not occur or, if they do occur, that the third parties on
which we rely will adequately address them. The occurrence of any failures or
interruptions could have a material adverse effect on our results of operations,
financial condition and business prospects.
The success and growth of our business will depend upon our ability to adapt to
and implement technological changes.
Our mortgage loan origination business is currently dependent upon our ability
to effectively interface with our brokers, borrowers and other third parties and
to efficiently process loan applications and closings. The origination process
is becoming more dependent upon technological advancement, such as the ability
to process applications over the Internet, accept electronic signatures, provide
process status updates instantly and other customer-expected conveniences that
are cost-efficient to our process. In addition, we are in the process of
implementing a new loan origination system. Implementing and becoming proficient
with the new loan origination system and other new technology will require
significant financial and personnel resources. There is no guarantee that the
implementation of our new loan origination system or other new technology will
be successful. To the extent that we become reliant on any particular technology
or technological solution, we may be adversely affected to the extent that such
technology or technological solution (i) becomes non-compliant with existing
industry standards, (ii) fails to meet or exceed the capabilities of our
competitors' equivalent technologies or technological solutions, or (iii)
becomes increasing expensive to service, retain and update. Any failure to
acquire technology or technology solutions when necessary could limit our
ability to remain competitive in our industry and could also limit our ability
to increase the cost-efficiencies of our operating model, which would have a
material adverse effect on our results of operations, financial condition and
business prospects.
We may be required to repurchase mortgage loans or indemnify investors if we
breach representations and warranties, which could adversely impact our
earnings.
When we sell loans, we are required to make customary representations and
warranties about such loans to the loan purchaser. Our whole loan sale
agreements require us to repurchase or substitute loans in the event we breach a
representation or warranty given to the loan purchaser or make a
misrepresentation during the mortgage loan origination process. In addition, we
may be required to repurchase loans as a result of borrower fraud or in the
event of early payment default on a mortgage loan. Likewise, we are required to
repurchase or substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us against the
originating broker or correspondent. Further, if a purchaser enforces its
remedies against us, we may not be able to enforce the remedies we have against
the sellers. The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at a
significant discount to the unpaid principal balance. Significant repurchase
activity could negatively affect our cash flow and results of operations.
17
We are exposed to risk of environmental liabilities with respect to properties
to which we take title.
In the course of our business, we may foreclose and take title to residential
properties, and could be subject to environmental liabilities with respect to
these properties. We may be held liable to a governmental entity or to third
parties for property damage, personal injury, investigation, and clean-up costs
incurred by these parties in connection with environmental contamination, or may
be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, as the owner or former
owner of a contaminated site, we may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant
environmental liabilities, our business, financial condition and results of
operations could be materially and adversely affected.
Our charter and bylaws and Nevada law contain provisions that could discourage a
takeover.
Our amended and restated certificate of incorporation and our amended and
restated bylaws include various provisions that could delay, defer or prevent a
takeover attempt that may be in the best interest of our stockholders. These
provisions include the existence of a classified board of directors, the ability
of our board of directors to issue shares of our preferred stock without any
further stockholder approval and requirements that (i) our stockholders give
advance notice with respect to certain proposals they may wish to present for a
stockholder vote, (ii) our stockholders act only at annual or special meetings
and (iii) two-thirds of all directors approve a change in the number of
directors on our board of directors. Issuance of our preferred stock could
discourage bids for the common stock at a premium as well as create a depressive
effect on the market price of our common stock.
We are also subject to Nevada General Corporation Law, which could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
If we do not manage our growth effectively, our financial performance could be
harmed.
Rapid growth places, and will continue to place, certain pressures on our
management, administrative, operational and financial infrastructure. As of
December 31, 2003, we had no employees as all of our personnel were independent
contractors; however, we have recently applied for licensure under the
California Department of Corporations as a Consumer Finance Lender and will
begin hiring loan executives as employees. Many of these employees have a
limited understanding of our systems and controls. The increase in the size of
our operations may make it more difficult for us to ensure that we originate
quality loans and that we service them effectively. We will need to attract and
hire additional sales and management personnel in an intensely competitive
hiring environment in order to preserve and increase our market share. At the
same time, we will need to continue to upgrade and expand our financial,
operational and managerial systems and controls.
Various factors may cause the market price of our common stock to become
volatile, which could adversely affect our ability to access the capital markets
in the future.
The market price of our common stock may experience fluctuations that are
unrelated to our operating performance. In particular, the price of our common
stock may be affected by general market price movements as well as developments
specifically related to the consumer finance industry and the financial services
sector. These could include, among other things, interest rate movements,
quarterly variations or changes in financial estimates by securities analysts,
or a significant reduction in the price of the stock of another participant in
the consumer finance industry. This volatility may make it difficult for us to
access the capital markets through additional secondary offerings of our common
stock, regardless of our financial performance.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
On January 27, 2004 DL Pacific Center LP ("DL Pacific") filed a lawsuit for
$40,444 plus costs and attorney's fees against us in San Diego County Superior
Court. The suit alleges that, after we purchased San Francisco Funding, Inc.
("SFF") in November 2003, we assumed SFF's obligations pursuant to DL Pacific's
lease with SFF by accepting the benefits of such lease and by negotiating with
DL Pacific for amendments to the lease. Silverado has agreed to settle the
lawsuit.
18
On March 9, 2004 Robert E. Vener ("Vener") filed an amendment to his lawsuit for
$7,500 per month from November 2003 to March 2006 plus costs and attorney's fees
against us in Marin County Superior Court. The suit alleges that, after we
purchased San Francisco Funding, Inc. ("SFF") in November 2003, we assumed SFF's
obligations pursuant to Vener's lease with SFF by stating and representing to
Vener that we would be responsible for any amounts due from SFF pursuant to the
lease, and that Vener relied on our representations by allowing SFF to remain on
the premises following SFF's default in the payment of rent on the lease. We
have agreed to settle the suit.
We have filed a cross-complaint against SFF and its major stockholder(s) Mr. and
Mrs. Daniel Selis, for indemnity for the cost of defending the Veneer lawsuit,
and punitive damages resulting from breach of contract, fraud and/or
interference with our advantageous business relationships because of: (1) SFF's
material breaches of the SFF stock purchase agreement and SFF's material
misrepresentations to us of SFF's liabilities and obligations, (2) SFF's written
false statements to its creditors that we had assumed their debts, and (3) SFF's
forwarding of its phone calls tour offices and directing their creditors to call
our offices concerning payment of their liabilities and obligations.
On May 12, 2004 The Subway. Com filed for Arbitration for $60,000 plus interest
against us in the state of Florida. The suit claims breach of contract for stock
promotion services. The Company believes it has meritorious defense and that no
contract was ever consummated.
On July 16, 2004, the company was served with a complaint by the State of
California, Department of Industrial Relations on behalf of a former contractor
for back wages of $10,937.50 and penalties of $288.46 for an indeterminate
number. It is management's opinion, that we have meritorious defenses based upon
the facts, among others, that claimant was acting as an independent contractor
who was paid for services performed and her claims are baseless.
On November 24, 2004, SRD Technologies signed a debt cancellation and release
agreement which included the release of any and all liabilities owed to SRD
Technologies, the relinquishing of 574,953 shares of Silverado Financial, Inc.
(SLVO) stock, and a payment to be made by SRD Technologies for auditing expenses
in the amount of $7,500. On the date of the agreement the 574,953 shares were
worth $.05 a share or $28,748. The affect on our books would be the release of
debt in the form of a note payable in the amount of $275,000 plus accrued
interest of $41,047. the $7,500 payment would reduce our payable to our auditors
and there would be a reduction in shares issued and outstanding.
On November 24, 2004, John Shebanow signed a general release agreement, which
included the relinquishing of any and all shares of Silverado Financial, Inc.
held by himself (575,870 shares), friends and family and releases any and all of
Silverado Financials liability to Mr. Shebanow on the date of the agreement the
575,870 shares were worth $0.05 a share or $28,794. The affect on our books
would be a reduction in accounts payable of approximately $20,660 and a
reduction in the number of shares issued and outstanding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
General
The Company has an authorized capitalization of 20,000,000 shares of common
stock and 1,000,000 shares of preferred stock, $0.001 par value per share of
which 18,216,697 were issued and outstanding at December 31, 2004.
