<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR R 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from _____________to______________
Commission file number 33-68700-S
Opportunity Management Company, Inc.
(Name of small business issuer in its charter)
Washington 91-1427776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12904 East Nora, Suite A, Spokane, WA 99216
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (509) 928-6545
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
The total number of shares outstanding of the issuer's common stock, as of
October 31, 1996 was 2,229,780 shares at $5.00 per share for a total capital
contribution of $11,148,900.
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD
ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I
Item 1: Financial Statements.............................3
Item 2: Management's Discussion and Analysis of
Financial Condition & Results of Operation......18
PART II
Item 1: Legal Proceedings...............................24
Item 2: Changes in Securities...........................24
Item 3: Defaults Upon Senior Securities.................24
Item 4: Submission of Matters to a Vote of Security
Holders.........................................24
Item 5: Other Information...............................24
Item 6: Exhibits and Reports on Form 8-K................25
<PAGE>
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENTS OF CONDITION
SEPTEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Loans receivable, earning (Note 3) $ 6,236,262 $7,465,843
Loans receivable, nonearning (Note 3) 3,391,703 1,512,976
------------ -----------
9,627,965 8,978,819
Real estate held for sale (Note 3) 1,161,633 884,155
------------ -----------
10,789,598 9,862,974
Allowance for losses (Note 3) (98,603) (100,123)
NET LOANS AND REAL ESTATE 10,690,995 9,762,851
Cash 355,492 101,528
Other assets 750 89,817
Accrued interest receivable 75,421 5,248
------------ -----------
TOTAL ASSETS $11,122,658 $9,959,444
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses 21,454 18,809
Accrued cash dividends payable to
stockholders 113,428 152,883
------------ -----------
TOTAL LIABILITIES 134,882 171,692
------------ -----------
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000
shares authorized; 1996 2,229,635
and 1995 1,967,832 shares issued and
outstanding 11,067,103 9,839,158
Undistributed income (expense) (79,327) (51,406)
------------ -----------
10,987,776 9,787,752
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,122,658 $9,959,444
============ ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income on residential loans $ 523,358 $ 522,617
Interest income on commercial loans 384,156 416,252
Interest income on bank accounts 9,108 3,796
Other income 6,927 1,878
---------- ----------
TOTAL REVENUES 923,549 944,543
---------- ----------
EXPENSES
Management fees - related party (Note 5) 122,168 105,601
Amortization of organizational costs 3,374 11,840
Provision for loan and real estate losses 35,000 38,000
Accounting and auditing expenses 22,481 18,013
Legal expenses 27,964 13,841
Business and occupational taxes 6,530 9,663
Real estate owned expenses 3,907 -
Other expense 2,628 1,270
---------- ----------
TOTAL EXPENSES 224,052 198,228
---------- ----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 699,497 746,315
Gain on sale of real estate (Note 3) 11,486 23,598
---------- ----------
NET INCOME (Notes 4 and 5) $ 710,983 $ 769,913
========== ==========
Primary earnings per common share $ 0.32 $ 0.41
Weighted average shares outstanding 2,225,870 1,875,483
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENTS OF INCOME
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income on residential loans $ 134,577 $ 193,431
Interest income on commercial loans 140,543 118,752
Interest income on bank accounts 1,416 882
Other income 1,117 716
---------- ----------
TOTAL REVENUES 277,653 313,781
---------- ----------
EXPENSES
Management fees - related party (Note 5) 41,191 36,444
Amortization of organizational costs 1,125 1,125
Provision for loan and real estate losses 20,000 0
Accounting and auditing expenses 7,611 3,900
Legal expenses 19,453 1,000
Business and occupational taxes 2,194 3,681
Real estate owned expenses 2,281 -
Other expense 118 598
---------- ----------
TOTAL EXPENSES 93,973 46,748
---------- ----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 183,680 267,033
Gain on sale of real estate (Note 3) 11,486 401
---------- ----------
NET INCOME (Notes 4 and 5) $ 195,166 $ 267,434
========== ==========
Primary earnings per common share $ 0.08 $ 0.14
Weighted average shares outstanding 2,334,229 1,954,370
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Common Stock Undistributed Total
---------------------- Income Stockholders'
Shares Amount (Expense) Equity
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 2,086,779 $10,433,894 $ (61,406) $10,372,488
Net income - - 710,983 710,983
Issuance of common stock 63,344 316,724 - 316,724
Dividends reinvested in stock 63,297 316,485 (316,485) -
