<PAGE>
PROSPECTUS
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
$96,500,000 Investment Debentures, Series II
$ 3,500,000 Installment Debentures, Series I
250,000 Shares Variable Rate Cumulative Preferred
Stock, Series E-6 ($100 Per Share Offering
Price and Liquidation Preference)
The Investment Debentures, Series II and Installment Debentures,
Series I (the "Debentures") and the shares of Variable Rate Cumulative
Preferred Stock, Series E-6 (the "Preferred Stock") are being offered
separately and not as units. Investment Debentures, Series II will pay
interest monthly, quarterly, semi-annually or annually, or if left with
the issuer interest will compound semi-annually. Installment Debentures
Series I will pay equal monthly installments of principal and interest
until maturity according to an amortization schedule selected by the
owner. The Debentures are unsecured, senior in liquidation to
outstanding equity securities, subordinate to collateralized debt, on
a parity with unsecured accounts payable and accrued liabilities and on
parity with all other issued and outstanding debentures. The
Debentures will be issued in fully registered form in fractional
denominations of $0.01 or multiples thereof at 100% of the principal
amount paid. Metropolitan Mortgage & Securities Co., Inc. reserves the
right to change prospectively the interest rates, maturities, and
minimum investment amounts on unsold Debentures. The current provisions
are set forth below. See "DESCRIPTION OF DEBENTURES".
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
__________ ______________________ _____________
INVESTMENT DEBENTURES, SERIES II
<S> <C>
$1,000 60 to 71 months 8.50%
$1,000 56 to 59 months 7.95%
$1,000 55 months 8.50%
$1,000 48 to 54 months 7.95%
$1,000 36 to 47 months 7.90%
$ 100 24 to 35 months 7.75%
$ 100 12 to 23 months 7.35%
$5,000 6 to 11 months 6.75%
$ 100 72 to 119 months 8.50%
$ 100 120 to 125 months 8.75%
<CAPTION>
INSTALLMENT DEBENTURES, SERIES I
<S> <C>
$2,000 60 to 108 months 7.75%
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK, SERIES E-6
PRICE DISTRIBUTION
PER SHARE FORMULA (Applicable Rate)
<S> <C>
$100.00 The greater per annum rate of the
Treasury Bill Rate, the
Ten Year Constant Maturity Rate, or the
Twenty Year Constant Maturity Rate,
plus .5%
(Minimum 6%/Maximum 14%)
</TABLE>
The Preferred Stock offered hereunder will be sold in whole or
fractional units. Preferred Stock distributions are cumulative and
are to be declared and paid monthly. The Board has authorized, for
an indefinite period, a
distribution payment on the Preferred Stock of one percentage point
above the Applicable Rate. See "DESCRIPTION OF PREFERRED STOCK-
Distributions."
Preferred Stock may be redeemed, in whole or in part, at the
option of Metropolitan at the redemption prices set forth herein.
Under certain limited circumstances, the Board of Directors may, in
their sole discretion and without any obligation to do so, redeem
shares tendered for redemption by stockholders at the redemption
prices set forth herein. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares".
In liquidation, Preferred Stock is subordinate to all debts of
Metropolitan including Metropolitan's Investment and Installment
Debentures, Series II and I, and in parity with other preferred stock
and senior to Metropolitan's common stock. See " DESCRIPTION OF
PREFERRED STOCK-Liquidation Rights".
There is no trading market for the Debentures or the Preferred
Stock and none is expected to be established in the future. See
"CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS". A list of persons
willing to sell or purchase Metropolitan's issued and outstanding
shares of preferred stock has been maintained by Metropolitan's
broker-dealer as a convenience to holders of Metropolitan's preferred
stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
This offering of Debentures and Preferred Stock is subject to
withdrawal or cancellation by Metropolitan without notice. No minimum
amount of Debentures or Preferred Stock must be sold.
The Debentures and Preferred Stock offered hereby involve
significant investment considerations which should be analyzed prior
to any investment decision. See "CERTAIN INVESTMENT CONSIDERATIONS-
RISK FACTORS".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE SALES PROCEEDS TO
TO PUBLIC COMMISSIONS (1) METROPOLITAN (2)
<S> <C> <C> <C>
Per
Debenture 100% .25% to 6% 99.75% to 94%
Total: $100,000,000 $250,000-$6,000,000 $99,750,000-$94,000,000
Per
Preferred
Share $100 0% to 6% 100% to 94%
Total: $25,000,000 None - $1,500,000 $25,000,000-$23,500,000
</TABLE>
(1) There is no sales charge to the investor. Metropolitan will
reimburse Metropolitan Investment Securities, Inc. for commissions paid
to licensed securities sales representatives. Sales commission rates on
the sale of Debentures depend upon the terms of the sale and upon
whether the sales are renewals or new purchases. See "PLAN OF
DISTRIBUTION".
(2) Before deducting expenses estimated at $225,000
The Debentures and Preferred Stock are being offered for sale on
a continuous, best efforts basis directly to investors through
Metropolitan Investment Securities Inc., a registered broker/dealer and
member of the National Association of Securities Dealer's Inc. (NASD),
which is the exclusive sales agent for the publicly issued securities
of Metropolitan. SEE "CERTAIN TRANSACTIONS". No offering will be made
pursuant to this prospectus subsequent to January 31, 1996. The
offering is subject to Schedule E of the Bylaws of the NASD. See "PLAN
OF DISTRIBUTION".
The date of this prospectus is February , 1995.
<PAGE>
INSIDE FRONT COVER PAGE OF PROSPECTUS REFER TO GRAPH APPENDIX ITEM 1
<PAGE>
No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus. If
given or made, such information or representations must not be relied
upon as having been authorized by Metropolitan. This Prospectus does
not constitute an offer to sell securities in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that there has
been no change in the affairs of Metropolitan since the date hereof.
AVAILABLE INFORMATION
Metropolitan is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files
periodic reports and other information with the Securities and Exchange
Commission. Such reports and other information filed by Metropolitan
can be inspected at the public reference facilities maintained by the
Commission in Washington, D.C. at 450 5th Street, N.W., Judiciary
Plaza, Washington, DC 20549 and at the public reference facilities in
the New York Regional Office, 7 World Trade Center, Suite 1300, New
York, NY 10048, and the Chicago Regional Office, Northwestern Atrium
Center, 500 West Madison Avenue, Chicago, IL 60661-2511. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 5th Street N.W., Judiciary Plaza, Washington, DC
20549 at prescribed rates.
Metropolitan has filed with the Securities and Exchange Commission
in Washington, D.C., a Registration Statement under the Securities Act
of 1933 with respect to the securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement, as permitted by the rules and regulations of the Commission.
For further information, reference is made to the Registration
Statement, including the exhibits filed or incorporated as a part
thereof, which may be examined without charge at the Public Reference
Room of the Commission in Washington, D.C. or copies of which may be
obtained from the Commission upon payment of the prescribed fee.
Incorporation of Certain Documents by Reference
Metropolitan's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, filed with the Securities and Exchange
Commission (File No.2-63708) is hereby incorporated in this Prospectus
by reference.
Metropolitan hereby undertakes to provide without charge to each
person, including any beneficial owner, to whom a prospectus is
delivered, upon written or oral request of such person, a copy of any
and all of the information that has been incorporated by reference in
this Prospectus (not including exhibits to the information that is
incorporated by reference into the information that the Prospectus
incorporates). Requests for such copies should be directed to
Corporate Secretary, Metropolitan Mortgage & Securities Co., Inc., PO
Box 2162, Spokane, WA 99210-2162, telephone number (509) 838-3111.
<PAGE>
TABLE OF CONTENTS PAGE
Available Information.........................................
Prospectus Summary............................................
Summary Consolidated Financial Data..........................
Certain Investment Considerations - Risk Factors..............
Description of Securities.....................................
Description of Debentures...............................
Description of Capital Stock............................
Description of Preferred Stock..........................
Legal Matters.................................................
Experts.......................................................
Plan of Distribution..........................................
Use of Proceeds...............................................
Capitalization................................................
Selected Consolidated Financial Data..........................
Managements's Discussion and Analysis of
Financial Condition and Results of Operations...........
Business......................................................
Overview................................................
Receivable Investments..................................
Real Estate Development.................................
Life Insurance and Annuity Operations...................
Method of Financing.....................................
Competition.............................................
Regulation..............................................
Management....................................................
Indemnification...............................................
Ownership of Management.......................................
Principal Shareholders........................................
Certain Transactions..........................................
Index to Consolidated Financial Statements....................
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety, and should be read in
conjunction with the detailed information and financial statements
appearing elsewhere in this Prospectus. This offering involves certain
considerations to prospective investors which are set forth in
"DESCRIPTION OF SECURITIES & CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS."
THE METROPOLITAN CONSOLIDATED GROUP OF COMPANIES
Metropolitan Mortgage & Securities Co., Inc. was established and
incorporated in the State of Washington in January, 1953. Its
principal executive offices are located at 929 West Sprague Avenue,
Spokane, Washington. Its mailing address is P.O. Box 2162, Spokane, WA
99210-2162 and its telephone number is (509) 838-3111. Where reference
herein is intended to include Metropolitan Mortgage & Securities Co.,
Inc. and its subsidiaries, they are jointly referred to as the
"Consolidated Group". Where reference herein is intended to refer to
Metropolitan Mortgage & Securities Co., Inc. only, (eg. the parent
company) it is referred to individually as "Metropolitan".
The Consolidated Group is engaged, nationwide, in the business of
acquiring, holding, selling and servicing receivables (hereinafter
"Receivables"). These Receivables generally consist of real estate
contracts and promissory notes secured by first lien mortgages or first
lien deeds of trust on residential real estate. The Consolidated Group
also invests in Receivables consisting of real estate contracts and
promissory notes secured by second and lower position liens, annuities,
lottery prizes, and other investments. In addition, the Consolidated
Group also invests in corporate bonds and U.S. Treasury obligations and
also, engages in real estate development. Metropolitan invests
directly in Receivables using funds generated from Receivable cash
flows and the sale of debentures and preferred stock which Metropolitan
sells through Metropolitan Investment Securities, Inc., ("MIS") a
limited-purpose broker/dealer. Metropolitan provides Receivable
acquisition, management and collection services, for a fee, to its
insurance subsidiaries, Western United Life Assurance Company ("Western
United") and Old Standard Life Insurance Company ("Old Standard").
Western United and Old Standard acquire the funds for their investments
from Receivable cash flows and from the sale of annuity and life
insurance products and from bond portfolio earnings. Other
subsidiaries provide supporting and ancillary services to the
Receivable investment business. These services include the servicing
and collection of the Receivables by Spokane Mortgage Company, which
does business under the trade name MetWest Services. Metropolitan also
provides Receivable acquisition, management and collection services,
for a fee to Summit Securities, Inc., See "BUSINESS-Management,
Receivable Acquisition and Collection Services" & "CERTAIN
TRANSACTIONS".
Metropolitan's subsidiary, Metropolitan Mortgage Hawaii, owns a
condominium resort and related real estate in Hawaii. The Consolidated
Group also owns various repossessed and other properties held for sale
or development. See "BUSINESS-Real Estate Development."
On September 9, 1994, Metropolitan sold its wholly-owned
subsidiary, Summit Securities Inc. (Summit) to National Summit Corp.
(National). National is wholly owned by C. Paul Sandifur Jr.,
President of Metropolitan.
On December 15, 1994, Metropolitan and Summit entered into an
understanding that on January 31, 1995, Summit will purchase MIS from
Metropolitan, and acquire the Metropolitan property development
division. Neither of these transactions is expected to have a material
impact on the Consolidated Group's financial statements. The parties
are currently negotiating the potential sale of one of Metropolitan's
insurance subsidiaries, Old Standard. It is currently anticipated that
the sale of Old Standard will occur during the first calendar quarter
of 1995. See "CERTAIN TRANSACTIONS".
At September 30, 1994, the Consolidated Group had 363 full time
employees. No personnel are represented by any labor organization and
the Consolidated Group considers relations with its employees to be
satisfactory.
Metropolitan's principal office and its subsidiaries principal
offices, are located in commercial buildings in downtown Spokane,
Washington on property owned by Metropolitan consisting of a full city
block with an aggregate rentable area of approximately 50,000 square
feet.
<PAGE>
ORGANIZATIONAL CHART
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(as of December 15, 1994)
____________________________________|______________________________
| | | |
100% 100% | 96.5%
Old Standard Metropolitan | Consumers
Life Mortgage | Group
Insurance Hawaii | Holding
Inc. | Co., Inc.
| |
| |
| |
| 100%
| Consumers Insurance
| Co., Inc.
| |
| |
| 75.5%
24.5% -> Western United
Life Assurance Co.
