<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Fifth Post Effective Amendment
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OPPORTUNITY MANAGEMENT COMPANY, INC.
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(Name of small business issuer in its charter)
WASHINGTON 6743 91-1427776
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State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
12904 E. NORA, SUITE A, SPOKANE, WA 99216 (509) 928-6545
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(Address and telephone number of principal executive offices)
12904 E. NORA, SUITE A, SPOKANE, WA 99216
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(Address of principal place of business or intended principal place of
business)
STANLEY E. BRAZINGTON, 12904 E. NORA, SPOKANE, WA 99216 (509) 928-6545
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(Name, address and telephone number of agent for service)
Effective date of Offering December 7, 1993
File Number 33-68700-S.
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered - Common Stock
Dollar amount to be registered - $12,000,000.00
Proposed maximum offering price per unit - $5.00
Proposed maximum aggregate offering price - $12,000,000.00
Amount of registration fee - $3,750.00
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that thiS
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
This Fifth Post Effective Amendment to the Registration Statement consists
of a total of 107 pages.
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Part I - Information Required in Prospectus
Page
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ITEM 1. FRONT OF REGISTRATION STATEMENT AND OUTSIDE FRONT COVER
OF PROSPECTUS . . . . . Furnish the information required 1/5
by Item 501 of Regulation S-B.
ITEM 2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF PROSPECTUS 6/107
. . . . . . Furnish the information required by Item 502
of Regulation S-B.
ITEM 3. SUMMARY INFORMATION AND RISK FACTORS . . . . . Furnish 11/13
the information required by Item 503 of Regulation S-B.
ITEM 4. USE OF PROCEEDS . . . . . Furnish the information 16
required by Item 504 of Regulation S-B.
ITEM 5. DETERMINATION OF OFFERING PRICE . . . . . Furnish the 17
information required by Item 505 of Regulation S-B.
ITEM 6. DILUTION . . . . . Furnish the information required by N/A
506 of Regulation S-B.
ITEM 7. SELLING SECURITY HOLDERS . . . . . Furnish the 17
information required by Item 507 of Regulation S-B.
ITEM 8. PLAN OF DISTRIBUTION . . . . . Furnish the information 18
required by Item 508 of Regulation S-B.
ITEM 9. LEGAL PROCEEDINGS . . . . . Furnish the information 19
required by Item 103 of Regulation S-B.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS . . . . . Furnish the information required by 20
Item 401 of Regulation S-B.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . Furnish the information required 26
by Item 403 of Regulation S-B.
ITEM 12. DESCRIPTION OF SECURITIES . . . . . Furnish the 27
information required by Item 202 of Regulation S-B.
ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL . . . . . Furnish 27
the information required by Item 509 of Regulation S-B.
ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES . . . . . Furnish the 27
information required by Item 510 of Regulation S-B.
ITEM 15. ORGANIZATION WITHIN LAST FIVE YEARS . . . . . Furnish the N/A
information required by Item 404 of Regulation S-B.
ITEM 16. DESCRIPTION OF BUSINESS . . . . . Furnish the information 34
required by Item 101 of Regulation S-B.
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 36
. . . . . Furnish the information required by Item 303 of
Regulation S-B.
FEDERAL INCOME TAX CONSIDERATIONS . . . . . 51
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<PAGE>
ITEM 18. DESCRIPTION OF PROPERTY . . . . . Furnish the information 43
required by Item 102 of Regulation S-B.
ITEM 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 28
Furnish the information required by Item 404 of
Regulation S-B.
ITEM 20. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS 48
. . . . . Furnish the information required by Item 201 of
Regulation S-B.
SCHEDULE OF DIVIDENDS PAID . . . . . 50
ITEM 21. EXECUTIVE COMPENSATION . . . . . Furnish the information 51
required by Item 402 of Regulation S-B.
ITEM 22. FINANCIAL STATEMENTS . . . . . Furnish the information
required by Item 310 of Regulation S-B. 60
ITEM 23. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . Furnish the information N/A
required by Item 304 of Regulation S-B.
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<PAGE>
Part II - Information Not Required in Prospectus Page
----
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . 91
Furnish the information required by Item 702 of
Regulation S-B.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION . . . . . 91
Furnish the information required by Item 511 of
Regulation S-B.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES . . . . . Furnish 92
the information required by Item 701 of Regulation S-B.
ITEM 27. EXHIBITS . . . . . Furnish the exhibits required by 93
Item 601 of Regulation S-B.
ITEM 28. UNDERTAKINGS . . . . . Furnish the undertakings required 105
by Item 512 of Regulation S-B.
SIGNATURE PAGE . . . . . 106
THIS SPACE INTENTIONALLY LEFT BLANK
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PART I
PROSPECTUS
The following Prospectus contains the information called for by Part
I of Form SB-2. The Table of Contents of this Prospectus is located at
Page 7.
THIS SPACE INTENTIONALLY LEFT BLANK
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PROSPECTUS
2,400,000 SHARES
OPPORTUNITY MANAGEMENT COMPANY, INC.
12904 EAST NORA, SUITE A
P.O. BOX 141037
SPOKANE, WASHINGTON 99214
This offering for 2,400,000 shares of common stock became effective on
December 7, 1993. The Company has sold 1,131,424 shares. The Company
continues to offer to sell 1,268,576 shares of Common Stock at $5.00 per
share to new investors and existing shareholders pursuant to its Dividend
Reinvestment Program.
The Company intends to use 99.1% of the proceeds of this offering to
purchase high interest bearing mortgage paper securities, secured by real
property in Eastern Washington and Northern Idaho. This offering allows
the Company to continue to spread its portfolio risk. The Company has paid
dividends on a quarterly basis since it began operations in 1989 and has no
debt. (See "Schedule of Dividends Paid" and "Financial Statements"
sections.)
The minimum investment is Two Hundred (200) shares for a total investment
of One Thousand ($1,000) dollars. Each investor must meet certain investor
suitability standards and consider this to be a long term investment. The
only market presently available for the shareholders to liquidate their
investment is to sell their stock to a new or an existing shareholder. The
Company does offer a matching service to facilitate shareholder liquidity,
but makes no assurances that any shareholder will be able to sell their
stock when they desire to do so.
The Company has identified the most significant risks to the investor is as
follows:
No Public Market - Limited Shareholder Investment Liquidity
High Risk Borrowers are Likely to Default
Dependence on its Management Company
Substantial Compensation to its Management Company
Lack of Portfolio Geographic Diversification
Appraisal may Overstate Value of Security
Contingent Liability - Existing Shareholder's Right of Rescission
_________________________________________________________________________
See Risk Factors for Certain Factors Relevant to an Investment in Common
Stock
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Per unit total Number of Price Proceeds to
Shares Per Share the Company
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Total Maximum 2,400,000 $ 5.00 $12,000,000
Total Already Sold <1,131,424> $ 5.00 < 5,657,120>
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Total Available
for Sale 1,268,576 $ 5.00 $ 6,342,880
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The Common Stock is exclusively offered on a best efforts basis for sale
directly to investors by the Officers and Directors of the Company without
commission or other fees.
The date of this Prospectus is August 20, 1996<PAGE>
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus. If given or
made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an
offer to sell securities in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof.
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AVAILABLE INFORMATION
The Company will provide without charge to any person who receives a
Prospectus, upon written or oral request of such person, a copy of any of
the information that was incorporated by reference in the Prospectus (not
including Exhibits to the information that is incorporated by reference
unless the Exhibits are themselves specifically incorporated by reference).
In order to receive such information, please contact the following
department:
OPPORTUNITY MANAGEMENT CO. INC.
ATTN: SHAREHOLDER RELATIONS
P.O. BOX 141037
SPOKANE, WASHINGTON 99214
(509) 928-6545
All questions and requests for information by potential investors should be
directed to the address and telephone number noted above. Investment in a
small business involves a high degree of risk, and investors should not
invest any funds in this offering unless they can afford to lose their
investment in its entirety.
Each shareholder is provided with a quarterly management report that
includes a financial summary for the past quarter, the status of the loan
portfolio and the dividend approved by the Board of Directors for the
Quarter. The Company also provides the shareholders with an annual report
which contains the audited financial statements and the notice of the
annual shareholders meeting. The Company has and does intend to comply
with the North American Securities Administrators Association ( referred to
as "NASAA" herein) guidelines adopted for the management and operation of
real estate investment trusts (referred to as "REIT" herein). In addition,
the Company must comply with the applicable provisions of the Internal
Revenue Code in order to maintain its favorable tax pass through status.
INVESTORS SHOULD CAREFULLY REVIEW THIS PROSPECTUS, PARTICULARLY WITH REGARD
TO THE RISKS (SEE "RISK FACTORS") AND CONFLICTS OF INTEREST, (SEE
"CONFLICTS OF INTEREST") BEFORE MAKING A DECISION TO INVEST. IN MAKING AN
INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE
ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED.
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
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Summary of the Offering . . . . . . . . . . . . . . . . . . 7
The Company . . . . . . . . . . . . . . . . . . . . . . . 7
Principle Business of the Company . . . . . . . . . . . . 7
Management and Conflicts of Interest. . . . . . . . . . . 7
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . 8
Investment Objectives and Policies. . . . . . . . . . . . 8
Description of Capital Stock. . . . . . . . . . . . . . . 8
Federal Income Tax Considerations . . . . . . . . . . . . 8
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . 9
No Public Market - Limited Shareholder Investment
Liquidity . . . . . . . . . . . . . . . . . . . . . . . 9
High Risk Borrowers are likely to Default . . . . . . . . 9
Dependence on CLS to Manage the Company . . . . . . . . . 9
Substantial Compensation to CLS . . . . . . . . . . . . . 10
Lack of Portfolio Geographic Diversification. . . . . . . 10
Appraisal May Overstate Value of Collateral . . . . . . . 10
Contingent Liability - Existing Shareholder's Right of
Rescission. . . . . . . . . . . . . . . . . . . . . . . 10
Federal Income Tax Status . . . . . . . . . . . . . . . . 11
Interest Rates May Go Down as the Portfolio Turns Over. . 11
Usury . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Insurance . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Government Regulation . . . . . . . . . . . . . . . 12
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 12
Determination of Offering Price . . . . . . . . . . . . . . 13
Selling Security Holders and Matching Service . . . . . . . 13
Continued Registration Aids Shareholder Investment
Liquidity. . . . . . . . . . . . . . . . . . . . . . . . 13
Matching Service For Existing Shareholders to Sell
Their Stock. . . . . . . . . . . . . . . . . . . . . . . 13
Plan of Distribution. . . . . . . . . . . . . . . . . . . . 14
No Outside Selling Agents . . . . . . . . . . . . . . . . 14
Shareholder Ownership Restrictions. . . . . . . . . . . . 14
Investor Suitability Standard . . . . . . . . . . . . . . 14
Long Term Investment-Funds May Not be Accepted. . . . . . 15
Funds from Stock Sales are Invested in New Loans. . . . . 15
Board of Directors May Delay or Deny Acceptance of
Investors Funds. . . . . . . . . . . . . . . . . . . . . 15
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<PAGE>
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . 15
Usury and Federal Preemption of State Law . . . . . . . . 15
Home Ownership and Equity Protection Act . . . . . . . . 16
Investment Company Act of 1940 . . . . . . . . . . . . . 16
Other Actions . . . . . . . . . . . . . . . . . . . . . . 16
Directors, Executive Officers, Promoters
and Control Persons. . . . . . . . . . . . . . . . . . . . 16
Officers and Directors of the Company . . . . . . . . . . 17
Background & Education information regarding
Officers and Directors of the Company. . . . . . . . . . 17
Director Responsibilities . . . . . . . . . . . . . . . . 19
Independent Director Responsibilities . . . . . . . . . . 19
Board approves all loans and fees paid to CLS . . . . . . 19
Quarterly Reports . . . . . . . . . . . . . . . . . . . . 20
Annual Reports. . . . . . . . . . . . . . . . . . . . . . 20
Board Member Compensation . . . . . . . . . . . . . . . . 20
No Employees. . . . . . . . . . . . . . . . . . . . . . . 20
Family Relationships. . . . . . . . . . . . . . . . . . . 20
Involvement in Certain Legal Proceedings. . . . . . . . . 21
Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 22
Description of Securities . . . . . . . . . . . . . . . . . 23
Interests of Named Experts and Counsel. . . . . . . . . . . 23
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities . . . . . . . . . . . . . . . . 23
Certain Relationships and Related Transactions . . . . . . 24
General . . . . . . . . . . . . . . . . . . . . . . . . . 24
Management Relationships. . . . . . . . . . . . . . . . . 24
Loan Closing and Servicing Relationship . . . . . . . . . 24
Prohibited Lending Practices. . . . . . . . . . . . . . . 24
Summary of the Management Agreement . . . . . . . . . . . 25
Summary of the Loan Acquisition Process . . . . . . . . . 25
Summary of the Collection Process . . . . . . . . . . . . 27
Management Compensation . . . . . . . . . . . . . . . . . 27
Payment of Management Fees . . . . . . . . . . . . . 27
Payment of Loan Acquisition Fees . . . . . . . . . . 27
Payment of Loan Closing, Escrow and Late Fees. . . . 28
Fees Projected to be Received by CLS . . . . . . . . 28
Conflicts of Interest . . . . . . . . . . . . . . . . . . 29
<PAGE>
<PAGE>
Description of the Business . . . . . . . . . . . . . . . . 30
Form and Year of Organization . . . . . . . . . . . . . . 30
REIT Status . . . . . . . . . . . . . . . . . . . . . . . 30
Merger with Greenacres Management Company . . . . . . . . 30
Business of the Company . . . . . . . . . . . . . . . . . 30
Basis for Loan is Value of Real Estate Collateral . . . . 31
Reliance on its Management Company (CLS). . . . . . . . . 31
Competition . . . . . . . . . . . . . . . . . . . . . . . 31
Ability to Compete. . . . . . . . . . . . . . . . . . . . 32
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 32
Overview. . . . . . . . . . . . . . . . . . . . . . . . . 32
Source of Funds to Purchase New Loans . . . . . . . . . . 32
Source of Funds to Pay Expenses and Dividends . . . . . . 32
Results from Operations in 1995 and 1994. . . . . . . . . 33
Results from Operations 1996 YTD and 1995 YTD . . . . . . 35
Return of Assets, Equity and Equity to Assets Ratio . . . 37
Plan for the Future . . . . . . . . . . . . . . . . . . . 37
Projections for Operations in 1996 and 1997 . . . . . . . 38
Capitalization . . . . . . . . . . . . . . . . . . . . . 38
Description of Company Loan Portfolio . . . . . . . . . . 39
General Description . . . . . . . . . . . . . . . . . . 39
Total Stock Invested in Loans and Yields
for, 1993, 1994 and 1995. . . . . . . . . . . . . . 39
Breakdown of Security for Loans . . . . . . . . . . . . . 40
Default Status . . . . . . . . . . . . . . . . . . . . . 41
Loan Term and Payoff. . . . . . . . . . . . . . . . . . . 41
Marketing of Company Owned Real Estate. . . . . . . . . . 41
Investment Objectives and Policies. . . . . . . . . . . . 41
Description of Key Operating Data . . . . . . . . . . . . 43
Market for Common Equity and Related Transactions . . . . . 44
No Public Market. . . . . . . . . . . . . . . . . . . . . 44
Principle Stockholders. . . . . . . . . . . . . . . . . . 44
Ownership Restrictions. . . . . . . . . . . . . . . . . . 44
Distributions of Dividends. . . . . . . . . . . . . . . . 44
Dividend Objective and Performance. . . . . . . . . . . . 44
Special Dividend Policy . . . . . . . . . . . . . . . . . 45
Dividend Reinvestment Plan. . . . . . . . . . . . . . . . 45
Executive Compensation. . . . . . . . . . . . . . . . . . . 47
Federal Income Tax Considerations . . . . . . . . . . . . . 47
Federal Income Taxation of the Company. . . . . . . . . . 47
Requirements for Qualification as a REIT. . . . . . . . . 49
Taxation of the Shareholders. . . . . . . . . . . . . . . 53
Taxation of Shareholders on Disposition of Shares . . . . 55
Capital Gains and Losses. . . . . . . . . . . . . . . . . 55
<PAGE>
<PAGE>
Financial Statements. . . . . . . . . . . . . . . . . . . . 56
Independent Auditor's Report (1995 & 1994). . . . . . . . 56
Audited Financial Statements (1995 & 1994). . . . . . . . 56
Statements of Condition. . . . . . . . . . . . . . . 57
Statements of Income . . . . . . . . . . . . . . . . 58
Statements of Changes in Stockholder's Equity. . . . 59
Statements of Cash Flows . . . . . . . . . . . . . . 60
Notes to Financial Statements. . . . . . . . . . . . 62
Unaudited Interim Financial Statements (1996 & 1995). . . 70
Statements of Condition. . . . . . . . . . . . . . . 70
Statements of Income . . . . . . . . . . . . . . . . 71
Statements of Changes in Stockholder's Equity. . . . 73
Statements of Cash Flows . . . . . . . . . . . . . . 74
Notes to the Interim Financial Statements. . . . . . 76
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE COMPANY
CONCERNING THIS OFFERING AND NO PERSON SHALL MAKE DIFFERENT OR BROADER
STATEMENTS THAN THOSE CONTAINED HEREIN. INVESTORS ARE CAUTIONED NOT TO
RELY UPON ANY INFORMATION NOT EXPRESSLY SET FORTH IN THIS PROSPECTUS.
This Prospectus consists of a total of 85 pages.
WARNING: The Company is relying on Section 3 (c)(5)(C) that it is exempt
from registration from the provisions of the Investment Company Act of
1940. Therefore, shareholders cannot expect the Company to redeem any of
its securities.
THIS SPACE INTENTIONALLY LEFT BLANK<PAGE>
<PAGE>
SUMMARY OF THE OFFERING
The following is a summary of important information contained in this
Prospectus, but it is not complete and is qualified in its entirety by
reference to the entire Prospectus.
THE COMPANY. Opportunity Management Company, Inc., ("Company"), was
incorporated in the State of Washington on October 12, 1988, began
operations in May of 1989, and has operated continuously since then. The
Company has been able to pass through all of its net income to its
shareholders, first under Subchapter S and in 1991 and subsequent years
under the Real Estate Investment Trust ("REIT") provisions of the Internal
Revenue Code ("IRC"). The Company sold stock in state offerings by permit
issued by the Washington and Idaho State Securities Administrators under
Regulation D exemptions from Federal Registration. In 1992, a similar REIT
with common management was merged into the Company. In 1993, the Company's
present on going Federal Offering of 2.4 million shares became effective.
The Company has sold 1,131,424 shares at $5.00 per share with the balance
yet to be sold. As of December 31, 1995, the Company had 396 shareholders,
who had purchased 2,102,994 shares at $5.00 per share for a $10.4 million
dollar capital contribution, exclusive of offering costs. The Company has
no debt. (See "Description of Business" and "Financial Statements"
sections.)
PRINCIPLE BUSINESS OF THE COMPANY. The principal business of the Company
is to purchase loans and participations with interest yields of 12% to 18%
that are well secured by real property. The primary basis for the loan is
the collateral value of the security, not the ability of the borrower to
repay the loan. As of December 31, 1995, the Company loan portfolio
contained an investment in 221 loans valued at $9.5 million dollars and the
yield on average year end loans in 1995 and 1994 was 13.50% and 14.45%
respectively. At year end 1995 and 1994, 81% and 89% of the loans were
secured by first liens on real property, the balance being secured by
junior liens and first liens on mobile homes. Total revenues in 1995 and
1994 were $1,191,518 and $1,030,712, respectively. Total expenses, as a
percentage of average assets, were 2.66% and 3.04% for years ending 1995
and 1994 respectively. Earnings per share in 1995 and 1994 were $.50 and
$.54, respectively. In 1995 and 1994, the Company distributed $997,901 and
$838,873, respectively in dividends. (See "Description of Business" and
"Management Discussion of Financial Condition and Results of Operations"
sections.)
MANAGEMENT AND CONFLICTS OF INTEREST. The Board of Directors manages the
Company and establishes investment policies and objectives, which have been
incorporated into the Company Bylaws. The Company has no employees and has
contracted with CLS Mortgage, Inc. ("CLS") since its inception to manage
its operations. The principle officers of CLS are also the principle
officers of the Company, presenting potential conflicts of interest. (See
"Conflicts of Interest" section). CLS receives substantial compensation
from the Company. (See "Risk Factors" and "Management Compensation"
sections). CLS is experienced in the business and has operated in Spokane,
Washington, as a Mortgage Broker Dealer since 1974. CLS has sold the
Company all of the loans in its portfolio, for which it receives
substantial compensation, but on the same basis that CLS sells loans to
other loan purchasers. The management contract is for one year, which is
renewable, and is cancelable upon sixty (60) days notice without cause.
The Board of Directors has renewed the management contract with CLS for
1996 and expects to do so for the foreseeable future. (See "Certain
Relationships and Related Transactions" sections).
RISK FACTORS. Investment in the common stock of the Company is subject to
certain risks that are more fully set forth in the "Risk Factors" section.
The Company has identified the most significant risks as follows; 1) The
lack of a public market negatively effects shareholder liquidity. 2) The
loans are made to high risk borrowers who are likely to default which could
negatively impact earnings. 3) The Company is heavily dependent on CLS to
manage its day to day operations and sell it the loans for its portfolio.
4) CLS receives substantial compensation from the Company. 5) The loans
are secured by real property geographically concentrated in Eastern
Washington and Northern Idaho making the Company subject to the adverse
effects of a regional recession. 6) Since the Company bases its loan
purchases on the value of the real estate security, it is reliant on the
appraisal, which is only an estimate of the actual market value.
INVESTMENT OBJECTIVES AND POLICIES. The Company's principal investment
objective is to acquire a portfolio of real estate collateralized loans
which will provide its shareholders with quarterly distributions of
dividends. (See "Schedule of Dividends Paid and or Accrued"). The Company
purchases loans secured by real estate and other property in the range from
12% to 18% annual interest. The loans generally provide for monthly
payments based on a term of 15 to 20 years or less, with a balloon payment
due in 5 to 7 years, or less. The maximum loan to value ratio is 70% for
quality residential property and less for other types of property. The
secondary source of income is from the sale of real estate acquired through
foreclosure. The Company has met its dividend distribution objectives in
each quarter since it began operations in 1989. (See "Investment
Objectives and Policies" & "Dividends Paid" sections).
DESCRIPTION OF CAPITAL STOCK. As of December 31, 1995, the Company had
2,102,994 shares outstanding which had been sold to 396 shareholders at
$5.00 per share. The Company has sold 1,131,424 shares with respect to
this offering with the balance yet to be sold as the offering continues.
The offering price paid by all past and present shareholders and new
investors who purchase shares is $5.00 per share. Each new investor must
meet the Company suitability standards and purchase a minimum of Two
Hundred (200) shares for a minimum investment of One Thousand Dollars
($1,000). All common shares are voting shares, equally participating in
dividends, and there is no cumulative voting. No individual shareholder
may own more than 9.8% of the outstanding and issued stock in the Company.
FEDERAL INCOME TAX CONSIDERATIONS. As a REIT, the Company is not taxed at
the Company level, provided the Company complies with the investment,
shareholder ownership, and dividend payment statutory requirements set
forth in the IRC. The REIT status is dependent on many conditions
discussed in detail in the section regarding Federal Income Tax
Considerations. Should the Company fail to meet any material condition set
forth in the Internal Revenue Code, it would be taxed as a "C" corporation,
which would reduce the profitability of the Company. (See "Federal Income
Tax Considerations" section.)
RISK FACTORS
The purchase of the common stock in this offering involves various risks.
Although the Company has remained profitable since it began operations in
1989, some of the matters that prospective stock purchasers should
carefully consider before making a decision to purchase the stock in
Opportunity Management Company, Inc., are set forth below.
