<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR R 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from _____________to______________
Commission file number 33-68700-S
Opportunity Management Company, Inc.
(Name of small business issuer in its charter)
Washington 91-1427776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12904 East Nora, Suite A, Spokane, WA 99216
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (509) 928-6545
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
The total number of shares outstanding of the issuer's common stock, as of
April 30, 1996 was 2,175,985 shares at $5.00 per share for a total capital
contribution of $10,879,925.
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD
ENDED MARCH 31, 1996
TABLE OF CONTENTS
Page
PART I
Item 1: Financial Statements.............................3
Item 2: Management's Discussion and Analysis of
Financial Condition & Results of Operation......17
PART II
Item 1: Legal Proceedings...............................23
Item 2: Changes in Securities...........................23
Item 3: Defaults Upon Senior Securities.................23
Item 4: Submission of Matters to a Vote of Security
Holders.........................................23
Item 5: Other Information...............................23
Item 6: Exhibits and Reports on Form 8-K................24
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
STATEMENTS OF CONDITION
MARCH 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Loans receivable, earning (Note 3) $ 7,119,258 $ 7,982,237
Loans receivable, nonearning (Note 3) 2,186,184 581,459
------------ ------------
9,305,442 8,563,696
Real estate held for sale (Note 3) 1,125,919 643,595
------------ ------------
10,431,361 9,207,291
Allowance for losses (Note 3) (101,513) (79,768)
------------ ------------
NET LOANS AND REAL ESTATE 10,329,848 9,127,523
Cash 523,235 125,279
Other assets 2,999 56,696
Accrued interest receivable 96,691 76,695
------------ ------------
TOTAL ASSETS $10,952,773 $ 9,386,193
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses 27,264 16,609
Accrued cash dividends payable to
stockholders 152,872 146,727
------------ ------------
TOTAL LIABILITIES 180,136 163,336
------------ ------------
CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000
shares authorized; 1996 2,170,392
and 1995 1,845,201 shares issued and
outstanding 10,851,964 9,274,262
Undistributed income (expense) (79,327) (51,405)
------------ ------------
10,772,637 9,222,857
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,952,773 $ 9,386,193
============ ============
</TABLE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - --------------------------------------------------------------------------
STATEMENTS OF INCOME
MARCH 31, 1996 AND 1995
REVENUES
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Interest income on residential loans $ 214,894 $ 159,182
Interest income on commercial loans 124,774 145,145
Interest income on bank accounts 3,214 1,224
Other income 4,676 570
---------- ----------
TOTAL REVENUES 347,558 306,121
---------- ----------
EXPENSES
Management fees - related party (Note 5) 40,479 33,974
Amortization of organizational costs 1,125 5,358
Provision for loan and real estate losses 15,000 13,000
Accounting and auditing expenses 4,419 3,000
Legal expenses 3,404 557
Business and occupational taxes 1,968 2,911
Other expense 1,223 458
---------- ----------
TOTAL EXPENSES 67,618 59,258
---------- ----------
NET INCOME (Notes 4 and 5) $ 279,940 $ 246,863
========== ==========
Primary earnings per common share $ 0.13 $ 0.13
Weighted average shares outstanding 2,223,161 1,863,015
</TABLE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
MARCH 31, 1996
<TABLE>
<CAPTION>
Common Stock Undistributed Total
---------------------- Income Stockholders'
Shares Amount (Expense) Equity
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 2,086,779 $10,433,894 $ (61,406) $10,372,488
Net income - - 279,940 279,940
Issuance of common stock 57,547 287,736 - 287,736
Dividends reinvested in stock 26,066 130,334 (130,334) -
Cash dividends - - (167,527) (167,527)
--------- ----------- ----------- ------------
Balance, March 31, 1996 2,170,392 $10,851,964 $ (79,327) $10,772,637
</TABLE>
<PAGE>
"UNAUDITED INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 279,940 $ 246,863
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of organizational costs 1,125 5,358
Provision for loan and real estate losses 15,000 13,000
Amortization of discounts (4,668) (2,954)
(Increase) decrease in:
Accrued interest receivable (12,586) (3,482)
Increase (decrease) in:
Accrued expenses 296 7
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 279,107 258,792
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (1,094,304) (1,434,823)
Principal reductions and maturities of loans 1,099,708 908,411
Proceeds from sale of real estate owned 1,287 2,075
