<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended September 30, 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 September 30, 1998 were $233,969.
The aggregate market value of the voting stock held by non-affiliates at
October 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
SEPTEMBER 30, 1998
TABLE OF CONTENTS
SAFE HARBOR STATEMENT
Page
PART I
Item 1: Financial Statements. . . . . . . . . . . . . . . . . . . . 1
Item 2: Management's Discussion and Analysis of Financial
Condition & Results of Operation. . . . . . . . . . . . . . 12
PART II
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 15
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . . . 15
Item 3: Defaults Upon Senior Securities . . . . . . . . . . . . . . 15
Item 4: Submission of Matters to a Vote of Security Holders . . . . 15
Item 5: Other Information . . . . . . . . . . . . . . . . . . . . . 15
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 15
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 decrease 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 appraised or tax
assessed 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 nonearning loans. (For the year
ended December 31, 1997, for example, approximately 21% of the Company's
portfolio was comprised on nonearning 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, 1997, for example, the book value of properties held for sale was
$2,208,231.) Other real estate owned ("OREO"), nonearning loans 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 affiliated 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
(ii)
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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, the sale proceeds of OREO
and, to a lesser extent, from reinvested dividends paid to the Company's
shareholders. The Company has not funded its operations from borrowing 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 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. 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.
(iii)
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PART I
Item 1. FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------
STATEMENTS OF CONDITION
SEPTEMBER 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Loans receivable, earning $ 6,713,581 $ 6,358,455
Loans receivable, nonearning 2,251,483 2,430,891
------------ ------------
8,965,064 8,789,346
Real estate held for sale 1,860,648 1,956,557
------------ ------------
10,825,712 10,745,903
Allowance for losses (90,328) (154,556)
------------ ------------
NET LOANS AND REAL ESTATE (Notes 2, 3, and 5) 10,735,384 10,591,347
Cash and cash equivalents 274,019 482,053
Accrued interest receivable 65,972 65,508
Other assets (Note 5) 27,110 2,002
------------ ------------
TOTAL ASSETS $11,102,485 $11,140,910
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 26,924 $ 27,437
Accrued cash dividends payable to stockholders 141,397 176,850
------------ -------------
TOTAL LIABILITIES 168,321 204,287
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000 shares
authorized; 1998, 2,244,012 shares; 1997,
2,244,504 shares, issued and outstanding 11,138,987 11,141,446
Undistributed income (expense) (204,823) (204,823)
------------ ------------
10,934,164 10,936,623
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,102,485 $11,140,910
============ ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 463,248 $ 460,259
Interest income on commercial loans 324,553 363,827
Interest income on bank accounts 8,534 6,556
Other income 88 645
------------ ------------
TOTAL REVENUES 796,423 831,287
------------ ------------
EXPENSES
Management fees - related party (Note 5) 125,295 124,771
Provision for loan and real estate losses (Note 3) 7,188 35,000
Foreclosure expenses 26,228 72,268
Real estate expenses, net of rental income 80,343 60,874
Accounting and auditing expenses 19,693 30,533
Legal expenses (Note 5) 2,278 24,086
Business and occupational taxes 6,655 6,421
Director compensation 5,400 4,400
Other expense 2,515 661
----------- ------------
TOTAL EXPENSES 275,595 359,014
----------- ------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 520,828 472,273
Gain on sale of real estate (Note 4) 28,941 20,752
------------ ------------
NET INCOME $ 549,769 $ 493,025
============ ============
Basic earnings per common share (Note 2) $ 0.25 $ 0.22
============ ============
Weighted average shares outstanding 2,244,409 2,242,752
============ ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
STATEMENTS OF INCOME
QUARTERS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 140,058 $ 154,351
Interest income on commercial loans 91,741 124,085
Interest income on bank accounts 2,170 2,722
Other income 0 459
------------ ------------
TOTAL REVENUES 233,969 281,617
------------ ------------
EXPENSES
Management fees - related party (Note 5) 41,771 41,780
Provision for loan and real estate losses (Note 3) 7,188 35,000
Foreclosure expenses 16,306 15,432
Real estate expenses, net of rental income 14,130 7,819
Rental property expenses 2,075 834