Metropolitan Mortgage & Securities Co., Inc. - Parent organization
invests in Receivables and other investments with proceeds from
investments and securities offerings.
Consumers Group Holding Co., Inc. - A holding company, currently
principally inactive other than as a shareholder of Consumers
Insurance Co., Inc.
Consumers Insurance Co., Inc. - Property and casualty insurer,
currently principally inactive other than as a shareholder of Western
United Life Assurance Company.
Western United Life Assurance Company - Metropolitan's largest
subsidiary and largest company within the Consolidated Group, is
engaged in investing in receivables and other investments principally
funded by life insurance and annuity sales. Western United is
domiciled in the State of Washington.
Metropolitan Mortgage Hawaii, Inc. - Holds and develops Hawaii
timeshare condominium known as Lawai Beach Resort and related
properties.
Old Standard Life Insurance Co. - Invests in Receivables and other
investments principally funded by life insurance and annuity sales
in Idaho. Old Standard is domiciled in the State of Idaho.
Other Subsidiaries
National Systems, Inc. - Performs real estate closing services, owned
100% by Metropolitan Mortgage & Securities Co., Inc.
Beacon Properties, Inc. - Real estate broker and property manager,
owned 100% by Metropolitan Mortgage & Securities Co., Inc.
Southshore Corporation - Lessee and operator of restaurant adjacent to
Lawai Beach Resort in Hawaii. Owned 100% by Metropolitan Mortgage &
Securities Co., Inc.
Spokane Mortgage Co. d/b/a MetWest Services - Performs Receivable
collection and servicing functions, owned 100% by Metropolitan
Mortgage & Securities Co., Inc.
<PAGE>
THE OFFERING
DEBENTURES:
The Offering . . . . This Debenture offering consists of $3,500,000 in
principal of Installment Debentures, Series I and $96,500,000 in
principal of Investment Debentures, Series II (the Debentures) issued
at minimum investment amounts, terms, and rates set forth on the cover
page of this Prospectus. There is no minimum amount of Debentures
which must be sold. Debentures are issued in fully registered form.
See "DESCRIPTION OF DEBENTURES".
The Debentures . . . . The Debentures are unsecured indebtedness of
Metropolitan. At September 30, 1994, Metropolitan had outstanding
approximately $199,377,000 (principal and accrued interest) of
Debenture debt and $62,123,000 (principal and compounded and accrued
interest) of collateralized debt and similar obligations. See
"CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this offering will provide
funds for Receivable investments, other investments, property
development operations, retiring and renewing maturing debentures, and
for general corporate purposes (including but not limited to
acquisition of insurance companies, other financial service companies
and related companies). See "USE OF PROCEEDS" and "BUSINESS".
Interest Payments . . . . At the option of the holders of Installment
Debentures, Series II, interest is paid monthly, quarterly, semi-
annually or annually (without compounding) or if left with
Metropolitan, interest will compound semi-annually. Holders of
Installment Debentures, Series I, are paid equal monthly installments
of principal and interest pursuant to an amortization schedule selected
by the holder. The minimum investment amounts, terms and interest
rates on unissued Debentures offered hereby may be changed from time to
time by Metropolitan, but any such change shall not affect the rate of
interest of any Debentures issued prior to the change. See "DESCRIPTION
OF DEBENTURES".
PREFERRED STOCK:
Offering . . . . The Preferred Stock offering consists of 250,000
shares of Variable Rate Cumulative Preferred Stock, Series E-6 (the
"Preferred Stock"), offered at $100 per share, and sold in whole and
fractional shares. There is no minimum amount of Preferred Stock which
must be sold.
Distributions . . . . Distributions on the Preferred Stock offered
hereunder are cumulative from the date of issuance, and, when and as
declared, are payable monthly at the rates described on the cover page
of the Prospectus based on the price of $100 per share. All preferred
stock of Metropolitan including this Preferred Stock is entitled to
receive distributions on the same basis. See "DESCRIPTION OF PREFERRED
STOCK-Distributions". Distributions may be classified as dividends or
returns of capital for federal income tax purposes. See "DESCRIPTION
OF PREFERRED STOCK-Federal Income Tax Consequences of Distributions."
Liquidation Rights . . . . In the event of liquidation of
Metropolitan, the Preferred Stock liquidation rights are $100 per share
of Preferred Stock, plus declared and unpaid dividends. The
liquidation rights of the Preferred Stock are in parity with the
liquidation rights of all other previously issued and outstanding
preferred stock and junior to all debts of Metropolitan. See
"DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
Redemption: Upon Call by Metropolitan . . . The shares of Preferred
Stock are redeemable, in whole or in part, at the option of
Metropolitan, upon not less than 30 nor more than 60 days' notice by
mail, at a redemption price of $102 per share if redeemed prior to
January 1, 1995 and $100 per share if redeemed thereafter plus, in each
case, any declared but unpaid dividends to the date fixed for
redemption. See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares."
Redemption: Upon Request of Holder . . . Subject to certain limitations
Metropolitan may, in its sole discretion and without any obligation to
do so accept share(s) of Preferred Stock for redemption upon the
receipt of unsolicited written requests for redemption of share(s) from
any holder. Redemption prices in such event will be $97 per share if
the redemption occurs during the first year after the date of original
issuance of the share(s) and $99 per share thereafter plus, in each
case, any declared but unpaid dividends. Metropolitan may not redeem
share(s) at the holder's request during the first three years after the
initial sale of such share(s) except in those cases involving the death
or major medical emergency of the holder or any joint holder. Any such
discretionary redemptions will also depend on Metropolitan's financial
condition, including its liquidity position. See "DESCRIPTION OF
PREFERRED STOCK-Redemption of Shares". Metropolitan, through its
broker/dealer, intends to use its best efforts to maintain a trading
list for holders of Preferred Stock. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares" & " CERTAIN INVESTMENT CONSIDERATIONS-RISK
FACTORS".
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Washington and (ii) in the event distributions payable on Preferred
Stock are in arrears in an amount equal to twenty-four full monthly
dividends or more per share. See "DESCRIPTION OF PREFERRED STOCK-Voting
Rights".
Use of Proceeds . . . . The proceeds of this offering will provide
funds for Receivable investments, other investments property
development operations, retiring and renewing maturing debentures and
for general corporate purposes (including but not limited to
acquisition of insurance companies, other financial service companies,
and other related companies). See "USE OF PROCEEDS" & "BUSINESS".
Federal Income Tax Considerations. . . . In the event the Consolidated
Group has earnings and profits for federal income tax purposes in any
future year, the distributions paid in that year will constitute
taxable income to the recipient to the extent of such earnings and
profits. Metropolitan is unable to predict the future character of its
distributions. Purchasers are advised to consult their own tax
advisors with respect to the federal income tax treatment of
distributions made. See "DESCRIPTION OF PREFERRED STOCK-Federal Income
Tax Consequences of Distributions."
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated financial data shown below as of and for the years
ended September 30, 1994, 1993, 1992, 1991 and 1990 (other than the
Ratio of Earnings to Fixed Charges and Preferred Dividends) have been
derived from, and should be read in conjunction with, Metropolitan's
consolidated financial statements, related notes, and Management's
Discussion and Analysis. The consolidated financial statements as of
September 30, 1994 and for the three years then ended, appear elsewhere
herein. The consolidated financial statements as of and for the years
ended September 30, 1994 and 1993 have been audited by Coopers &
Lybrand L.L.P. The consolidated financial statements as of and for the
years ended September 30, 1992, 1991 and 1990 have been audited by BDO
Seidman.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $ 138,186 $133,113 $121,221 $107,253 $ 85,987
========= ======== ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 5,702 $ 8,558 $ 3,290 $ 356 $ 1,154
Income allocated to
minority interests (224) (255) (363) (177) (249)
--------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 5,478 8,303 2,927 179 905
Extraordinary item (1) - - 651 193 555
Cumulative effect of change
in accounting
for income taxes (2) - (4,300) - - -
--------- -------- -------- -------- --------
Net income $ 5,478 $ 4,003 $ 3,578 $ 372 $ 1,460
========= ======== ======== ======== ========
Preferred stock dividends $ 3,423 $ 3,313 $ 3,399 $ 4,072 $ 3,594
========= ======== ======== ======== ========
Income (loss)
applicable to common
stockholders $ 2,055 $ 690 $ 179 $ (3,700) $ (2,134)
========= ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges and
Preferred Dividends(4): 1.04 1.17
<PAGE>
PER COMMON SHARE DATA (3):
Income before extraordinary
item and cumulative
effect of change in
accounting principle $ 14,996 $ 37,239 $ (3,579) $(29,274) $ (18,936)
Extraordinary item - - 4,932 1,454 3,908
Cumulative effect of change
in accounting principle (2) - (32,089) - - -
--------- ---------- -------- -------- --------
Net income (loss) (5) $ 14,996 $ 5,150 $ 1,353 $(27,820) $ (15,028)
======== ========== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 137 134 132 133 142
========= ======== ======== ======== ========
Cash Dividends $ 675 $ 675 $ -- $ 900 $ 900
======== ========== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,063,290 $1,031,958 $982,259 $824,385 $695,030
Debt Securities and Other
Debt Payable 261,500 234,497 230,814 201,458 239,565
Stockholders' Equity 32,625 32,781 28,260 29,365 34,200
</TABLE>
(1) Benefit from utilization of net operating loss carry
forwards.
(2) Change in accounting principles reflects the adoption of
Statement of Financial Accounting Standards No. 109 - "Accounting for
Income Taxes."
(3) All information retroactively reflects the reverse common
stock split of 2,250:1 which occurred during the fiscal year ended
September 30, 1994.
(4) The consolidated ratio of earnings to fixed charges and
preferred dividends was 1.04 and 1.17 for the years ended September 30,
1994 and 1993, respectively. Earnings were insufficient to meet fixed
charges and preferred dividends for the years ended September 30, 1992,
1991 and 1990 by approximately $783,000, $6,071,000 and $3,893,000,
respectively.
Assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments, the ratio of earnings to fixed
charges and preferred dividends for Metropolitan alone was 1.34 and
1.06 for the years ended September 30, 1994 and 1993, respectively.
Earnings were insufficient to meet fixed charges and preferred
dividends for the years ended September 30, 1992, 1991 and 1990 by
approximately $13,012,000, $9,759,000 and $7,326,000, respectively.
The consolidated ratio of earnings to fixed charges excluding
preferred stock dividends was as follows for the years ended September
30, 1994 - 1.29; 1993 - 1.43; 1992 - 1.21; 1991 - 1.02; and 1990 -
1.06. The ratio of earnings to fixed charges for Metropolitan,
assuming no benefit from the earnings of its subsidiaries with the
exception of actually paid dividends was 1.68 and 1.31 for the years
ended September 30, 1994 and 1993, respectively. Such "parent only"
earnings of Metropolitan were insufficient to meet fixed charges for
the years ended September 30, 1992, 1991 and 1990 by approximately
$7,701,000, $3,296,000 and $1,962,000, respectively.
(5) Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the weighted
average number of shares of common stock outstanding. There were no
common stock equivalents or potentially dilutive securities outstanding
during any year presented.
<PAGE>
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
General
1. Impact of Interest Rates and Economic Conditions: The
liabilities of the Consolidated Group, principally annuities,
debentures and short-term collateralized borrowings, tend to mature or
reprice more quickly than do its assets which are principally comprised
of Receivables, investment grade securities, and real estate.
Consequently, in a rising interest rate environment, the current level
of profitability and the fair value of the Consolidated Group's equity
are likely to decline. The fair value of equity is the difference
between the collective fair value of assets less the collective fair
value of liabilities. The impact of a change in interest rates will be
reflected to the greatest extent in the fair value of assets and
liabilities with the longest maturities or time to reprice.
Additionally, borrowers tend to repay Receivables when interest rates
decline as they are able to refinance loans at lower rates of interest.
This factor reduces the amount of interest to be received over time as
loans with higher rates of interest are prepaid more rapidly. However,
the Consolidated Group purchases the substantial majority of is
Receivables at a discount. The yield on these Receivables is improved
when recognition of the discount is accelerated through prepayment.
See "Business-Real Estate Receivable Investments-Yield and Discount
Considerations." Recently, the interest rate environment has been one
of rising interest rates. The Consolidated Group is exposed to the
risk that its interest expense may rise more quickly than its interest
income. Also, the fair value of its assets will tend to decline more
rapidly than the fair value of its liabilities will improve, thus
reducing the fair value of its equity. Conversely, in a declining
interest rate environment, the net interest income and the fair value
of equity for the Consolidated Group would likely increase. See"
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Asset/Liability Management." A general decline in
economic conditions could adversely impact the property development
operations of the Consolidated Group, cause an increase in the
foreclosure of loan collateral, and reduce the probable sale prices for
such property obtained through foreclosure.