NO PUBLIC MARKET - LIMITED SHAREHOLDER INVESTMENT LIQUIDITY. There is
currently no public market for the shareholders to sell their shares and
only a limited market among new and existing shareholders is expected to
develop through the Company matching service. Since the Company does not
intend to liquidate and distribute its assets, there is no assurance that a
shareholder will be able to liquidate their investment quickly. The
Company cannot redeem its stock but it does provide a matching service
available to any shareholder who desires to sell their stock. They can
contact the Secretary for a list of existing shareholders who may desire to
purchase additional stock. In addition, the Company agrees that it will
allow a new investor to purchase a selling shareholder's stock prior to
selling Company stock. In 1995 and 1994, a total of 29 and 36 shareholders
were able to sell 81,276 and 133,680 respectively, of their shares to new
and existing shareholders. (See "Selling Security Holders" section.)
HIGH RISK BORROWERS ARE LIKELY TO DEFAULT. The Company intends to acquire
loans that are made to high risk borrowers, who are willing to pay from 12%
to 18% annual interest secured by their interests in real estate. In order
to protect its interest, the Company purchases loans based upon the value
of the collateral, not the borrowers ability to repay the loan. The
investment policy provides for a maximum 70% Loan-to-Value ratio for
residential property and less for other types of properties. At year end
1995 and 1994, 81% and 89% respectively, of loans were secured by first
liens on real property, the balance being secured by junior liens and first
liens on mobile homes sitting on the borrower's land. (See "Investment
Objectives and Policies" section). Although the Company will take
precautions, there is no assurance that losses will not occur in a
portfolio of this type. The Company expects at any given point in time
that 10-20% of the loans in the portfolio will be at least 30 days
delinquent. At year end 1995 and 1994, 33.7% and 18.9% respectively, of
the principal balance in loans were delinquent in payments by over 30 days.
Nonearning loans were 30.0% and 15.2% at year end 1995 and 1994,
respectively. When an account is delinquent, appropriate collection
actions are promptly initiated. Loans are placed in a nonaccrual status
when they become 90 days delinquent. Due substantially to the increased
levels of nonaccrual loans during 1995, yields on loans decreased. For the
year ended 1995, the yield on total loans was 13.5% as compared to the 1994
yield of 14.45%. In 1995, the yield on commercial loans dropped to 13.63%
from 15.34% and the yield on residential loans dropped to 13.40% from
13.88%. (See "Summary of the Collection Process" and the "Financial
Statements" section.)
DEPENDENCE ON CLS TO MANAGE THE COMPANY. The Company has no employees and
contracts with CLS to manage its day to day activities. The Company
expects to continue to rely on CLS to manage its day to day operations, for
which it has agreed to pay a fee of up to 2% annually of its outstanding
stock balance, paid on a monthly basis. CLS has actually charged a fee of
1.5% during 1995 and 1994, $144,142 and $114,903 respectively. The
Company also relies on CLS to originate sufficient loans to sell to the
Company for its loan portfolio. The loans, once approved by the Board of
Directors, are without recourse. In event CLS would go out of business,
the Company would have to find a new management team and a new source to
purchase loans from which would likely be more expensive and less
experienced in this market. (See "Certain Relationships and Related
Transactions" section.)
SUBSTANTIAL COMPENSATION TO CLS. In addition to the management fee, the
Board of Directors of the Company has approved loan acquisition fees that
are paid when the loan is originated by CLS in an amount of up to 12% and
closing and escrow fees that are paid to CLS Escrow, Inc., ("CLS Escrow").
Both fees are paid at loan closing, prior to the loan being sold to the
Company without recourse. The acquisition or origination fee is actually a
discount that is included in the loan amount and is repaid by the borrower
over the term of the loan. CLS has been paid a loan origination fee that
has averaged 9.5% in 1995 and 1994, in the amount of $406,888 and $523,762
respectively. In event of a borrower default and the Company was unable to
realize at least its principal from the sale of the real property, then the
Company would have in fact paid the fee. (See "Certain Relationships and
Related Transactions" section). Since the fee constitutes the substantial
majority of the compensation received by CLS, it has the incentive to
advocate the rapid turnover of the portfolio. (See "Conflicts of Interest"
section.) CLS Escrow closes and services a substantial portion of the
loans purchased by the Company, for which it received $76,344 and $55,773
in 1995 and 1994, respectively, in closing fees and $55,161 and $46,624 in
escrow and collection fees paid by the borrower. (See "Summary of the Loan
Acquisition Process" section).
LACK OF PORTFOLIO GEOGRAPHIC DIVERSIFICATION. Nearly all of the real
properties securing the loans are concentrated in Eastern Washington and
Northern Idaho. While the Company believes that its focus in this
geographical area is an advantage, the Company's performance and its
ability to make distributions to stockholders could be adversely affected
by unfavorable economic conditions in the region. In the event of a
regional recession, the security for the loans would be negatively
impacted. (See "Description of the Business" section.)
APPRAISAL MAY OVERSTATE VALUE OF COLLATERAL. Since the Company bases all
of its loan purchases on the value of real estate securing the loan, the
Company relies heavily on the appraisal. The Company policy requires that
all appraisals must be conducted by a licensed and experienced appraiser.
However, all appraisals are an estimate of value and may overstate the
actual value of the collateral when sold. In the event of a default and
subsequent foreclosure, the value of the property may be significantly less
than the appraisal and could result in a loss of interest that would have
been due on the loan and a portion of the principal. (See "Description of
the Business" and "Financial Statements" sections.)
CONTINGENT LIABILITY - EXISTING SHAREHOLDER'S RIGHT OF RESCISSION. The
existing shareholder's 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 total contingent liability of $113,523. The
Company intends to offer those shareholders who purchased stock, after
April 30, 1995, the right to rescind their purchase. The Company will
offer to purchase the stock at $5.00 per share, which was the amount paid
by the shareholders. This right of rescission is limited to those existing
shareholders who elected to reinvest their dividends on June 30, 1995. The
Board of Directors approved that the recision offer shall be made to the
shareholders of record in the 3rd Quarter of 1996. The Company does not
expect a significant number of shareholders to exercise the recision offer.
FEDERAL INCOME TAX STATUS. The Company has filed Corporate tax returns as
a REIT for 1991, 1992, 1993, 1994, 1995 and expects to do so in 1996. The
IRS has not ruled on the Company's REIT status. Investors should note that
the REIT status is contingent upon a number of conditions. There is no
assurance that the Company will meet these conditions. If any one of the
conditions are not met, then the Company will be taxed as a "C" Corporation
which would have the effect of reducing earnings per share and dividend
distributions. (See "Federal Income Tax Considerations" and the notes to
the "Financial Statements" sections.)
INTEREST RATES MAY GO DOWN AS THE PORTFOLIO TURNS OVER. Interest rates may
fall and the Company may not be able to sustain the current portfolio
yields. When current loans pay off, there is no assurance that the Company
will be able to invest in new loans at the current rate. Downward interest
rate trends negatively effect the earnings of the Company. Borrowers who
are paying above market rates for loans purchased by the Company tend to
refinance or sell the property securing the loan before the term ends. The
average loan is paid off in less than 2 years, based upon past experience.
In addition, an unexpected increase in competition for these types of loans
and or government regulations could also reduce interest rates and
negatively impact the earnings of the Company. (See "Description of the
Business" section.)
USURY. Washington and other states have usury laws which establish
ceilings on the interest rates that may be charged on certain types of
loans. Violation of the usury provisions may substantially reduce or
eliminate the lender's recovery of the loan principal and interest. The
Federal Depository Institution of Deregulation and Monetary Control Act of
1980 preempts state usury laws for federally related mortgage loans, which
are generally first mortgage loans on a borrower's residence made by a
qualified lender. Loans made for commercial, agricultural or investment
purposes are generally exempt from state usury laws, particularly in the
State of Washington. The Company and CLS rely on this federal preemption
from state usury laws. (See "Legal Proceedings" section.)
INSURANCE. In the event of a borrower default, the Company policy is to
initiate legal proceedings against the collateral rather than against the
borrower. In the case where the real estate granted as security for the
loan is partially or wholly destroyed, the Company would recover from the
insurance proceeds. Insurance coverage may lapse or may not be available to
the borrower to insure the real estate in which the Company has a
collateral property interest (uninsured). Further, the borrower could
maintain insufficient hazard insurance (underinsured) or the security is
damaged by an act for which no insuring promise was given (e.g. flood,
arson, terrorist act, etc.) (denial of insurance coverage). (See
"Description of the Business" section.)
OTHER GOVERNMENT REGULATION. In 1994, Congress passed the Home Ownership
and Equity Protection Act (HOEPA), which became effective on October 1,
1995. HOEPA defines certain loans, including some loans originated by CLS
and subsequently purchased by the Company, as "high cost mortgages." Among
other provisions, the legislation prohibits high cost mortgages from
including certain terms, generally not applicable to the Company. However,
since the bill provides for increased civil liability for violations and
enables the borrower to assert such claims against both the originator of
the high cost loan (CLS) and any persons to which the loan is assigned (the
Company), it is viewed as likely that some borrowers in default may raise
the defenses, whether the defenses have merit or not. As of the date of
this prospectus, no borrowers in default have raised the provisions of
HOEPA as a defense (See "Legal Proceedings" section).
USE OF PROCEEDS
The Company has and intends to use the proceeds of this offering to
purchase new loans and participations in loans secured by real property.
The percentage of the proceeds of this offering available for investment in
loans and participations has been 98.2% since the offering began in 1993
through June 30, 1996 and is expected to be 99.1% of the total proceeds in
loans as the offering continues.
<TABLE>
<CAPTION>
SOLD % IF MAXIMUM SOLD %
----------- ------ --------------- ------
<S> <C> <C> <C> <C>
Proceeds $5,657,120 100.0% $12,000,000 100.0%
Less: Offering Expenses
Legal (1) < 72,862> 1.3% < 92,862> < .8%>
Accounting (1) < 8,213> .1% < 13,213> < .1%>
Miscellaneous (2) < 5,745> .1% < 5,745> < .0%>
----------- ------ --------------- -------
Net Proceeds for
Investment in Loans (3) $5,570,300 98.5% $11,888,180 99.1%
</TABLE>
NOTES TO USE OF PROCEEDS TABLE:
(1) The expenses for legal and accounting fees are actual fees related to
the offering and paid through December 31, 1995. The Company has
projected an additional $20,000 in legal fees in 1996 in connection
with the offering. (See "Financial Statements" section). The Company
expects to pay Legal and Accounting fees so long as the offering
continues.
(2) Miscellaneous expenses include license fees, permit fees, copying and
mailing of the prospectus to investors. (See "Financial Statements"
section).
(3) CLS will receive substantial compensation in the form of loan
origination fees as a result of this offering. (See "Fees Projected
to be Received by CLS" section). The borrower is legally obligated to
pay the fee over the term of the loan. (See "Summary of Loan
Acquisition Process" and "Risk Factors" sections).
DETERMINATION OF OFFERING PRICE
The Company has arbitrarily determined the offering price for each share to
be five dollars ($5.00). The Board of Directors established the price per
share at that amount since the Company was formed and expects that the
policy will remain unchanged. The Company policy is that all authorized
shares shall be purchased from the Treasury of the Company for five dollars
($5.00) per share. No stock has been or will be issued for any other
amount unless the Articles of Incorporation are amended. The Company does
allow the provision for purchasing fractional shares rounded to the nearest
hundred at the prorated rate of $5.00 per whole share.
SELLING SECURITY HOLDERS & MATCHING SERVICE
Due to the continuous nature of this offering, the Company estimates that
5% to 10% of the existing shareholders will want to sell their shares in
1996 and 1997 in conjunction with this offering, based on past experience.
In 1995 and 1994, a total of 29 and 36 shareholders were able to sell
81,276 and 133,680 shares respectively to new and existing shareholders.
The Company cannot redeem any shareholder's shares. (See "Investment
Company Act" discussion in the "Legal Proceedings" section.)
CONTINUED REGISTRATION AIDS SHAREHOLDER INVESTMENT LIQUIDITY. Each
investor must view the purchase of the Company stock as a long term
investment. However, the Company has recognized that due to circumstances
beyond the shareholder's control, a small percentage of the existing
shareholders will desire to liquidate all or a portion of their investment
at some future date. To date, the Company has only limited experience with
investors desiring to liquidate their investment in order to make accurate
projections. Since the Company cannot redeem any shareholder's shares, the
Company will make every effort to continue to register its stock for sale
to the public and to provide a matching service to its shareholders in
order to assist them in liquidating their investment when they desire to do
so.
MATCHING SERVICE FOR EXISTING SHAREHOLDERS TO SELL THEIR STOCK. In the
event that an existing shareholder desires to liquidate all or a portion of
their investment, the Company acts as a facilitator on a first come, first
serve basis for the benefit of the selling shareholder. The Company does
not actively promote the matching service nor does it receive compensation
in any form for doing so. The procedures for using the matching service
are as follows:
1. Upon request, the Secretary will provide any shareholder with a list
of all existing shareholders and, in particular, those who are most likely
to be interested in purchasing the shares.
2. Upon request, the Secretary will allow an existing shareholder to sell
his or her stock to any new or existing shareholder before the Company
sells its stock to that new or existing shareholder.
3. The Company accepts no fees for the transaction and acts only in an
agency capacity.
4. In event the Company determines that a given shareholder was merely
attempting to invest funds for a short term investment, or is attempting to
sell the stock with the intent of later repurchasing stock, the Company
reserves the right not to assist that selling shareholder in selling their
stock and to deny that individual the right to purchase additional shares.
(See "Plan of Distribution" section.)
PLAN OF DISTRIBUTION
The Company plans to distribute the stock itself through the office of the
Secretary of the Company. The most likely investors are existing
shareholders and investors who have purchased loans from CLS. No
commission is being paid to any selling agents.
NO OUTSIDE SELLING AGENTS. The individuals who are acting as selling
agents are corporate Officers and Directors who may be contacted at the
Company offices during business hours. The following individuals who may
be contacted regarding this offering are the Company President, H.E.
Brazington, who resides at 24306 E. Sprague, Liberty Lake, Washington,
99019, with a home telephone number of (509) 255-6683, the Company Vice
President, William E. Davies, who resides at 1235 W. Bellwood Dr., Spokane,
Washington, 99218, with a home telephone number of (509) 448-4801, and the
Company Secretary, Stanley E. Brazington, who resides at 2727 South Bannen,
in Veradale, Washington, 99037, with a home telephone number of (509) 924-
5104.
SHAREHOLDER OWNERSHIP RESTRICTIONS. In order to preserve the Company's tax
status as a REIT, Company policy effectively restricts any shareholder from
owning more than 9.8% of the Company's outstanding shares. The Secretary
may void any transfer of shares that places the Company's REIT tax status
in jeopardy. (See "Federal Income Tax Considerations" section.)
INVESTOR SUITABILITY STANDARD. The Company has established suitability
standards which require each individual investor to have, (1) a net worth
of at least Seventy Five Thousand Dollars ($75,000), or (2) an annual
income of at least Thirty Thousand Dollars ($30,000) and a net worth of at
least Thirty Thousand Dollars ($30,000), and (3) that money invested in the
Company is not required to be used in support of the family budget for
necessities, other business needs, to repay other obligations, or to fund
other investments in the near future. All computations of net worth shall
exclude the value of the investor's personal residence, its furnishings and
automobiles. By executing the Subscription Agreement, appended to this
Prospectus, an investor represents to the Company that the Investor
Suitability Standards are met at the time the investment is made. The
Investor Suitability Standard does not apply to any donee of a gift or
beneficiary of a Trust. The Company will maintain such suitability records
until the Company terminates its operations. (See "Market for Common
Equity and Related Transactions" section.)
LONG TERM INVESTMENT - FUNDS MAY NOT BE ACCEPTED. An investor should only
acquire the common stock issued by the Company as a long term investment.
Investments or reinvestments of funds from an investor, who attempts to
"park funds" in the Company shares for a short term investment, will not be
accepted. In addition, because of the various risks, the tax orientation
and the relative lack of liquidity of securities of this type of investment
as compared to other investments, each investor must be able to appraise
themselves of and assume the risks inherent in the purchase of common
stock. All investors, with the assistance of their investment advisor,
must evaluate whether this investment is suitable based upon their own
investment objectives, financial situation, and needs.
FUNDS FROM STOCK SALES ARE INVESTED IN NEW LOANS. The Company has a track
record of being able to invest all available funds by purchasing new loans
and participations in loans that meet its investment policies from CLS.
The Company has not experienced any problems with an oversupply of new
investor funds. The funds from stock sales enabled the Company to increase
its loan portfolio by $5.7 million dollars as a direct result of this
offering, an average of $190,000 per month. At present, CLS has the
capacity to sell the Company up to One Million Dollars ($1,000,000) per
month in loans that meet the Company's Investment Objectives and Policies.
BOARD OF DIRECTORS MAY DELAY OR DENY ACCEPTANCE OF INVESTORS FUNDS. In
event that the Company is attracting significantly more investment proceeds
from new investors or from paid off loans than the Company can invest into
new loans, the Board of Directors may delay or deny acceptance of investor
funds as frequently as necessary until the new investor proceeds can be
absorbed into new loans. No investor funds will be escrowed or otherwise
accepted for a future purchase.
LEGAL PROCEEDINGS
GENERAL. The Company is not presently involved, nor does it expect to be
involved, in any legal proceedings, except for 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 of Deeds of Trusts,
Mortgage Foreclosures and Real Estate Contract Forfeitures. Counsel for
the Company is of the opinion that collection actions on delinquent
accounts 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.
USURY AND FEDERAL PREEMPTION OF STATE LAW. The Company loan portfolio
contains a substantial number of loans that exceed the usury limits for
consumer loans made to Washington residents secured by real property
located in Washington. The position of Counsel for the Company is that the
Federal Depository Institution of Deregulation and Monetary Control Act of
1980 preempts state usury laws for federally related mortgage loans. No
Washington State Appellate Court or Federal Court located in Washington has
ruled directly on the issue. However, there are an abundance of rulings
from other states and other Federal Courts on this issue supporting
counsel's position. Generally, federally related mortgage loans are first
mortgage loans on a borrower's residence made by a qualified lender. The
position of counsel is that CLS is a qualified lender. The position of
counsel for the Company is that there are no unasserted claims against the
Company on this issue that are probable of assertion and if asserted would
have at least a reasonable possibility of an unfavorable outcome.
HOME OWNERSHIP AND EQUITY PROTECTION ACT. In 1994, Congress passed the
Home Ownership and Equity Protection Act (HOEPA), which became effective on
October 1, 1995. HOEPA defines certain loans, including some loans
originated by CLS and subsequently purchased by the Company, as "high cost
mortgages." Among other provisions, the legislation prohibits high cost
mortgages from including certain terms such as prepayment penalties,
balloon payments due in less than five years, increases in the rate of
interest after default ("default interest"), negative amortization, holding
back more than two months of payments from the loan amount to make monthly
payments, and charging points on refinancing through the same lender. The
bill also provides for increased civil liability for violations of HOEPA
and enables the borrower to assert such claims against both the originator
of the high cost loan (CLS) and any persons to which the loan is assigned
(the Company). Since the loans purchased by the Company do not contain the
certain terms precluded by HOEPA, the impact is viewed as minimal.
However, the provisions of HOEPA require careful study and may effect the
type of loans that CLS makes and as a result may negatively impact on the
profitability of the Company and its ability to continue the present rate
of dividend distributions.
INVESTMENT COMPANY ACT OF 1940. The Board of Directors and the Company
intend to conduct the operations of the Company so that the Company will
not be subject to regulation under the Investment Company Act of 1940 (the
"Investment Company Act") by virtue of the exception contained in Section
3(c)(5)(C) thereof. Accordingly, the Company does not expect to be subject
to the restrictive provisions of the Investment Company Act nor will the
Company redeem any shares from an existing shareholder as discussed
elsewhere in this Prospectus.
OTHER ACTIONS. The Company and its counsel are not aware of any proceeding
that a governmental authority is contemplating against the Company.
However, the Company can expect that its financial records will be reviewed
or audited by the Internal Revenue Service for correctness and compliance
with the Internal Revenue Code regarding its REIT tax status. (See
"Federal Income Tax Considerations" section.) The Company also expects
that its operations and financial records will be reviewed by Federal and
or State Security Regulators regarding its compliance with Security
Regulations.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
There are three (3) officers in the Company, namely a President, a Vice-
President and a Secretary. The President functions as the Chief Executive
Officer and the Secretary functions as the Chief Financial Officer. There
are nine (9) members of the Board of Directors, six (6) of which are
considered outside independent members. Each Board Member must have at
least three (3) years experience in the mortgage lending industry. All
current Board Members have more than three (3) years experience in the
mortgage lending industry.
OFFICERS AND DIRECTORS OF THE COMPANY. The following persons are the
Officers of the Company and are also members of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Title Address
<C> <C> <C> <C>
1) H.E. Brazington** 60 President 24306 East Sprague
Liberty Lake, WA 99019
2) Stanley E. Brazington** 38 Secretary 2727 South Bannen
Veradale, WA 99037
2.1) William E. Davies*** 59 Vice President 1235 West Bellwood Dr.
Spokane, WA 99218
3) Rudy W. Nelson* 79 Director 321 West 37th
Spokane, WA 99203
4) Dr. Vaughn Ransom* 71 Director 425 South Lakeside Rd.
Liberty Lake, WA 99019
5) Vern W. Haworth* 76 Director 9707 North Ivanhoe
Spokane, WA 99218
6) Douglas M. O'Coyne, Sr. 44 Director 10906 East Cimmaron Dr.
Spokane, WA 99206
7) Elden Sorensen* 61 Director P.O. Box 265
Cheney, WA 99004
8) Dr. David W. Hanson* 57 Director 5209 North Millview
Spokane, WA 99212
9) C. Patrick Craigen* 77 Director 2010 West Regina
Spokane, WA 99208
</TABLE>
* Denotes Independent Director
** Denotes Officer who is also a Director
*** Denotes Officer who is not a Director
Background & Education information regarding Officers and Directors of the
Company. The following section contains the name, title, employment
history and education of all key officers and all directors of the Company.
(1) H.E. BRAZINGTON is the President, member of the Board of Directors,
and a shareholder. He is also the President, Director and majority
shareholder of CLS Mortgage, Inc., the Company he formed and has managed
since 1974. He is also an Officer, Director and 50% shareholder of CLS
Escrow. He graduated from Deer Park High School in 1954 and attended
Washington State College in 1955 and 1956. He is also a Director of the
Company and expects to spend up to ten (10) hours per week accomplishing
Company business as its President and Chief Executive Officer.
(2) STANLEY E. BRAZINGTON is the Secretary, member of the Board of
Directors and is also a shareholder. He is and has been employed with CLS
Mortgage, Inc. since 1980, and is the Vice President and a Director. He is
also the President, Director and 50% shareholder of CLS Escrow. He
graduated from West Valley High School in June, 1975, and graduated from
Eastern Washington University in March, 1982, with a B.A. in Business
Administration. His major was Finance. He is also a Director of the
Company and expects to spend six to ten (6-10) hours per week on Company
business as its Chief Financial Officer. As the Company Secretary, he is
responsible for supervision of the Shareholder Relations function which
includes, but is not limited to, the quarterly distribution of dividends,
approving stock purchases and transfers, maintaining the Shareholder
Register, giving Notice to the shareholders, preparing and distributing
quarterly and annual financial information to the shareholders and
responding to shareholder concerns on an as needed basis.
(2.1) WILLIAM E. DAVIES is the Vice President of the Company but not a
Director. He has been employed with CLS Mortgage, Inc., since March of
1990, and holds the position of a mortgage investment manager. He
graduated from John Rogers High School in 1954, and attended WSU. As the
Company's Vice President, he is responsible for maintaining positive
relations with shareholders and for monitoring shareholder investment in
the Company to insure that the Company's cash flows from investors does not
exceed its ability to invest in loans.
(3) MR. RUDY W. NELSON is an Independent Director for the Company and also
a shareholder. He has been retired since 1980. He has been personally
investing in Mortgage Paper Securities with CLS Mortgage, Inc., since
August of 1983. As an Independent Trustee, he is required to provide
Quarterly and Annual Reports to the shareholders. He graduated from
Washington State College in 1938 with a degree in Business Administration
and Finance.
(4) DR. VAUGHN RANSOM is an Independent Director for the Company and also
a shareholder. He has been a self-employed Dentist in Spokane County for
over 30 years (Vaughn R. Ransom, DOS, P.S.). He has recently sold his
practice. He has been personally investing in Mortgage Paper Securities
with CLS Mortgage, Inc., since June of 1985. As an Independent Trustee, he
is required to provide Quarterly and Annual Reports to the shareholders.
