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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
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-KSB or any amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $1,218,889. The
aggregate market value of the voting stock held by non-affiliates at March
1, 1997, based on an assumed value of $5.00 per share, was $10,086,480.
The number of shares of common stock outstanding at such date was 2,209,443
shares.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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OPPORTUNITY MANAGEMENT COMPANY, INC.
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
SAFE HARBOR STATEMENT
Page
PART I
Item 1: Description of Business . . . . . . . . . . . . . . . . . . 1
Item 2: Description of Property . . . . . . . . . . . . . . . . . .12
Item 3: Legal Proceedings . . . . . . . . . . . . . . . . . . . . .12
Item 4: Submission of Matters to a Vote of Security Holders . . . .12
PART II
Item 5: Market for Common Equity and Related Stockholder Matters. .13
Item 6: Management's Discussion and Analysis or Plan of Operation .14
Item 7: Financial Statements . . . . . . . . . . . . . . . . . . .17
Item 8: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . .17
PART III
Item 9: Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Item 10: Executive Compensation . . . . . . . . . . . . . . . . .19
Item 11: Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . .20
Item 12: Certain Relationships and Related Transactions . . . . .21
Item 13: Exhibits and Reports on Form 8-K . . . . . . . . . . . .21
SIGNATURES
(i)
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Safe Harbor Statement
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. Potential risks and uncertainties
include, without limitation, the likelihood that the Company could
experience continued high loan default rates, which would have the effect
of further reducing portfolio yields and amounts distributable to the
Company's shareholders in the form of dividends; continued reliance on CLS
Mortgage, Inc. ("CLS") for loans and the provision of management and
related services, for which the Company will pay fees and costs possibly in
excess of amounts it would otherwise pay or incur for similar services
provided by a nonaffiliated entity or entities; the concentration of loans
in Eastern Washington and Northern Idaho, and the possible widespread
diminution in the value of the real property securing such loans as the
result of adverse changes in the economy of the region; the effect of
interest rates on loan yields generally; losses occasioned by damage or
destruction to the property securing the Company's loans; liabilities
associated with violations of state usury laws and other laws and
regulations of jurisdictions in which the Company does business; and other
factors that may affect future results, as described below.
The Company purchases high-risk loans made by CLS to borrowers who
typically do not qualify for financing from conventional lending sources.
Virtually all of these loans are secured by liens on real property having
values substantially in excess of the loan amounts. In determining whether
to purchase a loan, the Company is primarily motivated by the value of such
property, and, to a lesser extent, by other factors indicative of the
borrower's ability to repay the loan. High rates of delinquency are
typical in a loan portfolio of this composition and such rates can be
expected to continue in the future. The Company anticipates that, at any
given time, 20% to 30% or even more of the loans in the portfolio will be
delinquent by at least 90 days and will be determined to be non-earning
loans. (For the year ended December 31, 1996, for example, approximately
34% of the Company's portfolio was comprised of non-earning loans.) The
Company also anticipates that, at any given time, it will hold properties
obtained through foreclosure or by other means for resale, and that it will
incur substantial costs in holding these properties and readying them for
resale. (For the year ended December 31, 1996, for example, the aggregate
value of properties held for sale was $1,220,140.) These delinquencies and
costs have reduced the amount of dividends payable to the Company's
shareholders and will reduce the amount of future dividends if the Company
is unable to take corrective measures to improve the quality of its loan
portfolio.
The Company presently acquires substantially all of its loans from CLS,
which is affiliated with the Company; most of these loans are in turn
serviced by CLS Escrow, Inc. ("CLS Escrow"), which is indirectly affiliated
(ii)
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with CLS and the Company. CLS also provides the Company with management
and related administrative, accounting, computer and other services
necessary to the Company's operations. The Company pays significant fees
and costs to CLS and CLS Escrow for these loans and services. These fees
and costs are not the result of arms-length negotiation between the
Company, on the one hand, and CLS and CLS Escrow, on the other hand, and
possibly exceed amounts the Company would otherwise pay or incur were the
same or similar services provided by nonaffiliated entities. Other
conflicts of interest are inherent in the manner in which loans purchased
by the Company are selected.
Most of the loans in the Company's portfolio are secured by real property
(or, to a lesser extent, personal property) located in Eastern Washington
and Northern Idaho. Unfavorable economic conditions affecting the region
would likely result in increased loan delinquencies and a widespread
decline in the market values of
the property given as security for these loans. Were this to occur, the
Company may not be able to recover the outstanding amounts of its loans
through foreclosure or other collection proceedings, in which event
substantial losses would occur.
The results of operations for financial institutions such as the Company
and CLS may be materially and adversely affected by changes in prevailing
economic conditions, rapid changes in interest rates, and the monetary and
fiscal policies of the federal government. Accordingly, there can be no
assurance that the positive trends or developments discussed in this report
will continue or that negative trends or developments will not have a
material adverse effect on the Company.
The Company's initial loan purchases were funded from the sale of shares of
its common stock. Thereafter, such purchases have been funded from
repayments of principal on outstanding loans in its portfolio and, to a
lesser extent, from reinvested dividends paid to the Company's
shareholders. The Company has not funded its operations from borrowings
and as a result has not incurred interest rate risks commensurate with
those of conventional lending institutions. This could change, however, in
the event the Company borrows funds for operations. The Company has no
present plans to borrow money and probably will not undertake to borrow
money until efforts to improve the quality and yield of its loan portfolio
have been successfully undertaken. Pending such improvement, and in the
absence of additional funding from other sources, such as the sale of
additional shares of common stock, the size of the Company's loan portfolio
can be expected to remain fairly constant.
Although it is the Company's policy to purchase only those loans that are
secured by real property that is insured against damage or destruction,
such insurance cannot always be obtained. Further, even if insurance is
obtained, it may prove insufficient in amount, or may have even lapsed and
not been renewed subsequent to the date the Company acquired the loan.
(iii)
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Because the Company focuses its collection efforts on the property given as
security for the loan, as opposed to the borrower, any loss in value
attributable to uninsured or under insured damage or destruction to such
property would have a material adverse effect on the Company.
The Company and CLS are subject to extensive federal and state regulation
and supervision, including possible limitations, at least in Washington, on
the rate of interest CLS can charge with respect to certain types of loans.
Current, proposed and future legislation and regulations have had, will
continue to have or may have a significant impact on the Company's and
CLS's mortgage financing businesses.
The Company and CLS are subject to increasing competition from existing and
new lenders entering their market areas. Most of these lenders compete
with the Company and CLS on the basis of interest rates. Although not
anticipated, CLS may be compelled to lower its interest rates in order to
originate a sufficient volume of loans for sale to the Company and other
purchasers. Any such reduction could have the effect of lowering the yield
on the Company's loan portfolio and the amounts paid to its shareholders as
dividends.
[The balance of this page has been intentionally left blank.]
(iv)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW OF THE COMPANY
Opportunity Management Company, Inc. (the "Company") is engaged in the
business of purchasing and holding high-risk loans made primarily to
borrowers located in Eastern Washington and Northern Idaho, with the
objective of earning current income for its shareholders. The Company was
organized as a Washington corporation in 1988 and commenced operations in
May of 1989.
The Company has elected to be treated for federal income tax purposes as a
real estate investment trust ("REIT"), meaning that it is allowed to deduct
the dividends paid to its shareholders as an expense and, in effect, is not
obligated to pay federal income taxes. Dividends that are distributed to
the shareholders are considered ordinary income to such shareholders for
federal income tax purposes, however, gains on the sale of real property
acquired through foreclosure, are treated as capital gains. The Company
must continue to meet certain conditions on an annual basis in order to
retain its tax status as a REIT.
Since its inception, the Company has acquired substantially all of its
loans from CLS Mortgage, Inc. ("CLS"), which is affiliated with the
Company. CLS originates a variety of conforming and nonconforming loans,
including loans to borrowers who generally do not qualify for credit from
commercial banks, savings and loan associations, credit unions and other
financial institutions. During the years ended December 31, 1996, 1995 and
1994, approximately 80%, 60% and 60%, respectively, of these loans were
conforming loans meeting institutional underwriting guidelines. Virtually
all of these loans are sold by CLS to other financial institutions.
The remaining loans originated by CLS during these years were nonconforming
loans made to borrowers who typically do not qualify for financing from
conventional lending sources. Because of the higher levels of risk
associated with these loans, such borrowers are charged rates of interest
which exceed the rates charged by other financial institutions to their
more creditworthy borrowers. These loans typically bear interest at rates
ranging from 12% per annum to 18% per annum, and are generally amortizable
over 15 to 30 years, although most have balloon payment provisions
requiring full payment in five to ten years. All of such loans are secured
by real property and, in some instances, also by personal property. In
determining which loans to purchase from CLS, the Company has been
primarily motivated by the value of such property, and, to a lesser extent,
by other factors indicative of the borrower's ability to repay the loan.
During 1996, the Company reevaluated its selection criteria and began
placing more emphasis on the borrower's creditworthiness and ability to
repay the loan; this practice is expected to continue in the future, as
part of the Company's overall effort to decrease the level of non-earning
loans in the portfolio. CLS sells these loans to the Company and other
purchasers either as whole loans (being loans in which the purchaser is
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assigned the promissory note issued by the borrower, together with the
mortgage or deed of trust and other collateral securing the obligations
evidenced by the note) or undivided, participatory interests in such loans.
The Company purchases all of its loans from CLS without discount. CLS is
also paid loan placement fees in connection with such purchases, in amounts
ranging from 6% to 12% of the face value of the loan. Such fees are paid
by the borrower, but are included in the principal amount of the loan.
This arrangement allows CLS to account for the full value of the placement
fee as revenue when the loan is sold to the Company. All loans purchased
by the Company from CLS are without recourse, meaning that, in the event of
default, the Company cannot pursue any collection or other remedies against
CLS, but must, instead, pursue such remedies against the borrower or, as is
more likely, against the real or other property given as security for the
loan.