Advances of costs associated with other
real estate (20,383) (1,385)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (13,692) (525,722)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 287,736 278,395
Dividends paid to stockholders (119,896) (149,615)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 167,840 128,780
----------- -----------
INCREASE (DECREASE) IN CASH 433,255 (138,150)
Cash, January 1 89,980 263,429
----------- -----------
Cash, March 31 $ 523,235 $ 125,279
=========== ===========
</TABLE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for stockholder
reinvestment of dividends $ 130,334 $ 114,678
--------- ----------
Charge offs against the allowance $ 20,041 $ 2,287
--------- ----------
New contracts made in connection with
sales of real estate owned $ 47,615 $ 18,250
--------- ----------
</TABLE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
FORMATION OF THE COMPANY:
Opportunity Management Company, Inc. was incorporated in the State of
Washington on October 12, 1988 and operates as a Real Estate Investment Trust
(REIT) (Note 4). Its general business purpose is to make loans secured by
interests in real property and derive income from and relating to those
interests in real property.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period. Actual results could differ, either positively or negatively, from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate future additions to the
allowance may be necessary based on changes in economic conditions.
LOANS RECEIVABLE AND INTEREST ON LOANS:
Loans are stated at principal outstanding and net of the allowance for loan
losses. Interest income on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
Loans are placed in a nonaccrual status when loans become ninety days
delinquent. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments to principal and interest. Interest previously accrued but not
collected is generally reversed and charged against income at the time the loan
is placed on nonaccrual status.
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Loans placed in a nonaccrual status are considered impaired for purposes of
SFAS No. 114 and No. 118.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES:
The Company utilizes the allowance method of providing for losses on
uncollectible loans or overvalued real estate. Specific valuation allowances
are provided for loans receivable when repayment becomes doubtful and the
amounts expected to be received in settlement of the loan are less than the
amount due. In addition to specific allowances, a general allowance is
provided for future losses based upon a continuing review of loans which
includes consideration of actual net loan loss experience, changes in the size
and character of the loan portfolio, and the evaluation of current economic
conditions.
Valuation allowances are provided for real estate held for sale when the net
realizable value of the property is less than its costs. General valuation
allowances are also provided based on management's estimate of possible losses
in the portfolio. Foreclosed assets that are held for sale are carried at the
lower of cost (recorded amount at the date of foreclosure) or fair value less
disposition costs. Additions to the allowance are charged to expense.
REAL ESTATE HELD FOR SALE:
Real estate held for sale includes properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure or purchased by the
Company for resale. These properties are transferred to other real estate
owned and are recorded at the lower of the loan balances at the date of
transfer or the fair value of the property received as determined by
independent appraisals or current listings. Loan losses arising from the
acquisition of such property are charged against the allowance for loan
losses. An allowance for losses on other real estate owned is maintained
for subsequent valuation adjustments on a specific property basis.
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
SALES OF REAL ESTATE:
Sales of real estate generally are accounted for under the full accrual
method. Under that method, gain is not recognized until the collectability
of the sales price is reasonably assured and the earnings process is virtually
complete. When a sale does not meet the requirements for income recognition,
gain is deferred until those requirements are met.
LOAN PLACEMENT FEES:
Opportunity Management Company, Inc. purchases loans from CLS Mortgage, Inc.
for its loan portfolio. The loan principal outstanding includes a loan
placement fee to CLS Mortgage, Inc. which was paid by the borrower and
financed in the loan balance. These fees are accounted for as revenue by
CLS Mortgage, Inc. when the loan is sold to Opportunity Management Company,
Inc. No income or expense related to these fees are recorded by Opportunity
Management Company, Inc. (Note 5).