He graduated from the Dental School at the University of Washington in
1958.
(5) VERN W. HAWORTH is an Independent Director for the Company and also a
shareholder. He has been retired since 1988. He has been personally
investing in Mortgage Paper Securities with CLS Mortgage, Inc., since May
of 1985. As an Independent Trustee, he is required to provide Quarterly
and Annual Reports to the shareholders. He has a high school education.
(6) DOUGLAS M. O'COYNE, SR. is a Director for the Company, counsel to the
Company and also a shareholder. He is the general partner and shareholder
in the professional services law firm of O'Coyne & Phillips P.S. He has
represented the Company as corporate counsel since its formation. He is a
member of the United States Army Reserve with the current rank of
Lieutenant Colonel. He is a member in good standing of the Washington
State Bar Association, the Idaho State Bar Association, the District of
Idaho Federal Bar, the Eastern District and Western District of Washington
Federal Bar, the Ninth Circuit Court of Appeals, the United States Tax
Court and the American and Washington Trial Lawyers Association. He is
also the President and sole shareholder of Crown Financial Networks Inc., a
Washington corporation, that has experience in purchasing property at tax
and other distress sales and selling those properties under contracts, and
also purchasing Mortgage Paper Securities at a discount. He graduated from
Gonzaga University with a B.A. Degree in public accounting in 1973, earned
a Masters Degree in Business Administration from the University of Puget
Sound in 1975 and graduated from Gonzaga University School of Law in 1985.
(7) ELDEN SORENSEN is an Independent Director for the Company and also a
shareholder. He has been retired from active business since 1985, however
he is the President of Second Wind Engineering, Inc., a Washington
corporation, which is a company that rehabilitates antique cars. He has
been personally investing in Mortgage Paper Securities with CLS Mortgage,
Inc., since February of 1988. As an Independent Trustee, he is required
to provide Quarterly and Annual Reports to the shareholders. He graduated
from Reedly College in 1955 with a degree in Business Administration.
(8) DR. DAVID W. HANSON is an Independent Director for the Company and
also a shareholder. He has been a director since 1994. He has been a
dentist in Spokane County for over 20 years. He has been personally
investing in Mortgage Paper Securities with CLS Mortgage, Inc., since May
of 1985.
(9) C. PATRICK CRAIGEN is an Independent Director for the Company and also
a shareholder. He is a retired banker with over 47 years of experience in
the lending industry. He has been personally investing in Mortgage Paper
Securities with CLS Mortgage, Inc., since March of 1985. As an Independent
Trustee, he is required to provide Quarterly and Annual Reports to the
shareholders. He graduated from the Pacific Coast Banking School at the
University of Washington in 1960.
DIRECTOR RESPONSIBILITIES. The Company has incorporated the NASAA
Statements of Policy regarding the management of REITs into its Bylaws.
Board Members are referred to as Trustees in the NASAA section regarding
REITs. The Company and this Disclosure document interchangeably refer to
the Trustees as Board Members. A Board Member must have at least three
years of experience in the mortgage lending industry. The Bylaws require
that a majority of the Board consist of independent directors. A director
is independent if he is not, directly or indirectly, affiliated with CLS,
employment by, having a material business, professional relationship or
ownership interest in, or serving as an officer or director of CLS or an
affiliated business entity of CLS. At this time, all of the Company's
directors are independent with exception of H.E. Brazington, Stanley E.
Brazington and Corporate Counsel, Douglas M. O'Coyne.
INDEPENDENT DIRECTOR RESPONSIBILITIES. The independent directors are
required to monitor the relationship of the Company with CLS, to review and
approve all forms of compensation paid to CLS or its affiliates, to review
the Company's portfolio to insure that all loans comply with the Company's
investment objectives and policies, to declare quarterly dividends, to
provide Annual Reports to the shareholders and provide the management with
direction regarding the day to day operations of the Company.
BOARD APPROVES ALL LOANS AND FEES PAID TO CLS. The full Board reviews and
approves all loan acquisitions and fees paid to CLS on a quarterly basis.
A majority of the Independent Directors must approve all loans and fees
paid to CLS. The full Board of Directors has established a committee,
consisting of any two Independent Directors and the President, to review
and approve all loan acquisitions that exceed $200,000 prior to the
purchase of the loan. The Committee may approve, deny or refer the loan
acquisition to the full Board. Since all loans have been purchased from
CLS, the Board has the option of approving or reversing any loan
acquisition that is deemed not in compliance with the Company Investment
Policy at the quarterly meeting. To date, the Board has not done so. (See
"Investment Objectives and Policies" and "Conflict of Interest" sections).
QUARTERLY REPORTS. The Company currently provides Quarterly Financial
Reports to the shareholders along with their dividend checks and statements
of stock account balances. The Quarterly Financial Report includes a
Summary Letter signed by the President, the Unaudited Quarterly Financial
Statements which includes the Income Statement for the Period, the Balance
Sheet, the Loan Portfolio Report, the Report on Company Owned Property and
disclosures of all related party transactions. The Board of Directors has
mandated that the quarterly dividend checks be distributed to the
shareholders with the Quarterly Report not later than 30 days after the
close of each calendar quarter.
ANNUAL REPORTS. Each year, the Board of Directors retains a CPA firm to
audit the Company's Financial Statements. Since 1990, the Board has
retained the firm of McFarland & Alton in Spokane, Washington to audit the
Company records. After receiving the Audit and Management report, the
Board prepares its Annual Report which is mailed to the shareholders within
120 days after year end and at least 30 days before the Annual Shareholder
Meeting. It contains a Special Report to the shareholders from the Board
of Directors, the Audited Financial Statements and the Notice of the Annual
Shareholder Meeting and the agenda. The reporting is intended to conform
to the NASAA Statements of Policy regarding REIT disclosure guidelines and
Generally Accepted Accounting Principles ("GAAP"), Accounting Research
Bulletin ("ARB") number 43 Chapter 1A and Financial Accounting Standards
Board ("FASB") number 57 & 96.
BOARD MEMBER COMPENSATION. The Board of Directors are not compensated for
attending regular quarterly or special meetings nor have they been
compensated for out of pocket expenses incurred in connection with
attendance at the meeting. The Board of Directors are not prohibited from
paying the Directors to attend meetings and reimburse out of pocket
expenses, provided said payments are approved by the full Board of
Directors.
NO EMPLOYEES. There are no employees other than the President, a Vice
President and the Secretary. There are no other significant employees.
The Officers and Directors have not been and are not presently compensated
for their services. They are indirectly compensated for their services as
officers, directors and shareholders in CLS Mortgage, Inc. and CLS Escrow.
(See "Certain Relationships and Related Transactions" section).
FAMILY RELATIONSHIPS. H.E. Brazington is the father of Stanley E.
Brazington and is married to Sharon M. Brazington. H.E. Brazington is a
shareholder, member of the Board of Directors and the President and Chief
Executive Officer of this Company. H.E. Brazington is also the founder,
owns 100% of the stock (along with his wife, Sharon), is a member of the
Board of Directors and the President of CLS Mortgage, Inc. Sharon M.
Brazington is the Corporate Secretary of CLS Mortgage, Inc. and CLS Escrow
and is a member of the Board of Directors of both companies. H. E.
Brazington owns 50% of the stock (along with his wife Sharon), is a member
of the Board of Directors and the Vice President of CLS Escrow.
Stanley E. Brazington is a shareholder, member of the Board of Directors,
the Secretary and Chief Operations and Financial Officer of the Company.
Stanley E. Brazington is also a member of the Board of Directors and the
Vice President of CLS Mortgage, Inc. He also owns 50% of the stock, is a
member of the Board of Directors and the President of CLS Escrow. Stanley
E. Brazington is not now married.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. The Company, its officers and
directors, its advisors and affiliates have never filed a Petition in
Bankruptcy or Insolvency of any kind. No officer or director has been
convicted in a criminal proceeding or is the subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses). No
officer or director is subject to any order, judgment or decree limiting
his involvement in any type of business, securities or banking activity.
No Officer or Director has been found to have violated any federal or state
securities or commodities law.
NOTE: POTENTIAL INVESTORS SHOULD BE AWARE OF THE POTENTIAL CONFLICT OF
INTEREST, SINCE THE OFFICERS OF THE COMPANY ARE ALSO OFFICERS OF CLS
MORTGAGE, INC. AND CLS ESCROW.
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All Directors must be Shareholders or Officers in the Company. All of the
1995 members of the Board of Directors are shareholders. However, no
Officer or Director owns more than 3.25% of the outstanding and issued
stock of the Company. Further, no individual shareholder owns more than 5%
of the issued and outstanding stock of the Company. Under the Internal
Revenue Code, no five (5) persons can control more than fifty percent (50%)
of the outstanding and issued stock. The Company policy effectively
prohibits any shareholder from owning more than 9.8% of the outstanding and
issued stock. (See "Federal Income Tax Considerations," "Certain
Relationships and Related Transactions" sections and "Footnote 5 to the
Audited Financial Statements".)
The following table indicates the amount of common shares owned by the
Officers of the Company as of June 30, 1996. All shares were purchased for
cash at the offering price of five ($5.00) dollars per share. The address
of the Officers is set forth in the "Directors and Officers of the Company"
section.
<TABLE>
<CAPTION>
Name of Amount & Nature Percent
Title of Class Beneficial of Beneficial of
Owner Owner Class
- ---------------- ------------------- --------------- --------
<C> <C> <C> <C>
Common Stock (1) *H.E. Brazington &
Sharon Brazington 67,972** 3.23%
Common Stock (1) *Stanley Brazington 249 .00%
Common Stock Rudy W. Nelson &
Maxine E. Nelson 3,697** .18%
Common Stock (2) Vaughn R. Ransom 18,502** .88%
Common Stock (3) Vern W. Haworth 8,119** .39%
Common Stock (4) Douglas M. O'Coyne 18,420** .88%
Common Stock Elden Sorensen &
Joan F. Sorensen 13,569** .65%
Common Stock (5) Dr. David W. Hanson 35,803 1.70%
Common Stock (6) C.P. Craigen 14,157** .67%
--------------- --------
TOTAL 180,488 8.58%
</TABLE>
NOTES:
(1) Includes 11,563 shares owned by Mr. Brazington's brother and 40,506
shares owned by Mr. Brazington's children. Mr. Stan Brazington
owns 249 shares in his own name.
(2) Includes 7,544 shares owned by a profit sharing plan.
(3) Includes 619 shares owned by Mr. Haworth's children.
(4) Includes 10,957 shares of common stock owned by Mr. O'Coyne's
children and 200 shares owned by a Washington Corporation whom Mr.
O'Coyne is President and majority shareholder.
(5) Includes 31,606 shares owned by a Profit Sharing Plan.
(6) Includes 2,157 shares owned by Mr. Craigen's children.
*Denotes Officers who are also Board Members.
**Denotes Joint Tenancy.
<PAGE>
<PAGE>
DESCRIPTION OF SECURITIES
The securities of the issuer being offered is common equity stock in a
Washington Corporation. All stock issued and outstanding has been issued
for $5.00, the arbitrary offering price determined by the Board of
Directors, which is also the par or stated value of the stock. The
Articles of Incorporation require all stock to be issued for $5.00 in cash
consideration only. (See "Market for Common Equity and Related
Transactions" section and its subsection "Dividend Reinvestment Plan").
The dividends are declared on a per share basis and paid quarterly within
thirty (30) days after the end of the quarter. (See "Market for Common
Equity and Related Transactions" section and its subsections "Distributions
of Dividends" and "Schedule of Dividends Paid").
The stock has all rights allowed at law, including equal voting rights,
except that there is no cumulative voting. There are no preemptive rights.
There are limitations in the percent of ownership of any individual
person. (See "Plan of Distribution" and "Federal Income Tax
Considerations" sections).
INTERESTS OF NAMED EXPERTS AND COUNSEL
The legality of the stock issued herein and certain securities and income
tax matters have been passed on by DOUGLAS M. O'COYNE, SR., Attorney at
Law, of the law firm of O'Coyne & Phillips,P.S. with offices at 9 South
Washington, Suite 612, in Spokane, Washington, 99204. DOUGLAS M. O'COYNE
is a stockholder and Director of the Company. He and his immediate family
have purchased and own 18,420 shares as of December 31, 1995, for cash at
the offering price of $5.00 per share. DOUGLAS M. O'COYNE, Sr. and his law
firm were paid $50,212 and $22,650 for legal services performed on an
hourly compensated basis in 1995 and 1994 respectively. In addition,
during 1995 the Company financed a loan from which approximately $51,598
was paid to this related party on behalf of the borrower for legal fees
incurred from 1992 through 1995. The legal fees were secured by a deed of
trust on the property used as collateral for the loan. (See "Financial
Statements" Note 5 section).
The Financial Statements of the Company have been audited as of December
31, 1990, 1991, 1992, 1993, 1994 & 1995 by McFarland and Alton, P.S., with
offices at 1800 SeaFirst Financial Center in Spokane, Washington, 99201.
The Auditors were paid on an hourly fee basis.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
In general, the Directors are accountable to the shareholders as
fiduciaries and are required to perform their duties in good faith and in a
manner each Director believes to be in the best interest of the Company,
with such care, including reasonable inquiry, as a prudent person in a like
position would use under similar circumstances. Accordingly, the Directors
must supervise the relationship of the Company with CLS in the performance
of its duties under the Management Agreement, and must determine that the
compensation paid directly and indirectly to CLS is reasonable in relation
to the nature and quality of the services performed. (See "Certain
Relationships and Related Transactions" section).
The Company has chosen, under its Articles of Incorporation and Bylaws to
indemnify its Directors, Officers, employees and other agents against
certain liabilities incurred in connection with their service in such
capacities. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection these securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL. The Company has elected to contract with other entities to
perform all of its business functions, rather than own any equipment, rent
any facilities or hire employees. The Company has contracted with CLS
since its inception to perform the day to day management of the Company and
to provide it with loans to purchase for its portfolio under the Management
Agreement. The Company has primarily relied upon CLS Escrow to service
those loans. The Company also retains the services of professionals for
accounting, legal and consulting work.
MANAGEMENT RELATIONSHIPS. CLS is paid a management fee for managing and
performing the day to day operations of the Company. (See "Summary of
Management Agreement" below). CLS is also paid a loan acquisition fee from
the loan proceeds for which the borrower is responsible to pay. (See
"Summary of Loan Acquisition Process" below).
LOAN CLOSING AND SERVICING RELATIONSHIP. CLS Escrow, Inc. ("CLS Escrow"),
is paid a closing fee by the borrower to close the loan and escrow the
funds and service the loan in the escrow account over its term. In event a
collection action would be necessary, as part of the escrow instructions,
CLS Escrow initiates the collection action on the defaulted loans, in which
case it receives the late payments as its compensation for this service to
the lenders. See "Summary of the Collection Process" below.
PROHIBITED LENDING PRACTICES. The Company has a policy of prohibiting the
originating or acquiring of any loans made to any of the Officers,
Directors, Shareholders, or other key personnel of the Company, including
making any loans to CLS Mortgage, Inc. or its employees.
SUMMARY OF THE MANAGEMENT AGREEMENT. The Company has executed a Management
Agreement with CLS Mortgage, Inc., with its principal office at E. 12904
Nora, in Spokane, Washington, 99216, to act as the advisor for the REIT.
The agreement has been renewed for 1996 by the Board of Directors and is
expected to be renewed for 1997 and beyond.
The Company has contracted with CLS to provide for all of its
administrative expenses generally associated with managing a business. CLS
provides for all expenses typically associated with maintaining an office
and has agreed to provide sufficient office space, equipment and personnel
to accomplish the day to day function of managing the Company's business as
it grows. CLS is responsible to provide sufficient loans for the Company
to purchase and to manage and sell real properties acquired through the
foreclosure process. (See "Summary of the Loan Acquisition Process"
below). CLS is not responsible for the payment of taxes, securities
offering costs, professional accounting fees, legal fees, property
management fees, printing costs or costs directly related to shareholder
relations. CLS is not responsible for any costs directly relating to any
collection action or the management of a foreclosure or forfeiture
property.
The Company is contractually responsible to pay CLS an annual management
fee up to two percent (2%) of the average invested assets or 25% of net
income, whichever is greater, paid on a monthly basis. Average invested
assets for any period is the average of the aggregate book value of the
assets of the Company. In practice, since all of the proceeds from the
sale of stock are invested in loans held for long term investment and real
estate acquired through foreclosure, CLS calculates the fee based on the
common stock outstanding at each month end, times 1.5% divided by 12
(months). The Board of Directors approve the fee on a quarterly basis.
The management fee charged by CLS of 1.5%, is substantially less than the
2% or 25% of net income, whichever is greater, amount deemed presumptively
reasonable by the NASAA Statement of Policy.
CLS has charged the Company 1.5% for the past three years based upon the
total amount of common stock outstanding at each month end. There is no
guarantee that CLS will continue to charge the lesser fee in the future.
In event of a dispute, the contractual agreement requires that any dispute
be arbitrated in accordance with the rules of the American Arbitration
Association with Jurisdiction being in the State of Washington and Venue
being in Spokane County.
SUMMARY OF THE LOAN ACQUISITION PROCESS. The Company does not directly
engage in the loan origination process. The Company has adopted the policy
of purchasing loans that have been originated or acquired by CLS. The
Company is free to purchase loans originated by other mortgage brokers,
however it has not done so based upon the present loan origination capacity
of CLS. The Company has no overhead expenses commonly associated with the
loan origination process, e.g. advertising, maintaining office space,
maintaining and training personnel, answering telephone inquiries,
screening borrowers, reviewing the security, closing the loan, setting up
the escrow, etc. The Company is reliant upon CLS to perform the entire
loan origination function. CLS is paid a loan acquisition fee (or as also
referred to as a loan origination fee or a discount fee) from the loan
proceeds at closing. The Borrower is legally obligated to repay the
principal, which includes the acquisition fee and other loan costs, over
the term of the loan. In effect, the Company does not pay any loan
acquisition fee.
CLS is a registered Mortgage Broker Dealer in the State of Washington and
has been in business since 1974. CLS also meets the requirements of a
Federally Related Mortgage Lender under the Monetary Act of 1980. (See
"Legal Proceedings" section). CLS brokers and originates several different
types of loans to several different types of borrowers. In the case of
loans that are ultimately sold to the Company, CLS actually originates the
loan to the Borrower(s) using its line of credit with the Bank (presently
Inland Northwest Bank).
CLS Escrow or an independent closer, closes the loan, recording all legal
documents as appropriate and disbursing the funds. CLS Escrow then sets up
the escrow account and accounts for all loan payments. The loan or a
participation interest therein is then sold to the Company. The Company
may purchase the whole loan or just a part of the loan, which is referred
to in the industry as a participation. In the case of a participation, a
portion of the loan would be sold to the Company and to other private or
institutional investors, under the same terms that the Company receives.
The Board of Directors has approved a loan acquisition fee of up to 12% to
be paid to CLS from the loan proceeds, subject to a quarterly review. The
fee is actually paid by the borrower over the term of the loan. The loan
acquisition fee is negotiated by the Borrower and CLS. The fee is
generally 8% to 12% of the loan principal. The Company and CLS have
implemented a review system to account for and approve the loan acquisition
fees paid to CLS on a quarterly basis, as is required in the NASAA
Statements of Policy regarding REITs. The actual fee paid to CLS from the
Company aggregate loan proceeds from January 1, 1991 through December 31,
1995 averaged 9.5%.
The loan acquisition fee paid to CLS exceeds the 6% fee that is generally
presumed reasonable by the NASAA Statements of Policy. As specifically
provided for under the NASAA Statements of Policy, the Board of Directors
has approved the acquisition fee paid to CLS as being commercially
competitive, fair and reasonable under the circumstances. The factors used
in forming the Board's determination are as follows: 1) The borrower is
legally obligated to repay the fee, which is included in the loan
principal, over the term of the loan; 2) CLS fronts all of the loan
origination costs associated with the marketing effort; 3) CLS originates
and actually funds the loans using its own line of credit; 4) the
substantial majority of the loans are under $50,000, with a loan average of
$43,034 as of December 31, 1995; and 5) the actual performance of the loan
portfolio. (See "Description of Company Loan Portfolio" section.)
SUMMARY OF THE COLLECTION PROCESS. The majority of the loans in the
Company portfolio are escrowed with CLS Escrow. There is a separate escrow
agreement for each loan which is executed at loan closing. The borrower
pays an escrow set up fee at loan closing and an annual fee during the term
of the loan. In the event that a borrower is delinquent by over 30 days,
CLS Escrow contacts the borrower and retains any late charges that are
assessed and paid by the borrower to reimburse it for the costs associated
with collection. The Company pays all costs of Nonjudicial Deed of Trust
or Judicial Foreclosures and Real Estate Contract Forfeitures, including
attorney fees. The foreclosure costs are added to the basis of the
property and not expensed.
The Company had expected and continues to expect that 10-20% of the loans
in the portfolio will be delinquent at any point in time. On December 31,
1995, the Company had 221 loans in the portfolio as compared to 223 loans
on December 31, 1994. The Company expects that it will experience payment
delays caused by periodic borrower late payments, the foreclosure legal
process and Bankruptcy. The Company expects to experience some losses on
individual foreclosed property sales. The Company Real Estate Owned
increased from $662,874 at year end 1994 to $922,526 at year end 1995. The
Company expects to sell most of the property over the course of 1996 and
1997, and expects that gains on certain properties will offset losses on
other certain properties. During 1995 and 1994, the Company charged off
$10,902 and $31,000 against the allowance. However, gains on other
property sales totaling $23,196 and $21,808 were recognized in 1995 and
1994 respectively. The general allowance for loan losses was increased
from $68,275 in 1994 to $106,554 at year end 1995.
MANAGEMENT COMPENSATION. The Company Officers and Directors are not paid
any salary. The Company has no employees. The Company has paid CLS a
management fee monthly and CLS has been paid loan acquisition fees at
closing from the proceeds of loans funded by the Company. CLS Escrow and
other Escrow companies have been paid an annual escrow fee and the late
payment charges for collection action on the delinquent loans by the
borrower.
(1) Payment of Management Fees: CLS Mortgage, Inc. was paid $144,142 and
114,903 respectively as a management fee for 1995 and 1994. The increase
was due to the increase in the assets of the Company. The amount is set
forth in Note 5 to the Audited Financial Statements of the Company as a
Related Party Transaction. The full Board of Directors has approved the
Management Agreement and approves all management fees paid to CLS in each
quarterly director meeting.
(2) Payment of Loan Acquisition Fees: CLS Mortgage, Inc. was paid
$406,888 and $523,762 in loan acquisition fees in 1995 and 1994
respectively. The decrease was due to the slight reduction in sales of
stock and the resulting reduction in the amount of loans purchased by the
Company from CLS. The amount is also set forth in Note 5 to the Audited
Financial Statements of the Company as a Related Party Transaction. CLS
charges the borrower the same fee, regardless of whether the loan is sold
to the company or other loan purchasers. The full Board of Directors has
approved the loan acquisition fees paid to CLS in each quarterly director
meeting.
(3) Payment of Loan Closing, Escrow and Late Fees: CLS Escrow is paid a
loan closing fee of 1% of the loan principal, which is paid from the
proceeds of the loan and is repaid by the borrower. CLS Escrow was paid
$76,344 and $55,773 in closing fees in 1995 and 1994 respectively on loans
that were closed and then sold to the Company. It is also paid an escrow
set up fee and an annual fee by the borrowers over the term of the loan.
In addition, the escrow company retains all late fees that are actually
paid by the borrowers whose accounts are delinquent. CLS Escrow does not
charge the Company for collection activity or for the escrow fees. CLS
Escrow was paid approximately $55,161 and $46,624 in escrow and collection
fees in 1995 and 1994 on loans that are serviced for the Company. The
borrower pays all fees due the Escrow Company. In event that a delinquent
loan is turned over to an attorney for collection, the Company is
responsible for all costs associated with the collection action. The full
Board of Directors approve all fees and collection costs at each quarterly
director meeting.
