<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________ to ____________
OPPORTUNITY MANAGEMENT COMPANY, INC.
(Exact name of registrant as specified in its charter)
Washington 33-68700-S 91-1427776
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
12904 East Nora, Suite A
Spokane, Washington 99216
(Address of principal executive offices)
Registrant's telephone number, including area code: (509) 928-6545
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III of this Form
10-QSB or any amendments to this Form 10-QSB. [X]
The issuer's revenues for the quarter ended September 30, 1997 were
$493,025. The aggregate market value of the voting stock held by non-
affiliates at November 1, 1997, based on an assumed value of $5.00 per
share, was $10,378,233. The number of shares of common stock outstanding
at such date was 2,269,757 shares.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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OPPORTUNITY MANAGEMENT COMPANY, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART I
Item 1: Financial Statements. . . . . . . . . . . . . . . . . . . 1
Item 2: Management's Discussion and Analysis of Financial
Condition & Results of Operation. . . . . . . . . . . . .12
PART II
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . .15
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . .15
Item 3: Defaults Upon Senior Securities . . . . . . . . . . . . .15
Item 4: Submission of Matters to a Vote of Security Holders . . .15
Item 5: Other Information . . . . . . . . . . . . . . . . . . . .16
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . .16
SIGNATURES
(i)
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PART I
Item 1. FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF CONDITION
SEPTEMBER 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Loans receivable, earning $ 6,358,455 $ 6,236,262
Loans receivable, nonearning 2,430,891 3,391,703
------------ ------------
8,789,346 9,627,965
Real estate held for sale 1,956,557 1,161,633
------------ ------------
10,745,903 10,789,598
Allowance for losses (154,556) (98,603)
------------ ------------
NET LOANS AND REAL ESTATE (Notes 2 and 3) 10,591,347 10,690,995
Cash 482,053 355,492
Other assets 2,002 750
Accrued interest receivable 65,508 75,421
------------ ------------
TOTAL ASSETS $11,140,910 $11,122,658
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 27,435 $ 21,454
Accrued cash dividends payable to
stockholders 176,850 113,428
------------ ------------
TOTAL LIABILITIES 204,285 134,882
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
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<PAGE>
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000
shares authorized; 1997, 2,244,504
shares; 1996, 2,229,635 shares, issued
and outstanding 11,141,446 11,067,103
Undistributed income (expense) (204,821) (79,327)
------------ ------------
10,936,625 10,987,776
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,140,910 $11,122,658
============ ============
</TABLE>
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<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 460,259 $ 523,358
Interest income on commercial loans 363,827 384,156
Interest income on bank accounts 6,556 9,108
Other income 4,693 6,927
----------- -----------
TOTAL REVENUES 835,335 923,549
----------- -----------
EXPENSES
Management fees - related party (Note 5) 124,771 122,168
Amortization of organizational costs - 3,374
Provision for loan and real estate
losses (Notes 2 and 3) 35,000 35,000
Accounting and auditing expenses 30,533 22,481
Legal expenses (Note 5) 112,946 27,964
Business and occupational taxes 6,421 6,530
Directors' compensation 4,400 -
Other expense 48,991 6,535
----------- -----------
TOTAL EXPENSES 363,062 224,052
----------- -----------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 472,273 699,497
Gain on sale of real estate (Note 4) 20,752 11,486
----------- -----------
NET INCOME $ 493,025 $ 710,983
=========== ===========
Primary earnings per common share $ 0.22 $ 0.32
=========== ===========
Weighted average shares outstanding 2,242,752 2,225,870
=========== ===========
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF INCOME
QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 154,351 $ 134,577
Interest income on commercial loans 124,085 140,543
Interest income on bank accounts 2,722 1,416
Other income 4,507 1,117
------------------------
TOTAL REVENUES 285,665 277,653
------------------------
EXPENSES
Management fees - related party (Note 5) 41,780 41,191
Amortization of organizational costs - 1,125
Provision for loan and real estate
losses (Notes 2 and 3) 35,000 20,000
Accounting and auditing expenses 5,468 7,611
Legal expenses (Note 5) 20,081 19,453
Business and occupational taxes 2,036 2,194