The Company also contracts with CLS for the provision of management and
related administrative, accounting, computer and other services necessary
to the Company's operations, and with CLS Escrow, Inc. ("CLS Escrow") for
the provision of escrow and other loan services. CLS Escrow is affiliated
with CLS and is also an indirect affiliate of the Company. The Company's
management contract with CLS is renewable annually and provides for the
payment to CLS of monthly fees of up to one-twelfth of 2% of the assets
under management or, alternatively, one-twelfth of 2% of the number of
outstanding shares of common stock of the Company at month end, provided
such amount does not exceed the asset-based amount. The Company has
historically paid CLS one-twelfth of 1.5% of the number of outstanding
shares of common stock pursuant to this agreement. Amounts paid to CLS
Escrow for loan servicing have equalled approximately 0.01% of the
principal amount of the loans.
The Company's initial loan purchases were funded from the sale of shares of
its common stock. Thereafter, such purchases have been funded from
repayments of principal on outstanding loans in its portfolio and, to a
lesser extent, from reinvested dividends paid to the Company's
shareholders. The Company has continuously offered and sold its common
stock to the public at the price of $5.00 per share pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), and a related prospectus. During the years ended
December 31, 1996, 1995 and 1994, 122,553 shares, 326,756 shares and
550,868 shares of common stock were purchased in such offering, yielding
net proceeds to the Company of approximately $600,000, $1.5 million and
$2.8 million, respectively, after deduction of offering expenses. During
the years ended December 31, 1996, 1995 and 1994, approximately 67%, 28%
and 14%, respectively, of these shares were purchased by existing
shareholders of the Company who elected to reinvest cash dividends declared
and paid by the Company in such years pursuant to an informal dividend
reinvestment plan maintained by the Company, and the remainder of such
shares were purchased by existing or new investors using other funds.
Shareholders of the Company are afforded the opportunity to participate in
the plan each quarter, and may change their election at any time, or from
time-to-time without penalty.
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It is the Company's policy to declare and pay dividends on its common stock
no less often than quarterly, at rates determined by the interest income
and gain from the sale of real property received during the prior quarter.
In order to maintain its status as a REIT, the Company must distribute at
least 95% of its taxable income in each year, including at least 95% of
that portion of its taxable income that is set aside as a reserve against
bad debts.
The Company may seek to borrow funds from one or more financial
institutions to augment the funding of loan purchases beginning in 1997.
Whether and to what extent the Company engages in such borrowing will
depend on a number of factors, including its ability to improve the quality
and yield of its loan portfolio, then prevailing interest rates and the
effect, if any, of such rates on the Company's income. It is unlikely the
Company will rely materially on borrowed money to fund loan purchases,
particularly if such borrowings materially reduce dividends otherwise
payable to the Company's shareholders. In such event, the Company may seek
other financing alternatives, including, possibly, the offer and sale of
additional shares of its common stock.
The Company's executive offices are located at 12904 East Nora, Suite A,
Spokane, Washington 99216, which are also the executive offices of CLS.
CLS also maintains loan production offices in Kennewick and Wenatchee,
Washington and in Coeur d'Alene, Idaho.
OPERATING STRATEGIES
The Company's objectives are to acquire and maintain a portfolio of loans
collateralized by real property sufficient to generate dividends to its
shareholders at annualized rates ranging from 9% to 12%. 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 and (iii) more efficiently
manage the operations of the Company and CLS.
REDUCTION IN LEVEL OF NON-EARNING LOANS. Non-earning loans, which are
defined as loans which are 90 days or more delinquent, constituted 33.5%,
30.0% and 15.2% of the Company's loan portfolio at December 31, 1996, 1995
and 1994, respectively. As a consequence of the substantially increased
level of non-earning loans during 1996 and 1995, the Company's portfolio
yield significantly decreased. For the years ended December 31, 1996 and
1995, the yields on average loans in the loan portfolio were 12.5% and
13.5%, respectively, as compared to a yield of 14.45% for the year ended
December 31, 1994.
The Company believes the increase in non-earning loans in 1996 and 1995 is
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, but
declined in performance as those markets softened beginning in 1995.
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In order to improve the quality and yield of its loan portfolio, the
Company expects to increase its concentration of single-family residential
loans and reduce its concentration of higher-interest loans. In addition,
CLS has adopted stricter, more conservative appraisal practices; 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. Beginning in the fourth quarter
of 1996, 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 non-earning loans to 20% or less and to increase
the annual yield to at least 10%.
INCREASE IN VOLUME OF ORIGINATED LOANS. CLS currently maintain loan
origination offices in Spokane, Kennewick and Wenatchee, Washington, and
Coeur d'Alene, Idaho, employed approximately sixteen full-time sales
representatives. CLS also maintains relationships with 34 nonaffiliated
mortgage brokers who refer loans for purchase or funding.
Despite these advantages, CLS expects to continue to encounter significant
competition for loans from existing and new lenders in its market area. In
order to compete favorably for these loans, CLS intends to hire more
experienced loan officers, expand its advertising to include more
television advertising and internet advertising, and conduct special
marketing programs. These efforts will be designed to promote CLS's
lending abilities to a broader audience of prospective borrowers, and to
ensure a higher quality of borrowers. CLS also intends to continue
offering fixed rate loans to its borrowers, as opposed to variable rate
loans such as those offered by many of its competitors. CLS believes it
can compete favorably with these other lenders, even though the fixed rates
of interest it charges may be higher than the starting rates charged under
the variable loans.
MORE EFFICIENT MANAGEMENT OF OPERATIONS. CLS recognizes that efficient
management of its and the Company's operations, and their respective loan
portfolios, is dependent upon the receipt of adequate and timely
information. To this end, CLS is carefully considering investing in new
computer hardware and software to enable it to better manage its
operations. CLS believes that these advances will allow it to monitor the
composition of its and the Company's loan portfolios more carefully, and
thereby enhance its efforts to improve the quality and yield of these
portfolios.
INVESTMENT POLICY
As noted elsewhere in this report, the Company's principal investment
objective is to acquire and maintain a portfolio of loans collateralized by
real property sufficient to generate dividends to its shareholders at
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annualized rates ranging from 9% to 12%. In order to achieve this
objective, the Company purchases loans that are considered high risk and
are secured by real property having appraised values significantly in
excess of the loan amounts. These loans vary in size from $5,000 in
principal amount to $450,000 in principal amount, and bear interest at
rates ranging from 12% per annum to 18% per annum. The loans are generally
amortizable over 15 to 30 years, although most have balloon payment
provisions requiring full payment in five to ten years.
The Company's investment guidelines are administered by the board of
directors and may be changed only with the approval of a majority of those
directors of the Company who are not also executive officers or employees
of the Company or any of its affiliates. The more salient of these
provisions are set forth below.
The Company is precluded from investing more than 10% of its assets in any
single loan or in loans secured by undeveloped real property, and is
similarly precluded from investing more than 20% of its assets in loans
secured by developed property. For purposes of these limitations,
"undeveloped property" is unimproved property that has not been zoned as
commercial or residential property; "developed property" is property that
has been zoned for commercial or residential use, but is currently
unimproved.
In addition, the board of directors of the Company has established minimum
loan-to-value ratios which it applies in considering which loans the
Company will purchase. For loans secured by undeveloped property, the
loan-to-value ratio must be less than or equal to 40%; for loans secured by
developed property or by agricultural property, the loan-to-value ratio
must be less than or equal to 50%; for loans secured by commercial property
or by residential property that is considered substandard under
conventional lending guidelines, the loan-to-value ratio must be less than
or equal to 60%; and for loans secured by residential property that is
considered standard or above standard under conventional lending
guidelines, the loan-to-value ratio must be less than or equal to 70%. The
loan-to-value ratio represents the original principal balance of the loan,
divided by the original value of the collateral less the value of any prior
liens or other security interests in such collateral.
Generally, all loan acquisitions are required to be approved by at least
three members of the board of directors of the Company (two of whom must
not also be executive officers or employees of the Company) and at least
one executive officer. The board of directors attempts to meet on a
quarterly basis for such purpose.
SECURITY FOR LOANS; COMPOSITION OF LOAN PORTFOLIO
Most of the loans acquired by the Company are secured by first liens on
real property evidenced by deeds of trust or mortgages, or by assignments
of recorded real estate purchase contracts. Where appropriate, the Company
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may also occasionally purchase loans secured by second mortgages and by
liens on personal property such as mobile homes. The real property
underlying such liens is located primarily in Eastern Washington and
Northern Idaho. At December 31, 1996, 1995 and 1994, 85%, 81% and 89%,
respectively, of the loans held by the Company were secured by first liens
on real property. At such dates, loans secured by real property
categorized as single and multi-family residential real property comprised
42.9%, 43.7% 52.3% of the Company's total loans.
The following table sets forth, for the periods indicated, the categories
of real property securing loans held by the Company, and the aggregate
principal amounts of such loans and the percentage that each category bears
to the total loans of the Company outstanding.
<TABLE>
<CAPTION>
Amount and Percentage of Total Loans
December 31
Type of Real Property ---------------------------------------------------
Security Loans 1996 1995 1994
- -------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,934,661 20.1% $1,684,851 17.7% $1,699,102 21.3%
Single and multi-
family residential 2,371,002 24.6% 2,049,210 21.5% 1,691,913 21.1%
Rural single and
multi-family
residential 1,760,819 18.3% 2,106,955 22.2% 2,505,340 31.2%
Mobile homes 1,002,629 10.4% 1,150,649 12.1% 541,012 6.7%
Agricultural 9,758 0.1% 9,758 .1% 64,299 .8%
Developed land 1,952,558 20.2% 1,789,376 18.8% 1,418,793 17.7%
Undeveloped land 605,878 6.3% 719,728 7.6% 98,026 1.2%
__________ ______ __________ ______ __________ ______
$9,637,305 100.0% $9,510,527 100.0% $8,018,485 100.0%
========== ====== ========== ====== ========== ======
</TABLE>
At December 31, 1996, approximately 70% of the aggregate principal amount
in the Company's loan portfolio was secured by real property located in
Washington, and approximately 29% of such amount was secured by real
property located in Idaho. The balance of such amount was secured by real
property located in Oregon and Montana.