Cash dividends - - (412,419) (412,419)
--------- ----------- ----------- ------------
Balance, September 30, 1996 2,213,420 $11,067,103 $ (79,327) $10,987,776
========= ============ =========== ============
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 710,983 $ 769,913
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of organizational costs 3,374 56,806
Provision for loan and real estate losses 35,000 38,000
Amortization of discounts (6,815) (1,807)
Gain on sale of real estate (11,486) (23,598)
(Increase) decrease in:
Accrued interest receivable 8,684 (16,604)
Increase (decrease) in:
Accrued expenses (5,514) 981
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 734,226 823,691
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans net of reductions and
maturities - (912,986)
Purchases of new loans (3,810,428) -
Principal reductions and maturities of loans 3,414,724 -
Proceeds from sale of real estate owned 118,012 92,332
Purchases of real estate owned - (321,340)
Advances of costs associated with other
real estate development (101,769) (20,388)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (379,461) (1,162,382)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 316,724 614,496
Dividends paid to stockholders (405,977) (437,706)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING
ACTIVITIES (89,253) 176,790
----------- -----------
INCREASE (DECREASE) IN CASH 265,512 (161,901)
Cash, January 1 89,980 263,429
----------- -----------
Cash, September 30 $ 355,492 $ 101,528
=========== ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for stockholder
reinvestment of dividends $ 316,485 $ 343,473
---------- ----------
Acquisition of real estate in settlement
of loans $ - $ 321,340
---------- ----------
Charge offs against the allowance $ 43,431 $ 6,932
---------- ----------
New contracts made in connection with
sales of real estate owned $ 109,390 $ 45,200
---------- ----------
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
FORMATION OF THE COMPANY:
Opportunity Management Company, Inc. was incorporated in the State of
Washington on October 12, 1988 and operates as a Real Estate Investment Trust
(REIT) (Note 4). Its general business purpose is to make loans secured by
interests in real property and derive income from and relating to those
interests in real property.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period. Actual results could differ, either positively or negatively, from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate, future additions to the
allowance may be necessary based on changes in economic conditions.
LOANS RECEIVABLE AND INTEREST ON LOANS:
Loans are stated at principal outstanding and net of the allowance for loan
losses. Interest income on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
Loans are placed in a nonaccrual status when loans become ninety days
delinquent. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments to principal and
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
interest. Interest previously accrued but not collected is generally reversed
and charged against income at the time the loan is placed on nonaccrual status.
Loans placed in a nonaccrual status are considered impaired for purposes of
SFAS No. 114 and No. 118.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES:
The Company utilizes the allowance method of providing for losses on
uncollectible loans or overvalued real estate. Specific valuation allowances
are provided for loans receivable when repayment becomes doubtful and the
amounts expected to be received in settlement of the loan are less than the
amount due. In addition to specific allowances, a general allowance is
provided for future losses based upon a continuing review of loans which
includes consideration of actual net loan loss experience, changes in the size
and character of the loan portfolio, and the evaluation of current economic
conditions.
Valuation allowances are provided for real estate held for sale when the net
realizable value of the property is less than its costs. General valuation
allowances are also provided based on management's estimate of possible losses
in the portfolio. Foreclosed assets that are held for sale are carried at the
lower of cost (recorded amount at the date of foreclosure) or fair value less
disposition costs. Additions to the allowance are charged to expense.
REAL ESTATE HELD FOR SALE:
Real estate held for sale includes properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure or purchased by the
Company for resale. These properties are transferred to other real estate
owned and are recorded at the lower of the loan balances at the date of
transfer or the fair value of the property received as determined by
independent appraisals or current listings. Loan losses arising from the
acquisition of such property are charged against the allowance for loan losses.
An allowance for losses on other real estate owned is maintained for subsequent
valuation adjustments on a specific property basis.