Directors' compensation 1,000 -
Other expense 11,349 2,399
------------------------
TOTAL EXPENSES 116,714 93,973
------------------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 168,951 183,680
Gain on sale of real estate (Note 4) 6,879 11,486
------------------------
NET INCOME $ 175,830 $ 195,166
=========== ===========
Primary earnings per common share $ 0.08 $ 0.08
=========== ===========
Weighted average shares outstanding 2,268,900 2,334,229
=========== ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Undistributed Total
--------------------- Income Stockholders'
Shares Amount (Expense) Equity
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 2,225,547 $11,046,659 $(204,821) $10,841,838
Net Income - - 493,025 493,025
Repurchase of common stock (1,761) (8,806) - (8,806)
Issuance of common stock 658 3,291 - 3,291
Dividends reinvested in stock 20,060 100,302 (100,302) -
Cash dividends - - (392,723) (392,723)
--------- ----------- ---------- ------------
Balance, September, 1997 2,244,504 $11,141,446 $(204,821) $10,936,625
========= =========== ========== ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 493,025 $ 710,983
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of organizational costs - 3,374
Provision for loan and real estate losse 35,000 35,000
Amortization of discounts on loans (14,946) (6,815)
Gain on sale of real estate (20,752) (11,486)
(Increase) decrease in:
Accrued interest receivable 17,524 8,684
Other assets (143) -
Increase (decrease) in:
Accrued expenses 1,459 (5,514)
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 511,167 734,226
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (3,531,601) (3,810,428)
Principal reductions and maturities of loans 3,428,814 3,414,724
Proceeds from sale of real estate owned 279,280 118,012
Advances of costs associated with
improvements of other real estate (65,401) (101,769)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES 111,092 (379,461)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 3,291 316,724
Repurchase of common stock (8,806) -
Cash dividends paid to stockholders (351,843) (405,977)
------------ ------------
CASH FLOWS PROVIDED (USED) BY
FINANCING ACTIVITIES (357,358) (89,253)
------------ ------------
INCREASE (DECREASE) IN CASH 264,901 265,512
Cash, January 1st $ 217,152 $ 89,980
------------ ------------
Cash, September 30th $ 482,053 $ 355,492
============ ============
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for stockholder
reinvestment of dividends $ 100,302 $ 316,485
----------- -----------
Acquisition of real estate in settlement
of loans $ 1,139,618 -
----------- -----------
Charge offs against the allowance $ 36,932 $ 43,431
----------- -----------
New contracts made in connection with
sales of real estate $ 152,390 $ 109,390
----------- -----------
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
______________________________________________________________________
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 12, 1988, and is engaged in the business of making
loans secured by interests in real property. Since inception, it has
elected to be treated for federal income tax purposes as a real estate
investment trust, or REIT.
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 is adequate. While management uses currently available
information to recognize losses on loans and other real estate, future
additions to the allowances 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.
Loans placed in a nonaccrual status are considered impaired for purposes of
SFAS No. 114 and No. 118. A quarterly analysis of all nonaccrual loans is
performed by management which compares the collateral fair value less costs
to sell as compared to the loan balance, to determine if specific
allowances for impairment are needed.
<PAGE>
<PAGE>
Allowance for loan and real estate losses:
The Company utilizes the allowance method of providing for losses on
uncollectible loans or overvalued real estate held for sale. 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 allowance,
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
evaluation of current economic conditions.
Valuation allowances are provided for foreclosed real estate held for sale
or purchased real estate held for sale when the fair value of the property
less costs to sell is less than its cost. 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:
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:
The Company 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 the Company. No income or expense related to
these fees is recorded by the Company. (Note 5).
Dividends:
It is the policy of the Company to distribute at least 95% of annual
taxable income in cash and stock reinvestment dividends to the
stockholders.