SOURCES OF LOANS; PURCHASE PRICE AND TERMS; LOAN SERVICING; DELINQUENCIES
AND COLLECTIONS
OVERVIEW. The Company has purchased substantially all of its loans since
inception from CLS, which is affiliated indirectly with the Company. CLS'
mortgage lending activities consist of originating, selling and servicing
loans that are primarily secured by real property. These loans are then
sold to purchasers, including the Company, either as whole loans (being
loans in which the purchaser is assigned the promissory note issued by the
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borrower, together with the mortgage or deed of trust and other collateral
securing the obligations evidenced by the note) or undivided participatory
interests in such loans. Purchasers who acquire undivided participatory
interests in loans are required to enter into a participation agreement
with respect to the acquired loan; the participation agreement creates a
joint venture among such purchasers and obligates such purchasers, among
other things, to bear all of the costs and expenses incurred in connection
with any collection or foreclosure proceedings initiated with respect to
the loan, and to otherwise manage, hold or dispose of property acquired
through such proceedings.
Loans originated by CLS typically range in size from $30,000 in principal
amount to $150,000 in principal amount, and bear interest at rates ranging
from 12% per annum to 18% per annum. The loans are generally amortizable
over 15 to 30 years, although most have balloon payment provisions
requiring full payment in five to ten years.
LOAN ORIGINATION. CLS' administrative, underwriting and servicing
operations are based in Spokane, Washington. In addition, CLS maintains
loan productions offices in Kennewick and Wenatchee, Washington and in
Coeur d'Alene, Idaho. CLS originates a variety of conforming and
nonconforming loans, including loans to borrowers who generally do not
qualify for credit from commercial banks, savings and loan associations,
credit unions and other financial institutions. During the years ended
December 31, 1996, 1995 and 1994, approximately 80%, 60% and 60%,
respectively, of these loans were conforming loans meeting institutional
underwriting guidelines. Virtually all of these loans are sold by CLS to
other financial institutions.
The remaining loans originated by CLS during these years were nonconforming
loans made to borrowers who, for a variety of reasons, generally do not
qualify for credit from commercial banks, savings and loan associations,
credit unions and other financial institutions. Because of the higher
levels of risk associated with such loans, borrowers are required to pay
rates of interest in excess of the rates quoted by such financial
institutions to other, more creditworthy consumers.
The loans acquired by the Company from CLS are typically nonconforming
loans and bear interest at rates ranging from 12% per annum to 18% per
annum. All of such loans are secured by real property and, in some
instances, also by personal property. In determining which loans to
purchase from CLS, the Company has been primarily motivated by the value of
such property, and, to a lesser extent, by other factors indicative of the
borrower's ability to repay the loan. During 1996, the Company reevaluated
its selection criteria and began placing more emphasis on the borrower's
creditworthiness and ability to repay the loan; this practice is expected
to continue in the future, as part of the Company's overall effort to
decrease the level of non-earning loans in the portfolio. In determining
whether to make a loan, CLS relies on credit reports prepared by a local
credit reporting service and also elicits information concerning a
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borrower's income and employment status; CLS generally does not attempt to
verify the accuracy or completeness of such information, however, relying,
instead, on the borrower's written representations as to such matters in
the loan application.
CLS' primary criteria for underwriting loans, however, is the loan-to-value
ratio, or, stated differently, the extent to which the current value of the
real property to be given as security for the loan exceeds the principal
amount of the loan. CLS presently does not make loans to applicants unless
the proposed loan-to-value ratio, determined by independent appraisal or by
reference to the most recent tax assessment valuation, meets established
guidelines. Such appraisals are obtained from independent fee appraisers
at the applicant's expense.
In addition to the foregoing, all loans originated by CLS require the
receipt of a policy of title insurance covering the real property given as
security for the loan, and on the receipt of satisfactory evidence of
property insurance in an amount equal to the lesser of the principal
balance of the loan or the replacement cost of any improvements, and naming
CLS as a co-insured. CLS's rights under these policies are assigned to the
Company in connection with the purchase of loans.
LOAN SERVICING. Most of the loans originated by CLS, including those sold
to the Company, are serviced either by CLS Escrow, Inc., which is
affiliated with CLS and the Company; those loans that are not serviced by
CLS Escrow are serviced by an independent escrow service. Loan servicing
includes matters associated with the closing of the loan itself, including
the recording of appropriate security instruments, the retention of closing
documents, the maintenance of records of payment under the loan documents,
notification of the borrower in the event of delinquency and, if necessary,
the retention of counsel to pursue collection or foreclosure remedies
available to CLS.
DELINQUENCIES AND COLLECTIONS. Given the high-risk nature of the
nonconforming loans it originates, it is CLS' policy to monitor loan
compliance very carefully. Written notice is sent whenever an account is
more than five to six days past due to determine the reasons for the
delinquency and to attempt to cause the borrower to bring the account
current; this is followed by a second, stronger notice six to seven days
later if the delinquency in the account has not been cured. If the status
of the account continues to deteriorate, an analysis is undertaken to
determine the appropriate action to be taken. When a borrower is
experiencing difficulty in making timely payments, CLS may temporarily
adjust the borrower's payment schedule. The determination of how best to
work out a delinquent loan is based on a number of factors, including the
borrower's payment history and the reasons for the current delinquency.
Unless circumstances dictate otherwise, it is CLS's policy to commence
formal collection efforts whenever an account is more than 30 days past
due. Regulations and practices regarding the liquidation of properties
(namely, foreclosure) and the rights of the holder of the mortgage, deed or
<PAGE>
<PAGE>
trust or other lien vary from state to state. Only if a delinquency cannot
otherwise be cured will CLS determine that liquidation is the appropriate
course of action. If CLS determines that purchasing a property securing a
loan will minimize the loss associated with the defaulted loan, it may bid
at the foreclosure sale for such property or accept a deed in lieu of
foreclosure.
The Company anticipates that, at any given time, approximately 20% to 30%
of the loans in the loan portfolio will be at least 90 days delinquent. At
December 31, 1996, 1995 and 1994, 33.5%, 30.0% and 15.2%, respectively, of
the principal balance of loans in the portfolio were delinquent in payment
by 90 days or more and were therefore accounted for as non-earning loans.
As is previously noted in this report, as a consequence of the
substantially increased level of non-earning loans during 1996 and 1995,
yields significantly decreased. For the years ended December 31, 1996 and
1995, the yields on average loans in the loan portfolio were 12.5% and
13.5%, respectively, as compared to a yield of 14.45% during the year ended
December 31, 1994. During the years ended December 31, 1996 and 1995, the
yields on commercial loans in the portfolio dropped to 11.7% and 13.6%,
respectively, from 15.3% in 1994. The yields on residential loans dropped
to 13.2% and 13.4% in 1996 and 1995, respectively, from 13.9% in 1994.
The following table illustrates, for the periods indicated, the Company's
loan delinquency and loan and other real estate owned ("OREO") charge-off
experience, and its gains on OREO.
<TABLE>
<CAPTION>
As of and for the years
ended December 31,
------------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
30-59 days past due 18.5% 17.7% 11.9%
60-89 days past due 6.8% 7.5% 4.7%
90+ days past due 33.5% 30.0% 15.2%
Loans and OREO charged-off
against allowance, net $55,163 $9,721 $30,275
Loans and OREO charged-off
against allowance, net, as
a percentage of average
total loans and OREO 0.52% 0.10% 0.41%
Gains on sale of OREO $20,313 $23,196 $21,808
</TABLE>
OTHER REAL ESTATE OWNED. OREO includes property acquired by the Company in
foreclosure proceedings or by acceptance of a deed in lieu of foreclosure,
and property purchased by the Company for resale. These properties are
recorded at the lower of the loan balances at the date they are categorized
as OREO or their fair market determined by independent appraisals or
current listings less the costs of disposal.
<PAGE>
<PAGE>
The following table sets forth, for the periods indicated, the categories
of OREO owned by the Company, the aggregate amounts of OREO within each
category, and the percentage that the aggregate OREO in each category bears
to the total OREO of the Company.
<TABLE>
<CAPTION>
Amount and Percentage of Total Loans
December 31
Type of Real Property ---------------------------------------------------
Comprising OREO 1996 1995 1994
- --------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 127,442 10.4% $ 127,650 13.8% $ 0 0%
Single and multi-
family residential 104,850 8.6% 45,501 4.9% 29,909 4.5%
Rural single and
multi-family
residential 209,506 17.2% 157,629 17.1% 0 0%
Mobile homes 60,144 4.9% 0 0% 0 0%
Agricultural 0 0% 0 0% 0 0%
Developed land 718,198 58.9% 591,746 64.2% 632,965 95.5%
Undeveloped land 0 0% 0 0% 0 0%
__________ ______ __________ ______ _________ ______
$1,220,140 100.0% $ 922,526 100.0% $ 662,874 100.0%
========== ====== ========== ====== ========= ======
</TABLE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
represents management's recognition of the risks of extending credit and
its evaluation of the quality of the loan portfolios of the Company. The
allowance is maintained at levels considered adequate by management to
provide for anticipated loan losses, and is based on management's
assessment of various factors affecting the loan portfolio, including
problem loans, business conditions and loss experience, an overall
evaluation of the quality of the underlying collateral, and holding and
disposal costs. The allowance is increased by provisions charged to
operations and is reduced by loans charged off, net of any recoveries. The
provision for loan losses of the Company, both absolutely and as a
percentage of total loans, increased in 1996 relative to 1995, and the loan
loss allowance, both absolutely and as a percentage of total loans, was
higher at December 31, 1996 as compared to 1995. The increase in the
provision for loan losses and the loan loss allowance during the year is
attributable to the significant increase in nonperforming loans during the
year.
ACQUISITION OF LOANS BY THE COMPANY
PURCHASE PRICE AND TERMS. As is previously noted in this report, the
Company has purchased all of its loans from CLS since inception. The
<PAGE>
<PAGE>
Company is not precluded from purchasing loans from other sources, however,
and may consider doing so in the future, particularly if the volume of
loans originated by CLS is insufficient to meet the Company's demands.
The Company purchases these loans from CLS without discount. CLS is also
paid loan placement fees in connection with such purchases, in amounts
ranging from 6% to 12% of the face value of the loan. Such fees are paid
by the borrower, but are included in the principal amount of the loan.
This arrangement allows CLS to account for the full value of the placement
fee as revenue when the loan is sold to the Company. All loans purchased
by the Company from CLS are without recourse, meaning that, in the event of
default, the Company cannot pursue any collection or other remedies against
CLS, but must, instead, pursue such remedies against the borrower or, as is
more likely, against the real or other property given as security for the
loan.