(4) Fees Projected to be Received by CLS: CLS will receive a management
fee, loan acquisition fees and loan closing and escrow fees as a result of
this offering. The management fee is paid by the Company each month. The
contract amount is 2% of the assets, calculated on an annual basis and paid
monthly. The actual amount charged has been 1.5%. The acquisition fee is
paid by the borrower at loan closing. The Board of Directors had approved
a fee up to 12% of the loan principal. The actual amount has averaged
9.5%. The loan closing fees are 1% and the escrow and collection fees vary
with each loan. The following table reflects the maximum amount of fees
projected to be received by CLS as a result of this offering, assuming the
maximum of $12,000,000 is sold.
<TABLE>
<CAPTION>
Received through 12/31/95 If Maximum Sold
------------------------- ---------------
<S> <C> <C>
Loan Closing Fees (1) $ 132,117 $ 120,000
Loan Servicing Fees (1) 121,785 120,000
Acquisition Fees (2) 930,650 1,440,000
Management Fees (3) 259,045 480,000
---------- ----------
Total $1,443,59 $2,160,000
========== ==========
</TABLE>
(1) The Loan closing fees are customarily 1% of the total loan. The amount
of loan fees received from closing all of the company loans made during
1994 and 1995 is not limited to the offering proceeds. The escrow fees
vary with each loan but average .58% of the total loans serviced on an
annual basis. The closing and servicing fees are paid by the borrower.
The total fee column reflects the fees that are expected to be received
from the offering proceeds.
(2) The Acquisition fees average 9.5%. The amount received from selling
loans to the Company during 1994 and 1995 is not limited to the
offering proceeds. The total fee column reflects the maximum allowable
charge of 12% that could be received from the offering proceeds. Based
upon the historical 9.5% average, the projected amount is $1,140,000.
The Acquisition fees are also paid by the borrower.
(3) The Management fee has averaged 1.5%. The amount received in 1994 and
1995 is not limited to the offering proceeds. The total fee column
reflects the maximum allowable charge of 2% for 2 years. Based upon
the historical 1.5% charge, the projected amount is $360,000 for the 2
years anticipated to sell the remainder of the stock. The Company pays
the management fee.
CONFLICTS OF INTEREST. The Company has agreed to pay CLS a management fee
monthly. CLS receives a loan acquisition fee on each loan that is sold to
the Company. CLS Escrow receives a closing fee when the loan is closed
and escrow and collection fees as a result of servicing the loans. (See
"Management Agreement and Compensation" above.) The management fee is less
than and the loan acquisition fee is more than the amount deemed
presumptively reasonable by the NASAA Statements of Policy. The
acquisition fee constitutes the bulk of the compensation received by CLS,
and is paid regardless of the future performance of the loan. Due to this
fee structure, CLS has an incentive to encourage the acquisition of shorter
term loans and to generally advocate a more rapid turnover of the
portfolio.
The principal officers of the Company are also the principal officers of
CLS and CLS Escrow. (See "Certain Relationships and Related Transactions"
section). CLS is responsible for acquiring loans for the Company and for
managing the Company's day to day affairs under the management contract.
CLS also sells loans, which it has originated, to clients other than the
Company, and may hold loans for its own account. Due to these
relationships, CLS may not always place the most profitable or otherwise
desirable loans with the Company. Additionally, CLS may recommend the
percentage of the loan placed in its respective clients' portfolios. If
the Company does not hold a majority percentage of the loan, it will be
unable to control the actions taken by the investor group with respect to
the loan.
In an attempt to mitigate the conflicts of interest, CLS and the Company
have adopted the following criteria:
1. CLS will determine whether the loan is consistent with the
Company's Investment Policy prior to advancing company loan
proceeds;
2. All loans are approved by the Board of Directors at each
regularly scheduled quarterly meeting;
3. CLS has agreed that the Board of Directors may reverse any loan
purchase if the Board determines that the loan does not meet the
Company's Investment Policy set forth in the Bylaws or as made
more restrictive by the Board;
4. All loans in which the Company loan proceeds exceed $200,000 are
approved in advance by the Special Loan committee composed of any
two Independent Directors and the President or by the full Board;
5. Where possible, CLS will place an entire loan with the Company or
it will place a loan participation which constitutes a
controlling interest in the loan.
Douglas M. O'Coyne, Sr., Attorney at Law, is a shareholder and Director of
the Company and also represents the Company in certain legal matters,
including having rendered opinions concerning certain legal matters in
connection with this offering. He also represents CLS Mortgage, Inc., on
some matters.
DESCRIPTION OF THE BUSINESS
FORM AND YEAR OF ORGANIZATION. The Company was incorporated in the State
of Washington on October 12, 1988. Its original shareholders initially
elected to be taxed as an "S" corporation under the Internal Revenue Code.
The Company conducted a security offering in 1989 under the ULOR exemption
from federal registration in the State of Washington. The Security
Administrator granted the Company a permit to sell securities. After
selling a minimum of ten thousand dollars ($10,000) in stock at five
dollars ($5.00 per share) to 35 investors, the offering was closed. The
Company began business in May of 1989, with the intent of passing through
all net profits to its shareholders, without the Company paying any Federal
Income Tax. The Company has paid a dividend to its shareholders each
quarter since it began doing business.
REIT STATUS. In tax year 1991, the Company revoked its "S" Federal Tax
Status and elected to file its Federal Tax Returns as a Real Estate
Investment Trust (REIT). (See "Federal Income Tax Considerations"
section). The Company completed a Regulation D Rule 504 offering under a
permit issued by the Washington Securities Administrator and a Regulation D
Rule 505 offering under a permit issued by the Idaho Securities
Administrator. The original offering was amended in early 1992 in order to
increase the offering to the maximum limit of One Million Dollars
($1,000,000). All shares were issued for a cash consideration of Five
Dollars ($5.00) per share. The offering was completed in May of 1992.
Since that time, the Company has allowed existing shareholders, at the
shareholder's option, to purchase additional stock and by " rolling over"
or "reinvesting" their dividends into stock.
MERGER WITH GREENACRES MANAGEMENT COMPANY, INC. Effective on July 1, 1992,
a similar company, Greenacres Management Company, Inc. ("Greenacres"
hereinafter) was merged into Opportunity Management Company, Inc. All
shares in Greenacres were issued for Five Dollars ($5.00) per share. The
policies of Greenacres were identical to Opportunity, which was also
managed under a similar agreement by CLS. The Board of Directors,
shareholders and fund accounting were separate, however the investment
policies, corporate documents and methods of accounting were the same. The
merger increased the number of shareholders, decreased administrative costs
on a per share basis, reduced the risk of loss on loans in the portfolio on
a per share basis and positioned the Company for this Federal Offering.
The Audited Financial Statements for 1992 & 1993 were prepared consistent
with Generally Accepted Accounting Principles. The merger has been
accounted for as a pooling of interests business combination, consistent
with generally accepted accounting principles. All operating results for
the year ended December 31, 1992 have been presented to include Greenacres
Management Company Inc., as though the two companies had been combined as
of the beginning of the period.
BUSINESS OF THE COMPANY. The Company can best be described as a purchaser
of above market rate loans that are well secured by real estate. The
Company purchases loans with an annual interest rate of 12% to 18%, with a
term of 15 to 20 years and a balloon payment due in 5 to 7 years. The
loans are purchased from CLS and are made to borrowers who lack the credit
rating necessary to qualify for market rate financing and who are willing
to pay above market rates. The yield on average year end total loans was
13.50% and 14.45% in 1995 and 1994, respectively. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section). The Company purchases the loans for its own portfolio, not for
resale, that do not exceed 70% of the appraised value of the property. The
maximum Loan-to-Value ratio is 70% for quality residential property and
less for other types of property. (See "Investment Objectives and
Policies" section.) Total expenses as a percentage of average assets were
2.66% and 3.04% in 1995 and 1994, respectively. (See "Schedule of
Dividends Paid" section). The profits are distributed to the shareholders,
without being taxed according to REIT tax rules. (See "Federal Income Tax
Considerations" section). Stockholder capital and loan payoff's provide
the capital base to purchase new loans. Interest income provides the
liquidity to pay expenses and distribute dividends.
BASIS FOR LOAN IS VALUE OF REAL ESTATE COLLATERAL. The primary basis for
purchasing the loan is not the borrower's ability to repay the loan, but
rather the value of the real estate given for security. The loans are
described as "hard money" loans in the industry. The Loan-to-Value ratio
("LTV") ranges from a maximum of 70% for residential property to less
depending on the type and marketability of the property. (See "Investment
Objectives and Policies" section.) The Company intends to continue the
present investment policy. The Management Company, CLS, has profitably
operated in this market since 1974 and expects to continue to do so. There
is at present no shortage of borrowers who are willing to pay above market
interest rates for loans secured by real estate. However, due to the above
market interest rates the borrowers are paying, they can be expected to pay
off the loans early by either refinancing the loan at a lower rate of
interest or by selling the property. In some cases, the loan proceeds were
necessary to start up a new business, that when successful, is able to seek
financing from a bank at a lower interest rate. (See "Description of
Company Loan Portfolio" section and the "Financial Statements" section).
RELIANCE ON ITS MANAGEMENT COMPANY (CLS). The Company relies on CLS to
supply it with the collateralized loans needed for continued operations.
CLS has been in business since 1974. (See Certain Relationships and
Related Transactions" section.) CLS is a full service mortgage company,
with the ability to service each segment of the mortgage market. CLS
brokers loans guaranteed by the FHA and the VA, conventional loans
purchased by institutions and loans purchased by private sources, such as
the Company. CLS has the capacity to meet the loan purchase requirements
of the Company for the foreseeable future, however the Company reserves the
right to contract with other brokers as the Board of Directors deems
necessary. A complete copy of the Prospectus regarding CLS Mortgage, Inc.'s
mortgage broker/dealer license is available by contacting CLS Mortgage,
Inc. at 12904 East Nora, Spokane, Washington, 99216, telephone number
(509) 928-6545.
COMPETITION. The primary competition in the Eastern Washington and
Northern Idaho market for these types of loans is from a limited number of
Mortgage Companies and Investment Groups; several Finance Companies, e.g.
Associates Financial Services, Beneficial Financial Services, ITT Financial
Services etc., and individual investors who actively purchase interests in
what is commonly referred to as Mortgage Paper Securities. The yield
expectation of these lenders is similar to the yield expectations of the
Company. The competition is financially strong, stable and well funded.
ABILITY TO COMPETE. The Company believes it can effectively compete in the
market because it has signed a Management Agreement with CLS (See "Certain
Relationships and Related Transactions" section). As previously stated,
CLS has experience in this business and has provided the Company with over
$16.8 Million Dollars in loans over the past five years and over $9.8
Million Dollars in 1994 and 1995. As of December 31, 1995, the Company had
221 loans in the portfolio with a principal of over $9.5 million dollars.
The Board of Directors believe that CLS will be able to supply an adequate
number of loans consistent with its investment policy for the foreseeable
future based on its past performance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The basic business of the Company is to purchase loans secured by real
estate that yield above market interest rates. The loans are made based
primarily on the value of the real estate securing the loan, not the
borrowers credit worthiness. The maximum Loan to Value Ratio ranges from
70% of the appraised value of residential property to 40% for undeveloped
property. (See "Description of the Business" and "Investment Objectives
and Policies" sections).
OVERVIEW. In order to pass through income to its shareholders without
being taxed at the Company level, it must comply with the REIT provisions
of the Internal Revenue Code. (See "Federal Income Tax Considerations"
section). The Company has no Balance Sheet debt, other than the accrued
dividends owed to its shareholders and some minor expenses. The Company
has paid dividends to its shareholders in each and every quarter since it
began operations in 1989. (See "Description of the Business" and "Schedule
of Dividends Paid" sections).
SOURCE OF FUNDS TO PURCHASE NEW LOANS. Revenue from the sale of stock,
principal payments, loan payoffs and the sale of real estate owned provide
the Company with the source of funds to invest in new loans. CLS has been
able to provide the Company with sufficient loans meeting the Company's
Investment Objectives and Policies and is expected to be able to do so in
the future. (See "Description of the Business" and "Certain Relationships
and Related Transactions" section).
SOURCE OF FUNDS TO PAY EXPENSES AND DIVIDENDS. The interest paid on the
loans and the real property sales in excess of the Company's basis provide
the funds necessary to pay the expenses and make dividend distributions to
the shareholders. The Company's expenses constitute approximately 20% of
interest revenues leaving the balance to be paid to the shareholders in
quarterly dividend distributions. 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. (See "Description of the Business," "Distributions of
Dividends," "Schedule of Dividends Paid," and "Financial Statements"
sections.)
RESULTS FROM OPERATIONS IN 1995 AND 1994. The Company has remained
profitable meeting the financial performance objectives set forth by the
Board of Directors. Stock sales have translated into increased investment
in loans which has provided increased revenues while spreading the
portfolio risk. As revenues have grown, expenses have remained
proportionate providing the stable earnings necessary to make regular
quarterly dividend distributions. Set forth below are the key results from
operations in 1995 and 1994 in the opinion of management.
1. The Company met its Dividend Objectives in 1995 & 1994. The Company's
principle performance objective is to provide its shareholders with
quarterly dividend distributions. In 1995 and 1994, the Company posted
primary earnings per share of $.50 and $.54, respectively. The dividend
distribution in 1995 and 1994 of $997,901 and $838,873 respectively,
translated into a 10.0% and 11.0% respective shareholder rate of return,
based on a consistent per share price of $5.00. The compounded rate of
return for shareholders who elected to reinvest their dividends was 10.6%
and 11.5% in 1995 and 1994 respectively. The Company expects to continue
to meet its dividend distribution objectives in 1996 and beyond. (See
"Schedule of Dividends Paid" section.)
2. Sales of Stock and Reinvested Dividends Provided Funds to Purchase
Loans. Stockholders' equity increased in 1995 and 1994 as a result of
sales of common stock of $1,117,810 and $2,381,464, respectively.
Furthermore, $434,895 and $372,875 of dividends were reinvested in stock in
1995 and 1994 respectively. The Company expects that several shareholders
will continue to reinvest their dividends in the future. The total amount
reinvested was 38.9% in 1992, 40.6% in 1993, 44.4% in 1994 and 43.6% in
1995. The Company expects that approximately 45% of the dividends will be
reinvested in 1996 and that the number will gradually approach 50% in the
future. Stock sales and reinvested dividends combined with loan payoff's
provide the principle means for the Company to purchase new loans. For the
year ended December 31, 1995 and 1994, total loans increased by $1.5
Million and $1.9 Million respectively, which represented a 18.6% increase
in 1995 as compared to the 31.4% increase in 1994. The Company growth is a
direct result of the sale of stock and reinvested dividends to provide the
capital to purchase loans.
3. Revenues Increased due to Increase in Loan Portfolio. Total revenues in
1995 were $1,191,518, an increase of $160,806 or 15.6% over 1994. Total
revenues in 1994, were $1,030,712, an increase of $219,258 or 27% over
1993. The increases in revenues are directly attributable to the growth in
the loan portfolios of 18.6% and 31.4% for 1995 and 1994, respectively.
The rate of growth was lower in 1995 as compared to 1994 due to the
increase in nonearning loans and real estate owned by the Company. There
is no shortage of loans for the Company to purchase, therefore, the Company
expects to increase revenues with the sale of additional stock, by
decreasing the nonearning loans and through the sale of real estate owned
in 1996 and 1997.
4. Type of Property Securing the Loans in the Portfolio have changed
slightly. At year end 1995 and 1994, 81% and 89% respectively, of the
loans in the portfolio were secured by first liens on real property. Of
the $1.5 million in loan growth in 1995, 35% was in first mortgage loans,
24% in second mortgage loans and 41% in mobile home combination real estate
loans. The mobile homes are also referred to as factory made homes sitting
on the land that is owned by the borrower in which the Company has a first
lien. In 1995, the mobile home combination packages increased and the
first mortgage loans decreased. The Company expects that trend to
continue. In comparison, during 1994, 73% of the $1.9 million in loan
growth was in first mortgage loans. Overall, the Company loan portfolio is
seasoned and there is no known trend that would materially change the
portfolio, excepting the adjustment for factory made homes, as new loans
are expected to replace existing loans without material changes in the
breakdown of the types of property securing the new loans.
5. Gross Interest Yields were down in 1995 as compared to 1994. The gross
interest yields were down slightly in 1995 from 1994. Even though the
weighted average interest rate in the portfolio remained stable, 15.51% and
15.48% at year end 1995 and 1994, respectively, the yield on average year
end total loans was 13.50% for 1995, down from 14.45% for 1994. The gross
interest yield on average year end commercial loans was 13.63% and 15.34%
for 1995 and 1994, respectively. The gross interest yield on average year
end residential loans was 13.40% and 13.88%, for 1995 and 1994
respectively. The nonearning loans increased substantially from 15.2% in
1994 to 30.0% in 1995. The decreases in yields was the result of
nonearning loans in 1995 being much higher than in previous periods. The
Company has taken action to stabilize the delinquency rate and to gradually
reduce the rate in 1996 and 1997 to the expected 10% to 20% range.
6. Real Estate Owned by the Company Increased in 1995. Real estate held for
sale increased from $662,874 at December 31, 1994, to $922,526 at December
31, 1995 directly as a result of acquiring real estate properties in
settlement of delinquent loans and avoiding the cost and time associated
with litigation. The properties are currently listed for sale and
management believes the carrying values are expected to be fully
recoverable through the net proceeds of the sale of the properties. At
December 31, 1995, $555,074 related to a 19 lot development, of which 2
lots were sold subsequent to 1995 year end. A specific allowance of
$52,995 has been set aside to provide for possible losses on the sale of
lots in this development. Due to the nonearning loan balance, the Company
expects more foreclosures in 1996. However, the Company expects that gains
from the sale of certain real estate will offset losses from the sale of
other certain real estate in 1996 and 1997. The Company recognized gains
from the sale of real estate of $23,196 and $21,808 and charged off losses
of $10,902 and $31,000 in 1995 and 1994 respectively. The Company projects
that the amount of real estate owned will remain between 5% to 10% of the
total assets in the future.
7. Provision for Loan Losses Were Increased in 1995. The provision for
loan and real estate losses charged to expense for 1995 and 1994 was
$48,000 and $49,000 respectively. Actual charge off's against the
allowance for 1995 and 1994 were $10,902 and $31,000 respectively. The net
charge-off's to average loans outstanding during the years ended December
31, 1995 and 1994 were .11% and .41% respectively. The allowance at year
end 1995 of $106,554, representing 1.02% of the loan portfolio balance was
deemed as adequate and appropriate by
the Board of Directors for year end 1995. A general allowance is not tax
deductible. As a result, the Company has been required to declare a
special dividend, which exceeded the financial computation of net income in
order to maintain its REIT tax status in 1995. (See "Special Dividends
Policy" section). The Board uses a systematic approach to adjust the
general allowance based upon portfolio performance, industry trends,
economic conditions, and the sale of real estate owned on a quarterly
basis.
8. Total Expense Ratio slightly decreased in 1995 as compared to 1994.
Total expenses, as a percentage of average assets, were 2.66% and 3.04% for
the years ended December 31, 1995 and 1994, respectively. Management fees
in 1995 increased approximately $29,000 over 1994's since they are based on
1.5% (annually) of the outstanding stock, which increased during the same
period. Other expenses, such as accounting and legal, increased due to
review and assistance with S.E.C. quarterly and annual filings. Management
believes that total expenses will level off at approximately 2.75% to 3.00%
of average assets.
RESULTS FROM OPERATIONS IN 1996 YTD AND 1995 YTD. The Company has remained
profitable meeting the financial performance objectives set forth by the
Board of Directors. Stock sales have translated into increased investment
in loans which has provided increased revenues while spreading the
portfolio risk. As revenues have grown, expenses have remained
proportionate providing the stable earnings necessary to make regular
quarterly dividend distributions. Set forth below are the key results from
operations in the First and Second Quarters of 1996 and 1995 in the opinion
of management. (See "Interim Financial Statements" section).
1. The Company Paid Dividends in 1996 YTD and 1995 YTD. In the First and
Second Quarters of 1996 and 1995, the Company posted primary earnings per
share of $.23 and $.27, respectively. Net income was 79.9% and 79.7% of
total revenues in the first and second quarters of 1996 and 1995
respectively. The dividend distribution in 1996 and 1995 of $515,816 and
$502,479 respectively, translated into a 9.70% and 10.94% respective
shareholder rate of return, based on a consistent per share price of $5.00.
The Company expects to continue to distribute dividends on a quarterly
basis in 1996 and beyond. (See "Schedule of Dividends Paid" section.)
2. Sales of Stock and Reinvested Dividends Provided Funds to Purchase
Loans. Stockholders' equity increased from $9,501,556 at June 30, 1995 to
$10,904,840 at June 30, 1996 as a result of sales of common stock. In the
first six months of 1996 and 1995, the Company sold stock in the amounts of
$316,505 and $443,572 respectively. Shareholders reinvested $233,768 and
$228,201 in dividends in the first and second quarters of 1996 and 1995
respectively. The Company expects that several shareholders will continue
to reinvest their dividends in the future. The total amount reinvested
remained stable at approximately 45.3% in 1996 as compared to 45.4% in the
first six months of 1995. The Company expects that approximately 45% of
the dividends will be reinvested in 1996 and that the number will increase
in the future to over 50%. Stock sales and reinvested dividends combined
with loan payoff's provide the principle means for the Company to purchase
new loans. For the quarters ended on June 30, 1996 and 1995, total loans
increased 11.1% and 10.2% respectively, as a direct result of the sale of
stock and reinvested dividends.
3. Revenues Increased Slightly due to Increase in Loan Portfolio. Total
revenues in the first and second quarters of 1996 were $645,895 as compared
to $630,760, an increase of $15,135 or 2.4%. This rate of growth is lower
than previous quarters due to the reduction in the sales of stock in
relation to the size of the total portfolio. Management expects the
Company growth in dollars to be stable. However, the rate of growth as the
Company matures will be reduced and more controlled since increases in
revenues are directly attributable to the growth in the loan portfolio.
There is no shortage of loans for the Company to purchase, therefore, the
Company expects the trend to continue with the sale of additional stock.
4. Type of Property Securing the Loans in the Portfolio Continues to
Adjust. At first quarter end in 1996 and 1995, 83% and 82% respectively,
of the loans in the portfolio were secured by first liens on real property.
However, of the $983,125 in loan purchased in the first six months of 1996,
37% were in first mortgage loans, 30% were in second mortgage loans and 33%
were mobile home combinations, continuing the trend established in 1995,
when 10% were in first mortgage loans, 46% were in second mortgage loans
and 44% were in mobile home combinations. The mobile homes are also
referred to as factory made homes that are affixed to the land that is
owned by the borrower in which the Company has a first lien. The borrower
generally elects to have the factory made home taxed as part of the real
estate, in order for them to receive more favorable tax treatment. The
Company expects that 15% of the portfolio will be secured by mobile home
combinations at year end 1996.
5. Gross Interest Yields decreased in 1996 YTD as compared to 1995 YTD.
The gross interest yields were down in 1996 as compared to 1995. The
annualized yield on average total loans for the first six months in 1996
was 13.08%, down from 14.87% in 1995. The gross interest yield on average
commercial loans was 10.10% in 1996 compared to 15.74% in 1995. This
decrease is partly due to the increase in nonearning loans in 1996 as
compared to 1995. The gross interest yield on average residential loans
was 16.06% in 1996 compared to 13.95% in 1995. Overall, 23.71% of the
total loans in 1996 were nonearning compared to 16.09% in 1995. The Board
of Directors has directed management to underwrite loan acquisitions more
conservatively and to more aggressively pursue collection on nonearning
loans. This effort is expected to bring nonearning loans back into the 10%
to 20% level deemed acceptable to the Company on the current portfolio.
6. Real Estate Owned by the Company Increased in 1996. Real estate held for
sale increased from $723,160 at June 30, 1995, to $1,224,458 at June 30,
1996. This increase was the direct result of acquiring real estate
properties through a more aggressive collection policy. The properties are
currently listed for sale and management believes the carrying values are
expected to be fully recoverable through the net proceeds of the sale of
the properties. Management expects that the real estate owned by the
Company will continue to increase as a result of the increased collection
efforts. The Company expects to post gains on the sales of real estate in
the subsequent quarters of 1996, similar to past years.
