<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _____________
OPPORTUNITY MANAGEMENT COMPANY, INC.
(Exact name of registrant as specified in its charter)
Washington 33-68700-S 91-1427776
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
12904 East Nora, Suite A
Spokane, Washington 99216
(Address of principal executive offices)
Registrant's telephone number, including area code: (509) 928-6545
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-QSB or any
amendments to this Form 10-QSB. [X]
The issuer's revenues for the quarter ended March 31, 1998 were $267,018. The
aggregate market value of the voting stock held by non-affiliates at May 1,
1998, based on an assumed value of $5.00 per share, was $10,214,696. The number
of shares of common stock outstanding at such date was 2,244,012 shares.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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OPPORTUNITY MANAGEMENT COMPANY, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1: Financial Statements. . . . . . . . . . . . . . . . . . 1
Item 2: Management's Discussion and Analysis of Financial
Condition & Results of Operation . . . . . . . . . . . 11
PART II
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . 15
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . 15
Item 3: Defaults Upon Senior Securities . . . . . . . . . . . . 15
Item 4: Submission of Matters to a Vote of Security Holders . . 15
Item 5: Other Information . . . . . . . . . . . . . . . . . . . 15
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . 15
SIGNATURES
(i)
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PART I
Item 1. FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
STATEMENTS OF CONDITION
MARCH 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Loans receivable, earning $ 6,695,947 $ 6,287,562
Loans receivable, nonearning 1,821,664 3,056,736
------------ ------------
8,517,611 9,344,298
Real estate held for sale 2,343,425 1,612,483
------------ ------------
10,861,036 10,956,781
Allowance for losses (151,035) (155,801)
------------ ------------
NET LOANS AND REAL ESTATE (Notes 2, 3, and 5) 10,710,001 10,800,980
Cash and cash equivalents 341,974 125,564
Accrued interest receivable 71,350 70,609
Other assets (Note 5) 19,638 2,755
------------ ------------
TOTAL ASSETS $11,142,963 $10,999,908
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 22,624 $ 18,300
Accrued cash dividends payable to stockholders 186,175 95,763
------------ ------------
TOTAL LIABILITIES 208,799 114,063
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000 shares
authorized; 1998, 2,244,012 shares; 1997,
2,259,804 shares, issued and outstanding 11,138,987 11,090,668
Undistributed income (expense) (204,823) (204,823)
------------ ------------
10,934,164 10,885,845
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,142,963 $10,999,908
============ ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
STATEMENTS OF INCOME
QUARTERS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 153,190 $ 158,934
Interest income on commercial loans 111,274 111,418
Interest income on bank accounts 2,554 1,769
Other income - 166
------------ ------------
TOTAL REVENUES 267,018 272,287
------------ ------------
EXPENSES
Management fees - related party (Note 5) 41,753 41,392
Provision for loan and real estate
losses (Notes 2 and 3) - -
Foreclosure expenses (Note 3) 6,223 35,700
Real estate expenses, net of rental income 22,546 19,280
Accounting and auditing expenses 5,032 9,915
Legal expenses (Note 5) 149 14,062
Business and occupational taxes 2,625 2,213
Director compensation 1,800 2,400
Other expense 2,411 296
------------ ------------
TOTAL EXPENSES 82,539 125,258
------------ ------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 184,479 147,029
Gain on sale of real estate (Note 4) 1,537 -
------------- ------------
NET INCOME $ 186,016 $ 147,029
============= ============
Primary earnings per common share $ 0.08 $ 0.06
============= ============
Weighted average shares outstanding 2,244,012 2,298,678
============= ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTERS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Undistributed Total
------------------------ Income Stockholders'
Shares Amount (Expense) Equity
------ ------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 2,244,504 $11,141,446 $(204,823) $10,936,623
Net Income - - 186,016 186,016
Rescinded dividends (492) (2,459) - (2,459)
Cash dividends - - (186,016) (186,016)
---------- ------------ ---------- ------------
Balance, March 31, 1998 2,244,012 $11,138,987 $(204,823) $10,934,164
========== ============ ========== ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 186,016 $ 147,029
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discounts on loans (479) (4,802)
Gain on sale of real estate (1,537) -
(Increase) decrease in:
Accrued interest receivable 5,149 12,423
Other assets 2,675 (896)
Increase (decrease) in:
Accrued expenses (9,464) ( 7,668)
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 182,360 146,086