DIVIDENDS:
It is the policy of the Company to distribute at least 95% of quarterly net
earnings in cash and stock reinvestment dividends to the stockholders. A
special dividend is declared annually in order to meet REIT requirements which
require the Company to distribute 95% of its taxable income to its
stockholders. The special dividend cannot be determined until the tax return
is prepared which is always subsequent to the Company's year end (Note 4).
The Company offers a dividend reinvestment program (rollover dividend program)
whereby the shareholders have the option of receiving dividends in cash or in
the alternative they can apply their dividends toward the purchase of stock at
the $5 stated value per share. The following is a reconciliation of the
dividends on common stock as summarized in the statement of changes in
stockholders' equity:
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ----------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Cash dividends paid $ 119,896 $ 149,615
Dividends reinvested in stock 130,334 114,678
Accrued dividends, March 31 152,872 146,727
Accrued dividends, January 1 (105,252) (131,469)
---------- ----------
Dividends on common stock 297,850 279,551
Net effect of fractional shares 11 11
Dividends accrued in excess of
net income (17,921) (32,699)
---------- ----------
NET INCOME $ 279,940 $ 246,863
========== ==========
Cash dividends - accrual basis $ 167,527 $ 164,884
Dividends reinvested in stock -
accrual basis 130,334 114,678
Dividends accrued in excess of net income (17,921) (32,699)
---------- ----------
NET INCOME $ 279,940 $ 246,863
========== ==========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of the weighted average
number of shares outstanding during each quarter.
Note 2. Accounting Changes
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting By Creditors for Impairment
of a Loan, as amended by SFAS No. 118. Under the SFAS, impairment occurs
when it is probable a creditor will not be able to collect all amounts due
under a loan agreement. Impaired loans are to be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
Changes in these values will be 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 INTERIM FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at March 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
First mortgage loans $7,694,278 $7,274,518
Second mortgage loans 506,260 646,594
Loans secured by personal property 1,104,904 642,584
---------- ----------
$9,305,442 $8,563,696
========== ==========
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 March 31, 1996 and 1995 are as follows:
1996 1995
---------- ----------
Commercial $1,478,545 $1,759,193
Single and multiple family residential 2,300,602 1,762,062
Rural single and multiple family
residential 1,766,680 2,215,051
Mobile homes 1,104,904 642,584
Farm/agricultural 79,758 35,306
Developed land 1,855,977 1,401,820
Undeveloped land 718,976 747,680
---------- ----------
$9,305,442 $8,563,696
========== ==========
Real estate held for sale at March 31, 1996 and 1995 consists of the following:
1996 1995
---------- ----------
Commercial $ 141,225 $ 0
Single family residential 45,733 31,858
Rural single family residential 331,198 0
Developed land 607,763 611,737
---------- ----------
$1,125,919 $ 643,595
========== ==========
</TABLE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale (Continued)
An analysis of the changes in the allowance for losses is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Balance at January 1 $ 106,554 $ 68,275
Provision charged to expense 15,000 13,000
Recoveries 0 780
Charge-off of loss on sale of real
estate owned (20,041) (2,287)
----------- ----------
Balance at March 31 $ 101,513 $ 79,768
=========== ==========
</TABLE>
Impairment of loans having a recorded investment of $2,186,184 at March 31,
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 March 31, 1996. Interest income on impaired loans of $20,116
was recognized for cash payments received in 1996. The average impaired
loans during the first quarter of 1996 was $2,522,014.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $2,186,184 at March 31, 1996 and $581,459 at March 31, 1995.
If interest on those loans had been accrued, such income would have
approximated $230,606 for the quarter ended March 31, 1996 and $129,545 for
the quarter ended March 31, 1995. Interest income on those loans, which is
recorded only when received, amounted to $20,116 for March 31, 1996 and
$11,249 for March 31, 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.
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 4. Income Taxes (Continued)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Income before taxes on income $ 279,940 $ 246,863
Federal income taxes at statutory rates (92,427) (79,527)
---------- ----------
Net Income $ 187,513 $ 167,336
========== ==========
</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 March 31, 1996 and 1995. Dividends distributed are considered ordinary
income to the investors for tax purposes, with the exception of gains on the
sale of real estate, which are treated as capital gains to the investors.