7. Provision for Loan Losses Decreased Slightly in 1996 YTD. The
allowance for loan and real estate losses charged to expense in the First
and Second quarters of 1996 was $15,000 compared to $38,000 in 1995. The
allowance for losses at June 30, 1996 was $97,120 as compared to $104,768
in 1995. This represents .88% and 1.10% respectively, of the loans and
real estate owned portfolio balance. The Company policy is to
systematically review the amount of the reserve on a quarterly basis and
take appropriate action, based upon the performance of the portfolio and
current economic conditions. (See "Special Dividends Policy" section).
8. Total Expenses decreased in 1996 YTD as compared to 1995 YTD. Total
expenses, as a percentage of average assets, was 1.21% during the first six
months of 1996 as compared to 1.62% in 1995. Management fees are the
largest expense and it varies with the size of the portfolio. Management
fees increased by $11,280. All other costs have been controlled. The
Company expects that by year end 1996, total expenses to be consistent with
1995 and 1994.
RETURN OF ASSETS, EQUITY AND EQUITY TO ASSETS RATIO. The following net
returns were realized during the first six months of 1996 and for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Year ended
Six Months Ended December 31
June 30, 1996 1995 1994
----------------- ---- ----
<S> <C> <C> <C>
Return on Assets*
(net income divided by average
total assets) 9.57% 9.79% 10.74%
Return on Equity*
(net income divided by average
equity) 9.70% 9.93% 10.94%
Equity to Assets**
(average equity divided by
average total assets) 98.69% 98.56% 98.11%
</TABLE>
*The return on assets and return on equity for 1996 and 1995 were lower
than in 1994, primarily as a result of nonearning loans and nonearning real
estate owned.
**The equity to asset ratio continues to increase in 1996 but at a slower
rate than in 1995. This is consistent with Managements's present policy to
finance growth with equity, rather than debt.
PLAN FOR THE FUTURE. Since the Company has operated profitably in the
market, it has no plans to materially alter any of its operating policies
or procedures. The Company is committed to continue to offer its stock for
sale to the public for the foreseeable future. The Company has no debt,
except for accrued expenses caused by the accrual method of accounting
which are promptly paid when due. 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. The
Company has no plan for leveraged financing and is not dependant upon any
bank or financial institution to provide for its liquidity.
In the future, the Company has analyzed and continues to analyze the
consumer need for loans consistent with the Company's investment policies.
At present and for the foreseeable future, the local economy in Eastern
Washington and Northern Idaho continues to expand at a pace similar to the
past several years. Real estate values are increasing and therefore, the
value of the security remains strong. 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.
The Company expects that the portfolio will continue to perform as it has
over the past seven (7) years. The Company further expects that all of the
proceeds from this offering will be immediately absorbed into new loans
that have been originated by CLS. In the unlikely event the amount
received from investors as a result of this offering exceeds the ability of
the Company to purchase loans from CLS, the Board of Directors has directed
the Secretary to delay acceptance of new investor's funds as necessary, in
order to limit the negative impact on the earnings of the Company.
The Company projects that new investors and existing shareholders will
invest between One Hundred and Fifty Thousand ($150,000) and Two Hundred
Thousand ($200,000) monthly based on historical experience. The Company
has sold an average of $190,000 in stock per month during this offering,
from the fourth quarter of 1993, through 1994 and 1995 and through the
second quarter of 1996. Presently, CLS has the monthly capacity to provide
the Company with up to One Million Dollars ($1,000,000) in loans that meet
the Company's investment policies. CLS has plans to increase its capacity
by opening offices in other cities in Eastern Washington, Idaho and Western
Montana in the future.
PROJECTIONS FOR OPERATIONS IN 1996 AND 1997. Projected stock sales of
between $150,000 and $200,000 per month will result in an increase in new
loans and will also improve shareholder liquidity by providing a limited
market for existing shareholders to sell their stock. The Company projects
that the average yield on the portfolio is likely to remain between 14.5%
to 15.5%. Total Expenses as a percentage of assets is anticipated to
average between 2.75% to 3.00%. Nonearning loans will stabilize between
17.5% to 20.0% of the loan portfolio. Real Estate Owned should remain
between 5% to 10% of total assets. Primary earnings and dividends
distributed per weighted average share based on $5.00 per share is
projected to be between $.45 to $.60 per share, providing investors a 9% to
12% return on their investment through quarterly dividend distributions.
CAPITALIZATION. The Company has no debt and is entirely capitalized
through the sale of its stock on the basis of $5.00 per share. (See
"Financial statements" section.)
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
DESCRIPTION OF COMPANY LOAN PORTFOLIO
GENERAL DESCRIPTION. As of December 31, 1995, the Company Loan Portfolio
was $9.5 million dollars, which consisted of 221 loans with an average
principal balance of $43,034. This compares to $8.0 million dollars,
consisting of 223 loans with an average principal balance of $35,957 as of
December 31, 1994. The weighted average interest rate was 15.56% and
15.48% at year end 1995 and 1994 respectively. The gross interest yield
was 13.50% for 1995, down from 14.45% in 1994. The gross interest yield on
average year end commercial loans was 13.63% in 1995 as compared to 15.34%
in 1994. The gross interest yield on average year end residential loans
was 13.40% in 1995 as compared to 13.88% in 1994. The nonearning loans as
a percentage of total loans were 30.00% in 1995 as compared to 15.20% in
1994. 37 loans exceeded $100,000, with the largest being $204,820. The
Company owned a 100% interest in 179 loans and a participation interest in
42 loans. Of the 42 participations, the Company owned at least a 50%
interest in 13. (See "Management Discussion and Analysis" and "Financial
Statements" sections.)
TOTAL STOCK INVESTED IN LOANS AND YIELDS FOR 1993, 1994 AND 1995. The
Company stock is primarily invested in loans with the balance in real
property acquired through the foreclosure process.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Stock $6,126,850 100.0% $8,881,189 100.0% $10,433,894 100.0%
Loan Portfolio $6,100,164 99.6% $8,018,485 90.3% $ 9,510,527 91.2%
Average Year End Yield 15.29% 14.45% 13.50%
</TABLE>
BREAKDOWN OF SECURITY FOR LOANS. As of December 31 of 1995 and 1994, 81%
and 89% respectively, of the loans were secured by first liens on real
property, with the balance secured by junior liens and first liens on
mobile homes. The following provides a breakdown of the portfolio by type
of loan.
Percentage of Total Loans
<TABLE>
<CAPTION>
Type of Real Property December 31
Securing Loans 1995 1994
- --------------------- ------ ------
<S> <C> <C>
Single & Multiple Family
Rural 22.2% 31.2%
Residential 21.5% 21.1%
Commercial 17.7% 21.2%
Developed Land 18.8% 17.7%
Mobile Homes 12.1% 6.8%
Land
Agricultural .1% .8%
Undeveloped 7.6% 1.2%
------ ------
TOTAL 100.0% 100.0%
====== ======
</TABLE>
DEFAULT STATUS. As of December 31, 1995, 33.6% of the principal balance in
loans were delinquent in payments by over 30 days, as compared to 18.91% in
1994. In some cases, a payment is accepted after the accounting close out
date (December 31 in this case) and before the Quarterly Director Meeting
or an acceptable payment plan was being adhered. Loans delinquent in
payments by over 90 days are placed in a nonaccrual status. Nonearning
loans were 30.0% and 15.2% of the principal balance of the loans in the
portfolio at year end 1995 and 1994 respectively. Some loans have pending
sales and the balance has been turned over to an attorney for collection
and to conduct a Trustee sale or Sheriff sale as appropriate.
LOAN TERM AND PAYOFF. The scheduled payments on the loans are generally
amortized over 15 to 20 years with a 5 to 7 year balloon payment. Less
than 5% of the loans in the portfolio are fully amortized over the entire
term of the loan. Typically, loans are paid off before the term ends when
the borrower is able to either sell the property or refinance the loan at a
lower rate of interest. Since 1989, the average loan is paid off in 1.8
years. Although it is not accurate to predict with significant certainty
what the average loan payoff term in the future will be, the Company
expects the present trend to continue.
MARKETING OF COMPANY OWNED REAL ESTATE. In 1994 and 1995, the Company
agreed to purchase real estate in which the loans were in default, in order
to avoid the possibility of extensive litigation. Since the loan to value
ratio was 40% of appraised value, the Company expects to make a profit over
and above the principal and interest that would have been returned had the
loans not been in default. The Company sold a portion of the property in
1995 and expects to sell the property in 1996 and 1997 and remain in
compliance with the REIT tax rules that provide the Company with its pass
through status.
INVESTMENT OBJECTIVES AND POLICIES. The Company's principal investment
objective is to acquire a portfolio of real estate collateralized loans
that will enable the Company to make quarterly distributions of dividends
to its shareholders. The gain on the disposition of real estate is only
anticipated as a secondary source of revenue in the event of a loan
default. It is the Company's policy to primarily acquire loans in which the
borrowers are, for a variety of reasons, considered high risk, and which
are secured by real estate concentrated in Eastern Washington and Northern
Idaho. The Company will generally acquire loans for a portfolio average of
$30,000 to $40,000 bearing interest rates between 12% and 18%. The loans
will generally be amortized over 15 to 20 years with a balloon payment due
in five (5) to seven (7) years.
(1) Sources of Loans. The loans have been supplied by CLS. The loans are
originated by CLS and purchased from its inventory shortly after the loan
is made. The Company purchases the entire loan or a participation interest
in the loan. If the Company purchases a participation interest, CLS sells
the remaining interest to other investors. The Company has also purchased
existing real estate secured loans, in which the discounted yield is
consistent with the Company's investment objective.
(2) Security for Loans. The Company primarily purchases loans secured by
first liens in the form of Deeds of Trust, Mortgages, Real Estate Contracts
and Mobile Homes affixed to the land. Occasionally, where appropriate and
when in its best interest, the Company has acquired some loans secured by a
junior lien. At December 31, 1995 and 1994, 81% and 89% respectively of
the loans were secured by first liens on real property. In the opinion of
management, the properties are adequately covered by insurance.
(3) Loan to Value (LTV) Guidelines. The Board of Directors approves all
loans on a quarterly basis. (See "Director Responsibilities" and "Summary
of the Loan Acquisition Process" sections). The Company's Board of
Directors has established the following maximum loan-to-value (LTV)
guidelines for the loans it acquires which have been incorporated into the
Company Bylaws at Article XIV:
<TABLE>
<CAPTION>
SECURITY MAX LTV
<C> <C>
Undeveloped land 40%
Productive farm land 50%
Substandard residential and
commercial property 60%
Quality residential property 70%
</TABLE>
(4) Investment Restrictions. The Company may not invest more than 10% of
its assets in any one loan or in loans secured by unimproved real estate,
under the rules pertaining to investments by a REIT. Loans that exceed
$200,000 of Company funds must be approved in advance. (See "Director
Responsibilities" section). The Company is prohibited from making any loan
to any member of the Board of Directors, CLS Mortgage Inc., or any of its
affiliates. For other restrictions, see the "Federal Income Tax
Considerations" section.
(5) Procedure for Enforcing Investment Policy. The Board of Directors
meets on a quarterly basis. In event that a loan is purchased from CLS
that does not conform to the Company investment policy, the Board of
Directors has the option of reversing that loan, in which case CLS would be
required to purchase the loan back from the Company. To date, this action
has not been required. There is no provision for the Board to reverse any
loan purchase after it has been approved at the quarterly meeting. (See
"Conflicts of Interest" section.)
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
DESCRIPTION OF KEY OPERATING DATA. The Company has operated profitably
since it began operations in 1989. The Company has increased its revenues
each year due to the increased sale of stock and subsequent investment in
new loans. The Company revenues are generally from interest income and the
expenses were 21.8% and 22.5% of revenues in 1995 and 1994, respectfully,
with the balance distributed to the shareholders in quarterly dividend
distributions as reflected below. (See "Financial Statements" section.)
<TABLE>
<CAPTION>
1993 % 1994 % 1995 %
-------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $811,454 100.0% $1,030,712 100.0% $1,191,518 100.0%
Expenses $152,179 18.8% $ 232,353 22.5% $ 259,513 21.8%
-------- ------ ---------- ------ ---------- ------
Income Before
Gain on Real
Estate $659,275 81.2% $ 798,359 77.5% $ 932,005 78.2%
Gain on Sale
of Real Estate $ 0 0 $ 21,808 2.0% $ 23,196 1.9%
-------- ------ ---------- ------ ---------- ------
Net Income $659,275 81.2% $ 820,167 79.5% $ 955,201 80.1%
======== ====== ========== ====== ========== ======
</TABLE>
MARKET FOR COMMON EQUITY AND RELATED TRANSACTIONS
NO PUBLIC MARKET. There is no public market for the Company's stock. The
stock has not and is not expected to be listed on any stock exchange. The
Company intends to continue to register its stock for sale and does offer a
matching service in order to facilitate shareholder liquidity. A total of
29 and 36 shareholders were able to sell 81,276 and 133,680 shares,
respectively in 1995 and 1994 to new and existing shareholders. (See
"Selling Security Holders" section.)
PRINCIPLE STOCKHOLDERS. As of December 31, 1995, there were Three Hundred
and Ninety Six (396) named shareholders on the Stock Register who
collectively own Two Million One Hundred and Two Thousand Nine Hundred
Ninety Four (2,102,994) shares. All shares have been purchased at Five
Dollars ($5.00) per share. No shares have been issued for any
consideration other than cash in U.S. Dollars. As of December 31, 1995 no
single shareholder owned more 4% of the outstanding and issued shares.
(See "Financial Statements" section.)
OWNERSHIP RESTRICTIONS. No individual may own more than 9.8% of the shares
issued by the Company without the written authorization from the Secretary
and an opinion of Counsel in order to insure continued compliance with the
requirements of IRC Section 856(h), which mandates that no five (5)
shareholders may own 50% or more of the stock of a REIT. The Secretary
may void any transaction which places the REIT tax status in jeopardy.
(See "Federal Income Tax Considerations" section.)
DISTRIBUTIONS OF DIVIDENDS. The Dividends are declared on a per share
basis and distributed quarterly within thirty (30) days after the end of
the quarter. All dividend comparisons are based on the stated value of
$5.00 per share. A person who is a shareholder for less than the entire
quarter will have the Dividend prorated according to the number of days the
person was a shareholder during the quarter. The Company intends to
distribute at least 95% of the net income earned each quarter in order to
maintain its REIT tax status. (See "Federal Income Tax Considerations"
section).
DIVIDEND OBJECTIVE AND PERFORMANCE. The Company objective is to distribute
dividends on a quarterly basis providing its shareholders with a 10% to 12%
annual return on their investment. The Company has met its objective as
reflected in the table below. The Company expects to continue to meet its
dividend objective in future quarter.
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net Income $659,275 $820,167 $955,201
Dividends Distributed $659,275 $838,873 $997,901
Dividends Per Share(1) .620 .565 .526
Return on Investment(2) 12.40% 11.30% 10.52%
</TABLE>
NOTES:
(1) Dividends per common share are based on weighted average shares
outstanding during the period.
(2) Return on shareholders investment is based on Dividends per share above
divided by the stated value of $5.00 per share.
SPECIAL DIVIDEND POLICY. The Company declared and paid 1995 and 1994
Special Dividends of $27,921 and $32,700 respectfully, which was paid in
the first quarter of the following year to Shareholders of record as of
December 31st of the previous year. The adjustment is necessary to
compensate for accrued income and expenses and to take into consideration
the fact that the general allowance for bad debts is not tax deductible.
As a REIT, the Company must distribute at least 95% of its net income,
which does not include a deduction for the general allowance for bad debts.
In 1995, the Company posted earnings per share of $.50 and distributed
dividends in the same amount as compared to 1994, when the Company actually
distributed dividends per share ($.55) in excess of book earnings per
weighted average share ($.54). (See "Dividend Objectives and Performance"
and "Financial Statements" sections.) The Company has adopted a policy of
making a Special Dividend Distribution in the first quarter after year end,
but not later than filing of its Federal Tax Return, in order to insure
compliance with the REIT tax rules.
DIVIDEND REINVESTMENT PLAN. The Company allows shareholders to receive
cash dividends or elect to "roll over" or "reinvest" their quarterly
dividends into new shares of stock and take advantage of compounding their
dividends. The shareholder receives a quarterly statement indicating the
amount of dividends that have been reinvested into new shares. The
shareholder can change the election at any time prior to the end of the
quarter. There is no policy that would prohibit a shareholder from
changing the election on a quarterly basis. The shareholder is taxed on
reinvested dividends as if the dividend had been actually paid in cash in
the year it was declared. (See "Federal Income Tax Considerations"
section). The table below reflects that more shareholders are electing to
reinvest their dividends.
<TABLE>
<CAPTION>
1993 % 1994 % 1995 %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash Dividends $391,961 59.4% $465,998 55.6% $563,006 56.4%
Reinvested Dividends $267,314 40.6% $372,875 44.4% $434,895 43.6%
-------- ------ -------- ------ -------- ------
Total Dividends $659,275 100.0% $838,873 100.0% $997,901 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
<PAGE>
SCHEDULE OF DIVIDENDS PAID AND OR ACCRUED
January 1, 1991 through June 30, 1996
<TABLE>
<CAPTION>
Shareholders
Shareholders Reinvested
Total Dividends Annualized Dividends
Dividends Paid Rate of Compounded
Paid $ Per Share Return Rate of Return
--------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Dividends (1991)
First Quarter $ 47,726 $.152 12.22%
Second Quarter 56,592 .147 11.82%
Third Quarter 82,720 .193 15.45%
Fourth Quarter 83,978 .169 13.56%
--------- ----------- ------------
1991 Dividends: $271,016 $.661 13.22% 13.88%
Dividends (1992)
First Quarter $ 80,444 $.134 10.81%
Second Quarter 87,663 .131 10.48%
Third Quarter 107,587 .139 11.19%
Fourth Quarter 150,053 .173 13.84%
--------- ----------- ------------
1992 Dividends: $425,747 $.577 11.54% 12.04%
Dividends (1993)
First Quarter $147,334 $.155 12.40%
Second Quarter 160,606 .156 12.48%
Third Quarter 154,266 .148 11.09%
Fourth Quarter 197,069 .161 12.88%
--------- ----------- ------------
1993 Dividends: $659,275 $.620 12.40% 12.99%
Dividends (1994)
Special Dividend $ 18,706 $.015 1.20%
First Quarter 191,999 .134 10.72%
Second Quarter 202,430 .138 11.04%
Third Quarter 209,812 .133 10.64%
Fourth Quarter 215,926 .125 11.00%
--------- ----------- ------------
1994 Dividends: $838,873 $.545 10.90% 11.36%
Dividends (1995)
Special Dividend $ 32,700 .018 1.44%
First Quarter 246,762 .137 10.96%
Second Quarter 256,098 .137 10.96%
Third Quarter 266,790 .138 11.04%
Fourth Quarter 195,551 .096 7.68%
--------- ----------- ------------
1995 Dividends: $997,901 .526 10.52% 10.94%
1996 Dividends YTD:
Special Dividend $ 27,921 .013 1.04%
First Quarter 268,943 .125 10.00%
Second Quarter 236,873 .108 8.64%
</TABLE>
NOTE: Dividends are declared and paid quarterly based on the weighted
average number of shares held during the quarter. See "Distribution of
Dividends" section. Special dividends are declared and paid annually to
shareholders of record as of December 31st of the previous year, to meet
the required dividend distribution based upon taxable income to maintain
the Company REIT tax status. See "Special Dividend Policy" section. All
dividend per share computations are based upon the stated value of $5.00
per share. The compounded rate of return applies to reinvested dividends
only.
<PAGE>
<PAGE>
EXECUTIVE COMPENSATION
The Company does not compensate its Officers or Directors. However, its
Officers are compensated indirectly through CLS. (See "Certain
Relationships and Related Transactions" section.)
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary prepared by Counsel to the Company, of
the material federal income tax principles applicable to the Company and
its shareholders. The summary is based on the Internal Revenue Code,
Judicial Decisions, Treasury regulations, rulings, and other administrative
interpretations, all of which are subject to change. Investors should be
aware that the Code has been revised substantially by recent legislation,
much of which remains uninterpreted. No assurance can be given that future
legislation or administrative changes or court decisions will not be
retroactive. The Company has not requested a ruling from the Internal
Revenue Service (the "Service") with respect to any of the matters
discussed below. The federal income tax provisions governing REITs are
highly complicated. An attempt has been made in this section to discuss in
detail all of the possible tax considerations applicable to the Company and
its shareholders. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN (IF
APPLICABLE) TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
SHARES OF THE COMPANY.
FEDERAL INCOME TAXATION OF THE COMPANY. The Company intends to conduct its
operations in a manner that will permit it to qualify as a REIT for federal
income tax purposes. The Company has not requested, and does not intend to
request, a ruling from the Service that it will qualify as a REIT. The
Company has filed its Federal Tax Returns claiming its election as a REIT.
The Service has not challenged nor has it audited its tax returns. The
Company filed its 1993, 1994 and 1995 Federal Tax Return, and expects to do
so in succeeding years, claiming its election as a REIT. The REIT
qualification represents the view of the Company based on Counsel's review
and analysis of existing law, which includes no controlling precedent. The
statutory requirements for the ownership of its shares, the nature of its
assets, the sources of its income and the amount of its distributions to
shareholders all must be met. While the Board of Directors and its
Advisor, CLS, intend to cause the Company to operate in such a manner that
will enable it to comply with those requirements, there can be no certainty
that such intention will be realized. Moreover, relevant law may change so
as to make compliance with one or more of the REIT requirements difficult
or impracticable. Failure to meet any of the REIT requirements with
respect to a particular taxable year could result in termination of the
Company's election to be a REIT, effective for the year of such failure and
succeeding years.
Counsel to the Company has based his opinion and legal conclusions set
forth or referred to herein upon various documents and upon representations
by its Officers and its Advisor, CLS, that; (i) the Company will operate in
compliance with the Articles of Incorporation and the Bylaws; (ii) the
Company will conduct its operations as described in this Offering Circular
and Disclosure Document; (iii) the Company will not modify its operations
so that it becomes either (a) a financial institution referred to in
Section 582(c)(5) of the Code or (b) an insurance company to which
subchapter L of the Code applies; (iv) the Company will revoke and not
subsequently elect to be treated as an S corporation, a Real Estate
Mortgage Investment Conduit, a Regulated Investment Company, or any entity
other than a REIT for federal income tax purposes; (v) the Company will
invest in Loans conforming to the Investment Policies set forth in the
Company Bylaws to the extent that acceptable loans are made available under
the Management Agreement by CLS; (vi) the Company will not invest in any
assets other than the Loans that are acquired by the Company to the extent
that the Company fails to satisfy (a) the nature of assets test described
in "Requirements for Qualification as a REIT" below or (b) the sources of
income test described in "Requirements for Qualification as a REIT" below;
(vii) the Company will satisfy the 30% income test set forth in Section
856(c)(4) of the Code; (viii) the Company will use a calendar year for
federal income tax purposes and will comply with the dividend payment and
record keeping requirements of Sections 857(a)(1) and (2) of the Code and
the Treasury regulations promulgated pursuant thereto; (ix) the Company
will properly elect to be treated as a REIT and will satisfy all relevant
filing and other administrative requirements established by the Service
that must be met in order to elect and to maintain REIT status; and (x)
the Company will have at least 100 shareholders for at least 335 days to
each full taxable year, or proportionate part of any shorter taxable year,
after its first taxable year. In addition, Counsel has assumed that (i)
during the construction phase of any construction loan, the highest
principal amount of the loan at no point will exceed the fair market value
of the land (or, in the case of a loan secured by a leasehold interest, the
fair market value of such interest) plus the reasonably estimated cost (as
of the time when the loan is made) of the improvements or developments
(other than personal property) that are to be constructed from the proceeds
of the loan and that are to secure the loan and (ii) during the permanent
phase of each loan, the fair market value of the real property securing the
Loan at no point will be less than such principal amount.