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
SALES OF REAL ESTATE:
Sales of real estate generally are accounted for under the full accrual method.
Under that method, gain is not recognized until the collectability of the sales
price is reasonably assured and the earnings process is virtually complete.
When a sale does not meet the requirements for income recognition, gain is
deferred until those requirements are met.
LOAN PLACEMENT FEES:
Opportunity Management Company, Inc. purchases loans from CLS Mortgage, Inc.
for its loan portfolio. The loan principal outstanding includes a loan
placement fee to CLS Mortgage, Inc. which was paid by the borrower and financed
in the loan balance. These fees are accounted for as revenue by CLS Mortgage,
Inc. when the loan is sold to Opportunity Management Company, Inc. No income
or expense related to these fees are recorded by Opportunity Management
Company, Inc. (Note 5).
DIVIDENDS:
It is the policy of the Company to distribute at least 95% of quarterly net
earnings in cash and stock reinvestment dividends to the stockholders. A
special dividend is declared annually in order to meet REIT requirements which
require the Company to distribute 95% of its taxable income to its
stockholders. The special dividend cannot be determined until the tax return
is prepared which is always subsequent to the Company's year end (Note 4).
The Company offers a dividend reinvestment program (rollover dividend program)
whereby the shareholders have the option of receiving dividends in cash or in
the alternative they can apply their dividends toward the purchase of stock at
the $5 stated value per share. The following is a reconciliation of the
dividends on common stock as summarized in the statement of changes in
stockholders' equity:
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash dividends paid $ 405,977 $ 437,706
Dividends reinvested in stock 316,485 343,473
Accrued dividends, September 30 113,428 152,883
Accrued dividends, January 1 (105,252) (131,458)
---------- ----------
Dividends on common stock 730,638 802,604
Net effect of fractional shares (1,734) 9
Special dividends accrued in excess
of net income (27,921) (32,700)
Regular dividends paid in excess of
net income 10,000 -
---------- ----------
NET INCOME $ 710,983 $ 769,913
========== ==========
Cash dividends - accrual basis $ 412,419 $ 459,140
Dividends reinvested in stock -
accrual basis 316,485 343,473
Dividends accrued in excess of net income (27,921) (32,700)
Regular dividends paid in excess
of net income 10,000 -
---------- ----------
NET INCOME $ 710,983 $ 769,913
========== ==========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of the weighted average
number of shares outstanding during each quarter.
Note 2. Accounting Changes
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting By Creditors for Impairment of
a Loan, as amended by SFAS No. 118. Under the SFAS, impairment occurs when it
is probable a creditor will not be able to collect all amounts due under a loan
agreement. Impaired loans are to be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Changes in these
values will be
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 2. Accounting Changes (Continued)
reflected in income and as adjustments to the allowance for possible credit
losses account. The effect of adoption on the Company's 1995 financial
position and results of operations was insignificant (Note 3).
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at September 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
First mortgage loans $8,146,741 $7,304,866
Second mortgage loans 432,629 604,741
Mobile homes with land 1,048,595 1,069,212
---------- ----------
$9,627,965 $8,978,819
========== ==========
A concentration of credit exists in that the majority of loans are secured by
real property in the states of Washington and Idaho.