The Company formerly offered a dividend reinvestment or rollover program
that gave the stockholders the ability to reinvest their cash dividends in
additional shares of the Company's common stock at the stated par value of
$5 per share. In July of 1997, the Company voluntarily withdrew a
Securities Act registration statement in effect with respect to these newly
issuable shares, effectively ending the program. The Company is currently
considering adopting an open market purchase program having many of the
same objectives as the rollover program. The following is a reconciliation
<PAGE>
<PAGE>
of the dividends on common stock as summarized in the statement of changes
in stockholders' equity:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Cash dividends paid 351,843 405,977
Dividends reinvested in stock 100,302 316,485
Accrued dividends, September 30th 176,850 113,428
Accrued dividends, January 1st (135,293) (105,252)
Accrued fractional shares not paid (677) (1,734)
Dividends on common stock 493,025 728,904
Dividends paid or accrued in excess
of net income - (17,921)
NET INCOME 493,025 710,983
========= =========
Cash dividends - accrual basis 392,723 412,419
Dividends reinvested in stock - accrual basis 100,302 316,485
Dividends accrued in excess of net income - (17,921)
--------- ---------
NET INCOME 493,025 710,983
========= =========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each quarter.
Note 2. Accounting Changes
Effective January 1, 1996, the Company formally adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Under the SFAS, real estate held for sale is to
be measured at the lower of carrying amount or fair value less costs to
sell. Subsequent revisions in estimates of fair value less cost to sell
are to be reported as adjustments to the carrying amount of an asset. The
Company's policy prior to January 1, 1996, was not substantially different
than as prescribed by SFAS No. 121 and therefore, the adoption on the
Company's 1996 financial position and results of operations was
insignificant (Note 3).
<PAGE>
<PAGE>
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at September 30, 1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
First mortgage loans $7,490,207 $8,146,741
Second mortgage loans 382,845 432,629
Loans secured by personal property and real estate 916,294 1,048,595
---------- ----------
$8,789,346 $9,627,965
========== ==========
A concentration of credit exists in that the majority of loans are secured
by real property in the states of Washington and Idaho.
Types of real property securing loans at September 30, 1997 and 1996, are
as follows:
1997 1996
---------- ----------
Commercial $2,038,479 $1,781,770
Single and multiple family residential 2,177,945 2,492,755
Rural single and multiple family residential 1,505,942 1,840,659
Mobile homes 916,294 1,052,560
Farm/agricultural 60,000 9,758
Developed land 1,348,588 1,866,363
Undeveloped land 742,098 584,100
---------- ----------
$8,789,346 $9,627,965
========== ==========
Real estate held for sale at September 30, 1997 and 1996, consists of the
following:
1997 1996
---------- ----------
Commercial $ 231,809 $ 142,695
Single and multiple family residential 145,252 -
Rural single and multiple family residential 442,306 216,183
Mobile homes 112,306 43,070
Farm/agricultural 9,776 -
Developed land 912,369 759,685
Undeveloped land 102,739 -
---------- ----------
$1,956,557 $1,161,633
========== ==========
</TABLE>
<PAGE>
<PAGE>
An analysis of the changes in the allowance for losses is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Balance, January 1st $ 156,391 $ 106,554
Provision charged to expense 35,000 35,000
Recoveries 97 480
Charge off of losses on sale of real estate owned (36,932) (43,431)
---------- ----------
Balance, September 30th $ 154,556 $ 98,603
========== ==========
</TABLE>
Impairment of loans having a recorded investment of $2,430,891 and
$3,391,703 at September 30, 1997 and 1996, respectively, has been
recognized in conformity with SFAS No. 114 as amended by SFAS No. 118.
There is no specific allowance for loan losses related to these loans at
September 30, 1997 and 1996, respectively. Interest income on impaired
loans of $110,432 and $158,787 was recognized for cash payments received in
1997 and 1996, respectively. The average impaired loans during 1997 and
1996 was $3,316,616 and $2,746,786, respectively.
Included in the allowance for losses, there is a $151,980 and $83,966
specific allowance to reduce real estate held for sale to the estimated
fair value less costs of disposal at September 30, 1997 and 1996,
respectively.
Note 4. Income Taxes
Management is of the opinion the Company continues to qualify as a Real
Estate Investment Trust or REIT under 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>
1997 1996
---------- ----------
<S> <C> <C>
Income before taxes on income $ 493,025 $ 710,983
Federal income taxes at statutory rates (167,629) (241,734)
---------- ----------
Net Income $ 325,396 $ 469,249
========== ==========
</TABLE>
The Company must continue to meet certain conditions on an annual basis to
retain its tax status as a REIT. These conditions were met for the
quarters ended September 30, 1997 and 1996. Dividends distributed are
<PAGE>
<PAGE>
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.