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 $32,699 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 March 31, 1996 and 1995, $40,479 and $33,974, respectively, were paid for
these services in accordance with a management agreement. For 1996 and 1995
the monthly fee was based on one-twelfth of 1.5% of the amount of common stock
outstanding each month end. The Company is relying on CLS Mortgage, Inc. to
manage its day-to-day operations as its administrative manager. The President
is also the President of CLS Mortgage, Inc. and Chairman of the Board of
Directors of Opportunity Management Company, Inc. and owns .67% of the common
stock of the Company. The two sole stockholders directly and indirectly own
3.42% of the common stock of Opportunity Management Company, Inc. and 100% of
the stock of CLS Mortgage, Inc. at March 31, 1996.
CLS Escrow provides Opportunity Management Company, Inc. with escrow services
at no cost. The stockholders of CLS Mortgage, Inc. collectively own 50% of the
outstanding shares of CLS Escrow.
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 5. Related Party Transactions (Continued)
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 March 31, 1996 and
1995, Opportunity Management Company, Inc. paid $73,075 and $125,074,
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
loans are real estate loans with fixed interest rates, which range from 12-18%,
as of March 31, 1996. The approximate maturities of the loan portfolio are as
follows:
<TABLE>
<CAPTION>
Principal
Carrying Percentage
Amount of Portfolio
<S> <C> <C>
1996 $ 1,106,556 12%
1997 451,642 5
1998 779,992 8
1999 1,875,292 20
2000 3,153,368 34
2001 553,599 6
2002 120,888 1
2003 101,705 1
Thereafter 1,162,400 13
------------ -------------
9,305,442 100%
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS OF
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- - ---------------------------------------------------------------------------
NOTES TO INTERIM FINANCIAL STATEMENTS
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
March 31, 1995, no stockholder has exercised the right to rescind their
purchase.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
PLAN OF OPERATION AND LIQUIDITY
Stock sales together with principal payments received on loans receivable
provides the source of funds to invest in loans receivable. Opportunity
Management plans to continue its Management Contract with CLS and thereby
continue purchasing loans secured by real estate consistent with its
Investment Policy. The Board of Directors has retained the authority to
limit the sale of stock to the availability of loans, but to date has not
exercised this authority.
In order to pass through income to its shareholders without being taxed at
the Company level, it will continue to comply with the REIT provisions of
the Internal Revenue Code.
The interest received on the loans and the gains on real property sales
provide the funds necessary to pay the expenses and make quarterly dividend
distributions to the shareholders. The Company manages its cash by not
purchasing new loans toward the end of the quarter in order to provide the
necessary funds to pay the cash dividends as authorized by the Board of
Directors shortly after the end of each calendar quarter. The Company
expects to continue the present cash management procedures for the
foreseeable future.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company has remained profitable 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 for the quarters ended March 31,
1996 and March 31, 1995.
1. THE COMPANY MET ITS DIVIDEND OBJECTIVES FOR THE QUARTERS ENDED
MARCH 31, 1996 AND MARCH 31, 1995. The Company's principle performance
objective is to provide its shareholders with quarterly dividend
distributions. For the quarters ended March 31, 1996 and 1995, the
Company posted primary earnings per share of $.13 and $.13,
respectively. The dividend distribution for the quarters ended
March 31, 1996 and 1995 of $279,940 and $246,863 respectively,
translated into an 10.0% and 11.0% respective shareholder rate of
return, based on a consistent per share price of $5.00. If
nonearning assets continue to increase then the ability to pay a 10%
return to its shareholders may be impaired.