Accounting and auditing expenses 6,537 5,468
Legal expenses (Note 5) 860 3,171
Business and occupational taxes 2,377 2,036
Director compensation 2,600 1,000
Other expense 75 126
------------ ------------
TOTAL EXPENSES 93,919 112,666
------------ ------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 140,050 168,951
Gain on sale of real estate (Note 4) 1,123 6,879
------------ ------------
NET INCOME $ 141,173 $ 175,830
============ ============
Basic earnings per common share (Note 2) $ 0.06 $ 0.08
============ ============
Weighted average shares outstanding 2,244,012 2,268,900
============ ============
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 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 - - 549,769 549,769
Rescinded dividends (492) (2,459) - (2,459)
Cash dividends - - (549,769) (549,769)
--------- ------------ ---------- ------------
Balance, September 30, 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
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 549,769 $ 493,025
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and real estate losses 7,188 35,000
Amortization of discounts on loans (1,255) (14,946)
Gains on sale of real estate (28,941) (20,752)
(Increase) decrease in:
Accrued interest receivable 10,527 17,524
Other assets (4,797) (143)
Increase (decrease) in:
Accrued expenses (5,013) 1,459
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 527,478 511,167
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (2,379,491) (3,531,601)
Principal reductions and maturities of loans 2,083,758 3,428,814
Proceeds from sales and other transactions of
real estate owned 356,029 279,280
Advances of costs associated with other real estate(74,563) (65,401)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (14,267) 111,092
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of stock - 3,291
Rescinded dividends paid (2,459) (8,806)
Cash dividends paid to stockholders (572,343) (351,843)
------------ -----------
CASH FLOWS USED BY FINANCING ACTIVITIES (574,802) (357,358)
------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(61,591) 264,901
Cash and cash equivalents, January 1st $ 335,610 $ 217,152
----------- -----------
Cash and cash equivalents, September 30th $ 274,019 $ 482,053
=========== ===========
</TABLE>
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"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 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 $ - $ 100,302
Acquisition of real estate in settlement of loans $ 277,755 $ 1,139,618
Charge offs against the allowance $ 101,563 $ 36,932
New contracts made in connection with sales of
real estate $ 269,846 $ 152,390
</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. (herein referred to as the "Company") 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:
The Company purchases loans from CLS Mortgage, Inc. (herein referred to as
"CLS") for its loan portfolio. The loan principal outstanding includes a loan
placement fee to CLS which was paid by the borrower and financed in the loan
balance. These fees are accounted for as revenue by CLS when the loan is sold
to the Company. No income or expense related to these fees is recorded by the
Company (Note 5).
DIVIDENDS:
It is the policy of the Company to distribute at least 95% of 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
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registration statement in effect with respect to these newly-issuable shares,
effectively ending the program. The Company is currently considering adopting
an open market purchase program having many of the same objectives as the
rollover program. The following is a reconciliation of the dividends on
common stock as summarized in the statement of changes in stockholders'
equity:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash dividends paid $ 572,343 $ 351,843
Dividends reinvested in stock - 100,302
Accrued dividends, September 30th 141,397 176,850
Accrued dividends, January 1st (163,963) (135,293)
Accrued fractional shares not paid - (677)
---------- ----------
Dividends on common stock 549,777 493,025
Dividends paid or accrued in excess of net income (8) -
---------- ----------
NET INCOME $ 549,769 $ 493,025
========== ==========
Cash dividends - accrual basis $ 549,769 $ 392,723
Dividends reinvested in stock - accrual basis - 100,302
---------- ----------
NET INCOME $ 549,769 $ 493,025
========== ==========
</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 September 30, 1998
or 1997.
Note 3. Loans Receivable and Real Estate Held for Sale
Loans receivable at September 30, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
First mortgage loans $7,821,428 $7,490,207
Second mortgage loans 242,652 382,845
Loans secured by personal property and real estate 900,984 916,294
---------- ----------
$8,965,064 $8,789,346
========== ==========
</TABLE>
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A concentration of credit exists in that the majority of loans are secured by
real property in the states of Washington and Idaho.