Market Information
The Company's common stock is traded in the over-the-counter market on the OTC
Bulletin Board under the symbol "SLVO". The following table sets forth the range
of high and low bid quotes of the Company's Common Stock per calendar quarter
which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
19
2004
Low High
-------------------------------------------------------------------------------
Fourth Quarter (1) $ 0.040 $ 0.380
Third Quarter (1) $ 0.070 $ 0.330
Second Quarter (1) $ 0.100 $ 0.240
First Quarter (1) $ 0.140 $ 0.280
2003
Low High
-------------------------------------------------------------------------------
Fourth Quarter (1) $ 0.150 $ 0.420
Third Quarter (1) $ 0.100 $ 0.220
Second Quarter (1) $ 0.150 $ 0.210
First Quarter (1) $ 0.200 $ 0.350
2002
Low High
-------------------------------------------------------------------------------
Fourth Quarter (1) $ 0.100 $ 0.900
Third Quarter (1) $ 0.110 $ 0.600
Second Quarter (1) $ 0.110 $ 0.275
First Quarter (1) $ 0.080 $ 0.300
(1) As adjusted by the April 29, 2003 five for one rollback.
On March 10, 2000 the Company's common shares began trading on the Berlin and
Frankfurt Stock Exchanges in Germany under the symbol "919335".
Holders
The Company estimates that there are approximately 2200 shareholders of record
of the Company's Common Stock and approximately 300 additional shareholders
holding Common Stock in street name.
Recent Sales of Unregistered Securities
At December 31, 2004 we had $19,608 in cash and $821,577 in total assets. We
also had $467,071 in total liabilities down from $657,889 in 2003. On November
24, 2004, SRD Technologies signed a debt cancellation for the $275,000 note and
management anticipates executing on its right to convert some $36,000 in
convertible notes currently outstanding. Through the cancellation of the
$275,000 debt and the conversion of the aforementioned $36,000 in convertible
notes Silverado's has all but eliminated its long and short-term debt
obligations. In addition, Silverado anticipates settlement of $939.00 in debt to
affiliates and elimination of accrued officer salaries of $138,480 through the
conversion of the $138,480 into an equal amount of restricted common shares.
On February 1, 2004, Silverado opened a $200,000 private placement to accredited
investors. Subscribers receive shares at a 50% discount to the closing price of
SLVO common stock on the day preceding receipt of their subscription agreement
and investment. This offering is open only to accredited investors. As of
December 31, 2004, we had received $173,350 under this private placement.
We believe that we have sufficient capital and resources to support operations
through the remainder of 2005. However, we do not believe that we will be able
to successfully implement our long term plans without raising additional
capital. We anticipate that the capital requirements for the balance of the
period ending December 31, 2005 will require that additional cash be raised from
external sources. We believe that this requirement will be met by cash equity
investments.
20
Dividends
The Company has never declared or paid cash dividends on its common stock and
anticipates that future earnings, if any, will be retained for development of
its business. Payment of cash dividends in the future will be wholly dependent
upon the Company's earnings, financial condition, capital requirements and other
factors deemed relevant by them. It is not likely that cash dividends will be
paid in the near future.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
THIS REPORT (AND ESPECIALLY THIS SECTION) CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS, PLANS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS
"EXPECTS", "PLANS" "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE.
SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE SEEKING OF
REVENUE PRODUCING ACQUISITIONS, THE DEVELOPMENT PLANS FOR THE TECHNOLOGIES OF
THE COMPANY, TRENDS IN THE RESULTS OF THE COMPANY"S DEVELOPMENT, ANTICIPATED
DEVELOPMENT PLANS, OPERATING EXPENSES AND THE COMPANY'S ANTICIPATED CAPITAL
REQUIREMENTS AND CAPITAL RESOURCES. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE RISK FACTORS DISCUSSED IN THIS
ANNUAL REPORT ON FORM 10-KSB ARE AMONG THOSE FACTORS THAT IN SOME CASES
MAYAFFECT THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY AND ADVERSELY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
SUBJECT TO THE ABOVE QUALIFICATIONS AND SUCH RISK FACTORS, THE FOLLOWING
DISCUSSION IS INTENDED TO PROVIDE AN ANALYSIS OF MANAGEMENT'S PLAN OF
OPERATIONAND SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO.
Silverado Financial, Inc., operates as a mortgage bank, and as the marketing and
service organization to coordinate the activities of the Company's retail hub
offices, spoke offices, subsidiary companies and strategic partners. Silverado
will oversee the compliance, accounting, human resources, technology, help
facilitate cross selling and branding, and control and monitor the experience of
its retail and on-line clients. Silverado generates and controls the leads it
provides its Advisors and Associates and has focused its growth strategy on
creating unique proprietary lead flow.
By the December 31, 2006 Silverado will expand to operate five (5) retail hub
offices across the United States located in Campbell and Pleasanton, California,
Phoenix, Arizona, Denver, Colorado and Boise, Idaho.
Each hub shall contain approximately 100 employees including telemarketing,
Advisors, Associates, Loan Processors, a Sales Manager, Branch Manager and
Telemarketing Manager. The Company currently operates hubs in San Jose,
California and Phoenix, Arizona. By second quarter of 2005 it will open the
Denver, Colorado Hub.
Each Hub will manage as many spoke office as are reasonable without over
saturating the market. The San Jose, California Hub currently has a spoke in
Pleasanton, California and plans to open one in Martinez California in the first
quarter of 2005. Each spoke contains 10 to 20 Lending Advisors, a Loan Processor
and a Branch Manager.
Management has begun to create the operational and technological infrastructure
to connect each hub and spoke office ensuring a controlled flow of information,
technology, and products through the mortgage bank for delivery to the desk of
the Lending Advisor or Associate. Consistent net income will be achieved by
making the Lending Advisor a conduit for the products and offerings of the
Company so that delivery is consistent and a high level of service is achieved.
Silverado anticipates that approximately 75% of its brokerage and banking
revenue will come from internal loan products where Silverado acts as lender and
that the remaining 25% will come from externally brokered loan products.
The departmental structure for Silverado Financial, Inc. will include:
o Corporate
o Marketing o Finance
o Compliance
21
o Human Resources
o Technology
o Banking
o Education and Training (Silverado University)
Necessary steps to be taken in 2005 include:
1. Fully staff the Phoenix, Arizona hub by April 1, 2005
2. Open and begin staffing the Denver, Colorado hub by September 1,
2005.
3. Open and begin staffing the Boise, Idaho hub by December 1, 2005.
4. Focus hub expansion on the Western United States due to the rapid
growth within these western states.
5. Create additional venues for lead generation.
6. Presently our Pleasanton, California office has a mixed focus on the
Spanish speaking market. We see great opportunity in the Spanish
speaking market and anticipate expanding Pleasanton's Spanish
speaking workforce into a complete department or freestanding office
of approximately 40-60 Spanish speaking Loan Advisors and 15-25
Spanish-speaking Telemarketing Associates. Opening a solely
Latino/Hispanic hub office would probably be in the Central valley
area of California, have Spanish speaking Telemarketers, Lending
Advisors and Loan Processors, have all forms and documents printed
in Spanish and actively pursue the Hispanic and Latino communities
in the Western United States.
7. Formalize the Silverado training program and make it available to
teach in all hub offices.
8. Obtain or renew mortgage-banking licenses in California, Arizona,
Nevada, Oregon Washington, Utah, Colorado, Idaho and New Mexico.
9. Develop and implement incentive program for Managers, Advisors and
Associates to promote internal loan sales and minimize brokered
product.
10. Develop correspondent relationships to fill gaps in our current
product offering mix
11. Complete website and software development-phase II
Hub Offices
Each hub office should be a stand-alone profit center. Hub Manager's are
responsible for the profit, morale, expansion, etc. of their hub as well as
achieving a minimum internal growth rate of 20%. Hub Manager's will report
directly to Corporate Management at Silverado Financial, Inc. and layers of
management will be kept thin, and communication should be open and easy. The Hub
Managers will also be responsible for the creation and management of spoke
offices in their area of operation.
Corporate management has allowed each Hub to operate autonomously, keeps a close
eye on goals and growth, and helps to facilitate communication between
corporate-to-hub, as well as hub-to-spoke operations.
Recruiting
Recruiting and training are the backbone of Silverado's internal
growth strategy and as such the Company intends to continue the
following strategies in its recruiting program.
1. Hire untrained personnel and train in the Silverado way.
2. Promote managers developed within the Company.
3. Ensure that all new hires start as Telemarketing Associates and
control the entire training process.
22
Training
Continue to expand and implement Silverado University, our proprietary
training program Implement the new classroom training program and mandate
that all managers and corporate officers participate as teachers.
Expand the number of Senior Advisors/Mentors the Company has to facilitate
projected growth.