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (781,170) (1,253,360)
Principal reductions and maturities of loans 726,872 1,148,167
Proceeds from sales and other transactions of
real estate owned 45,499 45,963
Advances of costs associated with other real estate (925) (35,208)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (9,724) (94,438)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock - 863
Rescinded dividends paid (2,459) (8,806)
Cash dividends paid to stockholder (163,813) (135,293)
----------- -----------
CASH FLOWS USED BY FINANCING ACTIVITIES (166,272) (143,236)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,364 (91,588)
Cash and cash equivalents, January 1st $ 335,610 $ 217,152
----------- -----------
Cash and cash equivalents, March 31st $ 341,974 $ 125,564
=========== ===========
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
QUARTERS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock for stockholder
reinvestment of dividends $ - $ 51,952
---------- -----------
Acquisition of real estate in settlement of loans $ 237,446 $ 447,628
---------- -----------
Charge offs against the allowance $ 32,228 $ 590
---------- -----------
New contracts made in connection with sales of
real estate $ 25,500 $ 43,940
---------- -----------
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
FORMATION OF THE COMPANY:
Opportunity Management Company, Inc. was incorporated in the state of Washington
on October 12, 1988, and is engaged in the business of making loans secured by
interest in real property. Since inception, it has elected to be treated, for
federal income tax purposes, as a real estate investment trust or REIT.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period. Actual results could differ, either positively or negatively, from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and other real estate
owned is adequate. While management uses currently available information to
recognize losses on loans and other real estate, future additions to the
allowances may be necessary based on changes in economic conditions.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
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 (90 or more days delinquent) 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.
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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 listing 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 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).
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 if needed 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 formerly offered a dividend reinvestment or rollover program that
gave the stockholders the ability to reinvest their cash dividends in
additional shares of the Company's common stock at the stated par value of $5
per share. In July of 1997, the Company voluntarily withdrew a Securities Act
registration statement in effect with respect to these newly-issuable shares,
effectively ending the program. The Company is currently considering adopting an
open market purchase program having
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many of the same objectives as the rollover program. The following is a
reconciliation of the dividends on common stock as summarized in the statement
of changes in stockholders' equity:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<C> <C>
Cash dividends paid $ 163,813 $ 135,293
Dividends reinvested in stock - 51,952
Accrued dividends, March 31st 186,175 95,763
Accrued dividends, January 1st (163,963) (135,293)
Accrued fractional shares not paid - (686)
---------- ----------
Dividends on common stock 186,025 147,029
Dividends paid or accrued in excess of net income (9) -
---------- ----------
NET INCOME $ 186,016 $ 147,029
========== ==========
Cash dividends - accrual basis $ 186,175 $ 95,763
Dividends reinvested in stock - accrual basis - 51,952
Accrued fractional shares not paid (159) (686)
---------- ----------
NET INCOME $ 186,016 $ 147,029
========== ==========
</TABLE>
EARNINGS PER SHARE:
Earnings per share were computed by dividing net income by the total weighted
average common shares outstanding during the respective periods.
Note 2. Accounting Changes
Effective for the year ended December 31, 1997, the Company adopted SFAS No.
128, Earnings Per Share (EPS). Under the SFAS earnings per share is presented
for basic and diluted EPS on the face of the income statement. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. There were no dilutive stock convertibles at March 31, 1998 or
1997.
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at March 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
First mortgage loans $7,447,741 $7,751,944
Second mortgage loans 180,673 618,459
Loans secured by personal property and real estate 889,197 973,895
---------- ----------
$8,517,611 $9,344,298
========== ==========
</TABLE>
A concentration of credit exists in that the majority of loans are secured by
real property in the states of Washington and Idaho.
