<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, 1999
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, 1999 were $238,095. The
aggregate market value of the voting stock held by non-affiliates at April 1,
1999, based on an assumed value of $5.00 per share, was $10,189,106. The
number of shares of common stock outstanding at such date was 2,244,012
shares.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
<PAGE>
<PAGE>
OPPORTUNITY MANAGEMENT COMPANY, INC.
QUARTERLY REPORT ON FORM 10-QSB FOR THE PERIOD ENDED
MARCH 31, 1999
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. . . . . . . . . . . . . . 11
PART II
Item 1: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 14
Item 2: Changes in Securities . . . . . . . . . . . . . . . . . . . 14
Item 3: Defaults Upon Senior Securities . . . . . . . . . . . . . . 14
Item 4: Submission of Matters to a Vote of Security Holders . . . . 14
Item 5: Other Information . . . . . . . . . . . . . . . . . . . . . 14
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 14
SIGNATURES
(i)
<PAGE>
<PAGE>
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, 1998, for example, approximately 29% of the Company's
portfolio was comprised of 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, 1998, for example, the book value of properties held for sale was
$1,850,015.) 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)
<PAGE>
<PAGE>
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)
<PAGE>
<PAGE>
PART I
Item 1. FINANCIAL STATEMENTS
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------
STATEMENTS OF CONDITION
MARCH 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Loans receivable, earning $ 6,404,054 $ 6,695,947
Loans receivable, nonearning 2,686,359 1,821,664
------------ ------------
9,090,413 8,517,611
Real estate held for sale 1,762,585 2,343,425
------------ ------------
10,852,998 10,861,036
Allowance for losses (214,752) (151,035)
------------ ------------
NET LOANS AND REAL ESTATE (Notes 2 and 4) 10,638,246 10,710,001
Cash and cash equivalents 408,975 341,974
Accrued interest receivable 54,930 71,350
Other assets (Note 4) 24,761 19,638
------------ ------------
TOTAL ASSETS $11,126,912 $11,142,963
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses $ 54,618 $ 22,624
Accrued cash dividends payable to stockholders 266,014 186,175
------------ -------------
TOTAL LIABILITIES 320,632 208,799
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY
Common stock - $5 par value, 5,400,000 shares
authorized; 1999, 2,244,012 shares; 1998,
2,244,012 shares, issued and outstanding 11,138,985 11,138,987
Undistributed income (expense) (332,705) (204,823)
------------ ------------
10,806,280 10,934,164
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,126,912 $11,142,963
============ ============
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
STATEMENTS OF INCOME
QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
REVENUES
Interest income on residential loans $ 127,393 $ 153,190
Interest income on commercial loans 108,115 111,274
Interest income on bank accounts 2,568 2,554
Other income 19 -
------------ ------------
TOTAL REVENUES 238,095 267,018
------------ ------------
EXPENSES
Management fees - related party (Note 4) 41,771 41,753
Provision for loan and real estate losses (Note 2) 30,000 -
Foreclosure expenses 14,970 6,223
Real estate expenses, net of rental income 3,705 22,546
Rental property expenses 628 -
Accounting and auditing expenses 6,358 5,032
Legal expenses (Note 4) 354 149
Business and occupational taxes 1,728 2,625
Director compensation 1,000 1,800
Other expense 153 2,411
----------- ------------
TOTAL EXPENSES 100,667 82,539
----------- ------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 137,428 184,479
Gain on sale of real estate (Note 2) 158,580 1,537
------------ ------------
NET INCOME $ 296,008 $ 186,016
============ ============
Basic earnings per common share $ 0.13 $ 0.08
============ ============
Weighted average shares outstanding 2,244,012 2,242,012
============ ============
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock Undistributed Total
----------------------- Income Stockholders'
Shares Amount (Expense) Equity
------ ------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 2,244,012 $11,138,985 $(364,398) $10,774,587
Net Income - - 296,008 296,008
Cash dividends - - (264,315) (264,315)
--------- ------------ ---------- ------------
Balance, March 31, 1999 2,244,012 $11,138,985 $(332,705) $10,806,280
========= =========== ========== ============
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 296,008 $ 186,016
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and real estate losses 30,000 -
Amortization of discounts on loans (409) (479)
Gains on sale of real estate (158,580) (1,537)
(Increase) decrease in:
Accrued interest receivable 3,536 5,149
Other assets 2,465 2,675
Increase (decrease) in:
Accrued expenses (8,500) (9,464)