Types of real property securing loans at September 30, 1996 and 1995 are as
follows:
1996 1995
---------- ----------
Commercial $1,781,770 $1,613,330
Single and multiple family residential 2,492,755 1,853,839
Rural single and multiple family
residential 1,840,659 2,067,272
Mobile homes with land 1,052,560 1,069,212
Farm/agricultural 9,758 9,758
Developed land 1,866,363 1,634,686
Undeveloped land 584,100 730,722
---------- ----------
$9,627,965 $8,978,819
========== ==========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale (Continued)
Real estate held for sale at September 30, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Commercial $ 142,695 $ 124,231
Single and multiple family residential - 32,889
Rural single family residential 216,183 141,235
Mobile homes with land 43,070 -
Developed land 759,685 585,800
---------- ----------
$1,161,633 $ 884,155
========== ==========
An analysis of the changes in the allowance for losses is as follows:
1996 1995
----------- ----------
Balance at January 1 $ 106,554 $ 68,275
Provision charged to expense 35,000 38,000
Recoveries 480 780
Charge-off of loss on sale of real
estate owned (43,431) (6,932)
----------- ----------
Balance at September 30 $ 98,603 $ 100,123
=========== ==========
</TABLE>
Impairment of loans having a recorded investment of $3,391,703 at September 30,
1996, has been recognized in conformity with SFAS No. 114 as amended by SFAS
No. 118. There is no specific allowance for loan losses related to these loans
at September 30, 1996. Interest income on impaired loans of $158,787 was
recognized for cash payments received in 1996. The average impaired loans for
the nine months ending September 30, 1996 was $2,746,786.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $3,391,703 at September 30, 1996 and $1,512,976 at September 30,
1995. If interest on those loans had been accrued, such income would have
approximated $363,168 for the quarter ended September 30, 1996 and $118,422 for
the quarter ended September 30, 1995. Interest income on those loans, which is
recorded only when received, amounted to $158,787 for September 30, 1996 and
$120,324 for September 30, 1995.
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 4. Income Taxes
The Company, in the opinion of management, continues to qualify as a Real
Estate Investment Trust (REIT) under the applicable provisions of the Internal
Revenue Code. The Company is allowed to deduct the dividends paid to its
stockholders as an expense and in effect not pay federal income taxes. In the
event the Company does not qualify, the Company would owe federal income taxes
as estimated below.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Income before taxes on income $ 710,983 $ 769,913
Federal income taxes at statutory rates (241,734) (261,770)
---------- ----------
Net Income $ 469,249 $ 508,143
========== ==========
</TABLE>
The company must continue to meet certain conditions on an annual basis to
retain its tax status as a REIT. These conditions were met for the quarters
ended September 30, 1996 and 1995. Dividends distributed are considered
ordinary income to the investors for tax purposes, with the exception of gains
on the sale of real estate, which are treated as capital gains to the
investors. At each year end taxable income is computed and compared to book
income and special dividends are paid, if necessary, to maintain the REIT
status. During the first quarter of 1996 a special dividend of $27,921 was
paid for the year ended December 31, 1995. In the first quarter of 1995 a
special dividend of $32,700 was paid for the year ended December 31, 1994.
Note 5. Related Party Transactions
CLS Mortgage, Inc. provides office space, administrative, accounting, computer,
and other services to Opportunity Management Company, Inc. For the quarters
ended September 30, 1996 and 1995, $122,168 and $105,601, respectively, were
paid for these services in accordance with a management agreement. For 1996
and 1995 the monthly fee was based on one-twelfth of 1.5% of the amount of
common stock outstanding each month end. The Company is relying on CLS
Mortgage, Inc. to manage its day-to-day operations as its administrative
manager. The President is also the President of CLS Mortgage, Inc. and
Chairman of the Board of Directors of Opportunity Management Company, Inc. and
owns .68% of the common stock of the Company. The two sole stockholders
directly and
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 5. Related Party Transactions (Continued)
indirectly own 3.43% of the common stock of Opportunity Management Company,
Inc. and 100% of the stock of CLS Mortgage, Inc. at September 30, 1996.
CLS Escrow provides Opportunity Management Company, Inc. with escrow services
at no cost. The stockholders of CLS Mortgage, Inc. collectively own 50% of the
outstanding shares of CLS Escrow.
Loans are purchased from or brokered by CLS Mortgage, Inc. CLS Mortgage, Inc.
earns a 6-12% loan placement fee from the borrowers of the monies loaned by
Opportunity Management Company, Inc. For the quarters ended September 30, 1996
and 1995, Opportunity Management Company, Inc. paid $269,191 and $357,555,
respectively, in loan placement fees.
Note 6. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH:
The carrying amount approximates fair value.