2. Effect of Certain Insurance Regulations: As all of
Metropolitan's net book value is attributable to its ownership of its
subsidiaries, especially Western United, Metropolitan is dependant upon
its ability to receive dividends and charge fees for services to
subsidiaries in order to pay interest, retire debentures and pay
preferred stock distributions. Insurance company regulations restrict
transfers of assets and the amount of dividends that the insurance
subsidiaries may pay. Accordingly, to the extent of such restrictions,
assets and earnings of the insurance subsidiaries are not available to
Metropolitan without special permission from the insurance
commissioner. This restriction on dividends could affect
Metropolitan's ability to pay interest, retire Debentures and pay
Preferred Stock distributions. The total unrestricted statutory
surplus of the insurance subsidiaries was $6,827,000 as of September
30, 1994. See "BUSINESS-Regulation" & "CERTAIN TRANSACTIONS."
Metropolitan charges its insurance subsidiaries for facilities
rental, general office services, and for its services in acquiring and
servicing Receivables. Services are provided pursuant to an agreement
that is subject to approval by the Office of the Insurance
Commissioner. To the extent that such fees could be restricted by the
Office of the Commissioner, Metropolitan's ability to meet its
obligations could be adversely affected. See "BUSINESS-Life Insurance
and Annuity Operations."
3. Use of Leverage and Related Indebtedness: The Consolidated
Group's primary sources of new financing for its operations are sales
of annuities, debt securities (Debentures) and preferred stock. See
"BUSINESS-Method of Financing" & "MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The Consolidated
Group's principal sources of cash flow include Receivable payments and
proceeds from the sale of annuities, debentures and preferred stock. To
the extent the Consolidated Group's cash flow is insufficient or
unavailable for the payoff of debentures which mature during the period
ending January 31, 1996, portions of the net proceeds of this Debenture
and Preferred Stock offering may be used for such purpose. See "USE OF
PROCEEDS". Approximately $35,767,000 in principal amount of debt
securities will mature between January 31, 1995 and January 31, 1996.
Historically, approximately 50% to 70% of maturing debentures are
reinvested. Metropolitan's ability to repay its other outstanding
obligations, including those created by the sale of the securities
described herein, may be contingent upon the success of future public
offerings of debentures and preferred stock.
The following table summarizes anticipated cash requirements for
principal and interest obligations of Metropolitan's debentures and
other debts payable; and anticipated cash dividend requirements on its
preferred stock for the five year period ending September 30, 1999
based on amounts outstanding at September 30, 1994 and assuming no
reinvestment of maturing debentures:
<TABLE>
<CAPTION>
OTHER PREFERRED
Fiscal Year Ending DEBENTURE DEBT STOCK
September 30, BONDS PAYABLE DIVIDENDS TOTAL
___________________ _________ _______ _________ _____
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1995 $60,797 $61,146 $4,130 $126,073
1996 22,313 264 4,130 26,707
1997 50,381 242 4,130 54,753
1998 57,673 231 4,130 62,034
1999 46,216 220 4,130 50,566
-------- ------- ------- --------
$237,380 $ 62,103 $ 20,650 $320,133
======== ======= ======= ========
</TABLE>
4. Effect of Life Insurance and Annuity Termination Rates: An
increase in the number of life insurance and annuity policy
terminations will tend to negatively impact the insurance subsidiaries'
earnings, (and in turn the Consolidated Group's earnings) by requiring
the expensing of unamortized deferred costs related to policy
surrenders. At September 30, 1994, deferred policy acquisition costs
on annuities were approximately 8.8% of annuity reserves. Surrender
charges typically do not exceed 5% of the annuity contract balance at
the contract's inception, and such charges decline annually from that
rate. Annuity termination rates, adjusted for internal rollovers, for
the calendar years 1993, 1992 and 1991 were 15.3%, 12.0%, and 12.8%,
respectively. Deferred policy acquisition costs on life insurance
products were approximately 16.9% of life reserves at September 30,
1994. Life insurance termination rates were 8.0%, 8.2%, and 10.3%,
respectively, in calendar 1993, 1992,and 1991. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" & "Note 12, Consolidated Financial Statements".
5. Investments in Receivables:
Receivables Secured by Real Estate: The Consolidated Group is
engaged in the purchase of Receivables which principally consist of
Receivables secured by real estate. See "BUSINESS-Receivable
Investments." All such Receivable investments are subject to a risk of
payment default and loss in the event of foreclosure. The risk of
default and loss can be affected by changes in economic conditions,
property values, changes in zoning, land use, environmental laws and
other legal restrictions, including restrictions on timing and methods
of foreclosure. There is no assurance that these Receivables will be
paid according to their terms, or that property values will be adequate
to preclude loss in the event of a foreclosure. Metropolitan's
investment underwriting procedure includes a review of demographics,
market values, property appraisal, economy, and credit of the buyer.
The Consolidated Group buys these Receivables nationwide, allowing it
to focus its activities on areas where the market trends and economic
conditions are more favorable to this line of business. Management
believes that these procedures minimize the risk of default or loss in
the event of foreclosure. However, there is no assurance that these
procedures will be effective.
Investments in other Receivables: In addition to the purchase of
Receivables secured by real estate, the Consolidated Group is engaged
nationwide in the purchase of other types of Receivables including the
purchase of annuities issued in the settlement of disputes, other types
of annuities, lottery prizes, and other investments. All such
Receivables are subject to the risk of default by the payor, (generally
an unrelated insurance company, or a state government). Unlike
Receivables secured by real estate, these Receivables are generally not
secured by a specific asset. Metropolitan's investment underwriting
procedures includes a review of the credit rating of the payor, a
review of corresponding state laws including the existence of a state
insurance guaranty fund designed to protect annuity holders, and/or
other relevant factors designed to evaluate the risk of the particular
investment. Management believes that these procedures minimize the
risk of loss in the event of a default. However, there is no assurance
that these procedures will be effective.
The following table demonstrates the relative concentration of the
Consolidated Group's Receivable investments and other investments as a
percentage of assets. (See "BUSINESS-Life Insurance and Annuity
Operations"):
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1994 1993 1992
---- ---- ----
(Dollars in Thousands)
(Percentage of Total Assets)
<S> <C> <C> <C>
Carrying Value of Real Estate
Held For Sale and/or
Development $ 76,765 $ 76,269 $ 73,556
7% 7% 7%
Face Value of All
Receivables* $ 606,324 $ 598,490 $539,327
57% 58% 55%
Face Value of
Receivables in Arrears
for Three Months or More $ 19,000 $ 25,850 $ 21,300
Carrying value of 2%3%2%
Securities
Available for sale
and Held to
maturity
$ 289,251 $ 224,812 $265,781
27% 22% 27%
TOTAL ASSETS $1,063,290 $1,031,958 $982,259
100% 100% 100%
</TABLE>
* As of September 30, 1994, 97% of the Receivables were secured by
first position liens on real estate and approximately 87% of the
Receivables were non-conventional in the sense that they were not
originated by a financial institution.
6. Conflicts of Interest: Metropolitan and various of its
subsidiaries engage in similar business activities which include
investing in Receivables and selling insurance products. As a result,
certain conflicts of interest may arise between or among these
companies. A common management group directs the activities of all of
the companies in the Consolidated Group. Metropolitan provides
Receivable acquisition, collection and management services to it's
subsidiaries, Western United, Old Standard, and to Summit Securities,
Inc. Summit is effectively controlled by C. Paul Sandifur Jr.,
President of Metropolitan and President of most of the companies within
the Consolidated Group. On December 15, 1994 Metropolitan and Summit
entered into an understanding that on January 31, 1995, Summit will
purchase Metropolitan Investment Securities from Metropolitan, and
acquire the Metropolitan property development division. The parties
are currently negotiating the potential sale of Old Standard Life
Insurance Co. Management does not believe that these transactions will
have a material impact on either future earnings or equity of the
Consolidated Group. See "CERTAIN TRANSACTIONS". As a result, certain
conflicts of interest may now exist and may arise between or among the
Consolidated Group, Old Standard, and Summit. Investors in
Metropolitan's securities must rely on the integrity and corporate
responsibilities of Metropolitan and its subsidiaries' officers and
directors in making business decisions and directing the operations of
Metropolitan and its subsidiaries.
Relative to Debentures
1. Term Investment; Absence of Public Trading Market: The
Debentures offered hereby will be issued for specified terms and should
not be considered liquid investments. See "DESCRIPTION OF DEBENTURES."
Investors should be prepared to hold the Debentures until maturity. The
Debentures are not traded on any stock exchange and there is no
independent public market for the Debentures. At present, management
does not anticipate applying for a listing for such public trading.
2. Effect of Certain Debentures Regulations and Indenture
Provisions: The Debentures are issued pursuant to an Indenture which
does not restrict Metropolitan's ability to issue additional debentures
or to incur other debt. The Indenture does not require Metropolitan to
maintain any specified financial ratios, minimum net worth or minimum
working capital. Debentureholders should not rely on the terms of the
Indenture for protection of their investments, but should look rather
to the creditworthiness of Metropolitan and its ability to satisfy its
obligations. Debentures will not be guaranteed or insured by any
governmental agency. The amount of Debentures Metropolitan may issue is
subject to certain Washington State laws which require that
Metropolitan maintain its net worth at certain minimum levels in
relation to the amount of outstanding Debentures. See "BUSINESS-
Regulation." There is no sinking fund for the Debentures. On September
30, 1994, Metropolitan had outstanding approximately $199,377,000
(principal and compounded and accrued interest) of debentures and
similar obligations and $62,123,000 (principal and accrued interest) of
collateralized debt. See "Notes 7 and 8 to the Consolidated Financial
Statements." The Debentures are senior in liquidation to all
outstanding equity securities of Metropolitan. They are subordinate in
liquidation only to Metropolitan's collateralized debt as set forth
above and are on a parity with all other outstanding debentures,
unsecured accounts payable and unsecured accrued liabilities. In the
event of liquidation of Metropolitan, the policyholders, creditors and
bond holders of Metropolitan's subsidiaries would be paid in priority
to Debentureholders to the extent of the assets of the subsidiaries.
Relative to Preferred Stock
1. Prior Years' Net Income Insufficient to Cover Preferred Stock
Distributions and Fixed Charges: Metropolitan's net income in fiscal
1994, 1993 and 1992 exceeded the preferred stock distribution
requirements. Accordingly, for those years distributions were paid out
of the respective year's earnings. However, without gains aggregating
$12.3 million in fiscal 1993 and $7.9 million in 1992 from the sale of
investments and Receivables, earnings for 1992 and 1993 would have been
insufficient to meet preferred stock distribution requirements. Net
income for the years 1984 through 1991 was not sufficient to meet
distribution requirements. During 1994, net income was approximately
$5.5 million, from which preferred stock dividends of $3.4 million, and
common stock dividends of $87,000 were paid, which resulted in $2.7
million of retained earnings at September 30, 1994 compared to $778,000
and $179,000 at September 30, 1993 and 1992, respectively. During
fiscal years 1990 and 1991, Metropolitan's net income was insufficient
to cover preferred stock dividend requirements by the following
amounts: 1990: $2,134,000; and 1991: $3,700,000. See "SELECTED
CONSOLIDATED FINANCIAL DATA".
The ratios of earnings to fixed charges and preferred stock
dividends for the Consolidated Group and for Metropolitan alone
(unconsolidated-which includes Metropolitan's share of earnings from
50% or more owned subsidiaries) were as follows for the periods
indicated: 1994:1.04, and 1993: 1.17. Accordingly, adjusted earnings
(income before extraordinary items plus interest expense and income tax
expense) were sufficient to cover fixed charges in 1993 and 1994 and
insufficient to cover fixed charges (primarily interest and preferred
stock dividend requirements) for the prior years in the following
respective amounts for those years: 1992: $783,000; 1991: $6,071,000;
and 1990: $3,893,000. See "SELECTED CONSOLIDATED FINANCIAL DATA." No
assurance can be given that earnings will be sufficient to cover
preferred stock dividend requirements in the future.