As long as the Company qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on any income or
gain that is distributed to shareholders pursuant to current Company policy
and procedures. However, any undistributed income or gain will be taxed to
the Company at the regular corporate rates. In addition, the Company may
be subject to (i) a 100% tax on certain income from any "prohibited
transaction" (i.e., sales or other dispositions of property that is stock
in trade, inventory, or held primarily for sale to customers in the
ordinary course of business), (ii) a 100% tax on the greater of the amount,
if any by which it fails the 95% income test or the 75% income test
described below, (iii) a tax at the highest corporate rate on any net
income relating to "dealer" activities with respect to foreclosure
property, (iv) a potential excise tax on a portion of any undistributed
income, and (v) a minimum tax on any items of tax preference.
If the Company fails to qualify as a REIT for any taxable year, it will be
subject to federal income tax (including any applicable minimum tax) at
regular corporate rates and will not receive a deduction for dividends paid
to shareholders. As a result, the amount of after tax earnings available
for distribution to shareholders would decrease substantially. In
addition, the Company will not be eligible to elect REIT status for the
four (4) subsequent taxable years, unless its failure to qualify was due to
reasonable cause and not to willful neglect, and certain other requirements
were satisfied. In order to renew its REIT qualification at the end of the
required four year period, the Company will be required to distribute all
of its current and accumulated earnings and profits before the end of the
period. Any such distributions will be taxable as ordinary income to
shareholders. In addition, the Company will be subject to taxation on any
unrealized gain in its assets. If the Company were to lose its REIT
status, it could liquidate over a period and in the manner that the Board
of Directors deems to be in the best interest of the shareholders, and such
liquidation likely would be completed before the Company would be eligible
to reelect REIT status.
REQUIREMENTS FOR QUALIFICATION AS A REIT. In order to qualify as a REIT,
the Company must make an election to be taxed as a REIT and satisfy a
variety of complex tests relating to its Share ownership, assets, income,
and distributions. The Company made such election on its 1991, 1992, 1993
& 1994 Federal Income Tax Returns maintaining that it qualified as a REIT.
Those tests are summarized below:
1. SHARE OWNERSHIP. The Company must have at least 100 shareholders for
at least 335 days of each full taxable year (or proportionate part of
any shorter taxable year) after its first taxable year. In addition,
no more than 50% (in Value) of the Shares may be owned, directly or
indirectly, by five (5) or fewer individuals (or certain tax exempt
entities) at any time during the second half of each taxable year of
the Company after its first taxable year. The Company's first taxable
year will begin when it acquires significant assets and begins doing
business. To assure continued compliance with the 50% diversity of
ownership requirement, the Company's Bylaws prohibit any individual
investor from acquiring, directly or indirectly, more than 9.8% of the
outstanding Shares unless the corporate secretary so approves after
making a written finding that no more than five (5) or fewer
individuals own more than 50% (ownership test) of the issued and
outstanding stock. In addition, a written Opinion of Counsel must be
on file before the Secretary can issue the stock. Treasury
regulations require the Company to maintain records of the actual
ownership of its Shares. In accordance with those regulations, the
Company has the right to demand from shareholders of record a written
statement, annually or more often, which discloses information
concerning the actual ownership of the Shares. Any record shareholder
who does not provide the Company with such information is required to
include certain specified information relating thereto in his income
tax return. No shareholder has owned more than 5% of the outstanding
and issued stock of the Company during 1991 or any succeeding year.
2. NATURE OF ASSETS. At the close of each calendar quarter, at least 75%
of the value of the Company's total assets must be represented by cash
or cash items (including certain receivables), government securities,
or "real estate assets" (i.e., interests in real property, interest in
mortgages on real property to the extent the mortgage balance does not
exceed the value of the associated real property, shares of other
qualified REITs, and, in the case of certain capital contributions to
the Company, temporary investments in stock or debt instruments during
the one year period following the Company's receipt of such capital).
The remainder of the Company's assets may be invested in virtually any
type of asset except securities of any one nongovernmental issuer in
which such securities represent more than 5% of the value of the
Company's total assets or more than 10% of the outstanding voting
securities of such issuer. A leasehold in real property constitutes
an interest in real property for purposes of the asset test. These
loans generally will qualify largely or entirely as real estate assets
under the 75% requirement. (See "Treatment of Loans Containing
Participation Features" and "3. Sources on Income" below). In
addition, to the extent that the Company's funds are not invested in
the Loans, the Advisor, CLS, will attempt to make investments that are
consistent with the 75% asset requirement. However, no such
investments have been identified, and no assurance can be given that
the Company's funds will be placed in such investments. If a REIT
holds stock in a wholly owned subsidiary meeting certain requirements,
the assets of the subsidiary are attributed directly to the parent
REIT. The Company currently does not plan to form such a wholly owned
subsidiary, although it may decide to do so in the future. If the
Company invests as a partner in a partnership, it will be deemed to
own its proportionate share of each of the partnership's assets for
purposes of the asset requirements.
If the Company inadvertently fails to satisfy the asset requirements
at the end of a calendar quarter, such a failure would not cause it to
lose its REIT status if (i) it satisfied all of the asset tests at the
close of the preceding calendar quarter and (ii) the discrepancy
between the value of the Company's assets and the standards imposed by
the asset requirements either did not exist immediately after the
acquisition of any particular asset or was not wholly or partially
caused by such an acquisition (i.e., if the discrepancy arose from
changes in the market values of its assets). If the condition
described in clause (ii) of the preceding sentence was not satisfied,
the Company still could avoid disqualification by eliminating any
discrepancy within thirty (30) days after the close of the calendar
quarter in which it arose.
3. SOURCES OF INCOME. To qualify as a REIT in any taxable year, the
Company must satisfy three distinct tests with respect to the sources
of its income: the "75% income test," the "95% income test," and the
"30% income test." The 75% income test requires that the Company
derive at least 75% of its gross income (excluding gross income from
prohibited transactions) from certain real estate related sources,
e.g. (i) interest on obligations secured by mortgages on real property
or interests in real property, (ii) certain types of rent from real
property, (iii) income or gain from real property acquired through
foreclosure or similar proceedings, (iv) gains from the sale or other
disposition of certain real property or interests in real property
that are not "dealer property" (i.e., property that is stock in trade,
inventory, or held primarily for sale to customers in the ordinary
course of business), (v) commitment fees with respect to mortgage
loans, (vi) income from stock or debt instruments that were acquired
as a temporary investment of new capital, if such income is received
or accrued during the first year after the Company receives the new
capital ("qualified temporary investment income"), (vii) dividends or
other distributions on shares of other qualified REITs, (viii)
abatements and refunds of taxes on real property, and (ix) gain from
the sale or other disposition of a real estate asset that is not a
prohibited transaction solely by reason of Section 857(b)(6) of the
Code.
In order to satisfy the 95% income test, at least an additional 20% of
the Company's gross income for the taxable year must consist of either
income that qualifies under the 75% income test or certain types of
passive income, e.g. (i) dividends from companies other than REITs;
(ii) interest on obligations that are not secured by interests in real
property; (iii) gains from the sale or other disposition of stock,
securities, or real property, if such assets are not dealer property;
and (iv) payments from certain swap or interest rate agreements
entered into by the REIT to hedge against variable rate indebtedness
incurred to acquire or carry real estate assets ("Hedging
Instruments").
The 30% income test, unlike the other income tests, prescribes a
ceiling for certain types of income. The Company may not derive more
than 30% of its gross income from the sale or other disposition of (i)
stock, securities, or Hedging Instruments held for less than one year,
(ii) dealer property that is not foreclosure property, and (iii)
certain real property (including interests in real property and
interests in real property mortgages) held for less than four years.
A leasehold in real property constitutes an interest in real property
for purposes of all of the foregoing income tests.
For purposes of the foregoing income tests, if the Company invests as
a partner in a partnership it will take into account its proportionate
share of the partnership's income items, which will retain the same
character (e.g. rent, gain from "dealer property," etc.) they have at
the partnership level. If the Company fails to meet either the 75%
income test or the 95% income test, or both, in a taxable year, it
nonetheless might continue to qualify as a REIT if its items of gross
income were properly disclosed to the Service. However, in such a
case, the Company would be required to pay a tax equal to 100% of any
excess non-qualifying income. No analogous relief is available to
REITs that fail to satisfy the 30% income test.
If any loan made by the Company were not treated, in whole or in part,
as a real estate asset by reason of the structure of the security for
such loan, the interest income therefrom would be considered
nonqualifying income for purposes of the 75% income test. However, in
the Opinion of Counsel to the Company, the loans will be treated as
real estate assets to the extent that the loan amount (i.e. the
highest principal amount outstanding during the relevant taxable year)
does not exceed the value of the associated real property (or the sum
of the land value and the reasonable estimated cost, as of the time
when the loan is made, of the related improvements during the period
in which the loan is a construction loan). (See "Treatment of Loans
Containing Participation Features" below). In the case of any loan,
made by the Company, secured by both real property and other property:
if the loan amount exceeds the value of the real property, an
apportionment of the interest income will have to be made, which may
result in some nonqualifying income for purposes of the 75% test.
4. LOANS CONTAINING PARTICIPATION FEATURES. The Company may participate
in loans with other individuals or companies. The loans are
considered as being one of debtor and creditor for federal income tax
purposes to the extent of the principal and current interest due on
the loans. The Company may share in any appreciation in the value of
the property securing the loans which will satisfy the REIT asset and
income requirements regardless of whether such feature is treated as a
separate equity interest in the properties securing the loans.
Consequently, the Participation Loans will be qualifying assets, and
the income attributable to the Participation features of such loans
will constitute qualifying incomes for purposes of the REIT asset and
income requirements. However, as described above, Opinions of Counsel
and Management are not binding on the Service and represent only
Counsel's best judgment with respect to the legal questions presented.
The Company may make any other loans with participation features only
if such features would not (i) cause the Company to be treated as a
partner of, or joint venturer, with the relevant borrower or (ii)
endanger the Company's ability to maintain its status as a REIT.
However, there can be no complete assurance that the Service will not
assert successfully a position adverse to the Company with respect to
any of the loans. If the Service were to maintain successfully that
any loan represented an equity interest in whole or in part, the
Company might fail to qualify as a REIT. (See "Requirements for
Qualification as a REIT" above).
It is contemplated that any interest from a Loan Participation feature
that is based on the gross revenues from a property securing a loan (a
"Current Participation") would qualify as "interest" for purposes of
the 75% and 95% tests because of a special rule which allows such
treatment if the interest is based on a fixed percentage or
percentages of receipts or sales. Furthermore, to the extent that a
Loan Participation feature based on the residual cash proceeds from
sale of the property securing a loan (a "Terminal Participation")
constitutes a "shared appreciation provision" (as defined in the
Code), income attributable to such a participation feature will be
treated as gain from the sale of the secured property and, if held for
less than four (4) years, would have to be taken into account in
determining whether the Company meets the 30% requirement. In the
opinion of the Company's Counsel, its current participation in the
loans will constitute interest for purposes of the 75% and 95% income
tests, and the terminal participation in the loans will constitute
shared appreciation provisions or otherwise will give rise to
qualifying gain or income for purposes of the 75% income test.
5. REQUIRED DISTRIBUTIONS. For each taxable year the Company generally
must distribute to the shareholders an amount equal to at least 95% of
the sum of its "REIT taxable income" (determined without regard to the
deduction for dividends paid and by excluding any net capital gain)
and any after tax net income from foreclosure property. "REIT taxable
income" is generally computed in the same manner as taxable income of
ordinary corporations, with several adjustments, e.g. a deduction is
allowed for dividends paid, but not for dividends received. A general
allowance for bad debts is not tax deductible, but is a generally
accepted deduction for computing net income for financial purposes.
As a result, the Company may in fact have to distribute dividends in
excess of book net income in order to preserve its REIT pass through
tax status. The foregoing distribution requirement is based on the
Company's taxable income (with various adjustments) rather than its
available cash. Therefore, while the Company expects to meet that
requirement, its ability to make the required distributions may be
impaired if it has insufficient cash flow or otherwise has excessive
noncash income or nondeductible expenditures. Furthermore, the
distribution requirement may be determined not to have been met in a
given year be reason of the Service later successfully challenging the
deductibility of a Company expenditure or the Company's computation of
the amount of original issue discount on a loan. However, in such
event, it generally will be possible to cure the failure to meet the
distribution requirement with a "deficiency dividend," as discussed
below.
In general, a distribution must be made during the taxable year to
which it relates. However, any dividend that is declared by the
Company in the fourth calendar quarter of the year and payable to
shareholders of record as of a specified date in one of such months
will be deemed to have been paid by the Company and received by
shareholders on the record date, if it actually is paid before
February 1, of the following calendar year. Furthermore, if the
Company declares a dividend before the due date for filing its Federal
Income Tax Return for the taxable year and actually pays the dividend
before the first regular dividend made during the year following that
taxable year, it may elect, under certain circumstances, to treat the
first dividend as relating to the earlier taxable year. Shareholders
would recognize the income from such dividend in the year of
distribution, regardless of the Company's election. If the Company
fails to satisfy the distribution test for a taxable year as a result
of an adjustment in certain of its items of income, gain, or deduction
by a court or the Service, the Company generally will be permitted to
remedy such a failure by paying (i) a deficiency dividend to
shareholders and (ii) interest and a penalty to the Treasury.
The Company intends to meet all of the foregoing qualification tests
and requirements. However, if it fails to meet one or more of them
and such failure is not mitigated, its election to be a REIT will
terminate, effective for the year of such failure and all succeeding
years. Furthermore, while the Company has no intention of doing so,
it may revoke its election voluntarily. In the event of any such
termination or revocation, a new election may not be made by the
Company for any taxable year prior to the fifth taxable year following
the year of termination or revocation.
TAXATION OF THE SHAREHOLDERS. Company distributions (dividends) declared
in any year (including (i) distributions that are reinvested automatically
pursuant to the Dividend Reinvestment Plan and (ii) distributions received
in such year that are taken into account in computing the Company's
dividends paid deduction for a prior year) will be taxable as ordinary
dividend income to the shareholders in the year they are declared, e.g.
fourth quarter dividends declared but actually paid in January are taxable
to the shareholder in the year declared, except to the extent they are
designated by the Company as capital gain dividends or to the extent they
exceed the current or accumulated earnings and profits of the Company.
Distributions designated as capital gain dividends will be taxable to the
shareholders as long term capital gain in an aggregate amount not to exceed
the Company's actual net capital gain for the year. Distributions (other
than capital gain dividends) that exceed current or accumulated earnings
and profits of the Company will constitute a nontaxable return of capital
to the shareholders and will reduce the tax basis of each shareholder in
his shares. Any such distribution in excess of the shareholder's tax basis
in his shares will be taxable to the shareholder as a capital gain from the
sale of the shares (unless the shares constitute "dealer property" of the
shareholder, in which case such amount will constitute ordinary income).
Corporate shareholders should note that if the Company acquires and
subsequently disposes of any equity interest in real property, they may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Furthermore, none of the distributions from the Company received
by corporate shareholders, whether characterized as ordinary income or
capital gain, will qualify for the dividends received deduction generally
available to corporations.
Although the Company's income generally will be recognized by the
shareholders, rather than by the Company, any net loss incurred by the
Company in a particular taxable year is not deductible by the shareholders
on their personal income tax returns. Instead, such loss would be carried
over by the Company for potential offset against its future income (subject
to certain limitations). Furthermore, if a shareholder had any losses from
one or more passive activities in a particular year (such as losses from
certain types of limited partnerships in which the shareholder is a limited
partner), the taxable portion of the distributions received by the
shareholder from the Company in that year may not be offset against such
losses because the income and gain from his investment in the Company will
constitute portfolio income (or perhaps active income if the Shares are
"dealer property" of the shareholder) for purposes of the passive activity
loss rules. It should be noted that if a shareholder receives capital gain
dividends with respect to Shares and subsequently recognizes a loss on the
sale or exchange of such Shares prior to holding them for more than six (6)
months (determined with reference to certain specified holding-period
rules), such loss will be treated as long term capital loss up to the
amount of the previously received capital gain dividends.
The alternative minimum tax is designed to impose additional federal income
tax on persons whose regular taxable income is substantially lower than
their economic income because of their use of incentive (and certain other
favorable) tax provisions. The Code authorizes regulations that apportions
income and expense adjustments affecting the computation of the alternative
minimum tax between REITs and their shareholders. The Company does not
expect to generate a significant amount of such adjustments. However, the
Company may be required to withhold and remit to the Treasury 31% of the
dividends paid to any shareholder who (i) fails to furnish the Company with
a correct taxpayer identification number, (ii) has under reported dividend
or interest income to the service, or (iii) fails to certify to the Company
that he is not subject to backup withholding. An individual's taxpayer
identification number is his social security number.
TAXATION OF SHAREHOLDERS ON DISPOSITION OF SHARES. In general, any gain or
loss realized upon a taxable disposition of Shares of the Company by a
shareholder who is not a dealer in securities will be treated as long term
capital gain or loss if the Shares have been held for more than twelve (12)
months and otherwise as short-term capital gain or loss. However, any loss
realized upon a taxable disposition of Shares held for six (6) months or
less will be treated as long term capital loss to the extent of any capital
gain dividends received with respect to such Shares. All or a portion of
any loss realized upon a taxable disposition of Shares of the Company may
be disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within thirty (30) days before or
after the disposition.
CAPITAL GAINS AND LOSSES. A capital asset generally must be held for more
than one (1) year in order for the gain of loss derived from its sale or
exchange to be treated as long term capital gain or loss. Although
generally the tax rate differential between a capital gain and ordinary
income was eliminated by the Tax Reform Act of 1986, the rules regarding
the deduction of capital losses have not been materially altered. Thus,
capital losses not offset by capital gains may be deducted against an
individual's ordinary income only up to a maximum annual deduction of Three
Thousand Dollars ($3,000). Unused capital losses may be carried forward.
All net capital gain of a corporate taxpayer is subject to tax at ordinary
corporate rates. A corporate taxpayer can deduct capital losses only to
the extent of capital gains, with unused losses being carried back three
(3) years and forward five (5) years. President Bush had proposed to
reinstate preferential treatment for capital gains and President Clinton
may propose the same, however, there can be no assurance that Congress
will enact any such proposal.
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
MCFARLAND & ALTON P.S.
Certified Public Accountants
& Business Consultants
Independent Auditor's Report
----------------------------
Board of Directors and Stockholders
Opportunity Management Company, Inc.
Spokane, Washington
We have audited the accompanying statements of condition of Opportunity
Management Company, Inc. as of December 31, 1995 and 1994, and the related
statements of income, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of
Opportunity Management Company, Inc.'s management. Our responsibility is
to express an opinion of these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Opportunity Management
Company, Inc. as of December 31, 1995 and 1994, and the results of its
operations, changes in stockholders' equity, and its cash flows for the
years then ended in conformity with generally accepted accounting
principles.
As described in Note 2 to the financial statements, the Company changed its
method of accounting for impaired loans effective January 1, 1995, to
conform with Statement of Financial Accounting Standards Nos. 114 and 188.
Spokane, Washington
March 1, 1996
1800 Seafirst Financial Center 509-747-2600
Spokane, WA 99201 1-800-888-4065
FAX 509-624-5129<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
STATEMENTS OF CONDITION
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
-------------------------
1995 1994
-------------------------
<S> <C> <C>
Loans receivable, earning (Note 3) $ 6,652,683 $6,802,942
Loans receivable, nonearning (Note 3) 2,857,844 1,215,543
------------ -----------
9,510,527 8,018,485
Real estate held for sale (Note 3) 922,526 662,874
------------ -----------
10,433,053 8,681,359
Allowance for losses (Note 3) (106,554) (68,275)
------------ -----------
NET LOANS AND REAL ESTATE 10,326,499 8,613,084
Cash 89,980 263,429
Other assets 4,124 62,054
Accrued interest receivable 84,105 73,213
------------ -----------
TOTAL ASSETS $10,504,708 $9,011,780
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 26,968 $ 17,828
Accrued cash dividends payable to stockholders 105,252 131,469
------------ -----------
TOTAL LIABILITIES 132,220 149,297
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000 shares
authorized; 1995, 2,102,994 shares; 1994,
1,776,238 shares, issued and outstanding 10,433,894 8,881,189
Undistributed income (expense) (61,406) (18,706)
------------ -----------
10,372,488 8,862,483
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,504,708 $9,011,780
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
-------------------------
1995 1994
-------------------------
REVENUES
<S> <C> <C>
Interest income on residential loans $ 673,135 $ 599,729
Interest income on commercial loans 510,090 420,383
Interest income on bank accounts 5,690 4,296
Other income 2,603 6,304
------------ -----------
TOTAL REVENUES 1,191,518 1,030,712
------------ -----------
EXPENSES
Management fees - related party (Note 5) 144,142 114,903
Amortization of organizational costs 12,965 22,199
Provision for loan and real estate losses 48,000 49,000
Accounting and auditing expenses 25,418 22,055
Legal expenses - related party (Note 5) 15,316 14,840
Business and occupational taxes 12,293 8,874
Other expense 1,379 482
------------ -----------
TOTAL EXPENSES 259,513 232,353
------------ -----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 932,005 798,359
Gain on sale of real estate (Note 4) 23,196 21,808
------------ -----------
NET INCOME (Notes 4 and 5) $ 955,201 $ 820,167
============ ===========
Primary earnings per common share $ 0.50 $ 0.54
------------ -----------
Weighted average shares outstanding 1,928,686 1,524,529
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Undistributed Total
Income Stockholders'
Shares Amount (Expense) Equity
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 1,225,370 $ 6,126,850 $ - $ 6,126,850
Net income - - 820,167 820,167
Issuance of common stock 476,293 2,381,464 - 2,381,464
Dividends reinvested in stock 74,575 372,875 (372,875) -
Cash dividends - - (465,998) (465,998)
--------- ----------- ------------- -----------
Balance, December 31, 1994 1,776,238 8,881,189 (18,706) 8,862,483
Net income - - 955,201 955,201
Issuance of common stock,
net of stock issuance
costs (Note 5) 239,777 1,117,810 - 1,117,810
Dividends reinvested in stock 86,979 434,895 (434,895) -
Cash dividends - - (563,006) (563,006)
--------- ----------- ------------- -----------
Balance, December 31, 1995 2,102,994 $10,433,894 $ (61,406) $10,372,488
========= =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
-----------------------
1995 1994
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 955,201 $ 820,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organizational costs 12,965 22,199
Provision for loan and real estate losses 48,000 49,000
Amortization of discounts (2,516) (5,434)
Gain on sale of real estate (23,196) (21,808)
(Increase) decrease in:
Accrued interest receivable (10,892) (16,485)
Increase (decrease) in:
Accrued expenses 9,165 6,147
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 988,727 853,786
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (4,830,281) (4,925,633)
Principal reductions and maturities of loans 3,167,238 2,429,710
Proceeds from sale of real estate owned 92,332 39,145
Purchases of real estate owned (105,478) -
Advances of costs associated with other real estate (59,539) (69,597)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (1,735,728) (2,526,375)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 1,198,883 2,381,464
Payment of stock issuance and registration costs:
Related party (31,539) (7,210)
Other (4,569) (600)
Dividends paid to stockholders (589,223) (462,746)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 573,552 1,910,908
----------- -----------
INCREASE (DECREASE) IN CASH (173,449) 238,319
Cash, beginning of year 263,429 25,110
----------- -----------
Cash, end of year $ 89,980 $ 263,429
=========== ===========
</TABLE>
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 3, 1995 AND 1994
<TABLE>
<CAPTION>
-----------------------
1995 1994
-----------------------
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
<S> <C> <C>
Issuance of common stock for stockholder
reinvestment of dividends $ 434,895 $ 372,875
----------- -----------
Acquisition of real estate in settlement
of loans $ 215,862 $ 588,418
----------- -----------
Charge offs against the allowance $ 10,210 $ 31,000
----------- -----------
New contracts made in connection with sale of
real estate $ 45,200 $ 6,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Formation of the Company:
Opportunity Management Company, Inc. was incorporated in the state of
Washington on October 1, 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 allowances may be necessarily 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 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
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
review of loans which includes consideration of actual net loan loss
experience, changes in the size and character of the loan portfolio, and
evaluation of current economic conditions.
Valuation allowances are provided for foreclosed real estate held for
resale or purchased real estate held for resale when the net realizable
value of the property is less than its costs. Real estate held for sale is
carried at the lower of cost (recorded amount at the date of foreclosure or
acquisition) 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.