In addition, the Company pays CLS Escrow closing and escrow fees equal to
approximately 1% of the principal amount of the loan. During the year
ended December 31, 1996, the loan placement fees and closing and escrow
fees paid to CLS and CLS Escrow, respectively, averaged approximately 7%
and 1% of the principal amounts of the loans purchased by the Company.
During the year ended December 31, 1996, the Company paid loan origination
fees to CLS aggregating $355,209 and also paid closing and escrow fees to
CLS Escrow of $59,040. These fees constitute approximately 13% and 17% of
the total revenues earned by CLS and CLS Escrow, respectively, during the
most recent fiscal year. These fees are paid irrespective of the future
performance of the loans acquired by the Company. Because of this fee
structure, CLS may be deemed to have an incentive to encourage the
acquisition of shorter term loans by the Company and to generally advocate
a more rapid turn over of the Company's loan portfolio.
PROVISION OF MANAGEMENT SERVICES TO THE COMPANY
The Company has no employees. Instead, the Company contracts with CLS for
the provision of management and related administrative, accounting,
computer and other services necessary to the Company's operations. The
Company's contract with CLS is renewable annually and provides for the
payment to CLS of monthly fees generally equal to one-twelfth of 1.5% of
the number of outstanding shares of common stock of the Company at month
end. During the year ended December 31, 1996, such management fees
aggregated $163,445.
CONFLICTS OF INTEREST
The principal executive officers of the Company are also the principal
executive officers of CLS and CLS Escrow. CLS is responsible for acquiring
loans for the Company and for managing the Company's day-to-day operations,
pursuant to the terms of a management contract with the Company. CLS also
sells loans which it has originated to investors other than the Company,
and may hold loans for its own account. Despite the fact that CLS and the
<PAGE>
<PAGE>
Company may be deemed to have a common interest, CLS may not always offer
the most profitable or most desirable loans to the Company for purchase.
Additionally, CLS may limit the Company's percentage interest in any
participatory loans, the effect of which could hamper the Company's ability
to control actions taken with respect to the loan. In order to minimize the
conflicts of interest inherent in the selection of loans to be offered for
sale to the Company and those to other investors to whom CLS also owes
fiduciary duties, CLS has adopted the following policies: CLS will
initially determine whether a given loan is consistent with the Company's
investment policy guidelines, prior to purchasing any such loan on the
Company's behalf; loans purchased by the Company from CLS within that
conform to these investment policy guidelines require no additional
approval; however, loans purchased by the Company from CLS that do not meet
these guidelines are required to be approved by the board of directors of
the Company at the next regularly scheduled quarterly meeting of the board,
and if the board of directors determines that the loan is not acceptable,
the Company can require CLS to reverse the transaction and buy the loan
back from the Company at its original cost, together with any associated
fees and costs paid by the Company. These policies apply both to whole
loans and loan participation interests purchased by the Company.
SUPERVISION AND REGULATION OF THE COMPANY'S BUSINESS
OVERVIEW OF APPLICABLE REGULATIONS. The Company's operations are subject
to extensive local, state and federal regulations including, but not
limited to, the following federal statutes and regulations promulgated
thereunder: The Home Ownership and Equity Protection Act ("HOEPA"), Title
1 of the Consumer Credit Protection Act of 1968, as amended (including
certain provisions thereof commonly known as the "Truth in Lending Act" or
"TILA"), the Equal Credit Opportunity Act of 1975, as amended (the "ECOA"),
the Fair Credit Reporting Act of 1970, as amended (the "FCRA") and the Fair
Debt Collection Practices Act, as amended, and the Real Estate Settlement
Procedures Act (the "RESPA"). In addition, the Company is subject to state
laws and regulations, known as usury laws, with respect to the amount of
interest and other charges it can collect on loans.
Mortgage lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of
loans, adequate disclosure of certain contract terms and limitations on
certain collection practices and creditor remedies. Most states, including
Washington, have usury laws which limit interest rates. In addition, state
regulatory authorities may conduct audits of the books, records and
practices of the Company's operations. The Company is currently licensed
to do business in Washington, Idaho and Oregon, and believes that it is in
compliance in all material respects with these regulations.
HOME OWNERSHIP AND EQUITY PROTECTION ACT. HOEPA, which became effective in
October of 1995, defines certain loans, including some of the loans
originated by CLS and subsequently purchased by the Company, as "high-cost
<PAGE>
<PAGE>
mortgages." Certain borrowing terms and conditions associated with
mortgage financing are prohibited by HOEPA. These include: Prepayment
penalties; balloon payments that become due in less than five years;
automatic increases in the rate of interest following an event of default;
negative amortization of the principal amount of any loan; the hold back of
certain amounts of loan proceeds as monthly payments; and the charging of
points on refinancings conducted through the same or affiliated lenders.
HOEPA also increases civil liability for violation of its provisions and
enables a high-cost mortgage borrower to bring claims against both the
originator of the loan (such as CLS) and any person to whom the loan is
assigned (such as the Company). The Company believes that most, if not
all, of the loans that it holds do not contain terms or conditions
precluded by HOEPA, and that the impact of HOEPA on its operations is not
material. The provisions of HOEPA are significant, however, and require
ongoing analysis.
TILA, REGULATION Z, ECOA, FCRA AND RESPA. CLS's origination activities are
subject to TILA and Regulation Z promulgated thereunder. TILA contains
disclosure requirements designed to provide consumers with uniform
understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three-day right to cancel
certain credit transactions, including any refinanced mortgage or junior
mortgage loan on a consumer's primary residence. CLS believes that it is
in compliance in all material respects with TILA.
CLS is also required to comply with ECOA which, in part, prohibits
creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status. Regulation B, promulgated under ECOA,
restricts creditors from obtaining certain types of information from loan
applicants. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are turned
down for credit of the reasons therefor. In instances where a loan
applicant is denied credit or the rate or charge for a loan is increased as
the result of information obtained from a consumer credit agency, another
statute, the FCRA, requires the lender to supply the
applicant with a name and address of the reporting agency. Under RESPA and
Regulation X thereunder, disclosures to certain borrowers are required to
be made with prescribed time frames. Good-faith estimates of applicable
closing costs are provided where required.
STATE USARY LAWS. All of the loans held by the Company are made to high-
risk borrowers residing in either Washington or Idaho, and are secured
primarily by real property located in these states. Idaho has not adopted
usury laws regulating the maximum rate of interest that may be charged by
lenders such as CLS or the Company. The only restrictions currently
prescribed by Idaho law relate to oral agreements to loan money; these
restrictions are not applicable to loan transactions evidenced by written
agreements, such as those originated by CLS.
Washington has adopted fairly stringent usury laws, however, the violation
of which can subject a usurious lender to significant liability.
<PAGE>
<PAGE>
RELIANCE ON THE BUSINESS PURPOSE EXCEPTION. Under Washington law, the
highest rate of interest that generally may be charged by a lender of
consumer debt is the greater of (i) 12% per annum or (ii) a per annum rate
determined by adding four percentage points to the coupon equivalent yield
from the most recent auction of 26-week treasury bills. (As of the date of
this report, the highest rate of interest allowable in Washington for
consumer debt would be 12%; the coupon equivalent yield from the first
auction of 26-week treasury bills in January of 1997 was 5.32%.) These
limitations do not apply, however, to loans that are made for a commercial,
business, investment or agricultural purpose; such loans are expressly
excluded under the usury statute.
CLS and the Company believe those loans made by CLS which are primarily for
a business purpose pose relatively little risk of liability under the usury
statute. Nonetheless, the penalties for violation of the Washington usury
statute are significant. If the borrower establishes either a claim or
defense of usury in a lawsuit, then the creditor (in this case, the
Company) is entitled to receive only an amount equal to the principal of
the loan less the amount of interest accruing thereon at the rate
contracted for. If interest has been paid on the loan, the creditor is
entitled to receive only an amount equal to the principal of the loan less
twice the amount of interest paid thereon, and less the amount of all
accrued and unpaid interest. The borrower is also entitled to recover his
costs and reasonable attorney fees. In addition, because a violation of
Washington's usury statute is also a violation of the state's consumer
protection act, treble damages may be assessed.
RELIANCE ON MONETARY CONTROL ACT PREEMPTION. CLS and the Company also
believe that loans originated by CLS and purchased by the Company are
"federally related mortgage loans" within the meaning of Federal Depository
Institution Deregulation and Monetary Control Act of 1980 (the "Monetary
Control Act"), and that the Monetary Control Act by its terms preempts
state usury restrictions. The Monetary Control Act provides, generally,
that the laws of any state expressly limiting the rate or amount of
interest shall not apply to any loan or mortgage which is (i) secured by a
first lien on residential real property or by a lien on a residential
manufactured home; (ii) made after March 31, 1980; and (iii) a federal
related mortgage loan as defined in the Act.
Two issues arise in determining whether the Company may rely on the
preemptive provisions of the Monetary Control Act: whether the loans it
purchases are first lien loans? and whether the loans are federally related
mortgage loans? Cases interpreting the Monetary Control Act have held
that a "first lien" loan is a loan secured by a first mortgage; thus, any
loans in the Company's portfolio secured by a second or third mortgage
would not be preempted by the Act and would likely be subject to the usury
statute unless such loans were made for a business or other excluded
purpose.
<PAGE>
<PAGE>
A federally related mortgage loan is defined under the Monetary Control Act
as a loan which (i) is made in whole or in part by any lender the deposits
or accounts of which are insured by any agency of the federal government;
(ii) is made in whole or in part by any lender which is itself regulated by
any agency of the federal government; (iii) is made in whole or in part, or
insured, guaranteed, supplemented, or assisted in any way, by the Secretary
of Housing and Urban Development or any other officer or agency of the
federal government or under or in connection with a housing or urban
development program administered by the Secretary of Housing and Urban
Development or housing or related program administered by any other such
officer or agency; is eligible for purchase by the Federal National
Mortgage Association, the Government National Mortgage Association, of the
Federal Home Loan Mortgage Corporation, or from any financial institution
from which it could be purchased by the Federal Home Loan Corporation; or
(iv) is made in whole or in part by any "creditor," as defined under the
Consumer Credit Protection Act of 1968, who makes or invests in residential
real estate loans aggregating more than $1,000,000 per year.