LOANS:
It was determined that a reasonable estimate of fair value could not be made
without incurring excessive costs. The Company does not possess the
information processing system capabilities to provide future principal and
interest cash flows expected to be received. Manual calculation of these cash
flows could not be made without incurring excessive costs due to the
professional time and
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 6. Fair Value of Financial Instruments (Continued)
programming costs this procedure would require. All loans are real estate
loans with fixed interest rates, which range from 12-18%, as of September 30,
1996. The approximate maturities of the loan portfolio are as follows:
<TABLE>
<CAPTION>
Principal
Carrying Percentage
Amount of Portfolio
---------- ------------
<S> <C> <C>
1996 $ 644,033 6%
1997 355,809 4
1998 748,024 7
1999 1,621,709 17
2000 2,281,427 24
2001 2,093,647 22
2002 86,544 1
2003 101,640 1
Thereafter 1,695,132 18
---------- ------------
9,627,965 100%
</TABLE>
Note 7. Contingencies
CONTINGENT LIABILITY:
The existing stockholders who reinvested their dividends on June 30, 1995, have
the right to rescind their purchase. The Company prospectus became outdated on
April 30, 1995. A total of 22,704.6 shares were reinvested at $5.00 per share
representing a contingent liability of $113,523. No provision for the
contingent liability has been accrued in the financial statements. This right
of rescission is limited to those stockholders who purchased stock after April
30, 1995, and before the amendment to the offering became effective. On
September 30, 1996 a letter was sent notifying those stockholders of their
right to rescind any stock purchased between May 1, 1995 thru August 10, 1995.
<PAGE>
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PLAN OF OPERATION AND LIQUIDITY
Stock sales together with principal payments received on loans receivable
provides the source of funds to invest in loans receivable. For the nine
months ended September 30, 1995 sales of common stock and dividends
reinvested in stock were $957,969. For the nine months ended September 30,
1996 sales of common stock and dividends reinvested in stock were $633,209,
representing a 51% decrease over 1995 levels. Management believes that the
decrease in stock sales is directly attributable to the decrease in
profitability caused by the high level of nonearning assets. The Company
has taken immediate measures to decrease the levels of nonearning assets
with the objective of improving earnings, stock sales and therefore liquidity.
Increased emphasis is being placed on collection activities. In addition,
new loan purchases are concentrated in first mortgages to borrowers with
stronger credit history than borrowers lent to in the past. These objectives
are intended to stabilize and eventually decrease the levels of nonearning
assets. Available liquidity will dictate the volume of loan purchases that
may be acquired by the Company.
In order to pass through income to its shareholders without being taxed at the
Company level, it will continue to comply with the REIT provisions of the
Internal Revenue Code.
The interest received on the loans and the gains on real property sales provide
the funds necessary to pay the expenses and make quarterly dividend
distributions to the shareholders. The Company manages its cash by not
purchasing new loans toward the end of the quarter in order to provide the
necessary funds to pay the cash dividends as authorized by the Board of
Directors shortly after the end of each calendar quarter. The Company expects
to continue the present cash management procedures for the foreseeable future.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company has remained profitable and has continued to pay dividends to
its shareholders. Earnings per share and dividends have decreased over
1995 primarily as a result of higher levels of nonearning assets. Set
forth below are the key results from operations for the quarters ended
September 30, 1996 and September 30, 1995.
1. THE COMPANY MET ITS DIVIDEND OBJECTIVES FOR THE QUARTERS ENDED SEPTEMBER
30, 1996 AND SEPTEMBER 30, 1995. The Company's principle performance objective
is to provide its shareholders with quarterly dividend distributions. For the
nine months ended September 30, 1996 and 1995, the Company posted primary
earnings per share of $.32 and $.41, respectively. The dividend distribution
for the nine months ended September 30, 1996 and 1995 of $710,983 and $769,913
respectively, translated into a 8.88% and 11.01% respective return on average
shareholder equity. For the quarters ended September 30, 1996 and 1995, the
Company posted primary earnings per share of $.08 and $.14, respectively. The
dividend distribution for the quarters ended September 30, 1996 and 1995 of
$195,166 and $267,434 respectively, translated into a 7.13% and 11.09%
respective return on average shareholder equity. As nonearning assets continue
to increase the ability to pay a 10% return to its shareholders is impaired.