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 164,520 182,360
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of new loans (814,797) (781,170)
Cash paid for purchase of real estate (9,676) -
Principal reductions and maturities of loans 746,992 726,872
Proceeds from sales and other transactions of
real estate owned 111,436 45,499
Advances of costs associated with other real estate (8,789) (925)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES 25,166 (9,724)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Reversal of reinvested dividends - (2,459)
Cash dividends paid to stockholders (168,301) (163,813)
------------ -----------
CASH FLOWS USED BY FINANCING ACTIVITIES (168,301) (166,272)
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS 21,385 6,364
Cash and cash equivalents, January 1st $ 387,590 $ 335,610
----------- -----------
Cash and cash equivalents, March 31st $ 408,975 $ 341,974
=========== ===========
</TABLE>
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- -------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (CONTINUED)
QUARTERS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Acquisition of real estate in settlement of loans $ 210,808 $ 237,446
Charge offs against the allowance $ 16,614 $ 32,228
New contracts made in connection with sales of
real estate $ 368,065 $ 25,500
/TABLE
<PAGE>
<PAGE>
"UNAUDITED" INTERIM FINANCIAL STATEMENTS
OPPORTUNITY MANAGEMENT COMPANY, INC.
PREPARED BY MANAGEMENT
- --------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
FORMATION OF THE COMPANY:
Opportunity Management Company, Inc. (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.
<PAGE>
<PAGE>
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES:
The Company utilizes the allowance method of providing for losses on
uncollectible loans or overvalued real estate held for sale. Specific
valuation allowances are provided for loans receivable when repayment becomes
doubtful and the amounts expected to be received in settlement of the loan are
less than the amount due. In addition to specific 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 4).
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
3).
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
<PAGE>
<PAGE>
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>
1999 1998
---------- ----------
<S> <C> <C>
Cash dividends paid $ 168,301 $ 163,813
Accrued dividends, March 31st 266,014 186,175
Accrued dividends, January 1st (170,000) (163,963)
---------- ----------
Dividends on common stock 264,315 186,025
Dividends paid or accrued in excess of net income - (9)
Net income in excess of accrued dividends 31,693 -
---------- ----------
NET INCOME $ 296,008 $ 186,016
========== ==========
Cash dividends - accrual basis $ 264,315 $ 186,016
Net income in excess of accrued dividends 31,693 -
---------- ----------
NET INCOME $ 296,008 $ 186,016
========== ==========
</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. Loans Receivable and Real Estate Held for Sale
Loans receivable at March 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
First mortgage loans $7,626,988 $7,447,741
Second mortgage loans 261,329 180,673
Loans secured by personal property and real estate 1,202,096 889,197
---------- ----------
$9,090,413 $8,517,611
========== ==========
</TABLE>
<PAGE>
<PAGE>
A concentration of credit exists in that the majority of loans are secured by
real property in the states of Washington and Idaho.
Types of real property securing loans at March 31, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commercial $2,464,460 $2,096,229
Single and multiple family residential 1,910,414 1,945,625
Rural single and multiple family residential 1,959,345 1,636,939
Developed land 1,217,167 1,635,009
Undeveloped land 210,407 259,675
Manufactured homes on real property 1,229,598 871,325
Agricultural 99,022 72,809
---------- ----------
$9,090,413 $8,517,611
Real estate held for sale at March 31, 1999 and 1998, consists of the
following:
1999 1998
---------- ----------
<S> <C> <C>
Commercial $ 183,837 $ 201,638
Single and multiple family residential 170,992 205,451
Rural single and multiple family residential 226,547 443,176
Developed land 1,043,399 1,086,691
Undeveloped land 85,913 284,388
Manufactured homes on real property 51,897 112,305
Agricultural - 9,776
---------- ---------
$1,762,585 $2,343,425
========== ==========
An analysis of the changes in the allowance for losses is as follows:
1999 1998
---------- ----------
<S> <C> <C>
Balance, January 1st $ 201,345 $ 182,745
Provision charged to expense 30,000 -
Recoveries 21 518
Charge off of losses on sale of real estate owned (16,614) (32,228)
----------- ----------
Balance, March 31st $ 214,752 $ 151,035
=========== ==========
</TABLE>
Gains on sale of real estate, which are included in the statements of income,
were $158,580 and $1,537 for the quarters ended March 31, 1999 and 1998,
respectively.