Note 5. Related Party Transactions
Management fees:
CLS Mortgage, Inc. provides office space, administrative, accounting,
computer, and other services to the Company. For the quarters ended
September 30, 1997 and 1996, $124,771 and $122,168, respectively, were paid
for these services in accordance with a management agreement. The amounts
payable to CLS Mortgage, Inc. at September 30, 1997 and 1996, were $13,927
and $13,730, respectively. For 1997 and 1996, the monthly fee was based on
one-twelfth of 1.5% of the 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 and Chairman of
the Company is also the President of CLS Mortgage, Inc. The President and
his wife own 1.07% of the common stock of the Company. The two sole
stockholders directly and indirectly own 3.48% of the common stock of the
Company and 100% of the stock of CLS Mortgage, Inc. at September 30, 1997.
Escrow services:
CLS Escrow provides the Company with escrow services. The stockholders of
CLS Mortgage, Inc. collectively own 50% of the outstanding shares of CLS
Escrow.
Loan placement fees:
Loans are purchased from or brokered by CLS Mortgage, Inc. CLS Mortgage,
Inc. earns a 6-12% loan placement fee from the borrowers of the monies
loaned by Opportunity Management Company, Inc. For the quarters ended
September 30, 1997 and 1996, CLS Mortgage, Inc. received $282,363 and
$269,191, respectively, in loan placement fees (Note 1).
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Overview. The ratio of non-earning loans and OREO to total ending assets
decreased slightly from 40.9% at September 30, 1996 to 39.4% in 1997.
Total nonearning assets, although still at high levels, have not increased
during 1997. Nonearning loans as a percentage of ending total assets
decreased from 30.5% at September 30, 1996 to 21.8% at September 30, 1997.
However, OREO as a percentage of ending total assets increased from 10.4%
at September 30, 1996 to 17.6% at September 30, 1997. These fluctuations
are primarily due to the acquisition of real estate in settlement of
nonearning loans during 1997 of approximately $1.1 million. Management
foreclosed on several nonearning loans during 1997 and are now pursuing
sales of these OREO's. Management's ultimate goal is to reduce the total
of nonearning assets so that the Company can achieve the desired earnings
and dividends to shareholders. The impact of the high level of nonearning
assets decreased net income to $493,025 for the nine month period ended
September 30, 1997 from $710,983 for September 30, 1996.
The high level of nonearning loans and OREOs in 1997 and 1996 is believed
by management to be attributable to several factors, including a relatively
high concentration of portfolio loans secured by developed properties;
these loans were originated during the period from 1990 through 1994, when
the Spokane, Washington and Coeur d'Alene, Idaho housing markets were
robust. In 1995, 1996 and 1997 the housing markets softened resulting in
many failed land developments. As a consequence, the Company has
foreclosed on several land developments and much of the nonearning loan
portfolio is secured by developed and undeveloped land.
Management of the Company and CLS do not expect overall economic conditions
to improve significantly in 1997, and as a consequence, CLS has implemented
a number of internal measures designed to improve the quality of the loans
it originates and sells to the Company. One of these measures is a change
in the mix of loans comprising the portfolio. Management expects to
increase the concentration of single-family residential loans and
commercial property loans in the portfolio, and thereby reduce the
concentration of loans secured by developed and undeveloped property.
Management expects loans secured by residential and commercial property to
result in fewer nonearning loans and OREOs. Historically loans secured by
developed and undeveloped land have contributed significantly to increased
OREOs and nonearning loans, resulting in the decline in yields. In
addition, CLS has adopted a stricter, more conservative appraisal review
practice; it has also implemented internal policies designed to ensure that
no more than 20% of the loan portfolio is comprised of loans secured by
developed properties, and that no more than 10% of the portfolio is
comprised of loans secured by undeveloped properties. Additionally, CLS
has employed a full-time collection manager to oversee the sale or other
disposition of real estate acquired by CLS and the Company through
foreclosure or other means.