<PAGE>
<PAGE>
Types of real property securing loans at March 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial $2,096,229 $2,424,491
Single and multiple family residential 1,945,625 1,998,240
Rural single and multiple family residential 1,636,939 1,507,865
Manufactured homes on real property 1,635,009 1,784,183
Farm/agricultural 259,675 645,866
Developed land 871,325 973,895
Undeveloped land 72,809 9,758
---------- ----------
$8,517,611 $9,344,298
========== ==========
Real estate held for sale at March 31, 1998 and 1997, consists of the following:
1998 1997
---------- ----------
Commercial $ 201,638 $ 127,442
Single and multiple family residential 205,451 245,976
Rural single and multiple family residential 443,176 209,643
Manufactured homes on real property 1,086,691 819,501
Farm/agricultural 284,388 102,740
Developed land 112,305 107,181
Undeveloped land 9,776 -
---------- ---------
$2,343,425 $1,612,483
========== ==========
An analysis of the changes in the allowance for losses is as follows:
1998 1997
----------- -----------
Balance, January 1st $ 182,745 $ 156,391
Provision charged to expense - -
Recoveries 518 -
Charge off of losses on sale of real estate owned (32,228) (590)
Balance, March 31st $ 151,035 $ 155,801
=========== ===========
</TABLE>
Gains on sale of real estate, which are included in the statements of income,
were $1,537 and $-0- for the quarters ended March 31, 1998 and 1997,
respectively.
Impairment of loans having a recorded investment of $1,894,664 and $3,392,518 at
March 31, 1998 and 1997, respectively, has been recognized in conformity with
SFAS No. 114 as amended by SFAS No. 118. No specific allowance for these
loans was recorded at March 31, 1998. There is a $3,598 specific allowance
for loan losses related to these loans provided at March 31, 1997. The
average impaired loans during 1998 and 1997 was $2,399,459 and $3,185,851,
respectively.
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Included in the allowance for losses is a $113,611 and $124,428 specific
allowance to reduce real estate held for sale to the estimated fair value
less costs of disposal at March 31, 1998 and 1997, respectively. There were no
additional impairment losses resulting from changes in carrying amounts for the
quarter ended March 31, 1998.
Note 4. Income Taxes
The Company, in the opinion of management, continues to qualify as a Real Estate
Investment Trust (REIT) under the applicable provisions of the Internal Revenue
Code. The Company is allowed to deduct the dividends paid to its stockholders
as an expense and in effect not pay federal income taxes. In the event the
Company does not qualify, the Company would owe federal income taxes as
estimated below.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Income before taxes on income $ 186,016 $ 147,029
Federal income taxes at statutory rates (55,796) (40,591)
---------- ----------
Net Income $ 130,220 $ 106,438
========== ==========
</TABLE>
The Company must continue to meet certain conditions on an annual basis to
retain its tax status as a REIT. These conditions were met for the quarters
ended March 31, 1998 and 1997. 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 quarters
ended March 31, 1998 and 1997, $41,753 and $41,392, respectively, were paid for
these services in accordance with a management agreement. For 1998 and 1997 the
monthly fee was based on one-twelfth of 1.5% of the common stock outstanding
each month end. The amounts payable to CLS Mortgage, Inc. at March 31, 1998 and
1997, were $13,924 and $13,798, respectively. The Company is relying on CLS
Mortgage, Inc. to manage its day-to-day operations as its administrative
manager. The President and Chairman of the Company is also the President of
CLS Mortgage, Inc. The President and his wife own 1.09% of the common stock
of Opportunity Management Company. The two sole stockholders of CLS
Mortgage, Inc. directly and indirectly own 3.49% of the common stock of
Opportunity Management Company, Inc. and 100% of the stock of CLS Mortgage,
Inc. at March 31, 1998.
ESCROW SERVICES:
CLS Escrow provides the Company with escrow services. The stockholders of CLS
Mortgage, Inc. collectively own 50% of the outstanding shares of CLS Escrow.
LOAN PLACEMENT FEES:
Loans are purchased from or brokered by CLS Mortgage, Inc. CLS Mortgage, Inc.
earns a 6-12% loan placement fee from the borrowers of the monies loaned by
Opportunity Management Company, Inc. For the quarters ended March 31, 1998
and 1997, CLS Mortgage, Inc. received $60,572 and $98,790, respectively, in loan
placement fees (Note 1).
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LOANS:
During the second quarter of 1997, a loan was made to CLS Mortgage, Inc. which
is included in loans receivable on the statements of condition. The unsecured
note matures on May 30, 2000, and bears interest at a rate of 12%. At March
31, 1998, the loan receivable balance was $67,000.