Horizontal Integration
Silverado's target customer is the non-prime borrower, as such Silverado
intends pursue opportunities for expansion by providing additional
services to this market segment.
i. Non-prime auto loans
ii. Non-prime banking
iii. Secured Short-Term Consumer Finance Loans
iv. Hard Money Real Estate Loans
ITEM 7. FINANCIAL STATEMENTS
Silverado Financial, Inc.
Audited Consolidated Financial Statements
For the Years Ended December 31, 2004, 2003 and 2002
Table of Contents
Report
Report of Independent Accountants ............. 1
Audited Financial Statements
Consolidated Balance Sheets ................... 2
Consolidated Statements of Income ............. 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows ......... 7
Consolidated Notes to Financial Statements .... 9
23
[LETTERHEAD OF SALLMANN, PERCY S. YANG, CPA, ABV
YANG & ALAMEDA] KATHLEEN M. ALAMEDA, CPA
DEBRA K. DOBLE, CPA
LOUISE SALLMANN (RETIRED
____________________
J. LORI BATEMAN, CPA
CYNTHIA BROWN, CPA
JENNIFER D. CASTELLUCCIO, CPA
KAYLEEN J. CLEMENS, CPA
MARION E. LEACH, CPA
MICHAEL R. RAMIL, CPA
ARTHUR ROMERO, CPA
JOHN ROSEHTNAL, CPA
GEORGEAN M. VONHEEDER-LEOPOLD, EA
DANIEL J. PAYNE, CPA
Report of Independent Accountants
To The Board of Directors and Stockholders of
Silverado Financial, Inc.
Pleasanton, California
We have audited the accompanying consolidated balance sheets of Silverado
Financial, Inc. (a Nevada Corporation) as of December 31, 2004 and 2003 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years ended December 31, 2004. 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 auditing standards of the Public
Company Accountancy Oversight Board (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 misstatements. 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 consolidated financial statements present fairly, in all
material respects, the financial position of Silverado Financial, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the three years ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Sallmann, Yang & Alameda
---------------------------------
SALLMANN, YANG & ALAMEDA
An Accountancy Corporation
Pleasanton, California
April 6, 2005
1
Silverado Financial, Inc.
Consolidated Balance Sheets
December 31,
2004 2003
--------------------------
Assets
Current assets
Cash .................................. $ 19,608 $ 1,230
Accounts receivable ................... 16,886 11,405
Stock receivable ...................... 7,857 --
Investments ........................... -- 17,775
Prepaid expenses ........................ 10,924 --
--------------------------
Total current assets .................... 55,275 30,410
Furniture and equipment
Furniture and equipment ............... 149,971 134,271
Intellectual property ................. 699,010 --
Accumulated depreciation and
amortization ........................ (104,576) (17,901)
--------------------------
Total furniture and equipment ........... 744,405 116,370
Other assets
Deposits .............................. 21,897 6,900
Other intangibles ..................... -- 1,398,020
--------------------------
Total other assets ...................... 21,897 1,404,920
--------------------------
Total assets ............................ $ 821,577 $ 1,551,700
==========================
See accompanying notes and accountants' report
2
Silverado Financial, Inc.
Consolidated Balance Sheets
December 31,
2004 2003
----------------------------
Liabilities and stockholders' equity
Current liabilities
Accounts payable ....................... $ 55,870 $ 244,821
Notes payable - other .................. 25,000 --
Notes payable - shareholders ........... 43,767 --
Due to affiliates ...................... -- 74,000
Payroll taxes payable .................. 86,297 --
Income taxes payable ................... 2,400 --
Accrued wages .......................... 206,432 --
Accrued liabilities .................... 11,305 28,068
Convertible notes ...................... 36,000 36,000
----------------------------
Total current liabilities ................ 467,071 382,889
Long-term debt
Notes payable .......................... -- 275,000
----------------------------
Total long-term debt ..................... -- 275,000
----------------------------
Total liabilities ........................ 467,071 657,889
Stockholders' equity
Preferred stock, $.001 par value,
1,000,000 shares authorized,
no shares issued and oustanding ....... -- --
Common stock, $.001 par value,
20,000,000 shares authorized,
18,216,697 shares issued and oustanding 18,217 14,839
Deferred compensation .................. -- (16,000)
Additional paid in capital ............. 10,889,713 10,455,513
Accumulated deficit .................... (10,553,424) (9,560,541)
----------------------------
Total stockholders' equity ............... 354,506 893,811
----------------------------
Total liabilities and stockholders' equity $ 821,577 $ 1,551,700
============================
See accompanying notes and accountants' report
3
Silverado Financial, Inc.
Consolidated Statements of Income
For the Years Ended December 31,
2004 2003 2002
-----------------------------------------
Income
Net sales ................................ $ 903,067 $ 115,823 $ 7,500
Cost of sales ............................ 320,563 91,016 --
-----------------------------------------
Gross profit ............................... 582,504 24,807 7,500
Operating expenses
Research and development ................. -- -- (9,184)
Intellectual property impairment ......... 389,753 -- 276,250
Selling, general and administrative
expenses ................................ 1,114,222 910,565 136,587
Depreciation and amortization ............ 86,675 18,537 --
-----------------------------------------
Total operating expenses ................... 1,590,650 929,102 403,653
-----------------------------------------
Operating loss ............................. (1,008,146) (904,295) (396,153)
Other income (expense)
Interest income .......................... -- 9 --
Other income ............................. 33,378 -- --
Loss on sale of investments .............. -- (6,201) --
Loss on sale of equipment ................ -- (1,269) --
Interest expense ......................... (16,515) (26,304) (6,820)
-----------------------------------------
Total other income (expense) ............... 16,863 (33,765) (6,820)
-----------------------------------------
Loss before income taxes ................... (991,283) (938,060) (402,973)
Income tax expense ......................... 1,600 -- --
-----------------------------------------
Net loss ................................... $ (992,883) $ (938,060) $ (402,973)
=========================================
Loss per share (basic) ..................... $ (0.05) $ (0.07) $ (0.06)
=========================================
Loss per share (dilutive) .................. $ (0.05) $ (0.07) $ (0.06)
=========================================
See accompanying notes and accountants' report
4
Silverado Financial, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2004 and 2003
Additional
Common Stock Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit
--------------------------------------------------------------------------------
Balance at December 31, 2002 5,739,408 $ 5,739 $ 8,475,587 $ -- $ (8,219,508)
Shares issued for services 260,592 261 54,937
Shares issued for Financial Software, Inc. 4,400,000 4,400 1,085,503
Net unrealized holding gain on available for
sale securities
Net loss (402,973)
--------------------------------------------------------------------------------
Balance, December 31, 2002 10,400,000 $ 10,400 $ 9,616,027 $ -- $ (8,622,481)
Net unrealized holding (loss) on
securities available held for sale
Shares issued for cash 186,666 186 13,814
Shares issued for payables 566,367 566 170,109
Shares issued for services 2,770,635 2,771 493,408 $ (16,000)
Shares issued for Realty Capital Corporation 729,452 730 126,924
Shares issued for debt 248,372 248 51,853
Cancellation of shares (62,000) (62) (16,622)
Net loss (938,060)
--------------------------------------------------------------------------------
Balance, December 31, 2003 14,839,492 14,839 10,455,513 (16,000) (9,560,541)
Net Unrealized
Holding Loss on Total
Available for Stockholders'
Sale Securities Equity
------------------------------
Balance at December 31, 2002 $ (7,476) $ 254,342
Shares issued for services 55,198
Shares issued for Financial Software, Inc. 1,089,903
Net unrealized holding gain on available for
sale securities 14,875 14,875
Net loss (402,973)
----------------------------
Balance, December 31, 2002 $ 7,399 $ 1,011,345
Net unrealized holding (loss) on
securities available held for sale (7,399) (7,399)
Shares issued for cash 14,000
Shares issued for payables 170,675
Shares issued for services 480,179
Shares issued for Realty Capital Corporation 127,654
Shares issued for debt 52,101
Cancellation of shares (16,684)
Net loss (938,060)
----------------------------
Balance, December 31, 2003 -- 893,811
All shares reflect reverse stocksplit 5:1 effective April 29, 2003.
See accompanying notes and accountants' report
5
Silverado Financial, Inc.