2. Effect of Certain Subordination and Liquidation Rights: The
offering price and liquidation preference of Preferred Stock offered
herein is $100 per share. In the event of liquidation of Metropolitan,
outstanding shares of Preferred Stock are at parity with the
liquidation preference of all other outstanding series of preferred
stock of Metropolitan, and are subordinate to all outstanding debt of
Metropolitan including its Debentures. In the event of liquidation of
Metropolitan, the policy holders and creditors of Metropolitan's
subsidiaries would be paid in priority to all preferred shareholders
(including holders of the Preferred Stock offered herein) to the extent
of the unencumbered assets of the subsidiaries. Preferred Stock is
preferred in liquidation to Metropolitan's common stock. As of
September 30, 1994, total assets of the Consolidated Group were
$1,063,290,000, and the total liabilities of the Consolidated Group
ranking senior in liquidation preference to Preferred Stock were
$1,030,665,000 leaving $32,625,000 available for distribution to
preferred shareholders. The total liquidation preference of the
outstanding shares of previously issued series of preferred stock as of
September 30, 1994, was $43,332,000. Consequently, the liquidation
rights of the outstanding preferred stock had a book value of $.75 for
each $1.00 of outstanding liquidation rights as of September 30, 1994.
The preference in liquidation would not necessarily be applicable
to terms afforded Preferred Stock in the event of other extraordinary
corporate events such as the sale of substantially all its assets,
capital restructuring, merger, reorganization and bankruptcy. The
outcomes thereof could be subject to negotiation among all interested
parties and/or court determinations and are not presently determinable.
In such circumstances Preferred Stock would not necessarily enjoy any
preference over terms available to common stock, or even be as
favorable.
3. Federal Income Tax Considerations: To the extent that the
Consolidated Group has no current or accumulated earnings and profits
as computed for federal income tax purposes, Metropolitan believes that
distributions made with respect to Preferred Stock would be
characterized first as tax free returns of capital and then gain to the
extent the distributions exceed the holder's basis in the preferred
stock. When such a tax free distribution occurs, its treatment is not
elective to the shareholder. In the event the Consolidated Group has
earnings and profits for federal income tax purposes in any future
year, the distributions paid in that year will constitute taxable
income to the recipient to the extent of such earnings and profits.
Investors who purchase Preferred Stock through IRA's or other similar
tax deferred arrangements, should consult their tax advisor regarding
the deferral of taxable income. Metropolitan believes that
distributions on its outstanding common and preferred stock in 1984
through 1992 and 1994 were tax free returns of capital, but were
taxable in 1993. Prior year's tax treatment should not be considered
indicative of future year tax treatment. Management is unable to
predict the future character of its distributions. Purchasers are
advised to consult their own tax advisors with respect to the federal
income tax treatment of distributions made. See "DESCRIPTION OF
PREFERRED STOCK-Federal Income Tax Consequences of Distributions."
4. Limited Marketability of Shares: The Preferred Stock is not
expected to be traded on any National or Regional Stock Exchange and no
independent public market for Preferred Stock is anticipated. At
present, management does not anticipate applying for a listing for such
public trading. In order to provide shareholders with some liquidity,
Metropolitan's broker/dealer has operated a trading list to match
buyers and sellers of earlier issues of preferred stock. With limited
exceptions, Metropolitan has established a policy that all preferred
shareholders must place their shares for sale on the trading list for
60 consecutive days before Metropolitan will entertain a request for
redemption. During 1993 and 1994, the average waiting time for a
shareholder wishing to sell preferred shares on this trading list was
20 and 17 days, respectively. However, there can be no assurance that
the shares will be sold within similar time periods in the future.
There is no assurance that Metropolitan will redeem the shares if they
have not sold within the 60 day period. There can be no assurance that
this system will continue to operate, nor that it will provide
liquidity comparable to securities traded on recognized public stock
exchanges. See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares."
5. Control by Common Stockholders: The Class A Common Stock is
the only class of Metropolitan's stock carrying voting rights. Class
A Common stockholders now hold, and upon completion of this offering
will continue to hold, effective control of Metropolitan except as
described below. The Board resolution authorizing the Preferred Stock
provides that in the event distributions payable on any shares of
preferred stock (including the Preferred Stock offered herein) are in
arrears in an amount equal to twenty four full monthly dividends or
more per share, then the holders of Preferred Stock and all other
outstanding preferred stock shall be entitled to elect a majority of
the Board of Directors of Metropolitan. Preferred Stock shareholders
may also become entitled to certain other voting rights as required by
law. See "DESCRIPTION OF PREFERRED STOCK-Voting Rights".
6. Limitations on Redemption and Restrictions on Distributions:
Preferred Stock is designed as a long term investment in the equity of
Metropolitan, not as a short term liquid investment. The Preferred
Stock is redeemable solely at the option of Metropolitan, and with
limited exceptions is specifically not redeemable for three years
following its purchase. In addition, Metropolitan may not purchase or
acquire any shares of Preferred Stock in the event that cumulative
dividends thereon have not been paid in full except pursuant to a
purchase or exchange offer made on the same terms to all holders of
Preferred Stock. See "DESCRIPTION OF PREFERRED STOCK-Redemption of
Shares". Metropolitan is restricted from making distributions on
Preferred Stock in the event that any distributions to which the
holders of other series of preferred stock are entitled to have not
been paid. See "DESCRIPTION OF PREFERRED STOCK-Distributions "
<PAGE>
DESCRIPTION OF SECURITIES
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture dated as of July
6, 1979 and supplements thereto dated as of October 3, 1980 (with
respect to Investment Debentures, Series II) and November 12, 1984
(with respect to Installment Debentures, Series I). The following
statements relating to the Debentures and the Indenture are summaries
and do not purport to be complete. Such summaries are subject to the
detailed provisions of the Indenture and are qualified in their
entirety by reference to the Indenture, a copy of which is filed as an
exhibit to the Registration Statement and is also available for
inspection at the office of the Trustee.
General
The Debentures will represent unsecured general obligations of
Metropolitan and will be issued in fully registered form without
coupons, in fractional denominations of $0.01 or more subject to the
stated minimum investment amount requirements. The Debentures will be
sold at 100% of the principal amount. The Debentures will have the
minimum investment amounts, maturities and interest rates set forth on
the cover page of this Prospectus. The stated interest rates,
maturities, and minimum investment amounts of unissued Debentures may
be changed at any time by Metropolitan. Any such change will have no
effect on the terms of the previously sold Debentures.
Metropolitan is currently exploring an alternative means of
Debenture registration commonly known as "book entry". A book entry
method of registration eliminates the need for a negotiable debenture
certificate. Instead, a receipt for the investment would be issued,
and record of the investment maintained by the registrar (Metropolitan)
and the Trustee. If such a change to book entry is made, Metropolitan
intends to file an amendment to the Trust Indenture with the Securities
and Exchange Commission and a supplement to this prospectus.
Debentures may be transferred or exchanged for other Debentures of
the same series of a like aggregate principal amount subject to the
limitations provided in the Indenture. No service charge will be made
for any transfer or exchange of Debentures. Metropolitan may require
payment of taxes or other governmental charges imposed in connection
with any such transfer or exchange. Interest will accrue at the stated
rate from the issue date until maturity. The Debentures are not
convertible into capital stock or other securities of Metropolitan.
The Debentures are not subject to redemption prior to maturity,
but may be prepaid pursuant to the prepayment on death provision
described below. Also, in limited circumstances involving an
investor's demonstrated financial hardship, and subject to regulatory
restrictions affecting redemptions and exchanges of securities during
an offering, Metropolitan may, in its sole discretion, entertain a
request for an early payout of a Debenture upon terms mutually agreed
to by the holder of the Debenture and Metropolitan. Such early payout
requests, when received, are reviewed on a first come first served
basis and are subject to review by the Metropolitan's Executive
Committee, or by such other Committee as delegated by the
Metropolitan's Executive Committee.
Payment of Principal and Interest
Investment Debentures, Series II: Holders of Investment
Debentures, Series II will be paid interest in cash under one of
several plans. The purchaser may elect to have interest paid on a
monthly, quarterly, semi-annual or annual basis, without compounding,
or the purchaser may elect to accumulate interest with compounding
semi-annually at the stated interest rate. Debentureholders may change
the interest payment election at any time by written notice to
Metropolitan. Under the compounding option, upon written notice to
Metropolitan, the Debentureholder(s) may withdraw the interest
accumulated during the last two completed semiannual compounding
periods as well as the interest accrued from the end of the last
compounding period to the date Metropolitan receives the notice.
Amounts compounded prior to the last two compounding periods are
available only at maturity.
Installment Debentures, Series I: Holders of Installment
Debentures, Series I will be paid monthly installments comprised of
principal and interest until maturity. Payments will commence on the
date specified by the purchaser, which date shall be no less than 30
days from the debenture issue date. The amount of each installment will
be determined by the amortization term designated by the
Debentureholder at the time the Debenture is purchased.
Debentureholders are notified in writing between 15 and 45 days
prior to the date their Debentures will mature. The amounts due on
maturity are placed in a separate bank trust account until paid to the
registered owner(s). Debentures do not earn interest after the maturity
date. Metropolitan will pay the principal and accumulated interest due
on matured Debentures to the registered owner(s) in cash at
Metropolitan's main office in Spokane, Washington or by check mailed to
the address designated by the registered owner.
Prepayment on Death
In the event of the death of a Debentureholder, any party
entitled to receive some or all of the proceeds of the Debenture may
elect to have his or her portion of the principal and any accrued but
unpaid interest prepaid in full in five consecutive equal monthly
installments. Interest will continue to accrue on the declining
principal balance of such portion. No interest penalty will be
assessed. Any request for prepayment shall be made to Metropolitan in
writing and shall be accompanied by evidence satisfactory to
Metropolitan of the death of the registered owner or joint registered
owner. Before prepayment, Metropolitan may require the submission of
additional documents or other material which it may consider necessary
to determine the portion of the proceeds the requesting party is
entitled to receive, or assurances which, in Metropolitan's discretion,
it considers necessary to fulfill its obligations.
Related Indebtedness
The Indenture pursuant to which the Debentures are issued does not
restrict Metropolitan's ability to issue additional debentures or to
incur other debt. The Indenture does not require Metropolitan to
maintain any specified financial ratios, minimum net worth or minimum
working capital. There is no sinking fund for Debentures. Debentures
will not be guaranteed or insured by any governmental agency. The
State of Washington regulates the amount of debt securities
Metropolitan may issue, its debt to equity ratio, certain of its
investments and various other aspects of its business. See "Business-
Regulation". At September 30, 1994, Metropolitan had outstanding
approximately $199,377,000 (principal and compounded and accrued
interest) of Debentures and similar obligations, including obligations
of subsidiaries, and $62,123,000 (principal and accrued interest) of
collateralized debt. The Debentures offered hereby are senior in
liquidation to all outstanding equity securities of Metropolitan. They
are subordinate to Metropolitan's collateralized debt as set forth
above and are on a parity with all other outstanding debentures and
unsecured accounts payable and accrued liabilities. There are no
limitations on Metropolitan's ability to incur additional
collateralized debt. Debentureholders should not rely on the terms of
the Indenture for protection of their investment, but should look
rather to the creditworthiness of Metropolitan and its ability to
satisfy its obligations.
Concerning the Trustee
Seattle First National Bank , the Trustee, is obligated under the
Indenture to oversee and, if necessary, to take action to enforce
fulfillment of Metropolitan's obligations to Debentureholders. The
Trustee, a subsidiary of Bank of America Corporation, is a national
banking association headquartered in Seattle, Washington, with a
combined capital and surplus in excess of $1.5 billion. Metropolitan
and certain of its subsidiaries maintain deposit accounts and from time
to time, have borrowed money from the bank and conducted other banking
transactions with it. At September 30, 1994, and as of the date of
this Prospectus, no loans from the Trustee were outstanding. In the
event of default the Indenture permits the Trustee to become a creditor
of Metropolitan and its subsidiaries, and does not preclude the Trustee
from enforcing its rights as a creditor, including rights as a holder
of collateralized indebtedness.
Rights and Procedures in the Event of Default
Events of Default include the failure of Metropolitan to pay
interest on any Debenture for a period of 30 days after it becomes due
and payable; the failure to pay the principal or any required
installment thereof of any Debenture when due; the failure to perform
any other covenant in the Indenture for 60 days after notice; and
certain events in bankruptcy, insolvency or reorganization with respect
to Metropolitan. Upon the occurrence of an Event of Default, either
the Trustee or the holders of 25% or more in principal amount of
Debentures then outstanding may declare the principal of all the
Debentures to be due and payable immediately.
The Trustee must give the Debentureholders notice by mail of any
default within 90 days after the occurrence of the default, unless it
has been cured or waived. The Trustee may withhold such notice if it
determines in good faith that such withholding is in the best interest
of the Debentureholders, except if the default consists of failure to
pay principal or interest on any Debenture.