OTHER ASSETS:
At March 31, 1998, included in other assets is a $8,360 receivable from a
company owned in majority by a stockholder/director (owning .88% of the
outstanding stock at March 31, 1998) of the Company.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Overview. During 1995 and 1996, the company experienced negative trends in non-
earning assets. However, non-earning assets stabilized in 1997 and remained
stable for the quarter ending March 31, 1998. The ratio of non-earning loans
and OREO to total ending assets decreased from 42.5% at March 31, 1997 to 37.4%
in 1998. Nonearning loans as a percentage of ending total assets decreased from
32.7% at March 31, 1997 to 21.4% at March 31, 1998. Additionally, OREO as a
percentage of ending total assets increased from 14.7% at March 31, 1997 to
21.0% at March 31, 1998.
The increase in OREOs in 1998 is believed by management to be attributable to
several factors, including a relatively high concentration of portfolio loans
secured by developed properties; these loans were originated during the
period from 1990 through 1994, when the Spokane, Washington and Coeur d'Alene,
Idaho housing markets were robust. In 1995, 1996 and 1997 the housing markets
softened resulting in many failed land developments. As a consequence,
Opportunity Management Company, Inc. has foreclosed on several land
developments.
Total expenses decreased to $82,539 for the quarter ending March 31, 1998 from
$125,258 for the quarter ending March 31, 1997. This dramatic decrease in
expenses is directly related to a decrease in legal expenses. Legal expenses
for the quarter ending March 31, 1998 were $149 whereas legal expenses for the
quarter ending March 31, 1997 were $58,625. As a direct result of this decrease
in legal expenses the net income to average assets (annualized) increased from
5.4% for the quarter ending March 31, 1997 to 6.7% for the quarter ended
March 31, 1998. Furthermore, as a consequence of the decrease in legal
expenses net income increased to $186,016 for March 31, 1998, an increase of
$38,987 or approximately 27% from March 31, 1997. Most of the significant
legal expenses in 1997 were attributable to one case which is presently being
appealed. As legal expenses relating to the appeal accrue, legal expenses
may again increase.
Management of the Company and CLS do not expect overall economic conditions to
improve significantly in 1998, and, as a consequence, CLS has implemented a
number of internal measures designed to improve the quality of the loans it
originates and sells to the Company. One of these measures is a change in the
mix of loans comprising the portfolio. Management expects to increase the
concentration of single-family residential loans and commercial property loans
in the portfolio, and thereby reduce the concentration of loans secured by
developed and undeveloped property. Management expects loans secured by
residential and commercial property to result in fewer nonearning loans and
OREOs. Historically loans secured by developed and undeveloped land have
contributed significantly to increased OREOs and nonearning loans, resulting
in the decline in yields. In addition, CLS has adopted a stricter, more
conservative appraisal review practice; it has also implemented internal
policies designed to ensure that no more than 20% of the loan portfolio is
comprised of loans secured by developed properties, and that no more than 10% of
the portfolio is comprised of loans secured by undeveloped properties.
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<PAGE>
Additionally, CLS has employed a full-time collection manager to oversee the
sale or other disposition of real estate acquired by CLS and the Company through
foreclosure or other means.
CLS has employed a full-time collection manager to oversee the sale or other
disposition of real estate acquired by CLS and the Company through foreclosure
or other means. CLS's and the Company's goals with respect to the Company's
loan portfolio are to reduce the level of nonearning loans to 20% or less of
total assets and to increase the annual yield to 10% or more. No assurance can
be given that these goals will be achieved timely.
QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997.
GENERAL. The Company's net income increased 27%, to $186,016, for the quarter
ended March 31, 1998, from $147,029 for the quarter ended March 31, 1997. This
increase was primarily a result of a decrease in legal expenses as outlined
above.
Return on average assets (annualized) were 5.4% at March 31, 1998, as compared
to 6.7%, at March 31, 1997. Total assets increased 1.3%, to $11,142,963, at
March 31, 1998, from $10,999,908 at March 31, 1997. Total loans decreased
$826,687 during the year. Real estate owned increased $730,942 for the year.