CLS's and the Company's goals with respect to the Company's loan portfolio
are to reduce the level of nonearning loans to 20% or less of total assets
and to increase the annual yield to 10% or more. No assurance can be given
that these goals will be achieved timely.
<PAGE>
Expenses of the Company increased during 1997. The increase of
approximately $85,000 in legal expenses is attributable to several factors.
The Company incurred significant collection expenses related to its
nonearning loans, incurred additional legal costs due to a high level of
foreclosure activity during 1997 and due to legal proceedings for one non-
performing loan. The increased operating expenses, as well as the loss of
interest revenue due to higher nonearning assets, resulted in a decrease in
average shareholder equity.
Nine Month Period Ended September 30, 1997 Compared to the Nine Month
Period Ended September 30, 1996.
General. The Company's net income decreased 30.7%, to $493,025, for the
nine month period ended September 30, 1997, from $710,983 for the nine
month period ended September 30, 1996. Return on average assets and equity
were 4.5% and 4.5%, respectively, at September 30, 1997, as compared to
6.6% and 6.7%, respectively, at September 30, 1996. Total assets increased
.2%, to $11,140,910, at September 30, 1997, from $11,122,658 at September
30, 1996. Total loans decreased $838,619 during the year. Real estate
owned increased $794,924 for the year. These trends reflect significant
foreclosure activity during 1997 and the impact on earnings of having
approximately $4.4 million of nonearning assets.
Interest Income. The Company's interest income decreased 9.4%, to
$830,642, for the nine month period ended September 30, 1997, from $916,622
in the prior year. The decrease in interest income was primarily
attributable to a 68.4% increase in nonearning real estate owned.
Additionally, interest income has decreased due to a gradual decline in
interest rates of loans in the portfolio.
Prior to March of 1996 management's strategy was to fund high interest rate
loans (15% - 16%) secured by residential, land and mobile home, commercial,
agricultural, developed land and undeveloped land. These loans were
underwritten with an emphasis on the security and less emphasis on the
makers character and ability to repay the obligation. After March of 1996,
loans have been underwritten with more emphasis on the maker's character
and ability to repay. To compete for these loans in the market, the
interest rates of said loans are 12% to 16%. This change in emphasis has
resulted in a gradual decline of the loan portfolio's weighted average
interest rate. On September 30, 1996 the weighted average interest rate of
the loan portfolio was 15.2%, as compared to the weighted average interest
rate of the portfolio on September 30, 1997 of 15.0%. This decline of the
weighted average interest rate of the loan portfolio has contributed to the
decrease in interest income.
Total Expenses. Total expenses increased 62.0%, to $363,062, for the nine
month period ended September 30, 1997, as compared to $224,052 for the nine
month period ended September 30, 1996. This was an increase of $139,010.
The increase in total expenses is directly attributable to an increase in
legal expenses of $112,446. Legal expenses were higher due to legal
proceedings related to loan collection and OREO foreclosure costs, as well
as SEC legal filing costs. Approximately $25,000 of legal costs for the
first quarter of 1997 were associated with unusual and unexpected legal
proceedings for one non-performing loan. Management expects legal expenses
to decrease significantly in future quarters. Other expenses, primarily
expenses relating to nonearning loans and OREO's increased $48,991. The
<PAGE>
Company's policy is to expense all loan collection and OREO foreclosure
costs as incurred, even if it is anticipated that they may be recovered
upon sale of foreclosed properties.
Management fees paid to CLS for the nine month period ended September 30,
1997 were $124,771, as compared to $122,168 in 1996.
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30,
1996.
General. The Company's net income decreased 9.9%, to $175,830, for the
quarter ended September 30, 1997, from $195,166 for the quarter ended
September 30, 1996. This decrease was primarily a result of an increase in
the provision for loan and real estate losses and an increase in other
expenses directly associated with foreclosure, collection and OREO
expenses.
Interest Income. The Company's interest income increased 1.7%, to
$281,158, for the quarter ended September 30, 1997, from $276,336 in the
prior year.