Subject to certain conditions, any such default, except failure to
pay principal or interest when due, may be waived by the holders of a
majority (in aggregate principal amount) of the Debentures then
outstanding. Such holders will have the right to direct the time,
method and place of conducting any proceeding for any remedy available
to the Trustee, or of exercising any power conferred on the Trustee,
except as otherwise provided in the Indenture. The Trustee may require
reasonable indemnity from holders of Debentures before acting at their
direction.
Within 120 days after the end of each fiscal year Metropolitan
must furnish to the Trustee a statement of certain officers of
Metropolitan concerning their knowledge as to whether or not
Metropolitan is in default under the Indenture.
Modification of the Trust Indenture
Debentureholders' rights may be modified with the consent of the
holders of 66 2/3% of the outstanding principal amounts of Debentures,
and 66 2/3% of those series specifically affected. In general, no
adverse modification of the terms of payment and no modifications
reducing the percentage of Debentures required for modification is
effective against any Debentureholder without his or her consent.
Restrictions on Consolidation, Merger, etc.
Metropolitan may not consolidate with or merge into any other
corporation or transfer substantially all its assets unless either
Metropolitan is the continuing corporation or the corporation formed by
such consolidation, or into which Metropolitan is merged, or the person
acquiring by conveyance or transfer of such assets shall be a
corporation organized and existing under the laws of the United States
or any state thereof which assumes the performance of every covenant of
Metropolitan under the Indenture and certain other conditions precedent
are fulfilled.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Metropolitan consists of 222
shares of Class A Common Stock ($2,250 par value), 222 shares of Class
B Common Stock ($2,250 par value), 750,000 shares of Preferred Stock,
Series A ($1 par value), 200,000 shares of Preferred Stock, Series B
($10 par value), 1,000,000 shares of Preferred Stock, Series C ($10 par
value), 1,375,000 of Preferred Stock, Series D ($10 par value),
5,000,000 shares of Preferred Stock, Series E ($10 par value), and
1,000,000 shares of Subordinate Preferred Stock, no par value. See
"Consolidated Financial Statements".
Relative Rights of Common Stock
Holders of shares of Class A Common Stock are entitled to one vote
per share on all matters to be voted on by the shareholders. Subject
to the rights of holders of outstanding shares of preferred stock, if
any, and the Preferred Stock sold hereunder, if any, the holders of
Common Stock are entitled to receive such dividends, as may be declared
from time to time by the Board of Directors in its discretion from
funds legally available, and upon liquidation or dissolution of
Metropolitan are entitled to receive all assets available for
distribution to shareholders. The Common Stock has no preemptive or
other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares.
Certain Class A and B Common Shares, which are held by certain officers
of Metropolitan, are subject to resale restrictions and subject to
Metropolitan's right to repurchase in the event of termination of
employment. All outstanding shares of Common Stock are fully paid and
nonassessable.
DESCRIPTION OF PREFERRED STOCK
This offering consists of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-6 (hereinafter referred to as
"Preferred Stock"). All of the outstanding shares of preferred stock
and the shares of Preferred Stock offered by Metropolitan hereby, when
issued and sold against the consideration set forth in the prospectus,
will be validly issued, fully paid and nonassessable. The relative
rights and preferences of Preferred Stock have been fixed and
determined by the Board of Directors of Metropolitan and are set forth
in the Preferred Stock Authorizing Resolution (the "Authorizing
Resolution"). The following statements relating to the Preferred Stock
are summaries, do not purport to be complete and are qualified in their
entirety by reference to the Preferred Stock Authorizing Resolution a
copy of which is filed with the Commission as an exhibit to the
Registration Statement and is also available for inspection at the
principal office of Metropolitan.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to the
shareholders of record as of the fifth calendar day of each month.
Distributions are to be paid in cash on the twentieth calendar day of
each month in an amount equal to the offering price of $100 per share
multiplied by the distribution rate divided by twelve. The
distribution rate will be the "Applicable Rate" as defined herein
subject to the authority of Metropolitan's Board of Directors to
authorize, by resolution, a higher rate.
Metropolitan's Board of Directors has adopted a resolution to
authorize a distribution rate on the Preferred Stock at one percentage
point higher than the Applicable Rate. Such higher distribution rate
will continue from month to month until the Board elects to terminate
it.
The Applicable Rate for any monthly distribution period cannot be
less than 6% or greater than 14% per annum. The Applicable Rate for
any monthly distribution period shall be (i) the highest of the
Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the Twenty-
Year Constant Maturity Rate (each as hereinafter defined), plus (ii)
one half of one percentage point. Should Metropolitan determine in
good faith that one or more of such rates cannot be determined for any
distribution period, then the Applicable Rate of such period shall be
the higher of whichever of such rates can be so determined, plus one
half of one percentage point. Should Metropolitan determine in good
faith that none of such rates can be determined for any distribution
period, then the Applicable Rate in effect for the preceding
distribution period shall be continued for such distribution period.
The distribution rate for each monthly distribution period shall be
calculated as promptly as practicable by Metropolitan. Metropolitan
will cause notice of the distribution rate to be enclosed with the
next mailed distribution payment check. In making such calculation,
the Treasury Bill Rate, Ten-Year Constant Maturity Rate and Twenty-Year
Constant Maturity Rate shall each be rounded to the nearest five
hundredths of a percentage point.
Treasury Bill Rate
Except as provided below in this paragraph, the "Treasury Bill
Rate" for each distribution period will be the arithmetic average of
the two most recent weekly per annum market discount rates (or the one
weekly per annum market discount rate, if only one such rate shall be
published during the relevant weekly Calendar Period (as defined
below)) for the three-month U.S. Treasury bills, as published weekly by
the Federal Reserve Board during the Calendar Period immediately prior
to the ten calendar days immediately preceding the first day of the
distribution period for which the distribution rate on Preferred Stock
is being determined.
In the event that the Federal Reserve Board does not publish such
weekly per annum market discount rate during any such Calendar Period,
then the Treasury Bill Rate for the related distribution period shall
be the arithmetic average of the two most recent weekly per annum
market discount rates (or the one weekly per annum market discount
rate, if only one such rate shall be published during the relevant
Calendar Period) for three-month U.S. Treasury Bills, as published
weekly during such Calendar Period by any Federal Reserve Bank or by
any U.S. Government department or agency selected by Metropolitan. In
the event that a per annum market discount rate for the three-month
U.S. Treasury Bills shall not be published by the Federal Reserve Board
or by any Federal Reserve Bank or by any U.S. Government department or
agency during such Calendar Period, then the Treasury Bill Rate for
such distribution period shall be the arithmetic average of the two
most recent weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate shall be
published during the relevant Calendar Period) for all of the U.S.
Treasury Bills then having maturities of not less than 80 nor more
than 100 days, as published during such Calendar Period by the Federal
Reserve Board or, if the Federal Reserve Board shall not publish such
rates, by any Federal Reserve Bank or by any U.S. Government department
or agency selected by Metropolitan.
In the event that Metropolitan determines in good faith that for
any reason no such U.S. Treasury bill rates are published as provided
above during such Calendar Period, then the Treasury Bill Rate for such
distribution period shall be the arithmetic average of the per annum
market discount rates based upon the closing bids during such Calendar
Period for each of the issues of marketable non-interest bearing U.S.
Treasury securities with a maturity of not less than 80 nor more than
100 days from the date of each such quotation, as quoted daily for each
business day in New York City (or less frequently if daily quotations
shall not be generally available) to Metropolitan by at least three
recognized primary U.S. Government securities dealers selected by
Metropolitan.
In the event that Metropolitan determines in good faith that for
any reason Metropolitan cannot determine the Treasury Bill Rate for any
distribution period as provided above in this paragraph, the Treasury
Bill Rate for such distribution period shall be the arithmetic average
of the per annum market discount rates based upon the closing bids
during such Calendar Period for each of the issues of marketable
interest-bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently
if daily quotations shall not be generally available) to Metropolitan
by at least three recognized primary U.S. Government securities dealers
selected by Metropolitan.
Ten-year Constant Maturity Rate
Except as provided below in this paragraph, the "Ten-Year Constant
Maturity Rate" for each distribution period shall be the arithmetic
average of the two most recent weekly per annum Ten-Year Average Yields
(or the one weekly per annum Ten-Year Average Yield, if only one such
yield shall be published during the relevant Calendar Period as
provided below), as published weekly by the Federal Reserve Board
during the Calendar Period immediately prior to the ten calendar days
immediately preceding the first day of the distribution period for
which the distribution rate on Preferred Stock is being determined.
In the event that the Federal Reserve Board does not publish such
a weekly per annum Ten-Year Average Yield during such Calendar Period,
then the Ten-Year Constant Maturity Rate for such distribution period
shall be the arithmetic average of the two most recent weekly per annum
Ten-Year Average Yields (or the one weekly per annum Ten-Year Average
Yield, if only one such Yield shall be published during such Calendar
Period), as published weekly during such Calendar Period by any Federal
Reserve Bank or by any U.S. Government department or agency selected by
Metropolitan. In the event that a per annum Ten-Year Average Yield
shall not be published by the Federal Reserve Board or by any Federal
Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Ten-Year Constant Maturity Rate for such
distribution period shall be the arithmetic average of the two most
recent weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield shall be published
during the relevant Calendar Period) for all of the actively traded
marketable U.S. Treasury fixed interest rate securities (other than
Special Securities (as defined below)) then having maturities of not
less than eight nor more than twelve years, as published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve
Board shall not publish such yields, by any Federal Reserve Bank or by
any U.S. Government department or agency selected by Metropolitan.
In the event that Metropolitan determines in good faith that for
any reason Metropolitan cannot determine the Ten Year Constant Maturity
Rate for any distribution period as provided above in this paragraph,
then the Ten-Year Constant Maturity Rate for such distribution period
shall be the arithmetic average of the per annum average yields to
maturity based upon the closing bids during such Calendar Period for
each of the issues of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) with a final
maturity date not less than eight or more then twelve years from the
date of each quotation, as quoted daily for each business day in New
York City (or less frequently if daily quotations shall not be
generally available) to Metropolitan by at least three recognized
primary U.S. Government securities dealers selected by Metropolitan.
Twenty-Year Constant Maturity Rate
Except as provided below in this paragraph, the "Twenty-Year
Constant Maturity Rate" for each distribution period shall be the
arithmetic average of the two most recent weekly per annum Twenty-Year
Average Yields (or the one weekly per annum Twenty-Year Average Yield,
if only one such yield shall be published during the relevant Calendar
Period), as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the ten calendar days immediately
preceding the first day of the distribution period for which the
distribution rate on Preferred Stock is being determined.
In the event that the Federal Reserve Board does not publish such
a weekly per annum Twenty-Year Average Yield during such Calendar
Period, then the Twenty-Year Constant Maturity Rate for such
distribution period shall be the arithmetic average of the two most
recent weekly per annum Twenty-Year Average Yields (or the one weekly
per annum Twenty-Year Average Yield, if only one such Yield shall be
published during such Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Bank or by any U.S. Government
department or agency selected by Metropolitan.
In the event that a per annum Twenty-Year Average Yield shall not
be published by the Federal Reserve Board or by any Federal Reserve
Bank or by any U.S. Government department or agency during such
Calendar Period, then the Twenty-Year Constant Maturity Rate for such
distribution period shall be the arithmetic average of the two most
recent weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield shall be published
during such Calendar Period) for all of the actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) then having maturities of not less than eighteen nor more
than twenty-two years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board shall not
publish such yields, by any Federal Reserve Bank or by any U.S.
Government department or agency selected by Metropolitan.
In the event Metropolitan determines in good faith that for any
reason Metropolitan cannot determine the Twenty-Year Constant Maturity
Rate for any distribution period as provided above in this paragraph,
then the Twenty-Year Constant Maturity Rate for such distribution
period shall be the arithmetic average of the per annum average yields
to maturity based upon the closing bids during such Calendar Period for
each of the issues of actively traded marketable U.S. Treasury Fixed
interest rate securities (other than Special Securities) with a final
maturity date of not less than eighteen or more than twenty-two years
from the date of each such quotation, as quoted daily for each business
day in New York City (or less frequently if daily quotations shall not
be generally available) to Metropolitan by at least three recognized
primary U.S. Government securities dealers selected by Metropolitan.
As used herein, the term "Calendar Period" means a period of 14
calendar days; the term "Special Securities" means securities which
may, at the option of the holder, be surrendered at face value in
payment of any federal estate tax or which provide tax benefits to the
holder and are priced to reflect such tax benefits or which were
originally issued at a deep or substantial discount; the term "Ten Year
Average Yield" means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years); and the term "Twenty-Year Average
Yield" means the average yield of maturities for actively traded
marketable U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of 20 years).