INTEREST INCOME. The Company's interest income decreased 2.2%, to $264,464, for
the quarter ended March 31, 1998, from $270,352 in the prior year. This modest
decrease is viewed as a stabilization of interest income by management. This
stabilization of interest income was primarily attributable to the stabilization
in nonearning loans and OREOs as a percentage of total assets as outlined
above.
Prior to March of 1996 management's strategy was to fund high interest rate
loans (15% - 16%) secured by residential, land and mobile home, commercial,
agricultural, developed land and undeveloped land. These loans were
underwritten with an emphasis on the security and less emphasis on the makers
character and ability to repay the obligation. After March of 1996, loans
have been underwritten with more emphasis on the maker's character and
ability to repay. To compete for these loans in the market, the interest
rates of said loans are 12% to 16%. This change in emphasis has resulted in
a gradual decline of the loan portfolio's weighted average interest rate. On
March 31, 1997 the weighted average interest rate of the loan portfolio
was 15.1%, as compared to the weighted average interest rate of the portfolio on
March 31, 1998 of 15.0%. This decline of the weighted average interest rate
of the loan portfolio has contributed to the decrease in interest income.
TOTAL EXPENSES. Total expenses decreased 34.1%, to $82,539, for the quarter
ended March 31, 1998, as compared to $125,258 for the quarter ended March 31,
1997. This was a decrease of $42,719. The decrease in total expenses is
directly attributable to a decrease in foreclosure and legal expenses of
$43,390. These expenses were higher in 1997 due to legal proceedings related to
loan collection and OREO foreclosure costs, as well as SEC legal filing costs.
Approximately $25,000 of foreclosure costs for the first quarter of 1997 were
associated with unusual and unexpected legal proceedings for one non-
performing loan. The Company's policy is to expense all loan collection and
OREO foreclosure costs as incurred, even if it is anticipated that they may be
recovered upon sale of foreclosed properties.
Management fees paid to CLS for the quarter ended March 31, 1998 were $41,753,
as compared to $41,392 in 1997.
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996.
GENERAL. The Company's net income decreased 47%, to $147,029, for the quarter
ended March 31, 1997, from $279,940 for the quarter ended March 31, 1996.
This decrease was primarily a result of an increase in nonearning loans, an
increase in nonearning
<PAGE>
<PAGE>
real estate owned and higher levels of legal expenses directly associated with
foreclosure and collection activities.
Return on average assets and equity were 5.4% and 5.4%, respectively, for the
quarter ended March 31, 1997, as compared to 10.4% and 10.6%, respectively, for
the quarter ended March 31, 1996. Total assets increased .4%, to $10,999,908,
for the quarter ended March 31, 1997, from $10,952,773 for the quarter ended
March 31, 1996. Total loans increased $38,856 during the quarter. 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.
INTEREST INCOME. The Company's interest income decreased 20.6%, to $272,121,
for the quarter ended March 31, 1997, from $342,882 in the prior year. The
decrease in interest income was primarily attributable to a 39.8% increase in
nonearning loans and a 43.2% increase in nonearning real estate owned.
Additionally, interest income has decreased due to a gradual change in the
composition of loans in the portfolio.
Prior to March of 1996 management's strategy was to fund high interest rate
loans (15% - 16%) secured by residential, land and mobile home, commercial,
agricultural, developed land and undeveloped land. These loans were
underwritten with an emphasis on the security and less emphasis on the makers
character and ability to repay the obligation. After March of 1996, loans have
been underwritten with more emphasis on the maker's character and ability to
repay. To compete for these loans in the market, the interest rates of said
loans are 12% to 16%. This change in emphasis has resulted in a gradual decline
of the loan portfolio's weighted average interest rate. On March 31, 1996 the
weighted average interest rate of the loan portfolio was 15.4%, as compared to
the weighted average interest rate of the portfolio on March 31, 1997 of 14.9%.
This decline of the weighted average interest rate of the loan portfolio has
contributed to the decrease in interest income.