Consolidated Statements of Stockholders' Equity (continued)
For the Years Ended December 31, 2004 and 2003
Additional
Common Stock Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit
------------------------------------------------------------------------------
Balance, December 31, 2003 (from previous page) 14,839,492 $ 14,839 $ 10,455,513 $ (16,000) $ (9,560,541)
Shares issued for cash 1,642,700 1,643 115,857
Shares issued for payables 944,890 945 158,256
Shares issued for services 1,980,889 1,981 225,754 16,000
Shares loaned to Company (729,452) (729) (43,038)
Cancellation of shares (461,822) (462) (22,629)
Net loss (992,883)
------------------------------------------------------------------------------
Balance, December 31, 2004 18,216,697 $ 18,217 $ 10,889,713 $ -- $(10,553,424)
==============================================================================
Net Unrealized
Holding Loss on Total
Available for Stockholders'
Sale Securities Equity
-------------------------------
Balance, December 31, 2003 (from previous page) $ -- $ 893,811
Shares issued for cash 117,500
Shares issued for payables 159,201
Shares issued for services 243,735
Shares loaned to Company (43,767)
Cancellation of shares (23,091)
Net loss (992,883)
-------------------------------
Balance, December 31, 2004 $ -- $ 354,506
===============================
All shares reflect reverse stocksplit 5:1 effective April 29, 2003
See accompanying notes and accountants' report
6
Silverado Financial, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2004 2003 2002
--------------------------------------------
Operating activities
Net loss $ (992,883) $ (938,060) $ (402,973)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation and amortization 86,675 18,537 --
(Gain) loss on sale of marketable securities (9,813) 6,201 --
Loss on sale of equipment -- 1,268 --
Intellectual property impairment 389,753 -- 276,250
Stock for services and payables 385,594 650,854 55,198
Other non-cash adjustments 10,801 -- --
(Increase) decrease in:
Accounts receivable (5,481) 33,648 (12,627)
Prepaid expenses (10,924) -- 300
Deposits (14,997) 292 (6,899)
Increase (decrease) in:
Accounts payable (188,951) 148,433 (1,880)
Due to affiliates (74,000) 19,000 55,000
Payroll taxes payable 86,297 -- --
Income taxes payable 2,400 -- --
Accrued wages 206,432 -- --
Accrued liabilities (16,763) 24,976 3,092
--------------------------------------------
Net cash used in operating activities (145,860) (34,851) (34,539)
Investing activities
Proceeds from the sale of investments 27,588 10,275 --
Accounts payable converted to notes payable - other 25,000 -- --
Cash received in acquisition of Silverato Mortgage
Corporation (formerly Reality Capital Corporation) -- 1,245 --
Purchases of equipment (15,700) -- --
--------------------------------------------
Net cash provided by investing activities 36,888 11,520 --
Financing activities
Proceeds private placements - stock 111,350 14,000 --
Deferred compensation 16,000 -- --
Proceeds from convertible notes -- 10,000 26,000
--------------------------------------------
Net cash provided by financing activities 127,350 24,000 26,000
Net increase (decrease) in cash 18,378 669 (8,539)
Cash at beginning of year 1,230 561 9,100
--------------------------------------------
Cash at end of year $ 19,608 $ 1,230 $ 561
============================================
See accompanying notes and accountants' report
7
Silverado Financial, Inc.
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31,
2004 2003 2002
-------------------------------------
Supplemental disclosure of cash flow information:
Interest expense $ -- $ 26,304 $ 6,820
Stock receivable for decrease in valuation
of software purchased with Financial
Software, Inc. 7,857
Supplemental disclosure of non-cash
investing and financing activities:
Issuance of 4,400,000 common shares to
purchase Financial Software, Inc. 1,089,903
Issuance of 729,452 common shares to
John E. Hartman to purchase Silverado Mortgage
Corporation, formerly Realty Capital Corporation 127,654
Issuance of 248,372 common shares in exchange
for cancellation of debt 52,101
Receipt and cancellation of 62,000 shares from
a director for the sale of all scientific
intellectual property (16,684)
Receipt of 729,452 common shares from
John E. Hartman in exchange for a note payable
to be satisfied with the re-issuance of shares (43,767)
Receipt of 461,822 common shares for
decrease in valuation of software purchased
with Financial Software, Inc. (23,091)
Relinquishment of notes payable for decrease
in valuation of software purchased with
Financial Software, Inc. (275,000)
See accompanying notes and accountants' report
8
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation
Nature of Operations
Silverado Financial, Inc. (the Company) is incorporated under the laws of the
State of Nevada and based in Pleasanton, California in the San Francisco Bay
Area. This Company provides first and second mortgage products to borrowers in
California through its subsidiary Silverado Mortgage, formerly Realty Capital
Corporation.
The corporation was initially formed on February 26, 1987 as Toledo Medical
Corporation. The name was changed to Almaz Space Corporation on February 9, 1991
and to Ready When You Are Funwear, Inc. on April 14, 1992. On February 17, 1995
the name was changed to Rhombic Corporation. On March 19, 2003 the company
changed its name to Silverado Financial, Inc.
The Company's efforts, since inception, until October 2002, had been primarily
focused on the acquisition of the rights to intellectual property that could
lead to the development of innovative scientific technologies. During the years
1999 and 2000 it began to focus on the research and development of its portfolio
of acquired intellectual property. During 2001, the main objective was to
identify and develop specific applications from the intellectual property in
order to make them commercially marketable. In November 2002, the Company
acquired Financial Software, Inc. as the first part of its strategy to enter the
financial services sector.
During 2004, the Company had two wholly owned subsidiaries as follows:
o Financial Software, Inc. (FSI)
o Silverado Mortgage Corporation (SMC), formerly Realty Capital
Corporation (RCC)
On November 19, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc. (FSI) a New Jersey corporation engaged in the
development of Internet and Intranet financial software in addition to operating
several financial industry publishing websites. This acquisition was completed
on a share for share exchange basis for 4,400,000 shares of the Company's common
stock. FSI was acquired in order to gain access to certain proprietary software
products owned by FSI, which the Company intends to further develop and extend
into comprehensive mortgage platforms called MortgageCenter and FinanCenter. FSI
transferred its state of incorporation to California in February 2003.
On May 9, 2003, in a non-arms length transaction with John E. Hartman, the
Company's President, the Company issued 729,452 shares of restricted common
stock at a purchase price of $0.175 per share, which was based on the prior five
days average trading price, in exchange for all of the outstanding shares of
Realty Capital Corporation (RCC). The purchase price of RCC was $127,654 and was
the net asset value of RCC, as determined by an independent, third party
valuation. The shares were issued under Section 4(2) of the 1933 Securities Act.
Additionally Rockford, Nanophase, ADEPT and RDT were held as subsidiaries until
sold in 2003. Rockford, Nanophase, ADEPT and RDT were never active, held any
assets or had any liabilities or operations. These subsidiaries were created for
the purpose of developing specific applications from scientific intellectual
property. The Company never implemented its plans to develop the scientific
intellectual property. All of its scientific intellectual properties, together
with certain marketable securities held for sale, were sold in 2003 to a
director, in exchange for the return of 62,000 shares of the Company's common
stock and the cancellation of $1,100 in debt.
Going Concern and Plan of Operations
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern, which contemplates
the realization of assets and extinguishment of liabilities in the normal course
of business.
9
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
As shown in the accompanying financial statements, the Company had a net loss of
$992,883, $938,060 and $402,973 for the years ended December 31, 2004, 2003 and
2002, respectively. It has incurred an accumulated deficit of $10,553,424 and
has a deficit in working capital of $411,796 as of December 31, 2004. The
ability of the Company to continue as a going concern is dependent on obtaining
additional capital and financing and operating at a profitable level. The
Company intends to seek additional capital either through debt or equity
offerings, or a combination thereof, and to seek acquisitions which will
generate sales volume with operating margins sufficient to achieve
profitability. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Basis of Presentation
The Company has prepared the financial statements on the accrual basis of
accounting in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the operations,
account balances and cash flows of the Company and its wholly owned
subsidiaries, Financial Services, Inc. and Silverado Mortgage Corporation,
formerly Realty Capital Corporation. Intercompany transactions and account
balances have been eliminated in consolidation. The operations are consolidated
from their respective acquisition dates of November 19, 2002 (Financial
Services, Inc.) and May 9, 2003 (Silverado Mortgage Corporation).
Concentration of Credit Risk
The Company maintains its cash balances in several financial institutions
located in California. The balances held are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 2004 and 2003 the
Company's account balances did not exceed these limits.
The Company's revenues are concentrated in the mortgage industry which is highly
competitive and subject to fluctuations in economic condition. The Company's
results of operations, financial condition and business prospects could be
materially adversely affected if competition intensifies or if competitors
significantly expand their activities in the Company's markets. Fluctuations in
interest rates and general economic conditions may also affect the Company's
competitive position.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of three
months or less to be cash equivalents.