Restrictions on Distributions
Metropolitan may not declare or pay a distribution on any share of
Preferred Stock offered herein for any distribution period unless, at
the same time, a like distribution shall be declared or paid on all
shares of preferred stock previously issued and outstanding and
entitled to receive distributions. See "Capitalization".
So long as any shares of the Preferred Stock offered herein are
outstanding, and unless the full cumulative distributions on all
previously issued outstanding preferred shares, including the Preferred
Stock offered herein, shall have been paid or declared and set apart
for all past distribution periods, Metropolitan may not: (i) declare or
pay or set aside for payment any distribution (other than a
distribution in common stock or in any other stock ranking junior to
Preferred Stock as to distributions and upon liquidation and other than
as provided in the foregoing paragraph); (ii) declare or pay any other
distribution upon common stock or upon any other stock ranking junior
to or on a parity with Preferred Stock as to distributions or upon
liquidation; or (iii) redeem, purchase or otherwise acquire common
stock or any other stock of Metropolitan ranking junior to or on a
parity with Preferred Stock as to distributions or upon liquidation for
any consideration (or pay or make available any funds for a sinking
fund for the redemption of any shares of any such stock) except by
conversion into or exchange for stock of Metropolitan ranking junior to
Preferred Stock as to distributions and upon liquidation.
Metropolitan may make distributions ratably on the shares of
Preferred Stock and shares of any stock of Metropolitan ranking on a
parity therewith with regard to the payment of distributions, in
accordance with the sums which would be payable on such shares if all
distributions, including accumulations, if any, were declared and paid
in full. As of the date hereof, no distributions on Metropolitan's
preferred or common stock are in arrears. No interest will be paid for
or on account of any unpaid distributions.
Liquidation Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of Metropolitan, the holders of shares of
Preferred Stock will be entitled to receive out of the assets of
Metropolitan available for distribution to stockholders, before any
distribution of assets is made to holders of common stock or any stock
of Metropolitan ranking, upon liquidation, junior to Preferred Stock,
liquidating distributions in the amount of $100 per share plus
declared and unpaid regular monthly distributions. Preferred Stock is
junior in liquidation to outstanding debt of Metropolitan and on parity
with all other issued and outstanding preferred stock to the extent of
its liquidation preference of $100 per share. As of September 30,
1994, the total liabilities of Metropolitan (consolidated) ranking
senior in liquidation preference to Preferred Stock were
$1,030,665,000. Obligations ranking on a parity with Preferred Stock
upon liquidation (i.e. the total liquidation preference of the
outstanding shares of all previous series of preferred stock) as of
September 30, 1994 were $43,332,000. The amount of additional
unsecured indebtedness that Metropolitan may incur is regulated by
Washington state law. See "Business Regulation." There are no
limitations on Metropolitan's ability to incur additional secured
indebtedness. See "Capitalization" & "Certain Investment
Considerations - Risk Factors".
The Preferred Stock Authorizing Resolution provides that, without
limitation, the voluntary sale, lease or conveyance of all or
substantially all of Metropolitan's property or assets to, or its
consolidation or merger with any other corporation shall not be deemed
to be a liquidation, dissolution or winding up of Metropolitan. If
upon any voluntary or involuntary liquidation, dissolution or winding
up of Metropolitan, the aggregate liquidation preference payable with
respect to Preferred Stock and any other shares of stock of
Metropolitan ranking as to any such distribution on a parity with
Preferred Stock are not paid in full, the holders of Preferred Stock
and of such other shares will share ratably in any such distribution of
assets of Metropolitan in proportion to the full respective
preferential amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are entitled,
the holders of shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets by Metropolitan.
Redemption of Shares
Upon call by Metropolitan: Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred Stock
are redeemable, in whole or in part, only at the option of Metropolitan
at a redemption price of $102 per share if redeemed prior to January 1,
1995 and $100 per share if redeemed thereafter plus, in each case,
declared and unpaid dividends to the date fixed for redemption. In the
event that fewer than all of the outstanding shares of Preferred Stock
are to be redeemed, the number of shares to be redeemed shall be
determined by Metropolitan and the shares to be redeemed shall be
determined by such method as Metropolitan in its sole discretion deems
to be equitable.
Discretionary Redemption Upon Request of the Holder: As provided
in the Preferred Stock Authorizing Resolution, the shares of Preferred
Stock are not redeemable at the option of the holder. If, however,
Metropolitan receives an unsolicited written request for redemption of
a block of shares from any holder, Metropolitan may, in its sole
discretion, subject to regulatory restrictions affecting redemptions
during an offering, and subject to the limitations described below,
accept such shares for redemption. Such redemption requests, when
received, are reviewed on a first come first serve basis, and are
subject to review by Metropolitan's Executive Committee. Any shares so
tendered, which Metropolitan in its discretion allows for redemption,
shall be redeemed by Metropolitan directly, (and not from or through a
broker dealer), at a price equal to $97 per share, plus any declared
but unpaid dividends to date if redeemed during the first year after
the date of original issuance and $99 per share plus any declared but
unpaid dividends if redeemed thereafter. Metropolitan may change such
optional redemption prices at any time with respect to unissued shares.
There can be no assurance that Metropolitan's financial condition
will allow it to exercise its discretion to accept any particular
request for redemption of Preferred Stock. Metropolitan will not
redeem any such shares tendered for redemption if to do so would be
unsafe or unsound in light of Metropolitan's financial condition
(including its liquidity position); if payment of interest or principal
on any outstanding instrument of indebtedness is in arrears or in
default; or if payment of any dividend on Preferred Stock or share of
any stock of Metropolitan ranking at least on a parity therewith is in
arrears as to dividends. In the event that cumulative dividends on
Preferred Stock have not been paid in full, Metropolitan may not
purchase or acquire any shares of Preferred Stock otherwise than
pursuant to a purchase or exchange offer made on the same terms to all
holders of Preferred Stock.
As provided in the Preferred Stock Authorizing Resolution, for a
period of three years from the date of initial sale of each share of
Preferred Stock, any such optional redemption of such share shall occur
only upon the death or major medical emergency of the holder or any
joint holder of the share requested to be redeemed. As further
provided in the Authorizing Resolution, any optional redemption of a
share in any calendar year after the third year from the date of sale
of the share, not arising from the death or medical emergency of the
holder or any joint holder shall occur only when the sum of all
optional redemptions (including those arising out of the death or
medical emergency of the holder or any joint holder) of shares of
Preferred Stock during that calendar year shall not exceed ten percent
of the number of shares of Preferred Stock outstanding at the end of
the preceding calendar year. In the event the ten percent limit is
reached in any calendar year, the only redemptions which may thereafter
occur during that calendar year shall be those arising from the death
or medical emergency of the holder or any joint holder; provided,
however, that to the extent that total optional redemptions in any
calendar year do not reach the ten percent limit, the amount by which
such optional redemptions shall fall short of the ten percent limit may
be carried over into ensuing years; and provided further that to the
extent that all redemptions, including those involving the death or
medical emergency of the holder or any joint holder, exceed the ten
percent limit in any year, the amount by which such redemptions exceed
the ten percent limit shall reduce the limit in the succeeding year for
limiting redemptions not involving the death or medical emergency of a
holder or any joint holder. In no event shall such optional
redemptions of all types in any single calendar year exceed 20% of the
number of shares of Preferred Stock outstanding at the end of the
preceding calendar year.
The Preferred Stock is not expected to be traded on any National
or Regional Stock Exchange and no independent public market for
Preferred Stock is anticipated. Management does not anticipate
applying for a listing for such public trading. In order to provide
shareholders with some liquidity, Metropolitan's broker/dealer operates
a trading list to match buyers and sellers of preferred stock.
Metropolitan does not participate as a buyer or seller on the trading
list. With limited exceptions, Metropolitan has established a policy
that all preferred shareholders (including holders of the Preferred
Shares offered hereunder) must place their shares for sale on the
trading list for 60 consecutive days before Metropolitan will entertain
a request for redemption. During 1993 and 1994, the average waiting
time for a shareholder wishing to sell preferred shares on this trading
list was 20 and 17 days, respectively. However, there can be no
assurance that the shares will be sold within similar time periods in
the future. There is no assurance that the shares will be sold within
the 60 day period. There is no assurance that Metropolitan will redeem
the shares if they have not sold within the 60 day period. There can be
no assurance that this system will continue to operate nor that it will
provide liquidity comparable to securities traded on recognized public
stock exchanges.
Voting Rights
The Preferred Stock has no voting rights except as provided in the
Preferred Stock Authorizing Resolution and except as required by
Washington State law regarding amendments to Metropolitan's Articles of
Incorporation which adversely affect holders of such shares as a class
and requires approval of 66 2/3% of the outstanding shares entitled to
vote.
The Preferred Stock Authorizing Resolution provides that holders
of Preferred Stock, together with the holders of Metropolitan's other
outstanding preferred stock and any other preferred stock thereafter
authorized, voting separately and as a single class, shall be entitled
to elect a majority of the Board of Directors of Metropolitan in the
event that distributions payable on any shares of Preferred Stock shall
be in arrears in an amount equal to twenty-four full monthly dividends
per share. Such right will continue until all distributions in arrears
have been paid in full.
Federal Income Tax Consequences of Distributions
The following discussion of the federal income tax consequences of
distributions is based upon the present Internal Revenue Code of 1986
as amended (the "Code"), existing Treasury regulations, current
published administrative positions of the Internal Revenue Service (the
"Service") contained in revenue rulings, revenue procedures and notes
and existing judicial decisions. No assurance can be given that
legislative or administrative changes or court decisions may not be
forthcoming that could significantly modify the statements in this
discussion. Any such changes may or may not be retroactive with respect
to transactions effected prior to the date of such changes.
Distributions made to the holders of Preferred Stock will either
be taxable or not depending, in part, on the extent to which they are
made out of current or accumulated earnings and profits of Metropolitan
as calculated for federal income tax purposes. To the extent, if any,
that distributions made by Metropolitan to the holders of Preferred
Stock exceed current and accumulated earnings and profits of
Metropolitan, such distributions will be treated first as a tax-free
return of capital, reducing the holder's basis in Preferred Stock (not
below zero), and thereafter, as capital gains (or ordinary gains if the
Preferred Stock is not held by the holder as a capital asset).
Distributions treated as capital gains result in (1) federal
income tax to a corporate holder at a maximum federal rate of 35% for
1994 and thereafter (exclusive of the impact, if any, of the
alternative minimum tax imposed by Section 55 of the Code) and (2)
federal income tax to a noncorporate holder on any amount treated as a
long-term capital gain at a maximum rate of 28% for 1994 and thereafter
(exclusive of the impact, if any, of the alternative minimum tax
imposed by Section 55 of the Code). Under certain circumstances,
distributions could be taxed as short-term capital gains which are
subject to the same tax rates as dividends. For 1994 and later years,
based upon current law, the maximum tax rate of noncorporate holders on
such ordinary income is 39.6% which may be higher pursuant to certain
statutory adjustments.
Although Metropolitan believes that distributions made to the
holders of Preferred Stock may under certain circumstances initially
constitute nontaxable distributions for federal income tax purposes, as
described above, certain events may cause the distributions to be
treated as taxable dividends. For example; Metropolitan may generate
taxable earnings and profits, as computed for federal income tax
purposes in future years; the Service may challenge Metropolitan's tax
accounting methods; or legislative enactments may cause a change in
either Metropolitan's tax accounting methods or the manner in which
earnings and profits are computed for federal income tax purposes.
If and to the extent distributions made to the holders of
Preferred Stock constitute dividends for federal income tax purposes,
any corporate holder of Preferred Stock otherwise entitled to the 70%
dividends-received deduction permitted by Section 243 of the Code will
be entitled to such deduction with respect to such dividends. If such
holder is entitled to the full dividends-received deduction, the
maximum effective federal income tax rate on such dividends will be
10.5% based on existing federal income tax rates applicable to
corporations generally (exclusive of the alternative minimum tax).
However, a corporate holder should be aware that, under Code Section
246A, the 70% dividends-received deduction will be reduced if the
holder has debt that is directly attributable to the holder's
investment in Preferred Stock. In addition, corporate shareholders may
be required under Code Section 1059 to treat the amount of dividends as
an extraordinary dividend and reduce the remaining basis and recognize
capital gain if no basis remains when the stock is sold. Noncorporate
taxpayers are not entitled to such a dividends-received deduction.