If loans originated by CLS are deemed to be federally related mortgage
loans, it is only because CLS meets the definition of a "creditor" within
the meaning of the Consumer Credit Protection Act. A "creditor" is defined
under such Act as "a person who both (i) regularly extends, whether in
connection with loans, sales of property or services, or otherwise consumer
credit which is payable by agreement in more than four installments or for
which the payment of a finance charge is or may be required, and (ii) is
the person to whom the debt arising from the consumer credit transaction is
initially payable on the face of the indebtedness."
CLS and the Company believe that CLS is a "creditor" within the meaning of
the Consumer Credit Protection Act because it regularly extends consumer
credit, such as credit used to pay personal or household expenses or debts;
accordingly, the preemption provisions of the Monetary Control Act have
been deemed to apply, thus protecting CLS and the Company from liability
for violations of the Washington usury statute, at least with respect to
those consumer loans secured by first liens on residences or mobile homes.
There are no actions, investigations or proceedings pending or, to the best
knowledge of management, threatened against the Company or CLS challenging
the rate of interest charged by CLS on mortgage loans.
COMPETITION
CLS and the Company compete primarily with other mortgage brokerage
companies and with finance companies such as Associates Financial Services,
The Money Store, Beneficial Financial Services and ITT Financial Services,
all of which exist in CLS's and the Company's service areas, in originating
and purchasing loans. To a lesser extent, they also compete with
commercial banks, savings and loan associations, mutual savings banks and
credit unions.
<PAGE>
<PAGE>
Most of these competitors have greater financial resources than either CLS
or the Company. The mortgage brokerage and finance companies with whom CLS
and the Company compete have yield expectations similar to those of CLS and
the Company; the competition for high-risk loans sufficient to generate
yields meeting these expectations is therefore substantial.
EMPLOYEES
As previously noted in this report, the Company has no employees. Instead,
it relies on CLS and CLS Escrow for the provision of management and related
administrative, accounting, computer, escrow, collection and other services
necessary to the Company's operations. As of December 31, 1996, CLS and
CLS Escrow had 45 full-time employees, of which 37 were employed by CLS and
eight were employed by CLS Escrow. Twenty-nine of these employees were
employed in administrative capacities at such date, and sixteen were
employed as sales representatives. None of CLS's or CLS Escrow's employees
are covered by a collective bargaining agreement. CLS's and CLS Escrow's
managements believe relations with their employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own or lease any property other than the OREO
described in Item 1 of this report. As is disclosed in Item 1 of this
report, the Company has no employees. Instead, the Company contracts with
CLS for the provision of management and related administrative, accounting,
computer and other services necessary to the Company's operations. Such
services are conducted from facilities owned by CLS.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1996.
<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. The common stock of the Company is not listed for
trading on any secondary market or exchange, nor are prices therefor quoted
on any such market or exchange. Since 1988, however, the Company has
attempted to assist those of its shareholders who are seeking to sell their
common stock by providing such holders with a list of the current
shareholders and the names of those shareholders who have expressed an
interest in acquiring additional common stock. The Company's participation
in such transactions is limited to the foregoing, and neither the Company
nor any of its affiliates receive a fee or other remuneration in connection
therewith.
HOLDERS. The number of holders of common stock of record on March 1, 1997
was approximately 430.
DIVIDENDS. The following table sets forth information concerning dividends
declared and paid by the Company for the years ended December 31, 1996 and
1995.
<TABLE>
<CAPTION>
1996
Amount Per Share (1)
<S> <C> <C>
First Quarter $268,943 $0.125
Second Quarter $236,643 $0.108
Third Quarter $194,744 $0.088
Fourth Quarter $232,726 $0.105
1995
Amount Per Share
First Quarter $246,762 $0.137
Second Quarter $256,098 $0.137
Third Quarter $266,790 $0.138
Fourth Quarter $223,831 (2) $0.096
_________________________
</TABLE>
(1) Per share amounts represent dividends as a percentage of shares
outstanding at the beginning of the quarter.
(2) Includes a special dividend of $32,700, or approximately $0.016 per
share, declared and paid in early 1996.
The Company has adopted a dividend policy which is periodically reviewed
and revised by the board of directors. The goals of such policy is to pay
cash dividends at annualized rates ranging from 9% to 12%, provided funds
are available, and to distribute at least 95% of its taxable income in each
year in order to maintain its status as a REIT.
<PAGE>
<PAGE>
The payment of dividends on the common stock is subject to statutory
limitations. Under Washington general corporate law as it applies to the
Company, no cash dividend may be declared or paid, if, after giving effect
to the dividend, the Company is insolvent or the liabilities of the Company
exceed its assets.
DIVIDEND REINVESTMENT PLAN. The Company presently maintains an informal
dividend reinvestment plan which enables its shareholders to elect
quarterly whether to receive their dividends in cash or reinvest such
dividends in common stock of the Company at the price of $5.00 per share.
Shareholders of the Company may change their election at any time, or from
time-to-time, without penalty. The Company maintains an effective
registration statement under the Securities Act, and a related prospectus,
pertaining to the continuous offering of its common stock pursuant to the
plan. During the years ended December 31, 1996, 1995 and 1994, 122,553
shares, 326,756 shares and 550,868 shares of common stock were purchased in
such offering, yielding net proceeds to the Company of approximately
$600,000, $1.5 million and $2.8 million, respectively.
Management of the Company is presently considering changing the plan to an
open market dividend reinvestment plan, provided an active secondary
trading market for its common stock can be established. Under an open
market plan, shares of the Company's common stock acquired for the benefit
of those shareholders who have elected to participate in the plan would be
purchased in secondary market transactions, at then prevailing market
prices, as opposed to being purchased directly from the Company. The
adoption of such a plan would deny the Company of its only current source
of financing, but would also obviate the expense and liability associated
with maintaining an effective Securities Act registration statement. In
addition, adoption of the plan would give participants in the plan the
ability to acquire common stock of the Company at market prices, as opposed
to a price arbitrarily determined by the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
SELECTED FINANCIAL DATA
The selected financial data for each of the three years ended December 31,
1996, 1995 and 1994 has been derived from the financial statements<PAGE>
<PAGE>
appearing elsewhere in this report, which have been audited by McFarland &
Alton, P.S., Spokane, Washington. The selected financial data should be
read in conjunction with, and is qualified by, such financial statements
and the notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
_____________________________________
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA
Interest income . . . . . . . . . $1,208,815 $1,188,915 $1,024,408
Loan loss provision . . . . . . . (105,000) (48,000) (49,000)
Net interest income . . . . . . . 10,074 2,603 6,304
Non-interest expense . . . . . . (319,439) (211,513) (183,353)
Gain on sale of real estate . . . 20,313 23,196 21,808
Net income . . . . . . . . . . . 814,763 955,201 820,167
PER SHARE DATA
Primary earnings per weighted
average common shares outstanding $0.37 $0.50 $0.54
Book value per common share . . $4.87 $4.93 $4.99
BALANCE SHEET DATA
Loans, earning . . . . . . . . . $6,412,272 $6,652,683 $6,802,942
Loans, nonearning . . . . . . . . 3,225,033 2,857,844 1,215,543
Real estate held for sale . . . . 1,220,140 922,526 662,874
Allowance for loan losses . . . . (156,391) (106,554) (68,275)
Net loans and real estate held for
sale . . . . . . . . . . . . . . 10,701,054 10,326,499 8,613,084
Total assets . . . . . . . . . . 11,003,097 10,054,708 9,011,780
Shareholders' equity . . . . . . 10,841,836 10,372,488 8,862,483
[Table continued on following page.]
<PAGE>
<PAGE>
Year Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
SELECTED RATIOS
Yield on average residential loans . . . . . . 13.21% 13.40% 13.88%
Yield on average commercial loans . . . . . . 11.68% 13.63% 15.34%
Yield on total assets . . . . . . . . . . . . 11.33% 12.21% 13.49%
Return on average total assets . . . . . . . . 7.58% 9.79% 10.74%
Return on average total shareholders' equity . 7.68% 9.93% 10.94%
Ratio of net income to total revenues . . . . 65.75% 78.64% 77.92%
ASSET QUALITY RATIOS
Allowance for losses to ending total loans
and OREO . . . . . . . . . . . . . . . . . . 1.44% 1.02% 0.79%
Allowance for losses to non-earning loans . . 4.85% 3.63% 5.62%
Non-earning loans to ending total assets . . . 29.31% 27.21% 13.49%
Non-earning loans to total loans . . . . . . . 33.46% 30.05% 15.20%
Non-earning loans and OREO to ending
total assets . . . . . . . . . . . . . . . . 40.94% 36.23% 21.64%
Net charge-offs to average loans and OREO . . 0.52% 0.10% 0.41%
CAPITAL RATIOS
Average shareholders' equity to average assets 98.64% 98.56% 98.11%
</TABLE>
RESULTS OF OPERATIONS
OVERVIEW. 1996 was not a particularly good year for the Company. The
level of non-earning loans continued to increase during the year, from
30.0% in 1995 to 33.5% in 1996, a near doubling of non-earning loan levels
in 1994. Yield on average assets for 1996 was 11.33%, which is down from
the 1995 and 1994 yields of 13.49% and 12.21%, respectively. As a
consequence of the continued deterioration of the loan portfolio, net
income declined to $814,763 in 1996, a reduction of $140,438 or
approximately 15% from 1995.
As is previously noted in this report, the increase in non-earning loans in
1996 and 1995 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, but declined in performance as
those markets softened beginning in 1995.
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
<PAGE>
<PAGE>
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 in
the portfolio, and thereby reduce the concentration of higher-interest
loans secured by developed property which, at least historically, have
contributed significantly to the decline in yield. In addition, CLS has
adopted stricter, more conservative appraisal practices; 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. Finally, 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 non-earning loans to 20% or less and to increase
the annual yield to at least 10%. Although management is optimistic, no
assurance can be given that these goals will be achieved during the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
GENERAL. The Company's net income decreased 14.70%, to $814,763, for the
year ended December 31, 1996, from $955,201 for the year ended December 31,
1995. This decrease was primarily as a result of an increase in the
provision for loan and real estate owned losses, and higher levels of legal
expenses directly associated with foreclosure and collection activities.
These expenses increased as a result of higher levels of non-earning assets
during 1996.
Return on average assets and equity were 7.58% and 7.68%, respectively, for
fiscal 1996, as compared to 9.79% and 9.93%, respectively, for fiscal 1995.