Financial Instruments
Financial instruments consist primarily of cash, investments in marketable
securities and obligations under accounts payable and accrued expenses. The
carrying amounts of cash, accounts receivable, accounts payable, notes payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments.
Investments
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires that all applicable
investments be classified as trading securities, available for sale securities
or held to maturity securities. The Company did not have any investments
classified as trading
See accompanying notes and accountants' report
10
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Investments (continued)
securities or held-to-maturity securities. The statement further requires that
available for sale securities be reported at fair value, with unrealized gains
and losses excluded from earnings but reported in a separate component of
stockholders' equity (net of the effect of income taxes) until they are sold. At
the time of sale, any gains or losses are recognized as a component of operating
results.
At December 2004 and 2003, the Company's investments held for sale were $0 and
$17,775, respectively.
Furniture and Equipment
Furniture and equipment are carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over estimated useful lives
generally ranging from three to seven years. Intellectual property is carried at
cost less valuation impairment expense and is amortized using the straight-line
method over its estimated useful life of three years. Leasehold improvements are
carried at cost and are amortized over the shorter of their estimated useful
lives or the related lease term (including options), generally ranging from one
to six years. Expenditures for major renewals that extend useful lives of
furniture, equipment and improvements are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. For income tax
purposes, depreciation is computed using the modified cost recovery system.
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$28,424, $18,537 and $0, respectively. Amortization expense for the years ended
December 31, 2004, 2003 and 2002 was $58,251, $0 and $0, respectively.
Intellectual Property
The Company's intellectual property is comprised of a software platform
purchased with Financial Services, Inc. in 2002. The Company periodically
evaluates the recoverability of intangible assets and takes into account events
or circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. The Company put the software into productive use
October 2004 and began amortizing the asset as of that date.
Impairment of Long-Lived Assets
On January 1,2002, the Company adopted SFAS No. 144, Accounting for Stock-Based
Compensation which requires that long-lived assets, to be held and used, be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
In the event that facts and circumstances indicate that the cost of long-lived
assets, primarily intellectual property and patents, may be impaired, the
Company performs a recoverability evaluation. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows expected to be generated by the asset. If assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts exceed the fair values of the assets.
Assets to be disposed of are reported at the lower of carrying values or fair
values, less costs of disposal.
The Company recognized an impairment expense for the years ended December 31,
2004, 2003 and 2002 of $389,753, $0 and $276,250, respectively.
See accompanying notes and accountants' report
11
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Compensating Balances
Employees of the company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service and other
factors. It is impracticable to estimate the amount of compensation for future
absences, and, accordingly, no liability has been recorded in the accompanying
financial statements. The company's policy is to recognize the costs of
compensated absences when actually paid to employees.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure, established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation. The Company periodically issues options to consultants
and members of the Board of Directors. The estimated value of these options is
determined in accordance with SFAS No. 123 and expensed as the granted options
vest to the grantees.
The price of any options granted pursuant to these grants is not to be less than
100 percent of the fair market value of the shares on the date of grant. The
options expire one year from date of grant and are immediately vested. There was
no charge to expense for the value of the options during the periods ended
December 31, 2004, 2003 and 2002 as no options were issued.
Restatement of Share Amounts
Effective April 29, 2003, the Company changed its trading name and trading
symbol to SLVO on the OTCBB and decreased the number of issued and outstanding
shares of common stock by issuing one new share for each five shares held.
Revenue Recognition
Sales are generally recognized at the time of loan funding, provided that no
significant vendor obligations exist and collections of accounts receivable are
probable.
Advertising
Advertising costs are expensed as incurred. For the years ended December 31,
2004, 2003 and 2002, the Company incurred advertising costs of $723, $0 and $0,
respectively.
Research and Development
Expenditures for research activities relating to software development and
improvement are charged to operations as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method as
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. As such, deferred income tax assets and liabilities are
recognized for the future tax consequences of the differences between the
financial statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results could differ from
those estimates.
See accompanying notes and accountants' report
12
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Technical Pronouncements
Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The Company has and will
continue to report convertible notes as liabilities.
3. Intellectual Property
Since its inception, the Company entered into numerous agreements as a result of
having acquired certain rights to various complex intellectual scientific
properties. The Company periodically analyzes its investments in intellectual
property for impairment.
During the quarter ended June 30, 2003, in a non-arms length transaction with
Robert George Krushinsky, a director of the Company, the Company received 62,000
shares of its own common stock together with cancellation of an outstanding debt
in the amount of $1,100 in exchange for all of the scientific intellectual
property assets acquired prior to the acquisition of FSI in November 2002 as
well as all shares of Rockford Technology held for sale by the Company.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., the Company acquired certain software, web sites and intellectual property
which can aggregate financial information from a large number of data sources on
an individual basis, amalgamate the host of disparate objectives as they relate
to a persons financial goals, be they investment or debt related or any
combination. This software suite, together with mortgage generation capabilities
can create a variety of new and different mortgage, investment or insurance
products. The Company recorded the software on its books at the seller's basis
of $1,398,020. The Company engaged an experienced software developer based in
Palo Alto, California to perform an independent, third party valuation of the
software during 2003.
During the fourth quarter of 2004, Silverado Financial, Inc. began implementing
its FinanceCenter Software system, but in doing so found that the software was
in need of upgrades in both programming and technology. With that in mind,
management felt that it was necessary to impair the original valuation of
$1,398,020 down 50% to $699,010. Additionally, on November 24, 2004 the purchase
price of the intellectual property was renegotiated as follows: SRD Technologies
(former owner of Financial Services, Inc.), signed a debt cancellation and
release agreement which included the release of any and all liabilities owed to
SRD Technologies, the relinquishment of 574,953 shares of Silverado Financial,
Inc. stock, and a payment for auditing expenses in the amount of $7,500. An
additional 44,000 shares were relinquished from Mike Shultz in the
re-negotiation. On the date of the agreement 618,953 shares were valued at $0.05
a share or $30,948.
At December 31, 2004 there remains 157,131 shares or $7,857 receivable from SRD
Technologies. The note payable of $275,000 corresponding accrued interest of
$41,047 and $7,500 in accounts payable have been reversed in these financial
statements. The resulting impairment expense was $389,753.
The Company placed the software into service October 2004 and is amortizing the
software over a three year period commencing upon the in-service date.
Amortization expense for the year ended December 31, 2004 was $58,251.
Amortization expense is estimated to be as follows for the years ended December
31,
See accompanying notes and accountants' report
13
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Year Amount
------- ----------
2005 $ 233,003
2006 233,003
2007 174,761
----------
$ 640,767
==========
4. Acquisitions
On November 19, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc. (FSI) a New Jersey corporation engaged in the
development of Internet and Intranet financial software in addition to operating
several financial industry publishing websites. This acquisition was completed
on a share for share exchange basis for 4,400,000 shares of the Company's Common
Stock. FSI was acquired in order to gain access to certain proprietary software
products owned by FSI, which the Company intends to further develop and extend
into comprehensive mortgage platforms called MortgageCenter and FinanCenter.
Through the acquisition of FSI, the Company acquired assets of $26,775 in
marketable securities, $1,398,020 in Intellectual property (MortgageCenter and
FinanCenter software), and $1,904 in computer equipment. The Company also
acquired liabilities of $61,796 in accounts payable and $275,000 through the
assumption of a note payable.
On May 9, 2003 the Board of Directors approved the acquisition of Realty Capital
Corporation (renamed Silverado Mortgage Corporation in 2004), a mortgage
brokerage company, from John Hartman for 729,452 restricted common shares. Mr.
Hartman (President of Silverado Financial, Inc.) abstained from the vote. The
acquisition was made at a trading value of $127,654 which was the net asset
value of Realty Capital Corporation and the average closing bid price of the
Company on they prior five trading days. Mr. Hartman's holdings of Silverado
Financial, Inc. common stock were 103,511 shares (0.87% of total shares
outstanding) prior to acquisition and 832,963 shares (6.59% of total shares
outstanding) after the acquisition of Realty Capital Corporation, respectively.
Through the acquisition of Realty Capital Corporation, the Company acquired
total assets of $168,233, consisting of $33,963 in accounts receivable and
prepaid expenses, $49,284 in computers and equipment, and $84,986 in furniture.
The Company also acquired liabilities of $7,871 in accounts payable and $32,708
through the assumption of notes payable.