Impairment of loans having a recorded investment of $2,686,359 and $1,894,664
at March 31, 1999 and 1998, respectively, has been recognized in conformity
with SFAS No. 114 as amended by SFAS No. 118. There is no specific<PAGE>
<PAGE>
allowance for loan losses related to these loans at March 31, 1999 and 1998,
respectively. The average impaired loans during 1999 and 1998 was $2,619,972
and $2,399,459, respectively.
Included in the allowance for losses is a $153,623 and $113,611 specific
allowance to reduce real estate held for sale to the estimated fair value less
costs of disposal at March 31, 1999 and 1998, respectively. There were no
additional impairment losses resulting from changes in carrying amounts for
the quarters ended March 31, 1999 and 1998, respectively.
Note 3. 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>
1999 1998
---------- ----------
<S> <C> <C>
Income before taxes on income $ 296,008 $ 186,016
Federal income taxes at statutory rates (98,693) (55,796)
---------- ----------
Net Income $ 197,315 $ 130,220
========== ==========
</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, 1999 and 1998. 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 4. Related Party Transactions
MANAGEMENT FEES:
CLS provides office space, administrative, accounting, computer, and other
services to the Company. For the quarters ended March 31, 1999 and 1998,
$41,771 and $41,753, respectively, were paid for these services in accordance
with a management agreement. For 1999 and 1998 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 March 31, 1999 and 1998, were $13,924 and $13,924,
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 1.27% of
the common stock of the Company. The two sole stockholders of CLS directly
and indirectly own 3.67% of the common stock of the Company and 100% of the
stock of CLS at March 31, 1999.
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
quarters ended March 31, 1999 and 1998, CLS received $62,339 and $60,572,
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 March 31, 1999 and
1998, the loan receivable balance was $67,000.
OTHER ASSETS:
Included in other assets is a $6,270 and $8,360 receivable from a company
owned in majority by a stockholder/director (owning .88% of the outstanding
stock at March 31, 1999 and 1998) of the Company at March 31, 1999 and 1998,
respectively.
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
nonearning assets. Nonearning 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. Nonearning assets
stabilized in 1997 and have continued to remain stable in 1998 and the first
quarter of 1999. Nonearning loans were $2,686,359 and OREOs were $1,762,585
for the quarter ending March 31, 1999. The ratio of non-earning loans and
OREO to total ending assets increased from 37.3% at March 31, 1998 to 39.9% in
1999. Nonearning loans as a percentage of ending total assets increased from
16.3% at March 31, 1998 to 24.1% at March 31, 1999. Additionally, OREO as a
percentage of ending total assets decreased from 21.0% at March 31, 1998 to
15.8% at March 31, 1999.
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 increased to $100,667 for the quarter ended March 31, 1999 from
$82,539 for the quarter ended March 31, 1998. This increase in expenses is
directly related to a $30,000 increase in the allowance for loan losses. Real
estate expenses, net of rental income, decreased to $3,705 from $22,546 for
the quarter ended March 31, 1999 and 1998, respectively. The increase in the
allowance for loan losses together with the decrease in real estate expenses,
net of rental income, account for $11,159 of the $18,128 increase in expenses.
Other expenses remained somewhat constant, yet increased $6,969.
Total revenues decreased $28,923 to $238,095 for the quarter ended March 31,
1999, from $267,018 for the quarter ended March 31, 1998. This decrease
correlated with a decrease of $25,807 in interest income on residential loans.
Six OREOs sold during the quarter ending March 31, 1999. The total cost basis
of these six properties was $305,879. Three OREO properties were acquired
during the quarter with a total cost basis of approximately $218,449. The net
<PAGE>
<PAGE>
effect of these sales and foreclosures resulted in OREOs decreasing during the
quarter from $1,850,015 to $1,762,585. OREOs presently represent 15.8% of
total assets. One year ago, OREOs represented 21.0% of total assets.
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.
Management's strategy is to foreclose on nonearning loans, such that accounts
either pay off or result in a foreclosure sale. After the foreclosure is
complete, management will market the real property assets to create sales.