2. SALES OF STOCK AND REINVESTED DIVIDENDS PROVIDED THE FUNDS TO PURCHASE
LOANS. Stockholders' equity increased for the quarters ended March 31,
1996 and 1995 as a result of sales of common stock of $287,736 and
$278,395, respectively. Furthermore, $130,334 and $114,678 of dividends
were reinvested in stock for the quarters ended March 31, 1996 and 1995
respectively. The Company expects a portion of the shareholder base will
continue to reinvest their dividends in the future. The total amount
reinvested was 46.6% for the quarter ended March 31, 1996 and 46.5% for the
quarter ended March 31, 1995. Stock sales, reinvested dividends and
principal payments provide the means for the Company to purchase new
loans. For the quarter ended March 31, 1996, total loans decreased 2.2%
and increased 6.8% for the quarter ended March 31, 1995, as a direct
result of the sale of stock and reinvested dividends.
As stated above, stock sales growth thus far in 1996 compared to 1995
slowed down and Management expects this trend to continue. Management
believes the existing investor base has invested a significant portion of
their portfolio in Opportunity Management stock. Since stock sales
correlate to growth in the purchase of loans, Management projects loan
growth will be 5% to 10% throughout the current year.
3. REVENUES INCREASE. Total revenues for the quarter ended March 31,
1996 were $347,558, an increase of $41,437 or 13.5% over the first
quarter in 1995. Total revenues for the quarter ended March 31, 1995
were $306,121, an increase of $68,683 or 28.9% over 1994. As stated
above for the first quarter in 1996 there was a decrease of 2.2% in
the loan portfolio and an increase of 6.8% for the first quarter in
1995 as result of lower stock sales in 1996. Additionally, there are
more nonearning loans in the portfolio than there have been in previous
years thus less interest income.
4. TYPE OF PROPERTY SECURING THE LOANS IN THE PORTFOLIO HAVE CHANGED. For
the quarter ended March 31, 1996 and 1995, 83% and 85% respectively, of the
loans in the portfolio were secured by first liens on real property. Of
the $741,000 in loan growth in the first quarter of 1996, 57% was in first
mortgage loans, a decrease of 19% in second mortgage loans and 62% in
mobile home combination real estate loans. During the first quarter of
1995, of the $803,000 in loan growth, 50% was in first mortgage loans, 32%
in second mortgage loans and 18% in mobile home combination real estate
<PAGE>
loans. During the first quarter of 1996 mobile home loans increased and
second mortgage loans decreased. Most of the mobile homes or factory made
homes reside on the land that is owned by the borrower in which the Company
has a first lien. Management projects that there will be more of these
mobile home combination loans in the portfolio in the future.
5. GROSS INTEREST YIELDS WERE DOWN IN THE FIRST QUARTER OF 1996 AS
COMPARED TO THE FIRST QUARTER OF 1995. The gross interest yields were
down in the first quarter of 1996 compared to the first quarter of 1995.
The yield on average total loans for the quarter ended March 31, 1996
was 14.44%, down from 14.68% for the quarter ended March 31, 1995. The
gross interest yield on average commercial loans was 11.97% and 16.07%
for the quarters ended March 31, 1996 and 1995, respectively. The
decrease in the commercial loan yield is primarily due to the increase
in nonearning loans in the first quarter of 1996 compared to 1995. The
gross interest yield on average residential loans was 16.41% and 13.61%
for the quarters ended March 31, 1996 and 1995, respectively. The
nonearning loans as a percentage of total loans were 23.49% for the
first quarter ended 1996 and 6.79% for 1995. At any given time, the
Board and Management expect to have 10% to 20% of the loans portfolio
in a nonearning status. Since 23% of the loan portfolio are nonearning
assets, Management is now underwriting loan acquisitions more
conservatively and will continue to do so throughout the year.
Additionally, Management is aggressively foreclosing on most nonearning
assets.
6. REAL ESTATE OWNED BY THE COMPANY INCREASED FOR THE QUARTER ENDED MARCH
31, 1996. Real estate held for sale increased from $643,595 at March 31,
1995 to $1,125,919 at March 31, 1996. This increase was a result of
acquiring commercial property, developed land, and single family
residential properties through foreclosure. During the first quarter of
1996, two developed land lots were sold. These lots are part of a 19
lot development that are currently ready, available and listed for sale.
Subsequent to December 31, 1995 two lots in this development were sold.