Types of real property securing loans at September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial $2,442,672 $2,038,479
Single and multiple family residential 2,143,715 2,177,945
Rural single and multiple family residential 1,495,380 1,505,942
Developed land 1,458,062 1,348,588
Undeveloped land 441,719 742,098
Manufactured homes on real property 883,256 916,294
Agricultural 100,260 60,000
---------- ----------
$8,965,064 $8,789,346
Real estate held for sale at September 30, 1998 and 1997, consists of the
following:
1998 1997
---------- ----------
<S> <C> <C>
Commercial $ 183,837 $ 231,809
Single and multiple family residential 163,050 145,252
Rural single and multiple family residential 227,143 422,306
Developed land 1,115,783 912,369
Undeveloped land 85,913 102,739
Manufactured homes on real property 75,146 112,306
Agricultural 9,776 9,776
---------- ---------
$1,860,648 $1,956,557
========== ==========
An analysis of the changes in the allowance for losses is as follows:
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1st $ 182,745 $ 156,391
Provision charged to expense 7,188 35,000
Recoveries 1,958 97
Charge off of losses on sale of real estate owned (101,563) (36,932)
----------- ----------
Balance, September 30th $ 90,328 $ 154,556
=========== ==========
</TABLE>
Gains on sale of real estate, which are included in the statements of income,
were $28,941 and $20,752 for the nine months ended September 30, 1998 and
1997, respectively.
Impairment of loans having a recorded investment of $2,251,483 and $2,430,891
at September 30, 1998 and 1997, respectively, has been recognized in
conformity with SFAS No. 114 as amended by SFAS No. 118. There is no specific
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allowance for loan losses related to these loans at September 30, 1998 and
1997, respectively. The average impaired loans during 1998 and 1997 was
$2,074,997 and $3,316,616, respectively.
Included in the allowance for losses is a $63,971 and $151,980 specific
allowance to reduce real estate held for sale to the estimated fair value less
costs of disposal at September 30, 1998 and 1997, respectively. There were no
additional impairment losses resulting from changes in carrying amounts for
the nine months ended September 30, 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 $ 549,769 $ 493,025
Federal income taxes at statutory rates (186,921) (167,629)
---------- ----------
Net Income $ 362,848 $ 325,396
========== ==========
</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 nine
months ended September 30, 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 provides office space, administrative, accounting, computer, and other
services to the Company. For the nine months ended September 30, 1998 and
1997, $125,295 and $124,771, 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 at September 30, 1998 and 1997, were $13,924 and
$13,927, respectively. The Company is relying on CLS to manage its day-to-
day operations as its administrative manager. The president and chairman of
the Company is also the president of CLS. The president and his wife own
1.09% of the common stock of the Company. The two sole stockholders of CLS
directly and indirectly own 3.49% of the common stock of the Company and 100%
of the stock of CLS at September 30, 1998.
ESCROW SERVICES:
CLS Escrow provides the Company with escrow services. The stockholders of CLS
collectively own 50% of the outstanding shares of CLS Escrow.
<PAGE>
<PAGE>
LOAN PLACEMENT FEES:
Loans are purchased from or brokered by CLS. CLS earns a 6-12% loan
placement fee from the borrowers of the monies loaned by the Company. For the
nine months ended September 30, 1998 and 1997, CLS received $153,618 and
$282,363, respectively, in loan placement fees (Note 1).
LOANS:
During the second quarter of 1997, a loan was made to CLS 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 September 30, 1998,
the loan receivable balance was $67,000.
OTHER ASSETS:
At September 30, 1998, included in other assets is a $7,609 receivable from a
company owned in majority by a stockholder/director (owning .88% of the
outstanding stock at September 30, 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. Non-earning loans increased from $964,238 at December 31,
1994 to $3,225,033 at December 31, 1996. OREOs increased from $662,874 at
December 31, 1994 to $1,220,140 at December 31, 1996. However, non-earning
assets stabilized in 1997 and have continued to remain stable in 1998. Non-
earning loans were $2,251,483 and OREOs were $1,860,648 for the quarter ending
September 30, 1998. The ratio of non-earning loans and OREO to total ending
assets decreased from 39.4% at September 30, 1997 to 37.0% in 1998.