2. SALES OF STOCK AND REINVESTED DIVIDENDS PROVIDED THE FUNDS TO PURCHASE
LOANS. Stockholders' equity increased for the nine months ended September 30,
1996 and 1995 as a result of sales of common stock of $316,724 and $614,496,
respectively. Furthermore, $316,485 and $343,473 of dividends were reinvested
in stock for the nine months ended September 30, 1996 and 1995 respectively.
The Company expects a portion of the shareholder base will continue to reinvest
their dividends in the future. The total amount reinvested was 44.5% for the
nine months ended September 30, 1996 and 44.6% for the nine months ended
September 30, 1995. Stock sales, reinvested dividends and principal payments
provide the means for the Company to purchase new loans. For the nine months
ended September 30, 1996 and 1995, total loans increased 1.2% and 12.0%
respectively, as a direct result of the sale of stock and reinvested dividends.
As stated above, stock sales growth thus far in 1996 compared to 1995 has
slowed down and Management expects this trend to continue. Management believes
the existing investor base has invested a significant portion of their
portfolio in Opportunity Management stock. Since stock sales correlate to
growth in the purchase of loans, Management projects loan growth will be 5% to
10% throughout the current year.
3. REVENUES DECREASE. Total revenues for the quarter ended September 30, 1996
were $277,653, a decrease of $36,128 or 11.5% over the third quarter in 1995.
Total revenues for the quarter ended September 30, 1995 were $313,781, an
increase of $68,195 or 27.8% over 1994. As stated above, for the nine months
ended in 1996 there was an increase of 1.2% in the loan portfolio and an
increase of 12.0% for the nine months ended in 1995 as result of lower stock
sales in 1996. Additionally, there are more nonearning loans in the portfolio
than there have been in previous years thus less interest income. Management,
as stated above, expects revenues to increase as levels of nonearning assets
decrease.
4. TYPE OF PROPERTY SECURING THE LOANS IN THE PORTFOLIO HAVE CHANGED. At
September 30, 1996 and 1995, 85% and 81% respectively, of the loans in the
portfolio were secured by first liens on real property. During the first nine
months of 1996, of the $117,438 in loan growth, 6 % was in first mortgage
loans, while second mortgage loans decreased by 37% and mobile home combination
real estate loans decreased by 9%. During the first nine months of 1995, of
the $960,334 in loan growth, 2% was in first mortgage loans, 86% in second
mortgage loans and 98% in mobile home combination real estate loans. Most
of the mobile homes or factory made homes reside on the land that is owned
by the borrower in which the Company has a first lien. Management projects
that there will be more of these mobile home combination loans in the
portfolio in the future.
5. GROSS INTEREST YIELDS WERE DOWN FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995. The annualized
yield on average total loans for the nine months ended September 30, 1996 was
12.64%, down from 14.73% for the nine months ended September 30, 1995. The
gross interest yield on average commercial loans was 12.13% and 15.27% for the
nine months ended September 30, 1996 and 1995, respectively. The decrease in
the commercial loan yield is primarily due to the increase in nonearning loans
in the first three quarters of 1996 as compared to 1995. The gross interest
yield on average residential loans was 13.05% and 14.33% for the nine months
ended September 30, 1996 and 1995, respectively, also due to higher levels of
nonearning loans. Total nonearning loans as a percentage of total loans were
35.23% for the nine months ended 1996 and 16.85% for 1995. At any given time,
the Board and Management expect to have 10% to 20% of the loans portfolio in
a nonearning status. Since 30% of the loan portfolio are nonearning assets,
Management is now underwriting loan acquisitions more conservatively and will
continue to do so throughout the year. Additionally, Management is
aggressively foreclosing on most nonearning assets.
6. REAL ESTATE OWNED BY THE COMPANY INCREASED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996. Real estate held for sale increased from $884,155 at
September 30, 1995 to $1,161,633 at September 30, 1996. This increase was a
result of acquiring commercial property, single family residential property,
personal property with land, and developed land through foreclosure. During
the first quarter of 1996, two developed land lots were sold. These lots are
part of a 19 lot development that are currently ready, available and listed for
sale. In the second quarter one of the single family residential properties
was sold. During the third quarter, one of the rural single family residential
properties was sold and one developed land lot was sold. Of the Company's
total assets, 30% are nonearning loans receivable thus Management expects more
foreclosures throughout 1996 in settlement of nonaccrual loans.