Of the Company's total assets, 20% are nonearning loans receivable thus
Management expects more foreclosures throughout 1996 in settlement of
nonaccrual loans.
7. ALLOWANCE FOR LOAN LOSSES WERE INCREASED FOR THE QUARTER ENDED MARCH
31, 1996. The allowance for the first quarters ended 1996 and 1995
were $101,513 and $79,768 representing .97% and .87%, respectively of
the loan and real estate owned portfolio balance. The allowance for
loan and real estate losses charged to expense for the quarters ended
March 31, 1996 and 1995 were $15,000 and $13,000, respectively. Actual
losses for the quarters ended March 31, 1996 and 1995 were $20,041 and
$2,287, respectively. The net charge-off's to average loans and real
estate owned outstanding during the quarters ended March 31, 1996 and
<PAGE>
1995 were .19% and .02%, respectively. The balance for the quarter
ended March 31, 1996 was deemed as adequate and appropriate by the
Board of Directors. The Board of Directors review each delinquent
loan receivable and real estate property held for sale on a quarterly
basis to determine if a specific provision in the allowance for losses
is appropriate based upon the net realizable value of the property
securing the loan. The Board uses a systematic approach to evaluate
the need for general allowances based upon portfolio performance,
industry trends, economic conditions, and historical trends.
8. TOTAL EXPENSES FOR THE QUARTER ENDED MARCH 31, 1996 AS COMPARED TO
1995. Total expenses as a percentage of average assets were 2.52% and
2.58% for the quarters ended March 31, 1996 and 1995. Management
fees for the first quarter of 1996 increased approximately $6,505 over
the first quarter in 1995. Management fees paid to CLS are the largest
expense and relate proportionately to the net assets managed for the
Company by CLS. This expense continues to increase as new stock is
issued by the Company. The maximum fee allowed under the contract is
based on 2% of the common stock outstanding. At this time, the Company
is charging a 1.5% fee on the outstanding stock instead of the 2%
allowed.
RETURN ON ASSETS, EQUITY AND EQUITY TO ASSETS RATIO. The following net returns
were realized during the first quarters ended March 31, 1996 and 1995:
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
March 31,
1996 1995
------ ------
<S> <C> <C>
Return on Assets*
(net income divided by average total assets) 10.44% 10.73%
Return on Equity*
(net income divided by average equity) 10.59% 10.95%
Equity to Assets**
(average equity divided by average total assets) 98.54% 98.04%
</TABLE>
*The return on assets and return on equity for the quarter ended March 31,
1996 were lower than the first quarter ended 1995 primarily as a result of
nonearning loans and nonearning real estate owned.
**The equity to asset ratio increased to 98.54% at March 31, 1996, from
98.04% at March 31, 1995. This is consistent with Management's present
policy to finance growth with equity, rather than debt.
PLAN OF OPERATION THROUGHOUT THE YEAR.
* The Company is committed to continue to offer its stock for sale to
the public for the foreseeable future. Management projects stock
sales growth will be 5% to 10% annually.
<PAGE>
* The Company has no debt, except for the accrued expenses caused by the
accrual method of accounting, which are promptly paid when due. The
Company has no plan for leveraged financing.
* The Company has been able to fully invest all available funds through
the purchase of loans. The Company expects to be able to continue to
acquire similar loans in the future.
* Real estate values have stabilized 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.
* Because 20% of Company assets are nonearning loans receivable,
Management expects real estate owned to continue to increase.
* Management expects revenues as a percentage of total assets to
decrease further during 1996. This anticipated decrease is expected
because nonearning assets have increased as outlined above. This is
expected to result in lower return on equity.
* Management's strategy in the immediate future is to purchase more
residential loans than developed and undeveloped land loans. When
developed and undeveloped land loans are purchased, management
plans to purchase them with lower loan to collateral value ratios
than they have in the past.
UNCERTAINTIES
The principle competition for investors' funds are other income producing
securities. One uncertainty is possible fluctuations in market interest
rates. A rise in market rates would make debt securities more competitive
with the Company's historical dividend rates. In the short term, a rise in
interest rates could result in less stock sales, or shareholders may choose
to sell Opportunity Management stock in an effort to change their portfolio.