Total assets increased 4.74%, to $11,003,097, for the year ended
December 31, 1996, from $10,504,708 for the year ended December 31, 1995.
Total loans increased $126,778 during the year. The increase in loans
resulted from an increase in funds available for the purchase of loans
during the year, which funds were primarily derived from principal
repayments and the issuance of common stock.
NET INTEREST INCOME. The Company's interest income decreased 1.67%, to
$1,208,815, for the year ended December 31, 1996, from $1,188,915 in the
prior year. The decrease in interest income was primarily attributable to
the increase in non-earning loans during the year.
TOTAL EXPENSES. Total expenses increased 63.6%, to $424,439, in fiscal
1996, as compared to $259,513 in fiscal 1995. The increase in total
expenses is attributable to increased funding of the allowance for loan
losses during the year, and collection expenses related to defaulted loans.
Management fees paid to CLS during the year ended December 31, 1996 were
$163,445, as compared to $144,142 in 1995. These fees are the largest
expense item of the Company and are based on the number of outstanding
shares of common stock of the Company in each year.
<PAGE>
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
GENERAL. The Company's net income increased 16.46%, to $955,201, for the
year ended December 31, 1995, from $820,167 for the year ended December 31,
1994. The increase in net income was primarily as the result of an
increase in the size of the loan portfolio during the year, which more than
offset lower yields achieved during the year.
Return on average assets and equity were 9.79% and 9.93%, respectively, for
fiscal 1995, as compared to 10.74% and 10.94%, respectively, for fiscal
1994. Total assets increased 16.57%, to $10,504,708 for the year ended
December 31, 1995, from $9,011,780 for the year ended December 31, 1994.
Total loans increased $1,492,042 during the year. The increase in loans
resulted from an increase in funds available for the purchase of loans
during the year, which funds were primarily derived from reinvested
dividends and sales of common stock to new investors.
NET INTEREST INCOME. The Company's interest income increased 16.1%, to
$1,188,915, for the year ended December 31, 1995, from $1,024,408 in the
prior year. The increase was primarily as the result of an increase in the
size of the loan portfolio during the year.
TOTAL EXPENSES. Total expenses increased 11.7%, to $259,513, in fiscal
1995, as compared to $232,353 in fiscal 1994. The increase in total
expenses is attributable to increased funding of the allowance for loan
losses during the year. Management fees paid to CLS during the year ended
December 31, 1995 were $144,142, as compared to $114,903 in 1994. These
fees are the largest expense item of the Company and are based on the
number of outstanding shares of common stock of the Company in each year.
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 or issue
additional securities. The Company may borrow on a short-term basis to
compensate for a reduction in funds occasioned by the likely termination of
its current dividend reinvestment plan in 1997. The Company's ability to
service borrowing is dependent upon its interest income.
The Company's total shareholders' equity increased to $10,841,836 at
December 31, 1996, from $10,372,488 at December 31, 1995. At December 31,
1996, shareholders' equity was 98.64% of total assets, compared to 98.56%
at December 31, 1995. At December 31, 1996, the Company held cash of
$217,152.
EFFECTS OF INFLATION AND CHANGING PRICES. The primary impact of inflation
on the Company's operations is increased asset yields, deposit costs and
operating overhead. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature.
<PAGE>
<PAGE>
As a result, interest rates generally have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Although interest rates do not necessarily move 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.
The effects of inflation can magnify the growth of assets, and if
significant, would require that equity capital increase at a faster rate
than would otherwise be necessary.
PLAN OF OPERATION. As is set forth more fully in Item 1 of this report,
the Company's plan of operation during the ensuing twelve-month period is
to acquire and maintain a portfolio of loans collateralized by real
property sufficient to generate dividends to its shareholders at annualized
rates ranging from 9% to 12%. 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 and (iii) more efficiently manage the
operations of the Company and CLS. Reference is made to Item 1 for more
complete information concerning these strategies and the Company's and
CLS's plans for implementing them.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company for the years ended December 31,
1996, 1995 and 1994 included elsewhere in this report have been audited by
McFarland & Alton, P.S., Spokane, Washington. An index to such financial
statements appears at page 22 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUANTING AND
FINANCIAL DISCLOSURE.
During the years ended December 31, 1996, 1995 and 1994, there were no
disagreements with McFarland & Alton, P.S. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure, which, if not resolved to the satisfaction of such firm,
would have caused them to make reference to the subject matter of such
disagreement in their reports on such financial statements.
[The balance of this page has been intentionally left blank.]
<PAGE>
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names, ages, business experience for at least the past five years and
positions of the directors and executive officers of the Company as of
March 1, 1997 are as follows. The Company's board of directors consists of
six directors. All directors serve until the next annual meeting of the
Company's stockholders or until their successors are elected and qualified.
Executive officers of the Company are appointed by the board of directors.
H. E. Brazington is the father of Stanley E. Brazington. There are no
other family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or executive
officer.
<TABLE>
<CAPTION>
NAME AND AGE OF
DIRECTOR OR EXECUTIVE POSITION WITH
OFFICER THE COMPANY PRINCIPAL OCCUPATION
_____________________ ________________________ _______________________
<S> <C> <C>
H. E. Brazington President, Chief Execu- Executive Officer of the
Age: 61 tive Officer and Director Company, CLS Mortgage,
Inc. and CLS Escrow, Inc.
Stanley E. Brazington Secretary and Principal Executive Officer of the
Age: 39 Financial and Accounting Company, CLS Mortgage,
Officer Inc. and CLS Escrow, Inc.
Robert C. Brown Director Retired
Age: 66
Dr. Vaughn Ransom Director Retired
Age: 72
Vern W. Haworth Director Retired
Age: 77
Douglas M. O'Coyne Director Principal in the law firm
Age: 45 of O'Coyne & Phillips,
P.S., Spokane, Washington
Elden Sorensen Director Retired
Age: 62
Dr. David W. Hanson Director Dentist
Age: 57
C. Patrick Craigen Director Retired
Age: 78
</TABLE>
<PAGE>
<PAGE>
BIOGRAPHICAL INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS.
H. E. BRAZINGTON is the President and Chief Executive Officer of the
Company and a member of its board of directors, positions he has held since
1988. Mr. Brazington is also the President, a Director and a majority
shareholder of CLS Mortgage, Inc. which he founded and has managed since
1974, and the Vice President, a Director and principal shareholder of CLS
Escrow, Inc. Mr. Brazington attended Washington State College in 1955 and
1956.
STANLEY E. BRAZINGTON is the Secretary of the Company and a member of the
board of directors, positions he has held since 1988. He is also the Vice
President and a member of the board of directors of CLS Mortgage, Inc. Mr.
Brazington graduated from Eastern Washington University in 1982, with a
bachelor of arts degree in business administration.
ROBERT C. BROWN has been a member of the board of directors since January
of 1997. Mr. Brown retired in 1991 but has been active since 1995 in
managing a fishing manufacturing business he owns. Prior to his
retirement, Mr. Brown was employed by E-Z Loader Boat Trailers, Inc. of
Spokane as its credit manager and international sales manager.
DR. VAUGHN RANSOM has been a member of the board of directors since 1988.
Prior to 1992, when he sold his practice, he was a self-employed dentist in
Spokane County.
VERN W. HAWORTH has been a member of the board of directors since 1988. He
has been retired since 1986. Prior to his retirement, he was employed by
Wendle Ford in Spokane.
DOUGLAS M. O'COYNE has been a member of the board of the directors since
1988, and from 1988 until January of 1997, was also counsel to the Company.
He is the principal in the law firm of O'Coyne & Phillips, P.S. in Spokane,
Washington and was formerly a partner of the law firm of Deglow, Peterson,
O'Coyne, and Phillips, P.S., also located in Spokane. Mr. O'Coyne is also
the president and sole shareholder of Crown Financial Networks, Inc., which
is engaged in the same business as CLS and the Company.
ELDEN SORENSEN has been a member of the board of directors since 1989. He
has been retired from active business activities since 1985, but is the
President of Second Wind Engineering, Inc., which designs and builds street
rods. Prior to 1985, Mr. Sorensen owned a retail sportswear store. He
graduated from Reedly College in 1955 with a bachelor of arts degree in
business administration.
DR. DAVID W. HANSON has been a member of the board of directors since 1994.
He has been practicing dentistry in Spokane County for over 20 years. Dr.
Hanson is a 1965 graduate of the University of Washington, with a degree in
dentistry.
<PAGE>
<PAGE>
C. PATRICK CRAIGEN has been a member of the board of directors since 1989.
He has been retired since 1989, but prior to then spent 45 years in the
banking industry, most recently with First National Bank where he was
employed for 35 years. Mr. Craigen graduated from the Pacific Coast School
of Banking at the University of Washington in 1960.
ITEM 10. EXECUTIVE COMPENSATION.
As is disclosed elsewhere in this report, the Company has no employees and
pays no compensation to its executive officers or to those of its directors
who are also executive officers or employees. Directors who are not
otherwise affiliated with the Company receive $200 for each board meeting
attended.
The Company contracts with CLS for the provision of management and related
administrative, accounting, computer and other services necessary to the
Company's operations. The compensation paid to CLS for such management and
related services is disclosed in this report, in, Item 1, in the subsection
entitled "Acquisition of Loans by the Company" and "Provision of Management
Services to the Company," and in Item 13.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 1, 1997, the names of, and
number of shares of common stock of the Company beneficially owned by,
persons known to the Company to own more than five percent (5%) of the
Company's common stock; the names of, and number of shares beneficially
owned by each director and executive officer of the Company; and the number
of shares beneficially owned by, of all directors and executive officers as
a group. At such date, the number of shares of common stock of the Company
outstanding was 2,209,443 shares.
<TABLE>
<CAPTION>
Amount and
Nature of Beneficial
Ownership all direct Percent
Name of Owner unless otherwise noted of Class
___________________________ ______________________ ________
<S> <C> <C>
H. E. Brazington (1) 76,328 3.45%
Stanley E. Brazington (1) 272 0.01%
Robert C. Brown (1), (2) 1,524 0.07%
Dr. Vaughn Ransom (1), (3) 18,065 0.82%
Vern W. Haworth (1), (4) 8,675 0.39%
[Table continued on following page.]