Revenues from sales are then invested into new loans secured by real property.
In 1997, CLS's and the Company's goals with respect to the 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 March 31, 1999 Compared to the Quarter Ended March 31, 1998.
GENERAL. The Company's net income increased 59.1%, to $296,008, for the
quarter ended March 31, 1999, from $186,016 for the quarter ended March 31,
1998. This increase in income was wholly a result of an increase in gains on
the sales of real estate. Six properties sold for the quarter ended March 31,
1999, which resulted in gains on the sales of real estate of $158,580. A year
ago, gains on the sales of real estate were $1,537 for the quarter ended March
31, 1998.
Return on average assets (annualized) was 9.5% at March 31, 1999, as compared
to 6.7%, at March 31, 1998. This increase in the return on assets is directly
attributable to extraordinary gains on the sales of real estate owned.
Nonearning loans and OREO to total assets peaked at 44.4% on June 30, 1997.
For the quarter ending March 31, 1999, nonearning loans and OREO to total
assets were 39.9% as compared to 37.3% for the quarter ending March 31, 1998.
Management will continue to monitor the percentage of nonearning loans and
OREOs to total assets. Management's goal is for this percentage to decrease
to 20% or less.
REVENUES. The Company's revenues decreased 10.8%, to $238,095, for the
quarter ended March 31, 1999, from $267,018 for the same quarter in 1998.
<PAGE>
<PAGE>
Revenues decreased because, as noted above, nonearning assets increased to
39.9% of total assets from 37.3% to total assets, an increase of 6.5%.
Additionally, the weighted average interest rate of the portfolio has
decreased slightly, resulting in less revenues. The increase in nonearning
assets is clearly a trend which started in the second quarter of 1998, when
the percentage of nonearning assets to total assets was 34.3%.
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 increased 22%, to $100,667, for the quarter
ended March 31, 1999, as compared to $82,539 for the quarter ended March 31,
1998. This was an increase of $18,128. The increase in total expenses is
directly attributable to an increase in the provision for loan and real estate
losses of $30,000.
Management fees paid to CLS for the quarter ended March 31, 1999 were $41,771,
as compared to $41,753 in 1998.
Quarter Ended March 31, 1998 Compared to 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.
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 $267,018,
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.
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. 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.
<PAGE>
<PAGE>
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 the 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.
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 $10,806,280 at March 31,
1999, from $10,934,164 at March 31, 1998. At March 31, 1999, shareholders'
equity was 98.64% of total assets, compared to 98.13% at March 31, 1998. At
March 31, 1999, the Company held cash of $408,975.
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 made an internal Y2K audit. Results of
the audit were:
The Company's state of readiness and costs to address the Company's Y2K
issues. Two personal computers preform all of Opportunity's accounting
functions. Prior to September 1, 1999, both computers will be replaced with
new Y2K compliant computers. Said computers will be purchased by CLS
Mortgage, Inc. at no cost to the Company. All software presently used by the
Company and or its affiliates is Y2K compliant, with the exception of the
Peachtree program. The Peachtree upgrade can be purchased at a cost of
approximately $200. Said software will be purchased by CLS Mortgage at no
cost to the Company.
Risks of the Company's Y2K issues and contingency plan. In the event the
software and hardware professionals that advise the Company are wrong and all
our computer systems fail, our Company is small enough that all accounting
procedures can be performed manually. Our staff can handle such an unlikely
series of events.
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
<PAGE>
<PAGE>
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.
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 1999.
Item 5. Other Information.
None.
<PAGE>
<PAGE>
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. A current report on Form 8-K was filed on February 5, 1999 to
report the change in the registrant's auditing firm.
<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 14, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 408975
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 9090413
<ALLOWANCE> 214752
<TOTAL-ASSETS> 11126912
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 11138985
<OTHER-SE> 322705
<TOTAL-LIABILITIES-AND-EQUITY> 11126912
<INTEREST-LOAN> 235508
<INTEREST-INVEST> 0
<INTEREST-OTHER> 2587
<INTEREST-TOTAL> 238095
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 16614
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 100667
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296008
<EPS-PRIMARY> .13
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 2686359
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 201345
<CHARGE-OFFS> 16614
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 214752
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