The present high percentage of nonearning assets may result in lower earnings
and lower dividends. In the event dividends decrease, more shareholders may
choose to sell their stock. No assurance can be made the limited market will
provide liquidity to shareholders choosing to sell.
The loan portfolio consists of loans with maturities of one to fifteen years.
Most loans, however, have remaining terms of three to five years. As loans
<PAGE>
mature and balloon payments are paid, new loans are expected to be funded at
present market rates. Thus, the Board believes there would be a three to five
year lag before the average interest rate of the portfolio would increase after
a rise in market rates.
Additionally, throughout 1995 and 1996 the Company has been able to fund loans
with a weighted average interest rate in excess of 15.3%. No assurance can be
made the Company will be able to acquire loans with interest rates in excess of
15% in the future.
As stated earlier, the Board limits stock sales to the availability of secured
real estate loans provided by CLS. Although the Board is comfortable with its
relationship with CLS, no assurance can be made that CLS will continue to
supply the Company with an adequate number of qualified real estate secured
loans.
Recent federal legislation relating to high cost real estate loans may effect
CLS Mortgage's ability to supply the Company with an adequate number of
qualified real estate loans.
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
The Company is not presently involved nor does it expect to be involved in
any legal proceedings, excepting collection actions on loans that are in
default. Since the Company is involved in purchasing loans secured by
real property, it will, by its very nature always be involved in
collection activities to enforce collection on past due loans, including
but not limited to Judicial and Nonjudicial Foreclosure on Deeds of
Trusts, Mortgage Foreclosures and Real Estate Contract Forfeitures.
Counsel for the Company is of the Opinion that collection actions on
delinquent accounts does not constitute pending or threatening litigation
under Financial Accounting Standards Board Opinion Number 5 (FASB 5) and
is properly categorized as routine litigation incidental to its business.
ITEM 2 CHANGES IN SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
There are no exhibits attached to this report. Exhibits previously filed
are incorporated by reference as noted. Exhibits filed herewith appear
begin at page E-1.
EXHIBIT
NUMBER EXHIBIT PAGE
2 Plan of acquisition, reorganization, arrange-
ment, liquidation, or succession*
4 Instruments defining the rights of holders,
including indenture, filed as exhibit 4 to the
Registrant's original Registration Statement
dated October 3, 1993
10 Material contracts filed as exhibit 10 to the
Registrant's original Registration Statement
dated October 3, 1993
11 Statement re: Computation of per share
earnings filed as exhibit 11 to the Registrant's
original Registration Statement dated
October 3, 1993
15 Letter on unaudited interim financial information*
18 Letter on change in accounting principles*
19 Reports furnished to securityholders*
22 Published report regarding matters submitted to
vote by shareholders*
23 Consent of experts and counsel filed as exhibit
24 to the Registrants original Registration State-
ment dated October 3, 1993
24 Power of attorney*
27 Financial data schedule
99 Additional exhibits*
29 Information from reports furnished to State
Insurance Authorities*
*Items denoted by an asterisk have either been omitted or are not applicable.
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K in the first quarter of
1996.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPPORTUNITY MANAGEMENT COMPANY, INC.
Registrant
Date
H. E. Brazington MAY 14, 1996
______________________________ _______________
President & Director
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 31,786
<INT-BEARING-DEPOSITS> 491,449
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,125,919
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<LOANS> 9,305,442
<ALLOWANCE> 101,513
<TOTAL-ASSETS> 10,952,773
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<SHORT-TERM> 0
<LIABILITIES-OTHER> 180,136
<LONG-TERM> 0
0
0
<COMMON> 10,851,964
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<TOTAL-LIABILITIES-AND-EQUITY> 10,952,773
<INTEREST-LOAN> 339,668
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<INTEREST-INCOME-NET> 347,558
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<NET-INCOME> 279,940
<EPS-PRIMARY> .13
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<LOANS-NON> 2,186,184
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