Nonearning loans as a percentage of ending total assets decreased from 21.8%
at September 30, 1997 to 20.3% at September 30, 1998. Additionally, OREO as a
percentage of ending total assets decreased from 17.6% at September 30, 1997
to 16.8% at September 30, 1998.
The large amount of OREOs in the portfolio is believed by management to be
attributable to several factors, including a relatively high concentration of
portfolio loans secured by developed properties. These loans were originated
during the period from 1990 through 1994, when the Spokane, Washington and
Coeur d'Alene, Idaho housing markets were robust. In 1995, 1996 and 1997 the
housing markets softened resulting in many failed land developments. As a
consequence, the Company has foreclosed on several land developments.
Total expenses decreased to $275,595 for the nine months ending September 30,
1998 from $359,014 for the nine months ending September 30, 1997. This
dramatic decrease in expenses is directly related to a decrease in legal
expenses and foreclosure expenses. Legal expenses for the nine months ending
September 30, 1998 were $2,278 whereas legal expenses for the nine months
ending September 30, 1997 were $24,086. Foreclosure expenses decreased to
$26,228 for the nine months ending September 30, 1998 from $72,268 for the
nine months ending September 30, 1997. As a direct result of the decrease in
legal and foreclosure expenses, the net income to total assets (annualized)
increased from 5.9% for the nine months ending September 30, 1997 to 6.6% for
the nine months ending September 30, 1998. Furthermore, as a consequence of
the decrease in legal and foreclosure expenses net income increased to
$549,769 for the nine months ending September 30, 1998, an increase of $56,744
or approximately 12% for the same time period of 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.
<PAGE>
<PAGE>
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 adopted a stricter, more
conservative appraisal review practice in 1997; it 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. In
1998, CLS adopted internal policies designed to ensure that no more than 15%
of the loan portfolio is comprised of loans secured by developed property and
no more than 5% of the loan portfolio is comprised of loans secured by
undeveloped property. 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.
In 1997, CLS's and the Company's goals with the respect to the loan portfolio
were to reduce the level of non-earning loans to 20% or less of total assets.
At September 30, 1998 the Company's level of non-earning loans to total assets
was 20%. Having achieved this goal, CLS's and the Company's revised goals
with respect to the Company's loan portfolio are to reduce the level of
nonearning loans to 10% or less of total assets, reduce the level of OREOs to
10% or less of total assets, and to increase the annual yield to 9.5% or more.
No assurance can be given that these goals will be achieved timely.
Quarter Ended September 30, 1998 Compared to the Quarter Ended September 30,
1997.
GENERAL. The Company's net income decreased 19.7%, to $141,173, for the
quarter ended September 30, 1998, from $175,830 for the quarter ended
September 30, 1997. This decrease in income was primarily a result of an
increase in nonearning loans from the quarter ending June 30, 1998 to the
quarter ending September 30, 1998. Nonearning loans as a percentage of total
loans increased from 21.5% to 25.1%. Comparing this increase in nonearning
loans to the corresponding period in 1997 reveals that in 1997 the exact
opposite happened.
Return on average assets (annualized) was 5.1% at September 30, 1998, as
compared to 6.3%, at September 30, 1997. This decrease in the return on
assets is directly attributable to decreases in interest income.
Nonearning loans and OREO to total assets peaked at 44.4% on June 30, 1997.
For the quarter ending September 30, 1997, nonearning loans and OREO to total
assets decreased to 39.4%. Nonearning loans and OREO to total assets have
remained stable for the past year with a slight downward trend. This past
quarter ending September 30, 1998, this ratio was 37.0%.
REVENUES. The Company's revenues decreased 16.9%, to $233,969, for the
quarter ended September 30, 1998, from $281,617 for the same quarter in 1997.