7. ALLOWANCE FOR LOAN LOSSES DECREASED FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996. The allowance for losses at September 30, 1996 and 1995 was $98,603 and
$100,123 representing .91% and 1.02%, respectively of total loans and real
estate owned portfolio balances. The provision for loan and real estate
losses charged to expense for the nine months ended September 30, 1996 and
1995 were $35,000 and $38,000, respectively. Actual losses charged against
the allowance for the nine months ended September 30, 1996 and 1995 were
$43,431 and $6932, respectively. The net charge-off's to average loans and
real estate owned outstanding during the first nine months of 1996 and 1995
were .41% and .07%, respectively. The balance at September 30, 1996 was
deemed as adequate and appropriate by the Board of Directors. The Board of
Directors review each delinquent loan receivable and real estate property
held for sale on a quarterly basis to determine if a specific provision in
the allowance for losses is appropriate based upon the net realizable value
of the property securing the loan. The Board uses a systematic approach to
evaluate the need for general allowances based upon portfolio performance,
industry trends, economic conditions, and historical trends.
8. TOTAL EXPENSES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO
1995. Total expenses as a percentage of average assets were 2.07% and 2.09%
for the nine months ended September 30, 1996 and 1995. Management fees for the
nine months ended September 30, 1996 increased approximately $16,567 over the
first nine months in 1995. Management fees paid to CLS are the largest expense
and relate proportionately to the net assets managed for the Company by CLS.
This expense continues to increase as new stock is issued by the Company. The
maximum fee allowed under the contract is based on 2% annually of the common
stock outstanding. At this time, the Company is charging a 1.5% fee on the
outstanding stock instead of the 2% allowed.
RETURN ON ASSETS, EQUITY AND EQUITY TO ASSETS RATIO. The following net returns
were realized during the nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------ ------
<S> <C> <C>
Return on Assets*
(net income divided by average total assets) 8.77% 10.82%
Return on Equity*
(net income divided by average equity) 8.88% 11.01%
Equity to Assets**
(average equity divided by average total assets) 98.76% 98.31%
</TABLE>
*The return on assets and return on equity for the nine months ended September
30, 1996 were lower than the first nine months of 1995 primarily as a result of
nonearning loans and nonearning real estate owned.
**The equity to asset ratio increased to 98.76% at September 30, 1996, from
98.31% at September 30, 1995. This is consistent with Management's present
policy to finance growth with equity, rather than debt.
PLAN OF OPERATION THROUGHOUT THE YEAR.
* The Company is committed to continue to offer its stock for sale to
the public for the foreseeable future. Management projects stock
growth, through both sales and reinvested dividends, will be
approximately 5% to 10% for the year ending 1996.
* The Company has no debt, except for the accrued expenses caused by
the accrual method of accounting, which are promptly paid when due.
The Company has no plan for leveraged financing.
* The Company has been able to fully invest all available funds through
the purchase of loans. The Company expects to be able to continue to
acquire similar loans in the future. Loan purchases will be limited
by available liquidity as discussed in "Plan of Operation and
Liquidity".
* Although real estate values are down somewhat from the same period
last year, proceeds from sales of real estate owned are still
expected to recover investments in the majority of real estate
properties.
* Because 30% of Company assets are nonearning loans receivable,
Management expects to foreclose on more real estate in settlement
of nonearning loans. Furthermore, Management intends to actively
market all real estate owned in efforts to reinvest the proceeds
in earning assets.
* The Company forecasts a stable demand for its services for the
foreseeable future, evidenced by the daily loan inquiries to CLS and
the portfolio performance.
* Management expects revenues as a percentage of total assets to
decrease further during 1996. This anticipated decrease is expected
because nonearning assets have increased as outlined above. This is
expected to result in lower return on equity.
* Management's strategy in the immediate future is to purchase more
single family residential loans than developed and undeveloped land
loans. When developed and undeveloped land loans are purchased,
management plans to purchase them with lower loan to collateral value
ratios than they have in the past.