<PAGE>
<PAGE>
Amount and
Nature of Beneficial
Ownership all direct Percent
Name of Owner unless otherwise noted of Class
___________________________ ______________________ ________
Douglas M. O'Coyne (1), (5) 19,457 0.88%
Elden Sorensen (1) 14,801 0.67%
Dr. David W. Hanson (1), (6) 38,673 1.75%
C. Patrick Craigen (7) 14,352 0.65%
All Directors and Executive Officers
as a Group (9 persons) (8) 192,147 8.70%
____________________
</TABLE>
(1) Director of the Company.
(2) Includes 804 shares held by Mr. Brown's spouse.
(3) Includes 8,230 shares held in trust for Mr. Ransom's benefit under
the Vaughn R. Ransom DDS PS Profit Sharing Plan and Trust.
(4) Includes 675 shares held jointly by Mr. Haworth and his
grandchildren.
(5) Includes 11,721 shares held by Mr. O'Coyne's minor children and 200
shares held by Crown Financial Networks, Inc., a corporation
controlled by Mr. O'Coyne.
(6) Includes 34,477 shares held in trust for Mr. Hanson's benefit under
the David W. Hanson DDS PS Profit Sharing Plan and Trust.
(7) Includes 2,352 shares held jointly by Mr. Craigen and his children.
(8) See footnotes (2) through (7), above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PAYMENT OF MANAGEMENT FEES. During the years ended December 31, 1996, 1995
and 1994, the Company paid management fees of $165,445, $144,142 and
$114,903 to CLS, respectively. Such fees were determined by multiplying
the outstanding common stock of the Company in each year by a factor of
1.5%. (The management agreement between the Company and CLS provides that
the Company can base such fees on a factor of 2.0%, but the Company has
historically elected to use the lower factor.) The board of directors of
the Company approves the management agreement annually.
PAYMENT OF LOAN ACQUISITION FEES. During the years ended December 31,
1996, 1995 and 1994, the Company paid loan acquisition fees of $355,209,
$406,888 and $523,762 to CLS, respectively.
PAYMENT OF ESCROW AND LATE FEES. CLS Escrow is paid escrow set up fees and
continuing annual escrow fees by the borrowers, and retains all late fees
<PAGE>
<PAGE>
that are paid by the borrowers whose accounts are delinquent. The amounts
of these fees were not determinable for the periods covered by this report.
CLS Escrow does not charge the Company for collection services or for
escrow fees. However, in the event collection procedures are initiated
with respect to a loan, the Company bears all of the associated fees and
costs.
PAYMENT OF LEGAL FEES TO AFFILIATE. A law firm with which Douglas M.
O'Coyne is affiliated rendered legal services to the Company in each of the
years ended December 31, 1996, 1995 and 1994. Such firm also represented
CLS during such years. The Company paid Mr. O'Coyne's firm $42,489,
$50,212 and $22,650 during 1996, 1995 and 1994, respectively. In addition,
during 1995 the Company loaned money to a borrower who, in turn, remitted
$51,598 of the loan proceeds to Mr. O'Coyne's firm for legal fees incurred
over a three-year period beginning in 1992.
ITEM 13. 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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
___________ ___________
<S> <C>
3.1 Articles of Incorporation of the Company, as amended.
Filed as Exhibit 3 to the Registrant's Registration
Statement on Form SB-2, dated October 3, 1993, and
incorporated by reference herein.]
3.2 Bylaws of the Company, as amended, filed as Exhibit 3
to the Registrant'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, as amended. Filed herewith.
27.1 Financial data schedule. Filed herewith.
</TABLE>
FORM 8-K. No reports on Form 8-K were filed by the registrant during the
fourth quarter of 1996.
<PAGE>
<PAGE>
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, 1996 and 1995, 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 on 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, 1996 and 1995, 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 118,
and its method of accounting for real estate held for sale effective
January 1, 1996, to conform with Statement of Financial Accounting
Standards No. 121.
Spokane, Washington
January 24, 1997
<PAGE>
<PAGE>
STATEMENTS OF CONDITION
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Loans receivable, earning $ 6,412,272 $ 6,652,683
Loans receivable, nonearning 3,225,033 2,857,844
-------------- --------------
9,637,305 9,510,527
Real estate held for sale 1,220,140 922,526
-------------- --------------
10,857,445 10,433,053
Allowance for losses (156,391) (106,554)
-------------- --------------
NET LOANS AND REAL ESTATE (Notes 2 and 3) 10,701,054 10,326,499
Cash 217,152 89,980
Other assets 1,859 4,124
Accrued interest receivable 83,032 84,105
-------------- --------------
TOTAL ASSETS $11,003,097 $10,504,708
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 25,968 $ 26,968
Accrued cash dividends payable to
stockholders 135,293 105,252
-------------- --------------
TOTAL LIABILITIES 161,261 132,220
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000
shares authorized; 1996, 2,225,547
shares; 1995, 2,102,994 shares, issued
and outstanding 11,046,659 10,433,894
Undistributed income (expense) (204,823) (61,406)
-------------- --------------
10,841,836 10,372,488
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $11,003,097 $10,504,708
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 689,559 $ 673,135
Interest income on commercial loans 508,327 510,090
Interest income on bank accounts 10,929 5,690
Other income 10,074 2,603
------------- -------------
TOTAL REVENUES 1,218,889 1,191,518
------------- -------------
EXPENSES
Management fees - related party (Note 5) 163,445 144,142
Amortization of organizational costs 4,124 12,965
Provision for loan and real estate
losses (Notes 2 and 3) 105,000 48,000
Accounting and auditing expenses 31,087 25,418
Legal expenses (Note 5) 98,987 15,316
Business and occupational taxes 11,022 12,293
Other expense 10,774 1,379
------------- -------------
TOTAL EXPENSES 424,439 259,513
------------- -------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 794,450 932,005
Gain on sale of real estate (Note 4) 20,313 23,196
------------- -------------
NET INCOME $ 814,763 $ 955,201
============= =============
Primary earnings per common share $ 0.37 $ 0.50
Weighted average shares outstanding 2,199,791 1,928,686
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Total
Common Stock Undistributed Stock-
----------------------- Income holders'
Shares Amount (Expense) Equity
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
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
Net income - - 814,763 814,763
Issuance of common stock 40,028 200,140 - 200,140
Dividends reinvested in stock 82,525 412,625 (412,625) -
Cash dividends - - (545,555) (545,555)
--------- ----------- ---------- ----------
Balance, December 31, 1996 2,225,547 $11,046,659 $(204,823) $10,841,836
========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
-----------------------
1996 1995
-----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 814,763 $ 955,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organizational costs 4,124 12,965
Provision for loan and real estate losses 105,000 48,000
Amortization of discounts on loans (9,805) (2,516)
Gain on sale of real estate (20,313) (23,196)
(Increase) decrease in:
Accrued interest receivable 1,074 10,892
Other assets (1,859) -
Increase (decrease) in:
Accrued expenses (1,687) 9,165
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 891,297 988,727
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (4,796,982) (4,831,045)
Principal reductions and maturities of loans 4,307,608 3,167,238
Proceeds from sale of real estate owned 155,709 92,332
Purchases of real estate owned (20,148) (105,478)
Advances of costs associated with other real estate (92,664) (59,539)
----------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES (466,477) (1,736,492)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock 200,140 1,198,883
Payment of stock issuance and registration costs:
Related party - (31,539)
Other - (4,569)
Cash dividends paid to stockholders (517,788) (588,459)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES (317,648) 574,316
----------- -----------
INCREASE (DECREASE) IN CASH 127,172 (173,449)
Cash, beginning of year 89,980 263,429
----------- -----------
Cash, end of year $ 217,152 $ 89,980
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 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 $ 412,625 $ 439,895
---------- ----------
Acquisition of real estate in settlement
of loans $ 525,259 $ 215,862
---------- ----------
Charge offs against the allowance $ 56,065 $ 10,902
---------- ----------
New contracts made in connection with sales of
real estate $ 149,390 $ 45,200
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
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, l988, 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 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>
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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 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
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:
Real estate held for sale includes properties acquired through a
foreclosure proceeding, 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 less costs of
disposal. Loan losses arising from the acquisition of such property are
charged against the allowance for loan and real estate losses. An
allowance for losses on real estate held for sale 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 is recorded by Opportunity
Management Company, Inc. (Note 5).
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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 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>
1996 1995
---------- ----------
<S> <C> <C>
Cash dividends paid $ 517,788 $ 588,459
Dividends reinvested in stock 412,625 434,895
Accrued dividends, end of year 135,293 105,252
Accrued dividends, beginning of year (105,252) (131,469)
Accrued fractional shares not paid 687 764
---------- ----------
Dividends on common stock 961,141 997,901
Dividends paid or accrued in excess
of net income (146,378) (42,700)
---------- ----------
NET INCOME $ 814,763 $ 955,201
========== ==========
Cash dividends - accrual basis $ 545,555 $ 563,006
Rescinded dividends 2,961 -
Dividends reinvested in stock -
accrual basis 412,625 434,895
Dividends accrued in excess of net income (146,378) (42,700)
---------- ----------
NET INCOME $ 814,763 $ 955,201
========== ==========
</TABLE>
Per share amounts:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year.
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Reclassifications:
Certain reclassifications have been made to the December 31, 1995, balances
to conform with the December 31, 1996, classification. These
classifications had no impact on net income as previously presented.
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).
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).
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at December 31, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
First mortgage loans $ 8,190,034 $ 7,676,367
Second mortgage loans 401,747 683,511
Loans secured by personal property and
real etate 1,045,524 1,150,649
----------- -----------
$ 9,637,305 $ 9,510,527
=========== ===========
</TABLE>
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 3. Loans Receivable and Real Estate Held for Sale (Continued)
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, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial $ 1,934,661 $ 1,684,851
Single and multiple family residential 2,371,002 2,049,210
Rural single and multiple family residential 1,760,819 2,106,955
Mobile homes 1,002,629 1,150,649
Farm/agricultural 9,758 9,758
Developed land 1,952,558 1,789,376
Undeveloped land 605,878 719,728
----------- -----------
$ 9,637,305 $ 9,510,527
=========== ===========
Real estate held for sale at December 31, 1996 and 1995, consists of the
following:
1996 1995
----------- -----------
Commercial $ 127,442 $ 127,650
Single family residential 104,850 45,501
Rural single family residential 209,506 157,629
Developed land 718,198 591,746
Mobile homes 60,144 -
----------- -----------
[Table continued on following page.]