The corporate dividends-received deduction, pursuant to Section
246(b)(1) of the Code, cannot exceed 70% of the corporate shareholder's
taxable income computed without regard to the dividends-received
deduction, net operating loss deduction, and certain other deductions
and adjustments. Code Section 246(b)(2) provides that the 246(b)(1)
limitation does not apply for any taxable year for which there is a net
operating loss. For purposes of determining whether there is a net
operating loss, the dividends-received deduction is allowed without
regard to the 246(b)(1) limit. In addition, Section 246(c)(2) mandates,
in the case of preferred stock, that the stock on which the dividend is
paid be held for at least 91 days in order for the corporate
shareholder to qualify for the dividends-received deduction. This rule
applies if the holder receives dividends on that stock which were
attributable to a period or periods more than 366 days. Special rules
prescribed by Section 246(c)(3) apply for determining holding periods.
Metropolitan believes that distributions with respect to
Metropolitan's preferred stock paid during the calendar years 1984
through 1992 and 1994 were a return of capital under Section 301 of the
Code. Metropolitan has filed a Report of Nondividend Distributions for
the years 1984 through 1992 with the Service and will file a report of
non-dividend distribution with the Service before the applicable due
date for 1994. Metropolitan believes that distributions paid during
1993 were taxable. At this time, Metropolitan is unable to determine
the characterization of distributions to be made during calendar year
1995 or any future year.
In the event the holder of Preferred Stock disposes of the stock
by redemption or otherwise in a taxable sale or exchange, the holder
will recognize gain equal to the excess of the amount received over the
holder's basis in the stock. The basis is equal to the holder's cost of
acquiring the stock, which is anticipated to be the $100 per share
offering price. This amount is reduced (not below zero) by the return
of capital distributions previously received by the holder. Certain
other transactions or events may also affect the basis in the holder's
stock. Provided the stock is held by such holder as a capital asset,
such gain would be a capital gain.
Thus, the basis in the Preferred Stock may ultimately be reduced
to zero assuming distributions are a return of a capital and the holder
received aggregate distributions at least equal to the holder's basis.
In that event, the entire amount received by the holder from redemption
or otherwise in a taxable sale or exchange would be recognized as gain.
Prospective purchasers are advised to consult their own tax
advisor with respect to the income tax treatment or any distribution
made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether deemed
to be dividends, return of capital, or capital gains for federal income
tax purposes, will result in the same federal income tax consequences
to Metropolitan as other payments of dividends. These distributions are
not deductible by Metropolitan under current tax law. Additionally,
distributions to foreign taxpayers are subject to special rules not
discussed herein.
Tax Withholding
The Code generally requires reporting of gross distributions and
inclusion of dividends and capital gain distributions as income to the
holder and will, in certain instances, require 31% backup withholding
by the payor of such dividends.
In general, Metropolitan is required to file with the Service each
year a Form 1099-DIV information return (with a copy to the holder)
reporting the amount of distributions paid to the holder during each
calendar year. The holder must report the amount of ordinary dividends
and capital gains distributions as income on the holder's federal
income tax return for that year.
Backup withholding on dividends generally will be imposed if:
(1) the taxpayer fails to furnish a taxpayer identification
number to the payor;
(2) the Service notifies the payor twice within three calendar
years that the taxpayer furnished an incorrect taxpayer
identification number;
(3) the taxpayer is notified that he is subject to backup
withholding because he failed to report taxable dividends;
(4) the taxpayer fails to certify to the payor that the taxpayer
is not subject to backup withholding; or
(5) the taxpayer fails to certify his taxpayer identification
number.
Outstanding Capital Stock Summary
Metropolitan's Common Stock consists of Series A and B. There is
no redemption provision for either series of common stock. Each series
of common stock pays dividends in such amounts as may be declared from
time to time by the Board of Directors. The liquidation preference of
Common Stock Series A is $2,250 per share. It is junior in liquidation
preference to Series B. The liquidation preference of Common Stock
Series B is the amount originally paid for the shares. All series of
Common Stock are subordinate in liquidation to all series of preferred
stock, including the Preferred Stock offered herein.
The following table sets forth the primary differences and
relative rights of the various series of outstanding preferred stock of
Metropolitan as of the date of this prospectus including the Preferred
Stock, Series E-6 offered hereby:
SERIES OFFERING LIQUIDATION REDEMPTION DIVIDEND
PRICE PREFERENCE PRICE* RATE****
C $10 $10 $9.90 APPLICABLE RATE
D $10 $10 $9.90 APPLICABLE RATE
E-1 $10 $10 $9.90 APPLICABLE RATE
E-2 $100 $10** $99 APPLICABLE RATE
PLUS .5 PERCENT
E-3 $100 $10** $99 APPLICABLE RATE
PLUS .5 PERCENT
E-4 $100 $100 $99*** APPLICABLE RATE
PLUS .5 PERCENT
E-5 $100 $100 $99*** APPLICABLE RATE
PLUS .5 PERCENT
E-6 $100 $100 *** APPLICABLE RATE
PLUS .5 PERCENT
* The Redemption Price shown, is for Redemption's at the request of the
shareholder. In the event of a redemption at the request of
Metropolitan, the redemption price per share is $102 per share if
redeemed within twelve months from the initial commencement of the
respective offering and $100 thereafter.
** The liquidation preference for classes E-2 and E-3 is $10. In
addition, Metropolitan's Articles of Incorporation, as amended, provide
that the E-2 and E-3 shareholders will receive liquidation
distributions of up to $90 per share prior to any distribution to the
common shareholders.
*** E-4, E-5 and E-6 stock are not redeemable during the first three
years after their respective issuance except for instances of death or
major emergency. See "Description of Preferred Stock-Redemption
Rights". If redeemed during the first year, the redemption price is
$97, and thereafter it is $99.
**** The Board has authorized, for an indefinite period, a distribution
payment on all series of Preferred Stock of one percentage point above
the Applicable Rate.
Transfer Agent and Registrar
Metropolitan acts as its own transfer agent and registrar of
Metropolitan's capital stock.
<PAGE>
LEGAL MATTERS
LEGAL OPINION
The legality of the Debentures and Preferred Stock offered hereby
is being passed upon for Metropolitan by Susan A. Thomson, Esq., who is
employed by Metropolitan as its Assistant Corporate Counsel and
Assistant Secretary. She is also Assistant Corporate Counsel for
Metropolitan's subsidiaries, and for Summit Securities Inc, and its
subsidiaries.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against the Consolidated Group or to which its property is
subject.
EXPERTS
The Consolidated Financial Statements of Metropolitan as of
September 30, 1994 and 1993 and each of the years in the two-year
period ended September 30, 1994 included in this Prospectus have been
included herein in reliance on the report, which includes an
explanatory paragraph describing changes in Metropolitan's methods of
accounting for investments in certain debt and equity securities,
repossessed real properties and income taxes, of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing. The Consolidated Financial
Statements of Metropolitan for the year ended September 30, 1992
included in this Prospectus and in the Registration Statement have been
audited by BDO Seidman, independent certified public accountants, to
the extent and for the periods set forth in their report appearing
elsewhere herein and in the Registration Statement, and have been so
included in reliance upon such authority of said firm as experts in
auditing and accounting.
<PAGE>
Exhibit A
PLAN OF DISTRIBUTION
The Debentures and Preferred Stock are offered directly to the
public on a continuing best efforts basis through Metropolitan
Investment Securities, Inc. (MIS), which is affiliated with
Metropolitan through the common control of C. Paul Sandifur Jr. See
"Certain Transactions". Accordingly, the offering has not received the
independent selling agent review customarily made when an unaffiliated
selling agent offers securities. MIS is the exclusive selling agent
for the publicly issued securities of Metropolitan. No commission or
other expense of the offering will be paid by the purchasers of the
Debentures or Preferred Stock. A commission will, however, be paid by
Metropolitan on most Debenture purchases ranging from 0.25% to 6% of
the Debenture price, depending on the term of the Debenture and whether
or not the transaction is a reinvestment or new purchase. A commission
in the maximum amount of 6% of the offering price will also be paid by
Metropolitan on most Preferred Stock purchases. Debentures are offered
only for cash or cash equivalents. Preferred Stock is offered for cash
or other consideration acceptable to Metropolitan as determined by the
Board of Directors. Purchases of the securities offered herein shall
be made with funds or other acceptable consideration payable to
Metropolitan. MIS will transmit such funds or other consideration
directly to Metropolitan by noon of the next business day after
receipt. Metropolitan will also pay certain other expenses in
connection with the offering. During the three fiscal years ended
September 30, 1994, MIS has received commissions of $4,611,877 from
Metropolitan on sales of approximately $183,530,000 of Metropolitan's
debentures and preferred stock.
MIS is a member of the National Association of Securities
Dealer's, Inc. (NASD). As such, Schedule E of the By-laws of the NASD
applies and requires, in part, that a qualified independent underwriter
be engaged to render an opinion regarding the fairness of the interest
rates to be paid on the Debentures and the fairness of the pricing of
the Preferred Stock offered through this Prospectus. Accordingly, MIS
has obtained an opinion from Welco Securities, Inc., an NASD member,
("Welco") that the interest rates on the Debentures using a formula
tied to corresponding interest rates paid by the U.S. Treasury and
regional financial institutions meets this fairness objective based on
conditions and circumstances existing as of the date of the Prospectus.
A similar opinion has been obtained from Welco, which states that the
offering price of the Preferred Stock meets the fairness objective
based on conditions and circumstances, existing as of the date of the
Prospectus. Metropolitan undertakes to maintain the interest rates on
Debentures no lower than those recommended by Welco based on the
formula. Accordingly, the yield at which the Debentures will be
distributed will be no lower than that recommended by Welco and the
price offered for the Preferred Stock will be no higher than Welco
would have independently recommended. Welco has assumed the
responsibilities of acting as the qualified independent underwriter in
pricing the offering and conducting due diligence. For performing its
functions as a qualified independent underwriter with respect to the
Debentures and Preferred Stock offered hereunder, Welco is to be paid
$52,000.00 in fees and $15,000.00 in non-accountable expenses plus its
accountable expenses, which are not expected to exceed $2,500.00.
There is not now and Metropolitan does not expect that there will
be a public trading market for the Debentures or Preferred Stock in the
future. MIS does not intend to make a market for the Debentures or
Preferred Stock. Metropolitan, through MIS, maintains on a regular
basis, as an accommodation, a list of holders of preferred stock who
wish to sell their preferred stock and buyers who wish to purchase
previously issued and outstanding shares of preferred stock. See
"Certain Investment Consideration-Risk Factors-Limited Marketability of
Shares & Description of Preferred Stock-Redemption of Shares."
MIS may enter into selected dealer agreements with and reallow to
certain dealers who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a commission
of up to 6% of the principal amount of Debentures and Preferred Stock
sold by such dealers. After the commencement of the offering the
commissions and reallowances, if any, may be lowered.
USE OF PROCEEDS
Debenture Proceeds . . . . Metropolitan expects net proceeds from this
Debenture offering of $94,000,000 to $99,750,000 before deducting
expenses estimated at $225,000 (combined total for both Debentures and
Preferred Stock expenses) and after sales commissions, assuming all of
the Debentures are sold. There can be no assurance, however, that any
of the Debentures can be sold. Sales commissions will range between
$250,000 and $6,000,000 (0.25% to 6%) depending on maturities of
Debentures sold and whether sales are reinvestments or new purchases.
Such proceeds may be supplemented with funds generated by
Metropolitan's operations and/or borrowings from brokers or banks. See
"BUSINESS - Method of Financing."
Preferred Stock Proceeds . . . .Metropolitan expects net proceeds from
this Preferred Stock offering of $23,500,000 to $25,000,000 before
deducting expenses estimated at $225,000 (combined total for both
Debentures and Preferred Stock expenses) and after sales commissions of
up to $1,500,000 (6%), assuming all of the Preferred Stock is sold.
There can be no assurance, however, that any of the Preferred Stock can
be sold. Such proceeds may be supplemented with funds generated by
Metropolitan's operations and/or borrowings from brokers or banks. See
"BUSINESS-Method of Financing."
In conjunction with the other funds available to it, Metropolitan
will utilize the proceeds of the Debenture and Preferred Stock
offerings for funding investments in Receivables and other investments
and development of real estate now held or which may be acquired. To
the extent internally generated funds are insufficient or unavailable
for the retirement of maturing debt securities through the period
ending January 31, 1996, and for payment of operational expenses, debt
service and preferred stock dividend requirements, portions of the net
proceeds of this offering may also be used for such purposes.
Approximately $35.8 million in principal amount of debt securities will
mature between February 1, 1995 and January 31, 1996 with interest
rates ranging from 4.5% to 10% and averaging approximately 8.8% per
annum. Metropolitan may also use the proceeds of these offerings for
general corporate purposes, including but not limited the acquisition
of insurance companies, other financial service companies, and related
companies. See Note 8 to the Consolidated Financial Statements &
"CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS".