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 collectibility
of the sales price is reasonably assured and the earnings process is
virtually complete. When a sale does not meet the requirements for income
recognition, gain is deferred until those requirements are met.
Loan 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
(Notes 4 and 8).
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
The Company offers a dividend reinvestment program (rollover dividend
program) whereby the stockholders have the option of receiving dividends in
cash or alternatively of using their dividends to purchase new shares 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:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Cash dividends paid $ 589,223 $ 462,746
Dividends reinvested in stock 434,895 372,875
Accrued dividends, end of year 105,252 131,469
Accrued dividends, beginning of year (131,469) (128,217)
---------- ----------
Dividends on common stock 997,901 838,873
Special dividends accrued in excess of net income (32,700) (18,706)
Regular dividends paid in excess of net income (10,000) -
---------- ----------
NET INCOME $ 955,201 $ 820,167
========== ==========
Cash dividends - accrual basis $ 563,006 $ 465,998
Dividends reinvested in stock - accrual basis 434,895 372,875
Dividends accrued in excess of net income (32,700) (18,706)
Regular dividends paid in excess of net income (10,000) -
---------- ----------
NET INCOME $ 955,201 $ 820,167
========== ==========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year.
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. 188. 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 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).
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at December 31, 1995 and 1994, consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
First mortgage loans $7,676,367 $7,151,471
Second mortgage loans 683,511 326,002
Loans secured by personal property 1,150,649 541,012
---------- ----------
$9,510,527 $8,018,485
========== ==========
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 December 31, 1995 and 1994, are as
follows:
1995 1994
---------- ----------
Commercial $1,684,851 $1,699,102
Single and multiple family residential 2,049,210 1,691,913
Rural single and multiple family residential 2,106,955 2,505,340
Mobile homes 1,150,649 541,012
Farm/agricultural 9,758 64,299
Developed land 1,789,376 1,418,793
Undeveloped land 719,728 98,026
---------- ----------
$9,510,527 $8,018,485
========== ==========
Real estate held for sale at December 31, 1995 and 1994, consists of the
following:
1995 1994
---------- ----------
Commercial $ 127,650 $ -
Single family residential 45,501 29,909
Rural single family residential 157,629 -
Developed land 591,746 632,965
---------- ----------
$ 922,526 $ 662,874
========== ==========
An analysis of the changes in the allowance for losses is as follows:
1995 1994
---------- ----------
Balance, beginning of year $ 68,275 $ 50,000
Provision charged to expense 48,000 49,000
Recoveries 1,181 275
Charge off of losses on sale of real estate owned (10,902) (31,000)
----------- -----------
Balance, end of year $ 106,554 $ 68,275
=========== ===========
/TABLE
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale (Continued)
Impairment of loans having a recorded investment of $2,857,844 at December
31, 1995, 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 December 31, 1995. Interest income on impaired loans of
$245,934 was recognized for cash payments received in 1995. The average
impaired loans during 1995 was $1,593,682.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $2,857,844 at December 31, 1995, and $1,215,543 at December 31,
1994. If interest on those loans had been accrued, such income would have
approximated $229,517 for 1995 and $119,153 for 1994. Interest income on
those loans, which is recorded only when received, amounted to $245,934 in
1995 and $84,530 in 1994.
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>
1995 1994
---------- ----------
<S> <C> <C>
Income before taxes on income $ 955,201 $ 820,167
Federal income taxes at statutory rates (324,768) (278,857)
---------- ----------
Net Income $ 630,433 $ 541,310
========== ==========
</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 years
ended December 31, 1995 and 1994. 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. A special dividend of $32,700 and $18,706 was paid in 1995 and
1994 (Note 8).
Note 5. Related Party Transactions
Management fees:
CLS Mortgage, Inc. provides office space, administrative, accounting,
computer, and other services to Opportunity Management Company, Inc. For
the years ended December 31, 1995 and 1994, $144,142 and $114,903,
respectively, were paid for these services in accordance with a management
agreement. For 1995 and 1994 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. The President and his wife own .76% of the common
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 5. Related Party Transactions (Continued)
stock of the Opportunity Management Company. The two sole stockholders
directly and indirectly own 3.23% of the common stock of Opportunity
Management Company, Inc. and 100% of the stock of CLS Mortgage, Inc. at
December 31,1995.
CLS Escrow provides Opportunity Management Company, Inc. with escrow
services. The stockholders of CLS Mortgage, Inc. collectively own 50% of
the outstanding shares of CLS Escrow. CLS Escrow closes and services a
substantial portion of the loans purchased and owned by the Company, for
which it received $76,344 and $55,773 in 1995 and 1994, respectively, in
closing fees paid by the borrowers from loan proceeds. CLS Escrow also
received $55,161 and $46,624 in escrow and collection fees paid by the
borrowers from loan proceeds.
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 years ended
December 31, 1995 and 1994, CLS Mortgage, Inc. received $406,888 and
$523,762, respectively, in loan placement fees (Note 1).
During 1995 and 1994, the Company incurred charges for legal services that
were either capitalized, expensed, or deducted from stock proceeds as stock
issuance costs of approximately $50,212 and $22,650, respectively, from a
law firm in which a stockholder/director (owning .88% and .96% of the
outstanding stock at December 31, 1995 and 1994, respectively) of the
Company is a general partner. In addition, during 1995 the Company
financed a loan from which approximately $51,598 was paid to this related
party on behalf of the borrower for legal fees incurred from 1992 through
1995. The legal fees were secured by a deed of trust on the property used
as collateral for the loan.
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 programming costs this procedure would require. All
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6. Fair Value of Financial Instruments (Continued)
loans are real estate loans with fixed interest rates, which range from 12-
18%, as of December 31, 1995. The approximate maturities of the loan
portfolio are as follows:
<TABLE>
<CAPTION>
Principal
Carrying Percentage
Amount of Portfolio
---------- ------------
<S> <C> <C>
1996 $ 910,948 10%
1997 445,085 5
1998 1,088,452 11
1999 2,300,319 24
2000 3,379,008 36
2001 63,510 1
2002 121,467 1
2003 112,532 1
Thereafter 1,089,206 11
---------- ------------
$9,510,527 100%
========== ============
</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. As of December 31, 1995, no stockholder has
exercised the right to rescind their purchase.
Note 8. Subsequent Event
Special dividend:
Subsequent to December 31, 1995, the Company declared a special dividend of
$27,921 in order to distribute 95% of its 1995 taxable income to its
stockholders (Note 4).
<PAGE>
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF CONDITION
JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Loans receivable, earning (Note 3) $ 7,493,556 $7,417,280
Loans receivable, nonearning (Note 3) 2,329,298 1,422,449
------------ -----------
9,822,854 8,839,729
Real estate held for sale (Note 3) 1,224,458 723,160
------------ -----------
11,047,312 9,562,889
Allowance for losses (Note 3) (97,120) (104,768)
------------ -----------
NET LOANS AND REAL ESTATE 10,950,192 9,458,121
Cash 7,117 68,638
Other assets 1,874 51,339
Accrued interest receivable 96,669 81,506
------------ -----------
TOTAL ASSETS $11,055,852 $9,659,604
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 16,820 $ 14,747
Accrued cash dividends payable to stockholders 134,192 143,301
------------ -----------
TOTAL LIABILITIES 151,012 158,048
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000 shares
authorized; 1996, 2,213,048 shares; 1995,
1,910,952 shares, issued and outstanding 10,984,167 9,552,962
Undistributed income (expense) (79,327) (51,406)
------------ -----------
10,904,840 9,501,556
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,055,852 $9,659,604
=========== ===========
/TABLE
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUES
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Interest income on residential loans $ 388,780 $ 329,186
Interest income on commercial loans 243,613 297,500
Interest income on bank accounts 7,691 2,913
Other income 5,811 1,161
------------ -----------
TOTAL REVENUES 645,895 630,760
------------ -----------
EXPENSES
Management fees - related party (Note 5) 80,977 69,157
Amortization of organizational costs 2,249 10,715
Provision for loan and real estate losses 15,000 38,000
Accounting and auditing expenses 14,870 14,113
Legal expenses 8,511 12,840
Business and occupational taxes 4,336 5,981
Real estate owned expenses 1,625 -
Other expense 2,511 671
------------ -----------
TOTAL EXPENSES 130,079 151,477
------------ -----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 515,816 502,479
Gain on sale of real estate (Note 3) - 23,196
------------ -----------
NET INCOME (Notes 4 and 5) $ 515,816 $ 479,283
============ ===========
Primary earnings per common share $ 0.23 $ 0.27
Weighted average shares outstanding 2,195,414 1,845,941
/TABLE
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF INCOME
QUARTERS ENDED JUNE 30, 1996 AND 1995
REVENUES
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Interest income on residential loans $ 173,886 $ 170,003
Interest income on commercial loans 118,839 152,355
Interest income on bank accounts 4,478 1,690
Other income 1,134 592
------------ -----------
TOTAL REVENUES 298,337 324,640
------------ -----------
EXPENSES
Management fees - related party (Note 5) 40,497 35,182
Amortization of organizational costs 1,125 5,358
Provision for loan and real estate losses 0 25,000
Accounting and auditing expenses 10,451 11,113
Legal expenses 5,108 12,284
Business and occupational taxes 2,368 3,071
Real estate owned expenses 1,625 -
Other expense 1,288 212
------------ -----------
TOTAL EXPENSES 62,462 92,220
------------ -----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 235,875 232,420
Gain on sale of real estate (Note 3) - 23,196
------------ -----------
NET INCOME (Notes 4 and 5) $ 235,875 $ 255,616
============ ===========
Primary earnings per common share $ 0.11 $ 0.14
Weighted average shares outstanding 2,239,776 1,890,203
/TABLE
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Undistributed Total
Income Stockholders'
Shares Amount (Expense) Equity
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 2,102,994 $10,443,894 $ (61,406) $10,372,488
Net income - - 515,816 515,816
Issuance of common stock 63,301 316,505 - 316,505
Dividends reinvested in stock 46,753 233,768 (233,768) -
Cash dividends - - (299,969) (299,969)
--------- ----------- ------------- -----------
Balance, June 30, 1996 2,213,048 10,984,167 $ (79,327) $10,904,840
========= =========== ============= ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 515,816 $ 502,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organizational costs 2,249 10,715
Provision for loan and real estate losses 15,000 38,000
Amortization of discounts (5,759) (1,127)
Gain on sale of real estate - (23,196)
(Increase) decrease in:
Accrued interest receivable (12,564) (8,293)
Increase (decrease) in:
Accrued expenses (10,148) (3,081)
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 504,594 515,497
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans net of reductions and
maturities - (801,107)
Purchases of new loans (1,997,410) -
Principal reductions and maturities of loans 1,398,687 -
Proceeds from sale of real estate owned 4,978 58,597
Purchases of real estate owned - (105,478)
Advances of costs associated with other real estate (37,449) (10,737)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (631,194) (858,725)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 316,505 443,572
Dividends paid to stockholders (272,768) (295,135)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 43,737 148,437
----------- -----------
INCREASE (DECREASE) IN CASH (82,863) (194,791)
Cash, January 1 89,980 263,429
----------- -----------
Cash, June 30 $ 7,177 $ 68,638
=========== ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-----------------------
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
<S> <C> <C>
Issuance of common stock for stockholder
reinvestment of dividends $ 233,768 $ 228,201
----------- -----------
Charge offs against the allowance $ 24,291 $ 2,287
----------- -----------
New contracts made in connection with sales of
real estate owned $ 85,490 $ 18,250
----------- -----------
</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 1, 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 allowances may be necessarily 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 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<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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.
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 collectibility
of the sales price is reasonably assured and the earnings process is
virtually complete. When a sale does not meet the requirements for income
recognition, gain is deferred until those requirements are met.
Loan 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
(Notes 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
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash dividends paid $ 272,768 $ 295,135
Dividends reinvested in stock 233,768 228,201
Accrued dividends, June 30 134,192 143,301
Accrued dividends, January 1 (105,252) (131,469)
---------- ----------
Dividends on common stock 535,476 535,168
Net effect of fractional shares (1,739) 11
Special dividends accrued in excess of net income (27,921) (32,700)
Regular dividends paid in excess of net income (10,000) -
---------- ----------
NET INCOME $ 515,816 $ 502,479
========== ==========
Cash dividends - accrual basis $ 299,969 $ 306,978
Dividends reinvested in stock - accrual basis 233,768 228,201
Dividends accrued in excess of net income (27,921) (32,700)
Regular dividends paid in excess of net income (10,000) -
---------- ----------
NET INCOME $ 515,816 $ 502,479
========== ==========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year.
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. 188. 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 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).
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at June 30, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
First mortgage loans $8,198,833 $7,242,205
Second mortgage loans 401,263 699,675
Loans secured by personal property with land 1,222,758 897,849
---------- ----------
$9,822,854 $8,839,729
========== ==========
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 June 30, 1996 and 1995, are as
follows:
1996 1995
---------- ----------
Commercial $1,916,638 $1,782,584
Single and multiple family residential 2,372,955 1,868,505
Rural single and multiple family residential 1,847,949 1,935,950
Mobile homes 1,222,758 897,849
Farm/agricultural 79,692 19,788
Developed land 1,784,247 1,453,267
Undeveloped land 598,615 881,786
---------- ----------
$9,822,854 $8,839,729
========== ==========
Real estate held for sale at June 30, 1996 and 1995, consists of the
following:
1996 1995
---------- ----------
Commercial $ 142,695 $ -
Rural single family residential 346,259 111,424
Developed land 735,504 611,736
---------- ----------
$1,224,458 $ 723,160
========== ==========
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 15,000 38,000
Recoveries 204 780
Charge-off of losses on sale of real estate owned (24,638) (2,287)
----------- -----------
Balance at June 30 $ 97,120 $ 104,768
=========== ===========
/TABLE
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale (Continued)
Impairment of loans having a recorded investment of $2,329,298 at June 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 June 30, 1996. Interest income on impaired loans of $64,544
was recognized for cash payments received in 1996. The average impaired
loans during the second quarter of 1996 was $2,593,571.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $2,329,298 at June 30, 1996, and $1,422,449 at June 30, 1995.
If interest on those loans had been accrued, such income would have
approximated $273,601 for the quarter ended June 30, 1996 and $137,245 for
the quarter ended June 30, 1995. Interest income of those loans, which is
recorded only when received, amounted to $64,544 for June 30, 1996 and
$45,840 for June 30, 1995.
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 $ 515,816 $ 502,479
Federal income taxes at statutory rates (175,377) (170,843)
---------- ----------
Net Income $ 340,349 $ 331,636
========== ==========
</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 June 30, 1996 and 19954. 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. 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 June 30, 1996 and 1995, $80,977 and $69,157,
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
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 5. Related Party Transactions (Continued)
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 .67% of the common stock of the Company.
The two sole stockholders directly and indirectly own 3.43% of the common
stock of Opportunity Management Company, Inc. and 100% of the stock of CLS
Mortgage, Inc. at June 30, 1996.
CLS Escrow provides Opportunity Management Company, Inc. with escrow
services. 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 June
30, 1996 and 1995, Opportunity Management Company, Inc. paid $215,784 and
$274,187, 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 programming costs this procedure would require. All
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 6. Fair Value of Financial Instruments
loans are real estate loans with fixed interest rates, which range from 12-
18%, as of June 30, 1996. The approximate maturities of the loan portfolio
are as follows:
<TABLE>
<CAPTION> Principal
Carrying Percentage
Amount of Portfolio
---------- ------------
<S> <C> <C>
1996 $ 864,074 9%
1997 384,768 4
1998 747,631 8
1999 1,695,592 17
2000 2,432,867 25
2001 1,760,468 18
2002 87,156 1
2003 160,275 1
Thereafter 1,690,023 17
---------- ------------
$9,822,854 100%
========== ============
</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. As of June 30, 1996, no stockholder has
exercised the right to rescind their purchase.
<PAGE>
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus. If given or
made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an
offer to sell securities in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof.
________________________
AVAILABLE INFORMATION
The Company will provide without charge to any person who receives a
Prospectus, upon written or oral request of such person, a copy of any of
the information that was incorporated by reference in the Prospectus (not
including Exhibits to the information that is incorporated by reference
unless the Exhibits are themselves specifically incorporated by reference).
In order to receive such information, please contact the following
department:
OPPORTUNITY MANAGEMENT CO. INC.
ATTN: SHAREHOLDER RELATIONS
P.O. BOX 141037
SPOKANE, WASHINGTON 99214
(509) 928-6545
All questions and requests for information by potential investors should be
directed to the address and telephone number noted above. Investment in a
small business involves a high degree of risk, and investors should not
invest any funds in this offering unless they can afford to lose their
investment in its entirety.
Each shareholder is provided with a quarterly management report that
includes a financial summary for the past quarter, the status of the loan
portfolio and the dividend approved by the Board of Directors for the
Quarter. The Company also provides the shareholders with an annual report
which contains the audited financial statements and the notice of the
annual shareholders meeting. The Company has and does intend to comply
with the North American Securities Administrators Association (referred to
as "NASAA" herein) guidelines adopted for the management and operation of
real estate investment trusts (referred to as "REIT" herein). In addition,
the Company must comply with the applicable provisions of the Internal
Revenue Code in order to maintain its favorable tax pass through status.
INVESTORS SHOULD CAREFULLY REVIEW THIS PROSPECTUS, PARTICULARLY WITH REGARD
TO THE RISKS (SEE "RISK FACTORS") AND CONFLICTS OF INTEREST, (SEE
"CONFLICTS OF INTEREST") BEFORE MAKING A DECISION TO INVEST. IN MAKING AN
INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE
ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED.
<PAGE>
<PAGE>
PART II
This section contains information, list of Exhibits, undertakings and
signatures required to be set forth in Part II of Form SB-2.
Table of Contents
-----------------
Indemnification of Directors and Officers . . . . . . . . 91
Other Expenses of Issuance and Distribution . . . . . . . 91
Recent Sales of Unregistered Securities . . . . . . . . . 92
Exhibits Index . . . . . . . . . . . . . . . . . . . . . 93
Undertakings . . . . . . . . . . . . . . . . . . . . . . 105
Signatures . . . . . . . . . . . . . . . . . . . . . . . 106
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company has amended its
Articles of Incorporation regarding the indemnity of its Directors. The
Articles of Amendment were filed with the Secretary of State in and for the
State of Washington, on April 17, 1991, Registration Statement page 86, and
paragraph 3.12 of the Bylaws, Registration Statement page 123.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Company has projected
that the expenses of Issuance and Distribution will be as follows:
Actual YTD Projected
---------- ---------
Legal Fees $ 72,862 $ 92,862
Accounting Fees 8,213 13,213
Miscellaneous 5,745 5,745
---------- ---------
Total $ 86,820 $111,820
========== =========
See "Use of Proceeds" section.
In the event an existing shareholder desires to sell their shares as a part
of this offering, the selling shareholder will not bear any of the above
expenses. See "Shareholder Investment Liquidity" subsection to the
"Summary," and "Selling Security Holders" section.
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES. The Company sold shares of its
Common Stock without registering the securities under the Securities Act
during the past three years.
<TABLE>
<CAPTION>
a. Year Title Shares Sold
---- ----- -----------
<C> <C> <C>
1990 Common Stock 146,770
1991 Common Stock 78,903
1992 Common Stock 200,000
</TABLE>
b. During 1990 through September 30, 1991, and from May 22, 1992, through
December 6, 1993, the Company did not publicly offer any securities. The
Company did sell shares under its dividend reinvestment program to existing
stockholders who either directly purchased common stock or reinvested their
quarterly dividends. During the first 6 months of 1993, the Company sold
160,310.60 shares at $5.00 per share for an aggregate capital increase of
$801,553.00. The Company claims an unfiled exemption from federal
registration under section 4(2) of the Securities Act of 1933, Regulation D
Rule 504. The Company claims an exemption from registration with the State
of Washington under RCW 21.20.320(11) for the sale of stock to existing
shareholders without commission.
c. There have been no underwriting discounts or commissions associated
with the sale of stock of the Company. All shares have been issued at
$5.00 per share.
d. The Company sold shares to the public from September 30, 1991, through
May 22, 1992. The Company claimed an exemption from federal registration
under the Securities Act of 1933, under a filed Regulation D Rule 504.
The Company applied for and was granted a permit (Q-03178) to sell the
securities by the Security Administrator in and for the State of
Washington. A copy of the permit is an exhibit to the Registration
Statement at page 80.
THIS SPACE INTENTIONALLY LEFT BLANK
<PAGE>
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS TABLE ITEM A B C D E F G
<S> <C> <C> <C> <C> <C> <C> <C>
1. Underwriting agreement . . N/A N/A N/A N/A N/A N/A N/A
2. Plan of Acquisition,
reorg., arrgmnt,
liquid, or succession. . . N/A N/A N/A N/A N/A N/A N/A
3. Articles of Incorporation
w/amendments and Bylaws
w/amendments . . . . . . . N/A N/A N/A N/A N/A N/A 85
Articles of Merger . . . . N/A N/A N/A N/A N/A N/A 114
Bylaw Amendment. . . . . . N/A N/A N/A N/A N/A 80 N/A
4. Instruments defining the
rights of holders, incl.
indenture. . . . . . . . . N/A 86 N/A N/A N/A N/A 165
5. Opinion re: Legality of
Stock. . . . . . . . . . . N/A N/A N/A N/A N/A N/A 169
6. No exhibit required. . . . N/A N/A N/A N/A N/A N/A N/A
7. Opinion re: Liquidation
preference . . . . . . . . N/A N/A N/A N/A N/A N/A N/A
8. Opinion re: Tax matters. . N/A N/A N/A N/A N/A N/A 173
Opinion re: Usury. . . . . N/A N/A N/A N/A N/A N/A 184
9. Voting Trust agreement . . N/A N/A N/A N/A N/A N/A N/A
10.Material contracts . . . . N/A N/A N/A N/A N/A N/A 201
11.Statement re: computation
of per share earnings. . .62,75 58,69 57 56,69 56,69 52,64 46
12.No exhibit required. . . . N/A N/A N/A N/A N/A N/A N/A
13.Annual or quarterly
reports, Form 10-Q . . . . N/A N/A N/A N/A N/A N/A 212
14.Material foreign patents . N/A N/A N/A N/A N/A N/A N/A
15.Letter on unaudited interim
financial information. . . N/A N/A N/A N/A N/A N/A 225
16.Letter on change in
certifying accountant. . . N/A N/A N/A N/A N/A N/A N/A
17.Letter on director
resignation. . . . . . . . N/A N/A N/A N/A N/A N/A N/A
18.Letter on change in
accounting principles. . . N/A N/A N/A N/A N/A N/A N/A
19.Previously unfiled
documents. . . . . . . . . N/A N/A N/A N/A N/A N/A N/A
20.Reports furnished to
security holders . . . . . 94 N/A N/A 83 83 N/A 225
21.Other documents or statements
to security holders. . . . N/A N/A N/A N/A N/A N/A N/A
22.Subsidiaries of the
registrant . . . . . . . . N/A N/A N/A N/A N/A N/A N/A
23.Published report regarding
matters submitted to vote
by shareholders. . . . . . N/A N/A N/A 86 86 N/A 221
24.Consent of experts and
counsel. . . . . . . . . . 103 88 77 89 89 89 240
25.Power of attorney. . . . . N/A N/A N/A N/A N/A N/A N/A
26.Statement of eligibility
of trustee . . . . . . . . N/A N/A N/A N/A N/A N/A N/A
27.Invitations for
competitive bids . . . . . N/A N/A N/A N/A N/A N/A N/A
28.Additional exhibits -
Accountants Report . . . . N/A N/A N/A N/A N/A N/A 215
Charts and Graphs for
1993 & 1994. . . . . . . . N/A N/A N/A N/A N/A 81 70
29.Information from reports
furnished to State
Insurance Authorities. . . N/A N/A N/A N/A N/A N/A N/A
</TABLE>
A - Fifth Post Effective Amendment Page
B - Fourth & Third Post Effective Amendment Page
C - Second Post Effective Amendment Page*
D - First Post Effective Amendment Page**
E - Second Amended Registration Statement Page
F - First Amended Registration Statement Page
G - Registration Statement Page
* Was improperly designated as 4th Amendment
** Was improperly designated as 3rd Amendment
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
12904 E. Nora, Suite A
Spokane, WA 99216
OFFICERS: DIRECTORS:
H. E. Brazington, President Rudy W. Nelson
Stan E. Brazington, Secretary Dr. Vaughn Ransom
Vern W. Haworth
Douglas M. O'Coyne
Elden Sorensen
C. Patrick Craigen
Dr. David W. Hanson
May 29, 1996
RE: ANNUAL SHAREHOLDERS MEETING
FOR OPPORTUNITY MANAGEMENT COMPANY, INC.