5. Accounts Payable
As of December 31, 2004 and 2003, the Company owes its vendors a total of
$55,870 and $244,421, respectively, of which approximately $21,188 and $86,518
were outstanding over ninety days.
6. Long-Term Debt
Notes Payable
See accompanying notes and accountants' report
14
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
2004 2003
----------------------------------
Through the acquisition of Financial
Software, Inc. (FSI), the Company
became obligated for the acquired
accounts payable in the amount of
$30,000. In June 2003, the Company
issued 33,000 shares of stock at a
value of $5,000 and a note payable for
$25,000 in satisfaction of accounts
payable to one of the FSI vendors. The
note carries interest at 5.0% $ 25,000 $ --
On October 11, 2004 John E. Hartman
returned 729,452 shares, valued at
$43,767, of Silverado Financial, Inc.
stock to allow the Company the
capability to issue more shares for
financing transactions and services.
Silverado Financial, Inc. will satisfy
the note obligation with re-issuance of
shares and a 5% bonus of 36,472
shares, valued at $2,188. 43,767 --
----------------------------------
68,767 --
Current portion 68,767 --
----------------------------------
Long term-debt $ -- $ --
==================================
Convertible Notes Payable
The Company has three convertible notes payable totaling $36,000 at 10% per
annum, maturing in 2005 as a result of the Company's extensions of two
convertible notes that were originated during 2002. At December 31, 2004 and
2003 there was $7,144 and $3,537 of accrued unpaid interest, respectively.
A schedule of the maturity dates of the convertible debentures with their
attached warrants are as follows:
Original Extended
Amount Maturity Date Maturity Date Warrants Outstanding
--------------------------------------------------------------------------------------
$ 16,000 10/11/2003 10/11/2005 40,000 shares at $.40 per share
$ 10,000 11/16/2003 11/16/2005 25,000 shares at $.40 per share
$ 10,000 7/23/2004 7/23/2005 25,000 shares at $.40 per share
These notes can be converted into common stock for the same amount of shares as
their right to purchase shares through their warrants. Management plans to
convert these to equity in 2005; however if the Company has the ability to make
all note payments under their terms and does not convert or further extend the
convertible notes payable, the minimum annual payment is as follows:
Year Amount
---- ------
2005 $ 36,000
See accompanying notes and accountants' report
15
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Warehouse Facility
On September 3, 2004, the Company's wholly owned subsidiary, Silverado Mortgage
Corporation signed an agreement for a $2,000,000 mortgage warehouse and security
facility. The Company began utilizing the warehouse and security facility on
November 22, 2004.
The warehouse facility requires a demand note. The demand note, in the event of
a default, stipulates that any outstanding balance of warehouse facility can be
called at any time inclusive of interest. Per the terms in the warehouse
agreement the note is subject to mandatory prepayments and is collateralized by
the mortgage loans and other predetermined assets.
7. Operating Lease Commitments
During April 2004, the Company became responsible for a lease for 2,512 square
feet in an office building in Pleasanton, California. The lease is for a period
of three years ending on May 31, 2007 with an option to renew for an additional
three years. The base rental under the lease is $52,752 per annum (4,396 per
month) during the first twelve-month period, $54,259 per annum ($4,522 per
month) for the second twelve-month period and $55,766 per annum ($4,647 per
month) during the third twelve-month period. The lease provides for the Company
to pay its proportionate share of the landlord's common costs.
During September 2004, the Company became responsible for a lease for 6,000
square feet in an office building in Campbell, California. The lease is for a
period of three years ending on October 31, 2007. The base rental under the
lease is $108,000 per annum ($9,000 per month) during the first twelve-month
period and $120,000 per annum ($10,000 per month) for the second twelve-month
period and $126,000 per annum ($10,500 per month) during the third twelve-month
period. The lease provides for the Company to pay its proportionate share of the
landlord's common costs.
During November 2004, the Company became responsible for a lease for 6,000
square feet in an office building in Phoenix, Arizona. The lease is for a period
of three years ending on January 31, 2008. The base rental under the lease is
$99,000 per annum ($8,250 per month) during the first thirty-six month period
except the Company shall pay $2,750 for the first ninety (90) days, $4,125 for
the second ninety (90) days and $6,875 for the third ninety (90) days of the
lease. The lease provides for the Company to pay its proportionate share of the
landlord's common costs.
Lease expense for the years ended December 31, 2004, 2003 and 2002 was $93,604,
$53,808 and $15,773, respectively.
Minimum future commitments under all operating leases are as follows for the
years ended December 31,
Year Amount
----------------------- ----------------------
2005 $ 193,881
2006 275,138
2007 227,236
2008 8,250
----------------------
$ 704,505
======================
See accompanying notes and accountants' report
16
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The components of the provision for income tax consist of the following for the
years ended December 31,
2004 2003 2002
-----------------------------------
Current tax expense - state $ 1,600 $ -- $ --
Deferred tax benefit:
Federal 141,933 296,228 165,219
California 45,058 52,276 --
Change in valuation allowance (186,991) (348,504) (165,219)
-----------------------------------
Total deferred tax expense -- -- --
-----------------------------------
Provision for income taxes $ 1,600 $ -- $ --
===================================
The Company's effective income tax rate is higher than what would be expected if
the federal statutory rate were applied to loss from operations primarily
because of net operating losses deductible for financial reporting purposes that
are not deductible for tax purposes. A full valuation of net deferred tax assets
was recorded at December 31, 2004, 2003 and 2002 due to the Company's
uncertainty as to future realization of income tax loss carryforwards. The
valuation allowance increased by approximately $186,991, $348,504 and $165,219
for the years ended December 31, 2004, 2003 and 2002, respectively.
A reconciliation of the Company's income tax expense rate to U.S. federal
statutory rate for the years ended December 31, is as follows:
2004 2003 2002
----------------------------------------
Federal statutory rates (15%) (34%) (34%)
State statutory rates (9%) (6%) 0%
Change in valuation allowance 19% 34% 34%
Expiration of net operating loss carryforward 5% 6% 0%
----------------------------------------
0% 0% 0%
========================================
At December 31, 2004 the Company had realized federal net operating losses of
approximately $8,825,215. Future realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to their expiration. The
realized net operating losses expire, as follows:
See accompanying notes and accountants' report
17
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Silverado Mortgage
Consolidated Corporation Financial Services, Inc.
Expiration Federal State State
------------------------------------------------------------------------------------------------------------
2009 $ 44,994
2010 379,485 $ 2,109,954
2011 461,101 318,228
2012 236,028 76,034
2013 522,756
2014 119,873 $ 389,827
2018 861,526
2019 603,950
2020 3,670,269
2021 578,596
2022 126,723
2023 871,260
2024 991,283
---------------------------------------------------------------------------
$ 8,825,215 $ 3,146,845 $ 389,827
===========================================================================
9. Loss Per Share
At December 31, 2004, there were convertible notes with exercisable warrants
outstanding. Outstanding options, warrants and convertible securities to
purchase common stock were not considered in the calculation for diluted
earnings per share for the years ended December 31, 2004, 2003 and 2002, because
the effect of their inclusion would be anti-dilutive. A reconciliation of the
numerator and denominator of the basic and diluted per share calculations for
the loss from continuing operations is as follows:
Basic Loss Diluted Loss
Net (Loss) Per Share Per Share
----------------------------------------------------------------
2004
Loss $ (992,083) $ (992,083)
Shares 18,216,697
Per share $ (0.05) $ (0.05)
See accompanying notes and accountants' report
18
9. Loss Per Share (continued)
Basic Loss Diluted Loss
Net (Loss) Per Share Per Share
-----------------------------------------------------------------
2003
Loss $ (938,060) $ (938,060)
Shares 14,839,492
Per share $ (0.07) $ (0.07)
2002
Loss $ (402,973) $ (402,973)
Shares 6,389,045
Per share $ (0.06) $ 0.06
Convertible notes and warrants to purchase 90,000, 90,000 and 65,000 shares, and
options to purchase 90,000, 90,000 and 65,000 shares of common stock were
outstanding at December 31, 2004, 2003 and 2002, respectively. All shares which
could be exercised from convertible notes, warrants and stock options were
excluded from the computation of diluted loss per share because the effect of
their inclusion would be anti-dilutive.