UNCERTAINTIES
The principle competition for investors' funds are other income producing
securities. One uncertainty is possible fluctuations in market interest rates.
A rise in market rates would make debt securities more competitive with the
Company's historical dividend rates. In the short term, a rise in interest
rates could result in less stock sales, or shareholders may choose to sell
Opportunity Management stock in an effort to change their portfolio.
The present high percentage of nonearning assets may result in lower earnings
and lower dividends. In the event dividends decrease, more shareholders may
choose to sell their stock. No assurance can be made the limited market will
provide liquidity to shareholders choosing to sell.
The loan portfolio consists of loans with maturities of one to fifteen years.
Most loans, however, have remaining terms of three to five years. As loans
mature and balloon payments are paid, new loans are expected to be funded at
present market rates. Thus, the Board believes there would be a three to five
year lag before the average interest rate of the portfolio would increase after
a rise in market rates.
Additionally, throughout 1995 and 1996 the Company has been able to fund loans
with a weighted average interest rate in excess of 15.0%. No assurance can be
made the Company will be able to acquire loans with interest rates in excess of
15% in the future.
As stated earlier, the Board limits stock sales to the availability of secured
real estate loans provided by CLS. Although the Board is comfortable with its
relationship with CLS, no assurance can be made that CLS will continue to
supply the Company with an adequate number of qualified real estate secured
loans.
<PAGE>
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company is not presently involved nor does it expect to be involved in any
legal proceedings, excepting collection actions on loans that are in default.
Since the Company is involved in purchasing loans secured by real property, it
will, by its very nature always be involved in collection activities to enforce
collection on past due loans, including but not limited to Judicial and
Nonjudicial Foreclosure on Deeds of Trusts, Mortgage Foreclosures and Real
Estate Contract Forfeitures. Counsel for the Company is of the Opinion that
collection actions on delinquent accounts does not constitute pending or
threatening litigation under Financial Accounting Standards Board Opinion
Number 5 (FASB 5) and is properly categorized as routine litigation incidental
to its business.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
<PAGE>
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
There are no exhibits attached to this report. Exhibits previously filed are
incorporated by reference as noted. Exhibits filed herewith appear begin at
page E-1.
EXHIBIT
NUMBER EXHIBIT PAGE
2 Plan of acquisition, reorganization, arrange-
ment, liquidation, or succession*
4 Instruments defining the rights of holders,
including indenture, filed as exhibit 4 to the
Registrant's original Registration Statement
dated October 3, 1993
10 Material contracts filed as exhibit 10 to the
Registrant's original Registration Statement
dated October 3, 1993
11 Statement re: Computation of per share
earnings filed as exhibit 11 to the Registrant's
original Registration Statement dated
October 3, 1993
15 Letter on unaudited interim financial information*
18 Letter on change in accounting principles*
19 Reports furnished to securityholders*
22 Published report regarding matters submitted to
vote by shareholders*
23 Consent of experts and counsel filed as exhibit
24 to the Registrants original Registration State-
ment dated October 3, 1993
24 Power of attorney*
27 Financial data schedule 27
29 Information from reports furnished to State
Insurance Authorities*
99 Additional exhibits*
*Items denoted by an asterisk have either been omitted or are not applicable.
Reports on Form 8-K
The Company did not file any reports on Form 8-K in the third quarter of 1996.
<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPPORTUNITY MANAGEMENT COMPANY, INC.
Registrant
Date
H. E. Brazington
- --------------------------------------- -----------------
President & Director
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,756
<INT-BEARING-DEPOSITS> 342,736
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,161,633
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 9,627,965
<ALLOWANCE> 98,603
<TOTAL-ASSETS> 11,122,658
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 134,882
<LONG-TERM> 0
0
0
<COMMON> 11,067,103
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 11,122,658
<INTEREST-LOAN> 907,514
<INTEREST-INVEST> 0
<INTEREST-OTHER> 16,035
<INTEREST-TOTAL> 923,549
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 923,549
<LOAN-LOSSES> 35,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710,983
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 0
<LOANS-NON> 3,391,703
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 106,554
<CHARGE-OFFS> 43,431
<RECOVERIES> 480
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</TABLE>