Total Expenses. Total expenses increased 24.2%, to $116,714, for the
quarter ended September 30, 1997, as compared to $93,973 for the quarter
ended September 30, 1996. This was an increase of $22,741. The increase
in total expenses is directly attributable to an increase in provision for
loan and real estate losses and an increase in other expenses. The
provision for loan and real estate losses increased $15,000. Other
expenses, primarily expenses relating to nonearning loans and OREO's
increased $8,950. The Company's policy is to expense all loan collection
and OREO foreclosure costs as incurred, even if it is anticipated that they
may be recovered upon sale of foreclosed properties.
Management fees paid to CLS for the quarter ended September 30, 1997 were
$41,780, as compared to $41,191 in 1996.
Liquidity and Capital Resources.
Management believes that the Company's cash flow will be sufficient to
support its existing operations for the foreseeable future. If the Company
needs additional liquidity, it would be required to borrow. Management
believes the cash flow from interest income is sufficient to service debt.
Management has no plans to borrow capital in the foreseeable future.
The Company's total shareholders' equity decreased to $10,936,625 at
September 30, 1997, from $10,987,776 at September 30, 1996. At
September 30, 1997, shareholders' equity was 98.35% of total assets,
compared to 98.72% at September 30, 1996. At September 30, 1997, the
Company held cash of $482,053.
Effects of Inflation and Changing Prices. Increased inflation would most
likely result in increased interest rates in the market and increased
operating overhead. Unlike most industrial companies, most of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a significant impact on a financial
institution's performance. Although interest rates do not necessarily move
<PAGE>
in the same direction or to the same extent as the prices of goods and
services, increases in inflation generally have resulted in increased
interest rates. Management expects inflation to be 2% to 4% in the
foreseeable future. Additionally, management expects interest rates to
fluctuate less than 2% in the foreseeable future. If interest rates and
inflation remain stable as predicted by management, inflation and changing
prices will not have a big effect upon the company.
Plan of Operation. The Company's plan of operation during the ensuing
twelve-month period is to maintain a portfolio of loans collateralized by
real property sufficient to generate dividends to its shareholders at
annualized rates ranging from 6% to 10%. In order to meet these
objectives, the Company and CLS have adopted operating strategies designed
to (i) reduce the level of non-earning loans in the Company's loan
portfolio, (ii) increase the volume of loans CLS originates and makes
available to the Company and others for purchase, (iii) market real estate
owned, (iv) invest proceeds of real estate owned in earning assets and (v)
more efficiently manage the operations of the Company and CLS.
Additionally, the Company plans to continue operating as a real estate
investment trust, disbursing in excess of 95% of its taxable income to
shareholders as dividends.
<PAGE>
<PAGE>
PART II
Item 1. Legal Proceedings.
Because of the nature of its business, the Company is subject to numerous
claims and legal actions in the ordinary course of its business involving
the collection of delinquent accounts and the validity of liens. While it
is impossible to estimate with certainty the ultimate legal and financial
liability with respect to such claims, the Company believes that, in the
aggregate, such liabilities would not have a material adverse effect on the
financial condition or results of operations of the Company.
Item 2. Changes In Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders during
the third quarter of 1997.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits. The following exhibits filed as part of this report. Exhibits
previously filed are incorporated by reference, as noted.
Exhibit No. Description
3.1 Articles of Incorporation of the Company, as amended.
Previously filed as Exhibit 3 to the Company's
registration statement on Form SB-2, dated October 3,
1993, and incorporated by reference herein.
3.2 Bylaws of the Company, as amended. Previously filed as
Exhibit 3 to the Company's registration statement on
Form SB-2, dated October 3, 1993, and incorporated by
reference herein.
10.1 Copy of management agreement between CLS Mortgage, Inc.
and the Company. Previously filed as Exhibit 10.1 to
the Company's annual report on Form 10-KSB for the year
ended December 31, 1996, and incorporated by reference
herein.
27.1 Financial data schedule. Filed herewith.
Form 8-K. No reports on Form 8-K were filed by the registrant during the
third quarter of 1997.
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this amendment to registration statement to be
signed on this behalf by the undersigned, thereunto duly authorized.
OPPORTUNITY MANAGEMENT COMPANY, INC.
By: /s/ H. E. Brazington
-----------------------------------
H. E. Brazington, its President
Dated: November 11, 1997
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