10. Related Party Transactions
On May 9, 2003 the Board of Directors approved the acquisition of Realty Capital
Corporation (renamed Silverado Mortgage Corporation in 2004), a mortgage
brokerage company, from John Hartman (President of Silverado Financial, Inc.)
for 729,452 restricted common shares. Mr. Hartman abstained from the vote. The
acquisition was made at a trading value of $127,654 which was the net asset
value of Realty Capital Corporation and the average closing bid price of the
Company on the prior five trading days. Mr. Hartman's holdings of Silverado
Financial, Inc. common stock were 103,511 shares (0.87% of total shares
outstanding) prior to acquisition and 832,963 shares (6.59% of total shares
outstanding) after the acquisition of Realty Capital Corporation, respectively.
As of December 31, 2003, Sherry Hartman, the broker of record for Realty Capital
Corporation and the spouse of the President of Silverado Financial, Inc. had an
outstanding debt to the Company in the amount of $11,405.
On October 11, 2004 John E. Hartman returned 729,452 shares, valued at $43,767,
of Silverado Financial, Inc. stock to allow the Company the capability to issue
more shares for financing transactions and services. Silverado Financial, Inc.
will satisfy the note obligation with reissuance of shares and a 5% bonus of
36,472 shares, valued at $2,188.
11. Contingencies
On January 27, 2004 DL Pacific Center LP (DL Pacific) filed a lawsuit for
$40,444 plus costs and attorney's fees against the Company in San Diego County
Superior Court. The suit alleges that, after the purchase of San Francisco
Funding, Inc. (SFF) in November 2003, the Company assumed SFF's obligations
pursuant to DL Pacific's lease with SFF by accepting the benefits of such lease
and by negotiating with DL Pacific for amendments to the lease. Silverado has
agreed to settle the lawsuit for the nuisance value of $2,500.
On March 9, 2004 Robert E. Vener (Vener) filed an amendment to his lawsuit for
$7,500 per month from November 2003 to March 2006 plus costs and attorney's fees
against the Company in Marin County Superior Court. The suit alleges that, after
the purchase San Francisco Funding, Inc. (SFF) in November 2003, the Company
assumed SFF's obligations pursuant to Vener's lease with SFF by stating and
representing to Vener that it would be responsible for any amounts due from SFF
pursuant to the lease, and that Vener relied on the Company's representations by
allowing SFF to remain on the premises following SFF's default in the payment of
rent on the lease. Silverado Financial, Inc. has agreed to settle the suit for
the nuisance value of $3,000.
Silverado Financial, Inc. has filed a cross-complaint against SFF and its major
stockholder Mr. and Mrs. Daniel Selis, for indemnity for the cost of defending
the Vener lawsuit, and punitive damages resulting from breach of contract, fraud
and/or interference with the Company advantageous business relationships.
On May 12, 2004 The Subway.Com filed for arbitration for $60,000 plus interest
against the Company in the state of Florida. The suit claims breach of contract
for stock promotion services. The Company believes it has meritorious defense
and that no contract was ever consummated.
On July 16, 2004, the Company was served with a complaint by the State of
California, Department of Industrial Relations on behalf of a former contractor
for back wages of $10,938 and penalties of $288 for an indeterminate number of
days. Outside counsel for the company has advised that at this stage in the
proceedings he cannot offer an opinion as to the probable outcome. The company
believes the suit is without merit and is vigorously defending its position.
19
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 8A: CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Our chief executive officer
and principal financial officer, after evaluating the effectiveness of the our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this annual report (the "Evaluation Date"), has concluded that as of the
Evaluation Date, our disclosure controls and procedures were adequate and
designed to ensure that material information relating to the Company and our
consolidated subsidiaries would be made known to him by others within those
entities.
(b) Changes in internal control over financial reporting. There were no
significant changes in the our internal control over financial reporting during
the fourth fiscal quarter that materially affected, or are reasonably likely to
materially affect, the our internal control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company.
Each serves until the next annual meeting of the stockholders.
Name of Executive
Officers & Directors Age Title Since
-------------------------- ----- ----------------------------- --------
R.G. Krushnisky 42 Director 1/1/1995
Albert Golusin 49 C.F.O & Director 2/5/1999 (resigned 11/04)
John Hartman 38 President, CEO & Chairman of the Board 9/26/2002
Sean Radetich 36 COO & Director 1/10/2003
John E. Hartman- President, CEO, and Chairman of the Board
As Chief Executive and Chairman of the Board Mr. Hartman is actively involved in
leading and building Silverado Financial with particular focus on non-prime
mortgage banking, policy initiatives and strategic investments that are driving
the consolidation of the mortgage industry. Prior to being appointed Chief
Executive Officer of Silverado Financial, Inc., Mr. Hartman was Chief Executive
Officer of NEXT Advisors, Incorporated where he was responsible for raising its
venture funding and for completing three acquisitions including an on-line
securities brokerage, ATradeUSA.com, an insurance brokerage and a traditional
securities brokerage. Before joining Next Advisors, Mr. Hartman was Managing
Partner of Hartman-Kauffman, LLC, and a high-touch investment advisory firm,
which was acquired by Next Advisors. As the Managing Partner of H-K, he
increased the gross sales of the San Jose office 400% and more than tripled the
sales force. From 1995 to January 1999, Mr. Hartman was with Morgan Stanley
where he managed assets for both individuals and institutions. Prior to
beginning his career at Morgan Stanley, he was a Partner at Realty Capital
Partners where he syndicated equity funding and managed the development of
several multimillion-dollar commercial and residential real estate developments
in coastal California. Prior to Realty Capital Partners, he held the positions
of research analyst and Investment Property Specialist with Grubb & Ellis, a
commercial real estate firm headquartered in San Francisco, California. Mr.
Hartman received his Masters in Business Administration (MBA) from California
Coast University in Santa Ana, California and his Bachelor of Science Degree in
Business Administration from San Jose State University in San Jose, California.
20
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Sean Radetich - Executive VP - Chief Operations Officer - Member of the Board
As Chief Operating Officer Mr. Radetich is responsible for the day-to-day
operations of the Company. Mr. Radetich operates Silverado's mortgage banking
operations, oversees the mortgage brokerage operations, pursues State and
Federal licensure for brokerage and banking, investigates potential acquisition
targets and ensures the strategic goals of the entire Company are met through
the implementation of policy and procedure via the line managers. Mr. Radetich
has over 12 years of his professional career identifying and working with
emerging growth companies. Mr. Radetich has extensive management and capital
markets experience, which includes direct investment into and raising capital
for emerging micro-capitalization companies. Mr. Radetich served as Chief
Financial Officer for WebCash Corporation, a B2B internet infrastructure company
backed by Berg McAfee and Silicon Valley Angel Fund, and for over 10 years Mr.
Radetich has represented a select group of institutional investors by
structuring and negotiating their private investments into emerging
micro-capitalization companies. Some of the companies that Mr. Radetich has
invested into, managed PIPE transactions and/or performed business development
for are: Silverado Financial (SLVO-OTCBB), Next Advisors, Interchange Corp.
(INCX-NASDAQ), Peabodys Coffee (PBDY-OTCBB), Clearworks Technologies (formerly
CLWK-OTCBB) and Cekatel. Mr. Radetich previously worked for LBI Group and SBC
Warburg in the Structured Product/Private Placement Divisions, Webcash as Chief
Financial Officer and Hamilton & Associates as a real estate analyst. Mr.
Radetich received his B.S. in International Economics from the University of
Oldenburg, Germany, and an A.S. in California Real Estate from Napa College.
RG "Jako" Krushnisky - Director
Mr. Krushnisky has been an officer and director for both public and private
company's in the U.S. and Canada. As an independent director for Silverado he is
currently President and CEO of Rockford Energy Corporation. Rockford Energy is
in the business of developing environmentally friendly energy sources such as
hydroelectric and wind power. Mr. Krushnisky is one of the original founding
members of Rhombic Corporation who oversaw the development of various material
science projects including its joint venture with Daimler Benz Aerospace while
serving as its President and CEO. Additionally, Mr. Krushnisky is a founding
shareholder and member of the board of directors for Silverado Financial, Inc.
Mr. Krushnisky is a skilled entrepreneur and corporate officer who in addition
to his work with Rockford and Silverado is the owner of International Laser
Games in British Columbia, Canada. Mr. Krushnisky received his Bachelor of
Science in Business and International Commerce from United States International
University in San Diego, California from 1979-1982 and conducted further studies
in economics in London, England from 1982-1983.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the securities Exchange Act of 1934, as amended, requires the
Company's directors, executive officers and persons who own more than 10% of a
class of the Company's equity securities which are registered under the Exchange
Act to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes of ownership of such registered securities.