<PAGE>
<PAGE>
NOTES TO 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:
Balance, beginning of year $ 106,554 $ 68,275
Provision charged to expense 105,000 48,000
Recoveries 902 1,181
Charge off of losses on sale of real estate
owned (56,065) (10,902)
------------ ------------
Balance, end of year $ 156,391 $ 106,554
============ ============
</TABLE>
Impairment of loans having a recorded investment of $3,566,151 and
$2,857,844 at December 31, 1996 and 1995, respectively, has been recognized
in conformity with SFAS No. 114 as amended by SFAS No. 118. There is a
$32,348 and $-0- of specific allowance for loan losses related to these
loans at December 31, 1996 and 1995, respectively. Interest income on
impaired loans of $204,671 and $245,934 was recognized for cash payments
received in 1996 and 1995, respectively. The average impaired loans during
1996 and 1995 was $3,151,423 and $1,593,682, respectively.
Included in the allowance for losses, there is a $100,463 and $57,398
specific allowance to reduce real estate held for sale to the estimated
fair value less costs of disposal at December 31, 1996 and 1995,
respectively. The estimated impairment losses of $38,247 resulting from
changes in carrying amounts during 1996 of real estate held for sale are
included in the provision for loan and real estate losses on the statements
of income.
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
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 4. Income Taxes (Continued)
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 $ 814,763 $ 955,201
Federal income taxes at statutory rates (277,019) (324,768)
---------- ----------
Net Income $ 537,744 $ 630,433
========== ==========
</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, 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.
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, 1996 and 1995, $163,445 and $144,142,
respectively, were paid for these services in accordance with a management
agreement. The amounts payable to CLS Mortgage, Inc. at December 31, 1996
and 1995, were $13,691 and $13,029, respectively. For 1996 and 1995 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 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 .70% of the common stock of the Opportunity Management
Company. The two sole stockholders directly and indirectly own 3.46% of
the common stock of Opportunity Management Company, Inc. and 100% of the
stock of CLS Mortgage, Inc. at December 31, 1996.
Escrow services:
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.
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 5. Related Party Transactions (Continued)
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 years ended
December 31, 1996 and 1995, CLS Mortgage, Inc. received $355,209 and
$406,888, respectively, in loan placement fees (Note 1).
Legal fees:
During 1996 and 1995, the Company incurred charges for legal services that
were either capitalized, expensed, or deducted from stock proceeds as stock
issuance costs of approximately $42,489 and $50,212, respectively, from a
law firm in which a stockholder/director (owning .88% and .88% of the
outstanding stock at December 31, 1996 and 1995, 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, accrued interest receivable, and accured cash dividends payable:
The carrying amount approximates fair value due to the short-term nature of
these financial instruments.
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>
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, 1996. The approximate maturities of the loan
portfolio as of December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------
Principal Percentage Principal Percentage
Principal maturing during Carrying of Carrying of
years ended December 31, Amount Portfolio Amount Portfolio
- ------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996 $ - -% $ 910,948 10%
1997 998,417 10 445,085 5
1998 568,861 6 1,088,452 11
1999 1,459,730 15 2,300,319 24
2000 2,088,172 22 3,379,008 36
2001 2,437,920 25 63,510 1
2002 85,548 1 121,467 1
2003 101,683 1 112,532 1
2004 170,176 2 - -
Thereafter 1,726,798 18 1,089,206 11
---------- ---------- ---------- ----------
$9,637,305 100% $9,510,527 100%
========== ========== ========== ==========
</TABLE>
Actual maturities may differ from contractual maturities due to prepayments
of principal by borrowers or delinquency of borrowers.
[The balance of this page has been intentionally left blank.]
<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: March 18, 1997
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Stanley E. Brazington By: /s/ Elden Sorensen
------------------------------ ------------------------------
Stanley E. Brazington, its Elden Sorensen, a Director
Principal Financial and
Accounting Officer
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Robert C. Brown By:
------------------------------ ------------------------------
Robert C. Brown, a Director Dr. David W. Hanson, a Director
Date: March 18, 1997 Date: March ___, 1997
By: /s/ Vaughn Ransom By:
------------------------------ ------------------------------
Dr. Vaughn Ransom, a Director C. Patrick Craigen, A Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Vern W. Haworth
------------------------------
Vern W. Haworth, a Director
Date: March 18, 1997
By: /s/ Douglas M. O'Coyne
------------------------------
Douglas M. O'Coyne, a Director
Date: March 18, 1997
<PAGE>
<PAGE>
Exhibit 10.1 to Annual Report on Form 10-KSB
For the Year Ended December 31, 1996
Opportunity Management Company, Inc.
REVISED GENERAL MANAGEMENT AGREEMENT
1. Introduction. The original agreement is dated August 16, 1989, between
Opportunity Management Company, Inc., with principle offices at East 12904
Nora, Suite A, in Spokane, Washington 99216, hereinafter referred to as
"Company," and CLS Mortgage, Inc., located at East 12904 Nora, in Spokane,
Washington 99216, hereinafter referred to as "Contractor," and was revised
on February 9, 1990, to comply with WAC 460-36A-155.
2. Contract for Services. Company contracts for services and overhead
expenses with Contractor, subject to, and in accordance with, the terms and
conditions of this agreement.
3. Term of Agreement. This management contract will begin on January 1,
1991, and ends on December 31, 1991. Company has the right to contract for
an additional one (1) year on written notice to Contractor given not less
than one (1) month prior to December 31, 1991, and each December 31,
thereafter.
4. Payment to Contractor. Company will pay Contractor an annual fee to
manage the operations and cover the overhead costs of the Company. This
annual fee shall be based on 2% of the total balance of all loans,
contracts real estate and deposits outstanding and payable on a monthly
basis, not later than the 5th day of the following month at the rate of
1/12th of 2% of the total balance of the loans, contracts, real estate and
deposits outstanding at the end of the month or 25% of the net income,
whichever is greater. As an alternative method of calculating the fee, the
Contractor may base the fee on the outstanding and issued stock so long as
the total fee does not exeed the above mentioned basis for calculating the
fee as set forth above.
5. Contractor's Duties. Company contracts with Contractor, who will
provide the following services to the Company.
Contractor will provide the following general and administrative support to
include: Dues and subscriptions, vehicle expense, rent, telephone,
supplies, utilities, advertising, repairs and maintenance of Company
equipment, property insurance and computerized month-to-month bookkeeping
support. The Contractor will provide the necessary personnel to answer
telephone inquiries and provide initial contacts with potential customers.
The Contractor may perform other duties or provide other services for the
Company on a reimbursable basis.
Contractor will not be responsible for the payment of professional
accounting, legal or property management fees. The Contractor will not be
responsible for any cost directly relating to the management of a
foreclosure or forfeiture of any Company property.
<PAGE>
<PAGE>
6. Office Space and Administrative Support. Contractor will furnish
Company with an office, general telephone and general secretarial support
and any other facilities and services that are adequate for the performance
of this contract at the rate specified in paragraph 4.
7. Termination of Agreement on Sale or Termination of Company's Business.
Despite anything contrary contained in this agreement, Company may
terminate Contractor's agreement upon 30 days' notice to Contractor if any
of the following events occur:
Sale of Company Assets. The sale of substantially all of the
Company's assets to a single purchaser or a group of associated
purchasers;
Sale of Company Shares. The sale, exchange or other disposition, in
one transaction of 80% of the Company's outstanding corporate shares
after the initial sale of the Company stock; Termination of Company's
Business. Company's bona fide decision to terminate its business;
Merger or Consolidation. The merger or consolidation of Company and a
transaction in which Company shareholders receive less than 30% of the
outstanding voting shares of the new or continuing corporation;
Sixty (60) Day Written Notice. This agreement may be terminated upon
sixty (60) days' written notice to the other party by either party.
8. Arbitration of Controversies. Any claim or controversy that arises out
of, or relates to, this agreement, or breach of it, will be settled by
arbitration in the City of Spokane, in the State of Washington, in
accordance with the rules then obtaining of the American Arbitration
Association. Judgment upon the award rendered may be entered in the
Spokane County Superior Court in the State of Washington.
9. Waiver or Breach of Agreement. If either party waives a breach of this
agreement by the other party, that waiver will not operate or be construed
as a waiver of later similar breaches.
10. Company May Assign Agreement. The Company may not assign this
agreement. The Company's rights and obligations under this agreement will
not inure to the benefit of,and will not be binding upon, the Company's
successors and assigns.
11. Marketing Agreement. CLS Mortgage, Inc., further agrees to provide a
market for the Company's resources. This marketing effort is in addition
to those duties in paragraph 5 and nothing in this contract shall preclude
Contractor from assessing the Company, the borrower or recipient of the
Company's resources, a brokerage fee or a discount fee, subject to the
regulatory procedures contained in the NASA guidelines and the Washington
Administrative Code as approved by the Opportunity Management Company,
Inc., Board of Directors after a determination by them that the fee paid to
CLS Mortgage, Inc., is commercially fair, reasonable and competitive.
<PAGE>
<PAGE>
12. Entire Agreement. This agreement is the entire agreement of the
Company and the Contractor. Oral changes will have no effect. This
agreement may be altered only by a written agreement, signed by the party
against whom enforcement of any waiver change, modification extension or
discharge is sought.
IN WITNESS WHEREOF, the parties shave signed the agreement on this 12th day
of December, 1990.
CLS Mortgage, Inc., Contractor
/s/ H. E. Brazington, its
President
Opportunity Management Company, Inc.
/s/ H. E. Brazington, its
President
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 217,152
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 9,637,305
<ALLOWANCE> 156,391
<TOTAL-ASSETS> 11,003,097
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 11,046,659
<OTHER-SE> (204,823)
<TOTAL-LIABILITIES-AND-EQUITY> 11,003,097
<INTEREST-LOAN> 1,197,886
<INTEREST-INVEST> 0
<INTEREST-OTHER> 21,003
<INTEREST-TOTAL> 1,218,889
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 105,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 424,439
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 814,763
<EPS-PRIMARY> .37
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 3,225,033
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 106,554
<CHARGE-OFFS> 56,065
<RECOVERIES> 902
<ALLOWANCE-CLOSE> 156,391
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