As noted above this decrease is the result of an increase in nonearning loans
which directly reduces interest income. It is too early to tell if this
increase in nonearning loans is a temporary fluctuation or the beginning of a
trend. <PAGE>
<PAGE>
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 is expected to result in a
gradual decline of the loan portfolio's weighted average interest rate. Lower
interest income as a result of lower interest rates is expected to be offset
with a higher percentage of earning loans to total assets.
TOTAL EXPENSES. Total expenses decreased 16.6%, to $93,919, for the quarter
ended September 30, 1998, as compared to $112,666 for the quarter ended
September 30, 1997. This was a decrease of $18,747. The decrease in total
expenses is directly attributable to a decrease in provision for loan and real
estate losses of $27,812.
Management fees paid to CLS for the quarter ended September 30, 1998 were
$41,771, as compared to $41,780 in 1997.
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996.
GENERAL. The Company's net income decreased 9.9%, to $175,830, for the
quarter ended September 30, 1997, from $195,166 for the quarter ended
September 30, 1996. This decrease was primarily a result of an increase in
nonearning loans, an increase in the provision for loan and real estate losses
and an increase in other expenses directly associated with foreclosure,
collection and OREO expenses.
INTEREST INCOME. The Company's interest income decreased 1.7%, to $281,158,
for the quarter ended September 30, 1997, from $276,336 in the prior year.
TOTAL EXPENSES. Total expenses increased 24.2%, to $116,714, for the quarter
ended September 30, 1997, as compared to $93,973 for the quarter ended
September 30, 1996. This was an increase of $22,741. The increase in total
expenses is directly attributable to an increase in provision for loan and
real estate losses and an increase in other expenses. The provision for loan
and real estate losses increased $15,000. Other expenses, primarily expenses
relating to nonearning loans and OREO's increased $8,950. The Company's
policy is to expense all loan collection and OREO foreclosure costs as
incurred, even if it is anticipated that they may be recovered upon sale of
foreclosed properties.
Management fees paid to CLS for the quarter ended September 30, 1997 were
$41,780, as compared to $41,191 in 1996.
LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's cash
flow will be sufficient to support its existing operations for the foreseeable
future. If the Company needs additional liquidity, it would be required to
borrow or issue additional securities. The Company's ability to service
borrowing is dependent upon its interest income.
The Company's total shareholders' equity decreased to $10,934,164 at September
30, 1998, from $10,936,623 at September 30, 1997. At September 30, 1998,
shareholders' equity was 98.32% of total assets, compared to 98.35% at
September 30, 1997. At September 30, 1998, the Company held cash of $274,019.
<PAGE>
<PAGE>
EFFECTS OF INFLATION AND CHANGING PRICES. The primary impact of inflation on
the Company's operations is increased asset yields 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 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 internally-generated operational problems. The
cost of these modifications and conversions is not expected to be material.
The Company cannot predict whether other persons and entities with whom it
shares computer data will have modified its software to address the Year 2000
issue in a timely and comprehensive manner. As a consequence, there exists
the possibility that the Company's systems could be "contaminated" by
externally-generated data, which could result in operational problems.
Whether these problems will occur and, if so, their extent, cannot presently
be determined.
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.
<PAGE>
<PAGE>
PART II
Item 1. Legal Proceedings.
Because of the nature of its business, the Company is subject to numerous
claims and legal actions in the ordinary course of its business involving the
collection of delinquent accounts and the validity of liens. While it is
impossible to estimate with certainty the ultimate legal and financial
liability with respect to such claims, the Company believes that, in the
aggregate, such liabilities would not have a material adverse effect on the
financial condition or results of operations of the Company.
Item 2. Changes In Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders during the
third quarter of 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
third 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: October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 274,019
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,965,064
<ALLOWANCE> 90,328
<TOTAL-ASSETS> 11,102,485
<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> 11,102,485
<INTEREST-LOAN> 787,801
<INTEREST-INVEST> 0
<INTEREST-OTHER> 8,622
<INTEREST-TOTAL> 796,423
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 101,563
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 275,595
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549,769
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 2,251,483
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 182,745
<CHARGE-OFFS> 101,563
<RECOVERIES> 1,958
<ALLOWANCE-CLOSE> 90,328
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