TOTAL EXPENSES. Total expenses increased 85.2%, or $57,640 to $125,258, for the
quarter ended March 31, 1997, as compared to $67,618 for the quarter ended March
31, 1996. The increase in total expenses is directly attributable to an
increase in legal expenses of $55,221 over the first quarter of 1996. Legal
expenses were higher in the quarter ended March 31, 1997 due to legal
proceedings related to loan collection and OREO foreclosure costs, as well as
SEC legal filing costs. Approximately $25,000 of legal costs for the first
quarter of 1997 were associated with unusual and unexpected legal proceedings
for one non-performing loan. Management does not anticipate similar legal costs
on any other loan collections. The Company's policy is to expense all loan
collection and OREO foreclosure costs as incurred, even if it is anticipated
that they may be recovered upon sale of foreclosed properties.
Management fees paid to CLS for the quarter ended March 31, 1997 were $41,392,
as compared to $40,479 in 1996.
LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's cash
flow will be sufficient to support its existing operations for the foreseeable
future. If the Company needs additional liquidity, it would be required to
borrow or issue additional securities. The Company's ability to service
borrowing is dependent upon its interest income.
The Company's total shareholders' equity increased to $10,934,164 at March 31,
1998, from $10,885,845 at March 31, 1997. At March 31, 1998, shareholders'
equity was 98.96% of total assets, compared to 98.97% at March 31, 1997. At
March 31, 1998, the Company held cash of $341,974.
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<PAGE>
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. 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.
THE YEAR 2000 ISSUE. The Company has conducted a comprehensive review of its
computer systems to identify those that could be affected by the "Year 2000"
issue, and is developing an implementation plan to resolve the issue. Briefly
stated, the Year 2000 issue is the result of computer programs written to
identify a particular year in two digits as opposed to four; the problem arises
with respect to time-sensitive programs that may confuse the year 2000 with
1900, or for that matter, any year ending in "00". This could lead to major
system failures or miscalculations. The Company presently believes that it
can modify its existing software and, in some instances, convert to new
software, thereby avoiding any significant operational problems. The cost of
these modifications and conversions is not expected to be material.
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 6% to
9%. In order to meet these objectives, the Company and CLS have adopted
operating strategies designed to (i) reduce the level of non-earning loans in
the Company's loan portfolio, (ii) increase the volume of loans CLS originates
and makes available to the Company and others for purchase, (iii) more
efficiently manage the operations of the Company and CLS, and (iv) sell OREO's
thereby reducing the level of non-earning real estate owned in the Company's
portfolio. Reference is made to Item 1 for more complete information concerning
these strategies and the Company's and CLS's plans for implementing them.
[The balance of this page has been intentionally left blank.]
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<PAGE>
PART II
Item 1. Legal Proceedings.
Because of the nature of its business, the Company is subject to numerous claims
and legal actions in the ordinary course of its business involving the
collection of delinquent accounts and the validity of liens. While it is
impossible to estimate with certainty the ultimate legal and financial liability
with respect to such claims, the Company believes that, in the aggregate, such
liabilities would not have a material adverse effect on the financial condition
or results of operations of the Company.
Item 2. Changes In Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders during the
first quarter of 1998.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits. The following exhibits filed as part of this report. Exhibits
previously filed are incorporated by reference, as noted.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company, as amended.
Previously filed as Exhibit 3 to the Company's
registration statement on Form SB-2, dated October 3,
1993, and incorporated by reference herein.
3.2 Bylaws of the Company, as amended. Previously filed
as Exhibit 3 to the Company's registration statement on
Form SB-2, dated October 3, 1993, and incorporated by
reference herein.
27.1 Financial data schedule. Filed herewith.
</TABLE>
Form 8-K. No reports on Form 8-K were filed by the registrant during the first
quarter of 1998.
<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: May 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 341,974
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,517,611
<ALLOWANCE> 151,035
<TOTAL-ASSETS> 11,142,963
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 11,138,987
<OTHER-SE> (204,823)
<TOTAL-LIABILITIES-AND-EQUITY> 11,142,963
<INTEREST-LOAN> 264,464
<INTEREST-INVEST> 0
<INTEREST-OTHER> 2,554
<INTEREST-TOTAL> 267,018
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<NET-INCOME> 186,016
<EPS-PRIMARY> .08
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<LOANS-NON> 1,821,664
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<ALLOWANCE-OPEN> 182,745
<CHARGE-OFFS> 32,228
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