Such executive officers, directors and greater than 10% beneficial owners are
required by Commission regulation to furnish the Company with copies of all
Section 16(a) forms filed by such reporting persons.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and on representations that no other reports
were required, no person required to file such a report failed to file during
fiscal 2004. Based on stockholder filings with the SEC, Silverado Financial,
Inc. is subject to Section 16(a) filing requirements.
Code of Ethics
The Company has adopted a Code of Ethics as of the date of this report.
ITEM 10. EXECUTIVE COMPENSATION
21
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered in all capacities to the Company for
the three fiscal years ended December 31, 2004, 2003, 2002 and 2001 for all
officers, individually, and, as a group, for all officers and directors.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
Securities
Other Annual Restricted Stock Underlying All Other
Name and Principle Position Year Salary ($) Bonus ($) Compensation ($) Award(s) ($) Options/SARs (#) Compensation ($)
------------------------------------- ---- ---------- --------- ---------------- ------------- ------------------ ----------------
John E. Hartman, CEO (4) 2004 -- -- -- $ 120,000 None --
2003 -- -- -- $ 105,000 None --
2002 -- -- -- -- None --
Albert Golusin CFO (3) 2004 -- -- -- $ 82,500 None --
2003 -- -- -- $ 60,000 None --
2002 -- -- -- -- None --
Sean Radetich, COO (7) 2004 -- -- -- $ 90,000 None --
2003 -- -- -- $ 33,000 None --
2002 -- -- -- -- None --
All Officers & Directors as a group
(two persons) (3)(4)(5)(6)(7)(8) 2004 -- -- -- $ 292,500 None --
2003 -- -- -- $ 203,000 None --
2002 -- -- -- $ 85,675 None --
(3) Albert Golusin, during 2002 he served as the Chief Financial Officer and the
Chief Executive Officer from January 1, 2002 to September 25, 2002. During 2002
he received 1,189,156 restricted common shares at a trading value of $48,153.
During 2003, he received 280,228 restricted common shares at a trading value of
$60,000
(4) John Hartman became the Chief Executive Officer on September 26, 2002.
During 2002 he received 238,610 restricted common shares at a trading value of
$15,000. During 2003, he received 503,913 restricted common shares at a trading
value of $105,000 for 2004 he is an owed 956,091 restricted commons share as
deferred compensation.
(5) R.G. Krushnisky, Vice President and Director of the Company, provides his
consulting services on a part-time basis. During 2001, Mr. Krushnisky received
$15,000 for services as a Vice President. He also earned $18,000 for director
fees during 2001. During 2002 he received 304,532 restricted common shares at a
trading value of $15,261. During 2003, he received 25,014 restricted common
shares at a trading value of $5,000 he is owed 36,439 in directors fees.
(7) Sean Radetich, Executive Vice-President, Chief Operating Officer and
Director of the Company, during 2003, he received 137,014 restricted common
shares at a trading value of $33,000. During 2004 he is owed 699,147 restricted
common shares as deferred compensation.
There are no current plans to pay cash or stock dividends on the Company's
stock.
VALUE OF OPTIONS AT DECEMBER 31, 2004
The Company had no options outstanding from which it could obtain cash during
the entire year 2004.
22
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
OPTION GRANTS IN THE LAST FISCAL YEAR
The Company granted no options during 2004.
COMPENSATION OF DIRECTORS
The company compensates all independent directors $500 for each meeting
attended. The amount is paid in Common shares, the price of which is determined
by the average closing price of the Common stock during the month in which the
meeting is held. No compensation is paid to any employee director for attendance
at any meeting or any other services provided as a director.
STOCK OPTION PLAN
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information, as of December 31, 2003, regarding the
shareholdings of (1) The Company's current directors and executive officers, (2)
those persons or entities who beneficially own more than 5% of its common stock
and (3) all of the directors and executive officers as a group (giving effect to
the exercise of the warrants held by each such person or entity). Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of the shares and has sole voting and investment power with respect to the
share indicated:
Number of shares of Common Percent of Common Stock
Name Stock Beneficially Owned Beneficially Owned (1)
------------------------------------------------------------------------------------------------------------------
John Hartman
Chief Executive Officer, Chairman of the Board
5976 W. Las Positas Blvd., Suite 116
Pleasanton, CA. 94588 274,027 1.50%
Albert Golusin
Chief Financial Officer, Director
10641 North 44th Street
Phoenix, Arizona 85028 582,060 3.20%
R.G. Krushnisky
Director
93 English Bluff Road
Tsawwassen, British Columbia
Canada V4M 2M4 170,022 0.93%
Sean Radetich
Executive Vice-President, COO & Director
5976 W. Las Positas Blvd. Suite 116
Pleasanton, CA. 94588 758,275 4.15%
Total shares owned by Directors and
Officers of the Company (4 persons) 2,631,444 9.78%
(1) Based upon 18,216,697 outstanding shares of common stock on December 31,
2004.There were no options outstanding at December 31, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
23
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
None
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The following exhibits required by Item 601 to be filed herewith are
incorporated by reference to previously filed documents:
Exhibit No. Description and Method of Filing
----------- -----------------------------------------------------------------
3.2 The corporate by-laws filed on December 3, 1999 in the Form
10-QSB 10.1 Stock Option Plan filed in the 10-QSB on May 17,
2000.
10. Letter on change of accountant, incorporated by reference to
Form 8/K filed on March 19, 2004 and on Form 8-K/A on April 7,
2004
21.1 Subsidiaries of Issuer as of December 31, 2003
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant to Section 1350
(b) REPORTS ON FORM 8-K
1. Form 8-K dated December 2, 2003 relating to the acquisition of San Francisco
Funding, Inc. 2. Form 8-K dated December 24, 2003 relating to the rescission of
the acquisition of San Francisco Funding, Inc.
(a) Exhibits
31.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K/A was filed on April 7, 2004, reported in Items 4 pertaining to the
Change in the Registrant's Certifying Accountants.
A Form 8-K was filed on May 20, 2004, reported in Items 2 and 7 pertaining to
the acquisition of Lendingtech.com, Inc. The agreement was amended to extend the
closing date until an audit of Lendingtech, com's historical financials were
provided.
A Form 8-K was filed on November 15, 2004, reported in Section 5, Item 5.02 for
Departure of Directors or Principles Officers; Election of Directors;
Appointment of Principle Officers pertaining to the resignation of Al Golusin as
Chief Financial Officer, Chairman and Director of the Registrant.
A Form 8-K was filed on December 1, 2004, reported Section 1 Item 1.01 for Entry
into a Material Definitive Agreement. This pertains to the Debt Cancellation and
General Release Agreement signed by SRD Technologies. Details can be referenced
in the Subsequent Events section.
24
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Sallman, Yang & Alameda was the Company's independent auditor for the year ended
December 31, 2004 and reviewed the quarterly financial statements for the first
three quarters during 2004 prepared by Epstein, Webber. Sallman Yang & Alameda
performed the services listed below and was paid the fees listed below.
AUDIT FEES
Silverado's previous auditors Epstein, Webber billed aggregate fees of
approximately $9,300 for the review of the financial statements included in the
Company's Quarterly Reports on Form 10-QSB for each of the three quarters ended
September 30, 2004.
Sallman, Yang & Alameda billed the Company and approximately $17,000 for year
ended December 31, 2004 for professional services rendered for the audit of the
Company's annual financial statements and review of the financial statements
included in the Company's Quarterly Reports on Form 10-QSB.
TAX FEES
Sallman, Yang & Alameda anticipates charging the Company $4,000 for the
preparation of the 2004 State and Federal corporate tax returns.
ALL OTHER FEES
Sallman, Yang & Alameda did not provide or bill for any other professional
services during the two years ended December 31, 2004.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SILVERADO FINANCIAL, INC.
Date: April 11, 2004 By /s/ John E. Hartman
-------------------------------------------
John E. Hartman, Chief Executive Officer
In accordance with the Exchange Act, the report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date: April 11, 2004 By /s/ John E. Hartman
-----------------------------
John E. Hartman, Chairman
25
Silverado Financial, Inc.
Notes to Consolidated Financial Statements (continued)
Date: April 11, 2004 By /s/ Sean Radetich
-----------------------------
Sean Radetich, Director
Date: April 11, 2004 By /s/ R.G. Krushnisky
-----------------------------
R.G. Krushnisky, Director
SUBSIDIARIES OF ISSUER AS OF DECCMBER 31, 2004
The company has two operating subsidiaries. They are as follows:
Financial Software, Inc.:
Financial Software, Inc. is incorporated under the laws of the State of
California.
Silverado Mortgage Corporation:
Silverado Mortgage Corporation is incorporated under the laws of the State of
California.
26