DATE: MAY 29, 1996
The Board of Directors of Opportunity Management Company, Inc. gave
notice of the annual meeting to the Shareholders pursuant to the corporate
By-laws. The notice was mailed by regular mail to each shareholder of
record as of March 31, 1996. A copy of the meeting Notice was directed to
be filed in the corporate records.
The Annual Shareholder's Report by the Board of Directors and the
Audited Financial Statements were mailed to the shareholders of record on
April 23, 1996. A copy of the report is attached hereto and incorporated
herein as if fully set forth. The report also included the Notice of the
Annual Meeting, the Agenda for the Annual Meeting, the Annual Report to the
Shareholders for calendar year 1995 and the Audited Financial Statements
prepared by McFarland and Alton, CPA's.
The Secretary reported that there were 2,186,609 shares of record as
of March 31, 1995, which were entitled to vote. 401,346 shares were
present at the meeting, 606,487 shares were voted by written proxy by H. E.
Brazington, and 1,178,776 shares did not attend the meeting nor were they
voted by proxy. The Secretary, pursuant to the By-laws, was directed to
file the shareholders' attendance register and proxy statements in the
books and records of the corporation.
FIRST ITEM OF BUSINESS
The President reported on the financial performance of the Company
through December 31, 1995. The President reported that the financial
statements reflected that the Company distributed dividends to the
shareholder's which resulted in a $.50 cent per share distribution. This
represented an annual rate of return on each shareholders investment of
10%. The President further reported that the asset base grew to Ten and a
half (10.5) Million dollars in assets as of December 31, 1995. This
represents a 16% increase in assets. The reason for the rate of growth was
due to the sale of stock to the investors, which was invested in new loans
acquired by the Company.
The President went on to discuss the President's letter dated April
23, 1996, and the Annual Report to the Shareholders prepared by the Board
of Directors, dated April 23, 1996. Several shareholders asked additional
questions and those questions generally focused on market conditions, and
the expected rate of return that the shareholders could expect during the
next year. The President reported that the current market conditions were
stable and that the Company's earnings per share should remain about the
same. The Company has been able to distribute dividends over the past
seven years a the rate of 10 - 12 % per shareholder investment.
SECOND ITEM OF BUSINESS
The President turned the floor over to Ms. Sue Pittman, of McFarland
and Alton, P.S., the Certified Public Accountants who audited the 1994
financial statements and provided a comparative analysis for operations in
calendar year 1994 and 1995. Ms. Pittman had prepared overhead slides
showing the net income, growth, loan break down and default rates for 1995.
A copy of the slides is attached hereto and incorporated herein as if fully
set forth.
THIRD ITEM OF BUSINESS
The President then turned the floor over to attorney, Douglas M.
O'Coyne, Sr., of the law firm of O'Coyne & Phillips P.S., for a discussion
regarding the federal stock offering approved by the Board of Directors and
the corporate REIT tax status. The attorney had prepared slides to discuss
the history of the business and the future impact to the shareholders
regarding the federal stock offering. A copy of the slides is attached
hereto and incorporated herein as if fully set forth.
FOURTH ITEM OF BUSINESS
The President discussed the election of board members to the Board of
Directors for 1996. The President asked for nominations from the floor in
addition to the nominations set forth in the agenda. There were no new
nominations presented from the floor and upon motion duly made by Maurice
Schudel and seconded by Joy jordan, the following individuals were elected
to the Board of Directors for calendar year 1996, by unanimous vote of the
shareholders present and voting by proxy. The vote was 1,007,833 shares
for and no votes against. The following Directors were elected to their
positions for calendar year 1996 to serve until the next Annual Board
Meeting:
H.E. Brazington, President
Stanley Brazington, Secretary
*Rudy W. Nelson, Independent Director
*Dr. Vaughn Ransom, Independent Director
*Vern Haworth, independent Director
*Elden Sorensen, Independent Director
*C. Patrick Craigen, Independent Director
*Dr. David W. Hanson, Independent Director
Douglas M. O'Coyne, Senior Director
*The above individuals are designated as independent directors who are
required to conduct at least quarterly meetings and provide annual reports
to the shareholders as set forth by the Washington Administration Code
which incorporates the NASAA REIT guidelines.
FIFTH ITEM OF BUSINESS
The President opened the agenda to the floor for any shareholder
resolutions or any shareholder questions. There were no shareholder
resolutions or questions offered by any shareholders. The Chairman then
directed the meeting be closed and the Secretary to publish the minutes to
the shareholders within 60 days and to distribute the minutes to the
shareholders subsequent thereto.
DATED this 29th day of May, 1996.
ATTEST:
--------------------------------------------
STANLEY E. BRAZINGTON, Secretary
APPROVED:
- ----------------------------
H.E. BRAZINGTON, President
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
12904 E. Nora, Suite A
Spokane, WA 99216
OFFICERS: DIRECTORS:
H. E. Brazington, President Rudy W. Nelson
Stan E. Brazington, Secretary Dr. Vaughn Ransom
Vern W. Haworth
Douglas M. O'Coyne
Elden Sorensen
C. Patrick Craigen
Dr. David W. Hanson
April 23, 1996
TO: The Shareholders of Opportunity Management Company, Inc.
RE: BOARD OF DIRECTORS ANNUAL REPORT TO THE SHAREHOLDERS
FOR CALENDAR YEAR 1995
This report is sent to the shareholders in compliance with the NASAA
Statements of Policy as adopted into regulation by the Securities
Administrator for the State of Washington and the Security and Exchange
rules regarding the management of Real Estate Investment Trusts.
The Board of Directors engaged the accounting firm of McFarland &
Alton, P.S., certified Public Accountants, for the purposes of auditing the
financial records of the Company and to specifically determine whether the
financial statements of the Company are in conformity with Generally
Accepted Accounting principles. We are pleased to report to the
shareholders that the Financial Statements for 1995 do conform to the
requirements of Generally Accepted Accounting Principles. A copy of the
Audited Financial Statements and accompanying notes by the auditors are
attached to this report. The information contained in the Audited
Financial Statements have been incorporated into this Annual Report by
reference.
Based on their audit, our CPA's have provided the Board of Directors
with recommendations for improving the systems, procedures and controls of
the Company. The Board has reviewed each recommendation and directed the
Management Company to implement those recommendations as appropriate.
The Financial Statements for 1995 reflect that the Company distributed
dividends of $983,122 to the shareholders which is $.50 (10.0%) per share,
down slightly from $.55 (11.0%) in 1994. The reduction in the rate of
return in primarily due to the increase in Real Estate Owned, which
increased from $662,874 in 1994 to $922,526 at year end in 1995 and the
increase in the number of accounts in a non-performing status. The 1995
distribution represents an annual rate of return on each shareholder's
investment of 10.0%, with reinvested dividends the rate was 10.4%, which
remains within the 10% to 12% goal established by the Board.
The Company asset base grew by nearly $1.5 million dollars from
December 31, 1994, to December 31, 1995. The asset balance at year end
1995 was $10.5 million dollars. The reason for the rate of growth was
primarily due to the sale of 310,541 shares of stock at $5 per share, which
was down from the 550,868 shares sold in 1994, to our investors and the
Management Company's ability to generate an adequate number of loans
conforming to the Company Investment Policies and Objectives.
The Company filed its Second Post Effective Amendment (Amendment No.
4) on April 25, 1995, which incorporated the 1994 Financial Statements.
After an extensive review and almost a complete re-write of the prospectus
as mandated by the SEC, the Company filed its Third Post Effective
Amendment on July 24, 1995. That Amendment, with a few minor changes, was
ordered effective by the SEC on August 11, 1995.
The Company has registered 2.4 million shares at the offering price of
$5.00 per share for a total of $12 million for sale to investors under SEC
Regulation SB. The Company is a 1934 Act Reporting Company and effective
this next quarter will be required to file the 10Q's and 10K's
electronically. The cost of compliance with the SEC rules and regulations
is significant. The Management Company has been able to absorb the cost of
the annual and quarterly reporting compliance, with the assistance of our
CPA's and Counsel. The legal and accounting costs associated with
registration of the stock is absorbed by the Company.
As of December 31, 1995, the Company has sold a total of $5,106,850
million dollars in stock of the $12 million registered. At present, the
Company stock is available for sale to residents of the State of Washington
and Idaho. Just after the first of the year, the Company applied for and
received an amended permit to sell up to $7.8 million dollars in the State
of Washington and an indefinite amount in the State of Idaho. The Board
has approved the Company to register $1.0 million dollars for Sale in the
State of California in the next few months. The Board has approved the
preparation of the 4th Post Effective Amendment for filing with the SEC,
which will include the 1995 Financial Statements and the first Quarter of
1996.
The Company is not charged any commission on the sale of its stock by
the officers. As a result, the only cost of raising capital consists of
the filing fees and on-going legal and accounting expenses. The total
legal and accounting expenses paid in connection with the stock issuance of
310,541 shares ($1,552,705) and registration was $31,539 and $4,569
respectively. As compared to the increases in capital, the cost of raising
capital was 2.3% and 2.1% in 1995 and 1994 respectively. The Company cost
of capital continues to be well under the 15% limit imposed by Federal and
State Regulations.
The Financial Statements reflect that the loans originated by the
Management Company, CLS Mortgage, Inc., provided the Company with a
weighted average interest rate in portfolio of 15.54% at the end of
December, 1995. It was 15.48% at the end of December, 1994. The Board
expects that the rate will not significantly change in 1996.
The charge offs against the loan allowance in 1995 was $10,210 as
compared to $31,000 dollars in 1994. The Management Company has
aggressively monitored all loans that are in default over 30 days and in
all cases, took prompt and appropriate action to protect the company's
investment. The total allowance for loan losses was increased from $68,275
(.85%) at year end 1994 to $106,554 (1.12%) at year end 1995. The Board
remains committed to reaching the 1.5% goal, notwithstanding the fact that
the allowance is not tax deductible in calculating the dividend deduction.
The Board has carefully reviewed the loans that are in an impaired
status, meaning over 90 days past due. The loans continue to accrue
interest for collection purposes but the interest accrual is discontinued
for accounting purposes and for the payments of dividends pursuant to
Generally Accepted Accounting Procedures. Loans on which the accrual of
interest has been discontinued or reduced totaled $2,857,844 at year end
1995 compared to $1,215,543 at year end 1994. The average impaired loans
during 1995 was $1,593,682. If the interest on those loans had accrued,
the income would have been $229,517 for 1995 and $119,153 in 1994. The
Company did collect interest income on the loans in the amount of $245,934
in 1995 and $84,530 in 1994.
The Board remains committed to improving the Company performance in
this area by more aggressive collection action and carefully monitoring and
tightening the loan underwriting process. However, at this time, the Board
is of the opinion that no specific write-off is necessary, as the impaired
loans remain adequately collateralized. The Board and CLS have decided to
invest more funds in single family residential loans, less in loans secured
by developed and undeveloped land and to review more closely the borrower's
ability to make the loan payments.
The Company renewed the management contract with CLS Mortgage, Inc.
based on its favorable management fee, its ability to generate new loans
that meet the Company's investment objectives, the solid performance of the
portfolio during 1995 and prior years enabling the Company to again meet
its dividend objective of 10% to 12% and its trained resources necessary to
maintain regulatory compliance. The Company paid CLS Mortgage, Inc.,
$144,142 in management fees in 1995 as compared to $114,903 in 1994. The
increase is a direct result of the increase in assets that have been
managed for the Company. The Management Company is authorized to charge a
management fee of 2% of the invested assets, but during 1995 as in 1994,
charged the Company a fee of 1.5% of the issued and outstanding stock,
which is less.
The Company relies on CLS to originate all of its loans. As such the
Company does not advertise nor does it maintain the staff, facilities and
equipment to compete for loans in the market place. As a result, the
Company paid CLS $406,888 in loan acquisition fees in 1995 as compared to
$523,762 in 1994. The decrease is a direct result in the reduced sales of
stock in 1995 as compared to 1994. Essentially, CLS originates each loan
to the borrower. Then, provided the Company has sufficient funds to
invest, the Company purchases the loan in whole or a participation interest
in the loan from CLS. The loan acquisition fees are subsequently paid by
the borrowers and not the Company. Assuming the loan is fully paid
according to its terms, the Company does not pay any of the loan
acquisition fees.
The Board of Directors has examined the management fees and loan
acquisition fees including all terms, factors and circumstances with regard
to the transactions with CLS Mortgage, Inc. and found those transactions to
be fair, reasonable and commercially acceptable in the business judgment of
each of the Independent Board Members.
The Independent Board Members believe that they have discharged their
duties in the manner proscribed by law and have exercised their business
judgment in the best interests of the Company and the Shareholders. As
such, the Independent Board Members continue to carefully monitor the
relationship of the Company with CLS, the status of the portfolio and the
dividend performance of the Company. If any shareholder has any issues
that they want addressed at a Board Meeting, please contact the Secretary
in writing and your issue will be discussed as a part of the agenda.
The full Board believes that continuity of the members of the Board is
important, evidenced by the turnover of only 1 director in the past 36
months. The above listed Board Members have agreed to serve an additional
term, provided they are duly elected to do so at the Annual Meeting, which
will be held on Wednesday, May 29, 1996 at 7:00 p.m. at the Red Lion Inn in
the Spokane Valley at I-90 and Sullivan Road, in Veradale, Washington. A
separate Notice of the Annual Meeting is attached.
The Board of Directors recommend that each shareholder carefully
review the Audited Financial Statements. In event any shareholder has any
questions, please direct your questions to the Board of Directors or to our
Company Officers at any time or you may ask them at our Annual Shareholders
meeting.
THE BOARD OF DIRECTORS
Attachments:
1995 Presidents Report
1995 Annual Audited Financial Statements
Notice of Annual Meeting
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
12904 E. Nora, Suite A
Spokane, WA 99216
OFFICERS: DIRECTORS:
H. E. Brazington, President Rudy W. Nelson
Stan E. Brazington, Secretary Dr. Vaughn Ransom
Vern W. Haworth
Douglas M. O'Coyne
Elden Sorensen
C. Patrick Craigen
Dr. David W. Hanson
April 23, 1996
TO: The Shareholders of Opportunity Management Company, Inc.
RE: PRESIDENT'S MESSAGE
Dear Shareholders:
This past year was another remarkable year in the growth and
development of Opportunity Management Company, Inc. We reached the $10
million dollar milestone in both assets, $10,504,708, and stock,
$10,433,894. During the Summer of 1995, our Registration Statement and
Prospectus was thoroughly reviewed and examined by the SEC. It seems that
we ar a one-of-a-kind Real Estate Investment Trust and certainly one of the
few that has shown sustained profits since its inception. Our prospectus
is more readable and the facts speak for themselves that Opportunity
Management Company, Inc., is an investment worthy of your trust.
We have paid a dividend to our shareholders in each quarter since we
began operations in 1989. In addition, we have met our objective of
providing our shareholders a 10-12% return on their investment. We believe
that our management team and the members of the Board of Directors have
truly earned your trust and confidence. During 1995, we sold $1,552,705 in
stock, of which $434,895 was in reinvested dividends to our existing
shareholders. In fact, nearly 50% of our shareholders have elected to
reinvest their dividends, another strong showing of confidence in our
Company.
During 1995, our dividend payment was $.50 per share or 10.0%. This
is not as high as we would have liked and is partly due to the increase of
our real estate owned, which was acquired through our collection efforts on
delinquent accounts and the increase in our non-performing loans that
cannot accrue interest for dividend purposes because of regulations that we
must comply with. We are aggressively marketing our REO's, collecting on
our delinquent accounts and carefully reviewing our underwriting process to
increase our dividend performance in 1996. Rest assured, we will continue
to fine tune our operation, maintain our competitive edge and continue to
meet our dividend objective to you, our shareholders.
We have attached for you our Board of Directors Annual Report and our
Financial Statements audited by our CPA's, McFarland & Alton, P.S. I
encourage you to review the Annual Report and the Audited Financial
Statements. If you do, I am sure you will remain convinced that your have
invested in a very solid, well managed and successful company. Thank you
for being a part of our success!
____________________________________
H.E. BRAZINGTON, President
Enc: Annual Report
Audited Financial Statements
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
12904 E. Nora, Suite A
Spokane, WA 99216
OFFICERS: DIRECTORS:
H. E. Brazington, President Rudy W. Nelson
Stan E. Brazington, Secretary Dr. Vaughn Ransom
Vern W. Haworth
Douglas M. O'Coyne
Elden Sorensen
C. Patrick Craigen
Dr. David W. Hanson
April 23, 1996
RE: NOTICE OF ANNUAL SHAREHOLDERS MEETING
DATE: May 29, 1996
TIME: 6:00 P.M.
WHERE: RED LION INN, I-90 & SULLIVAN ROAD, VERADALE, WA
Dear Shareholders:
We're having our annual meeting on May 29, 1996, at the Red Lion Inn,
I-90 & Sullivan Road, Veradale, WA. The no-host dinner will start at 6:00
p.m. and the annual meeting will start at 7:00 p.m. The dinner's main
entre will be your choice of Fresh Salmon Filet or Chicken Oscar and the
cost will be $19.00 per person including tax and gratuity. Please R.S.V.P.
if you want to attend the dinner, not later than May 22, 1996, to our staff
The Pages of Harmony will provide the entertainment after the meeting.
We have attached my President's message, our 1995 Board of Directors
Annual Report and our audited Financial Statements prepared by McFarland &
Alton for your review. If you should have questions regarding the Annual
Report or the Audited Financial Statements, please bring them up informally
with one of the board members or formally in the open portion of the
agenda. Our attorney and our auditor will be present to answer your
questions. If you should desire to have a specific topic discussed at the
meeting, please contact the Corporate Secretary.
The agenda for the meeting will be as follows:
1. President's message.
2. Board of Directors Annual Report.
3. Report on Financial Statements by our Auditors.
4. Report on Federal Offering.
5. The election of the Board members listed above on the letterhead
for calendar year 1996 (Vote Required).
6. Open Agenda.
All Shareholders of record as of March 31, 1996, are entitled to vote
on the above issues. In event you are unable to attend the meeting, we
would request that you forward your proxy to the corporate offices prior to
the meeting date pursuant to our Articles of Incorporation and By-Laws.
Your vote is important. You may select any person of legal age to vote
your shares. We hope to see you there!
Sincerely yours,
_______________________________
H.E. BRAZINGTON, President
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PROXY
I certify that I am a Shareholder of record as of March 31, 1996. I am
unable to attend the annual shareholders' meeting on May 29, 1996. I
appoint the President, Mr. H. E. Brazington or ____________________, to
vote my shares at the meeting.
Signature:___________________________ Signature:______________________
Print Name:__________________________ Print Name:_____________________
NOTE: The Secretary will fill in your stock certificate number and the
number of shares you own if your records are not available. Please mail
your Proxy to the corporate address contained in the letterhead on or
before May 22, 1996, so that it will be received prior to the meeting.
Thank you.
Certificate Number:__________________ Number of Shares:_______________
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MCFARLAND & ALTON P.S.
Certified Public Accountants
& Business Consultants
Consent of Independent Public Accountants
We consent to the inclusion in and incorporation by reference in the
Registration Statement on Form SB-2 of Opportunity Management Company,
Inc., dated August 20, 1996, of our report dated March 1, 1996, on our
audits of the financial statements of Opportunity Management Company, Inc.
as of December 31, 1995 and 1994, and for the years ended December 31, 1995
and 1994. We also consent to the reference to our Firm under the caption,
"Interest of Named Experts and Counsel".
MCFARLAND & ALTON P.S.
August 20, 1996
1800 Seafirst Financial Center 509-747-2600
Spokane, WA 99201 1-800-888-4065
FAX 509-624-5129<PAGE>
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O'COYNE & PHILLIPS P.S.
Attorneys & Counselors At Law
A Professional Services Corporation
*DOUGLAS M. O'COYNE, SR. LEGAL ASSISTANT:
+CAROL BAKER SHARI L. HOLDREN
ROBERT F. PHILLIPS 1929-1991
*Admitted to practice in Washington,
Idaho & the U.S. Tax Court
+Admitted to practice in Washington
August 20, 1996
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
RE: OPPORTUNITY MANAGEMENT COMPANY, INC. SB-2
REGISTRATION CONSENT TO INCLUSION IN
DISCLOSURE DOCUMENT OF ATTORNEY'S OPINION
Dear Sirs:
As the attorneys for Opportunity Management Company, Inc. we hereby consent
to the use of our name in the above referenced matter and to all references
to our firm included in or made a part of the Prospectus and Disclosure
Document for the sale of its Common Stock.
Sincerely yours,
_________________________________
DOUGLAS M. O'COYNE, SR.
Attorney at Law
THE HISTORIC HUTTON BUILDING 1620 NORTHWEST BLVD
9 S. WASHINGTON, SUITE 612 BUILDING A
SPOKANE, WA 99204 COEUR D'ALENE, ID 83814
(509) 455-6588 (208) 769-7588
FAX (509) 456-3508 FAX (208) 667-0291
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UNDERTAKINGS. The Company undertakes to do the following:
1. The Company is registering these Securities under Rule 415 of the
Securities Act. The Company will file, during any period which it offers
or sells securities, a post-effective amendment to this registration
statement to:
(a) Include any prospectus required by section 10(a)(3) of the
Securities Act; and
(b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information
in the registration statement; and
(c) Include any additional or changed material information on the
plan of distribution, including the most recent Unaudited
Quarterly Financial Statements, the Annual Report and the
Annual Audited Financial Statements.
2. For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. The Company will file a 10K-SB and 10Q's as required under the
applicable reporting rules.
THIS SPACE INTENTIONALLY LEFT BLANK
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SIGNATURES OF COMPANY OFFICERS
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in
the City of Spokane, State of Washington, on this 20th day of August,
1996.
Opportunity Management Company, Inc.
by: _________________________________
H.E. Brazington, its President
The Chief Financial Officer signing this form does hereby certify that the
financial statements submitted fairly state the Company's financial
position and results of operations, or receipts and disbursements, as of
the dates and periods indicated, all in accordance with generally accepted
accounting principals consistently applied (except as stated in the notes
thereto) and (with respect to year-end figures) including all adjustments
necessary for fair presentation under the circumstances as of this 20th day
of August, 1996.
Opportunity Management Company, Inc.
by:___________________________________
Stanley E. Brazington, its Secretary
and Chief Financial Officer
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SIGNATURES OF BOARD OF DIRECTORS
A majority of the Directors and the Chief Executive and Financial Officers
of the Company have signed this Disclosure Document on behalf of the
Company and by so doing thereby certify that each has made diligent efforts
to verify the material accuracy and completeness of the information herein
contained. By signing this Disclosure Document, the Chief Executive and
Chief Financial Officers agree to make themselves, the Company's books and
records, copies of any contract, lease or other document referred to in the
Disclosure Document, or any other material contract or lease (including
stock options and employee benefit plans), except any proprietary or
confidential portions thereof, and a set of the exhibits to this Disclosure
Document, available to each investor prior to the time of investment, and
to respond to questions and otherwise confirm the information contained
herein prior to the making of any investment by such investor.
______________________ ______________________ ______________________
H.E. Brazington Stanley E. Brazington Rudy W. Nelson
President & Secretary & Independent Trustee &
Director Director Director
______________________ ______________________ ______________________
Dr. Vaughn Ransom Elden Sorensen Dr. David W. Hanson
Independent Trustee & Independent Trustee & Independent Trustee &
Director Director Director
______________________ ______________________ ______________________
Vern W. Haworth C. Patrick Craigen Douglas M. O'Coyne, Sr.
Independent Trustee & Independent Trustee & Attorney &
Director Director Director