Management anticipates that some of the proceeds of this offering
will be invested in money market funds, bank repurchase agreements,
commercial paper, U.S. Treasury Bills and similar short term
investments while awaiting use as stated above. Due to Metropolitan's
inability to accurately forecast the total amount of Debentures or
Preferred Stock to be sold pursuant to this offering, no specific
amounts have been allocated for any of the foregoing purposes.
CIRCULAR DIAGRAM OF USE OF PROCEEDS REFER TO GRAPH APPENDIX ITEM 2
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Metropolitan
and its consolidated subsidiaries at September 30, 1994.
<TABLE>
<CAPTION>
Amount
Class Outstanding
(Dollars in thousands)
<S> <C>
Debt Payable
Reverse repurchase agreements with various
securities brokers;
interest at 4.3% to 5.25% per annum due and
repaid during October 1994.................. $60,730
Real estate contracts and mortgage notes
payable, interest rates ranging from 3%
to 14% per annum, due 1994 to 2020........... 1,367
Accrued interest payable...................... 26
--------
Total Debt Payable....................... 62,123
--------
Debenture Bonds
Investment Debentures, Series II, maturing
1994 to 1999, at 5% to 11%.................. 171,919
Investment Debentures Series I, maturing
in 1994 to 2004 at 7 1/2% to 10 1/4%........ 747
Compound and accrued interest................. 26,711
--------
Total Debenture Bonds.................... 199,377
--------
Stockholders' Equity
Preferred Stock............................... 21,437
Common Stock.................................. 297
Additional paid-in capital.................... 10,981
Unrealized losses on investments............... (2,835)
Retained earnings............................. 2,745
--------
Total Stockholders' Equity.................... 32,625
--------
Total Capitalization.............................. $294,125
========
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data shown below as of and for the
years ended September 30, 1994, 1993, 1992, 1991 and 1990 (other than
the Ratio of Earnings to Fixed Charges and Preferred Dividends) have
been derived from, and should be read in conjunction with,
Metropolitan's consolidated financial statements related notes, and
Management's Discussion and Analysis. The consolidated financial
statements as of September 30, 1994 and for the three years then
ended, appear elsewhere herein. The consolidated financial
statements as of and for the years ended September 30, 1994 and 1993
have been audited by Coopers & Lybrand L.L.P. The consolidated
financial statements as of and for the years ended September 30,
1992, 1991 and 1990 have been audited by BDO Seidman.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $ 138,186 $133,113 $121,221 $107,253 $ 85,987
========= ======== ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 5,702 $ 8,558 $ 3,290 $ 356 $ 1,154
Income allocated to
minority interests (224) (255) (363) (177) (249)
--------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 5,478 8,303 2,927 179 905
Extraordinary item (1) - - 651 193 555
Cumulative effect of change
in accounting
for income taxes (2) - (4,300) - - -
--------- -------- -------- -------- --------
Net income $ 5,478 $ 4,003 $ 3,578 $ 372 $ 1,460
========= ======== ======== ======== ========
Preferred stock dividends $ 3,423 $ 3,313 $ 3,399 $ 4,072 $ 3,594
========= ======== ======== ======== ========
Income (loss)
applicable to common
stockholders $ 2,055 $ 690 $ 179 $ (3,700) $ (2,134)
========= ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges and
Preferred Dividends(4): 1.04 1.17
<PAGE>
PER COMMON SHARE DATA (3):
Income before extraordinary
item and cumulative
effect of change in
accounting principle $ 14,996 $ 37,239 $ (3,579) $(29,274) $ (18,936)
Extraordinary item - - 4,932 1,454 3,908
Cumulative effect of change
in accounting principle (2) - (32,089) - - -
--------- ---------- -------- -------- --------
Net income (loss) (5) $ 14,996 $ 5,150 $ 1,353 $(27,820) $ (15,028)
======== ========== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 137 134 132 133 142
========= ======== ======== ======== ========
Cash Dividends $ 675 $ 675 $ -- $ 900 $ 900
======== ========== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,063,290 $1,031,958 $982,259 $824,385 $695,030
Debt Securities and Other
Debt Payable 261,500 234,497 230,814 201,458 239,565
Stockholders' Equity 32,625 32,781 28,260 29,365 34,200
</TABLE>
(1) Benefit from utilization of net operating loss carry
forwards.
(2) Change in accounting principles reflects the adoption of
Statement of Financial Accounting Standards No. 109 - "Accounting for
Income Taxes."
(3) All information retroactively reflects the reverse common
stock split of 2,250:1 which occurred during the fiscal year ended
September 30, 1994.
(4) The consolidated ratio of earnings to fixed charges and
preferred dividends was 1.04 and 1.17 for the years ended September 30,
1994 and 1993, respectively. Earnings were insufficient to meet fixed
charges and preferred dividends for the years ended September 30, 1992,
1991 and 1990 by approximately $783,000, $6,071,000 and $3,893,000,
respectively.
Assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments, the ratio of earnings to fixed
charges and preferred dividends for Metropolitan alone was 1.34 and
1.06 for the years ended September 30, 1994 and 1993, respectively.
Earnings were insufficient to meet fixed charges and preferred
dividends for the years ended September 30, 1992, 1991 and 1990 by
approximately $13,012,000, $9,759,000 and $7,326,000, respectively.
The consolidated ratio of earnings to fixed charges excluding
preferred stock dividends was as follows for the years ended September
30, 1994 - 1.29; 1993 - 1.43; 1992 - 1.21; 1991 - 1.02; and 1990 -
1.06. The ratio of earnings to fixed charges for Metropolitan,
assuming no benefit from the earnings of its subsidiaries with the
exception of actually paid dividends was 1.68 and 1.31 for the years
ended September 30, 1994 and 1993, respectively. Such "parent only"
earnings of Metropolitan were insufficient to meet fixed charges for
the years ended September 30, 1992, 1991 and 1990 by approximately
$7,701,000, $3,296,000 and $1,962,000, respectively.
(5) Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the weighted
average number of shares of common stock outstanding. There were no
common stock equivalents or potentially dilutive securities outstanding
during any years presented.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Consolidated revenues of the Consolidated Group increased to
$138.2 million in 1994 from $133.1 million in 1993 and from $121.2
million in 1992. The revenue increase of $5.1 million from 1993 to
1994 is attributable primarily to the significant increase in real
estate sales, particularly time-share sales in Hawaii, of $19.1,
million, offset by reductions in the net gains on the sales of
investments and Receivables of $9.2 million, a slight reduction in
total interest and discount earnings from both Receivable and other
investments of $1.4 million and a reduction of $3.8 million in gains
realized on the settlement of insurance claims on property damage
caused by Hurricane Iniki in September 1992. The revenue increase of
$11.9 million from 1992 to 1993 was attributable primarily to increased
interest and discount earned on Receivables and other interest earning
investments of $4.2 million, increased net gains on the sales of
investments and Receivables of $4.4 million and gains from the Hawaii
insurance claim settlements of $4.0 million.
The Consolidated Group's 1994 income before income taxes and
minority interest was $8.7 million, reflecting net gains of $3.1
million from the sales of investments and Receivables, net gains on
real estate sales of $1.5 million, an additional gain of $.2 million
from insurance settlements for damage to its Hawaiian condominium
property and profits from operations of $3.9 million. Similar results
from 1993 showed gains of $12.3 million from the sales of investments
and Receivables, a break even on real estate sales, gains of $4.0
million on insurance settlements for damage to its Hawaiian condominium
property and losses of $3.3 million from operations. Included in the
1993 loss from operations was a charge for $3.9 million which the
Consolidated Group's life insurance subsidiaries made for estimated
future assessments to fund state insurance guaranty association funds
based upon known insolvencies of other insurance companies. All states
in which the Consolidated Group's insurance subsidiaries operate have
laws requiring solvent life insurance companies to pay assessments to
state guaranty funds to protect the interest of policyholders of
insolvent life insurance companies. The charge in 1993 was net of
approximately $1.2 million in discount; the Consolidated Group having
used a 7% annual discount rate applied over the estimated payment term
of approximately seven years. See Note 12 to the Consolidated
Financial Statements.
During 1993 the Consolidated Group realized gains of approximately
$12.0 million on the sales of investments which were the result of the
Consolidated Group's restructuring of its investment portfolios in
anticipation of the implementation of Statement of Financial Accounting
Standards No.115 (SFAS No.115), "Accounting for Certain Investments in
Debt and Equity Securities". The Consolidated Group adopted SFAS
No.115 on September 30, 1993 and since that time has classified its
investments in debt and equity securities as either "trading",
"available-for-sale" or "held-to-maturity". In the future, as was the
case in 1994, SFAS No.115 will restrict the Consolidated Group's
ability to sell investments that have been classified as "held-to
maturity". See Note 1 to the Consolidated Financial Statements.
In September 1992, the island of Kauai was struck by Hurricane
Iniki resulting in significant damage to the Consolidated Group's Lawai
Beach Resort and other related properties. The Consolidated Group's
share of insurance proceeds of, approximately $5.6 million, for the
property damage exceeded the Consolidated Group's carrying value, by
approximately $4.0 million. Accordingly the Consolidated Group
recognized a gain of approximately $4.0 million from insurance
settlements during 1993. Additionally, during 1994 the Consolidated
Group recorded gains from subsequent settlements of approximately $.2
million.
Net income in 1994 as in 1993 was sufficient to cover fixed
charges including preferred stock dividend requirements, in contrast to
shortfalls in 1992 and prior years. After considering the effects of
potentially non-recurring income items such as gains from insurance
settlements and the gains from sales of investments, Receivables and
real estate, the 1994 income would have been insufficient to cover
fixed charges by approximately $4.2 million. Additionally, the
elimination of similar items in 1993 would have resulted in
insufficient earnings to cover fixed charges by approximately $6.7
million. SEE "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" &
"SELECTED CONSOLIDATED FINANCIAL DATA". To help prevent recurrences of
such shortfalls in the future, management has concentrated on the
following methods of improving the Consolidated Group's profitability:
controlling overhead expenses; disposing of repossessed real estate;
sales of real estate development property; and carefully monitoring the
securities market to maximize profits in the trading and available for
sale portfolios along with the resale of Receivables.
With the exception of the last nine months of 1994, over the past
three years the Consolidated Group has benefitted from a declining
interest rate environment which has resulted in lower costs of annuity
and debenture funds and profitable returns in the bond market. This
declining rate environment has positively impacted earnings by
increasing the fair value of the portfolio of predominantly fixed rate
Receivables. Due to this factor, the Consolidated Group was able to
recognize net gains on the sales of investments and Receivables of $3.1
million in 1994 and $12.3 million in 1993. The Receivable portfolio
also experienced higher than normal prepayments during the period,
which increased income by allowing the Consolidated Group to recognize
unamortized discounts at an accelerated rate. During the last nine
months of 1994, interest rates began to rise which tends to reduce the
Consolidated Group's interest margin as its interest rate sensitive
liabilities generally reprice more rapidly than its interest rate
sensitive assets.
Although the national economy has experienced slow growth, during
the past fiscal year, the Consolidated Group's financial results were
not adversely impacted because of:(1)the wide geographic dispersion of
its Receivables;(2)the relatively small average size of each
Receivable; (3)the primary concentration of investments in residential
Receivables where market values have been more stable than in
commercial properties; and (4) a continuing strong demand for tax-
advantaged products, such as annuities.
Improving the Consolidated Group's collection procedures, reducing
delinquencies and reducing real estate held for sale and development
including repossessed property continue to be ongoing goals of
management. During 1994, gains on sales of real estate held for sale
and development including repossessed property and timeshare units were
approximately $1,527,000 compared to gains of $29,000 and $886,000 in
the previous two years. Included in the 1994 results are gains of
approximately $388,000 from the sale of development properties as
compared to $537,000 in 1993 with only an insignificant amount in 1992.
In April 1992, the Accounting Standards Division of the American
Institute of Certified Public Accountants issued Statement of Position
(SOP) No. 92-3, "Accounting for Foreclosed Assets," which provides
guidance on determining the accounting treatment for foreclosed assets.
SOP 92-3 requires that foreclosed assets be carried at the lower of
(a) fair value minus estimated costs to sell, or (b) cost. The
Consolidated Group applied the provisions of SOP 92-3 effective October
1, 1992. The initial charge for its application of approximately
$725,000, before the effect of related income taxes, was included in
continuing operations in 1993. The implementation of this SOP had a
significant effect on the Consolidated Group's ability to recognize
gains from sales of real estate in both 1994 and 1993 as compared to
losses in prior years when a provision for estimated selling costs was
not required. See Note 1 to the Consolidated Financial Statements.
During the years ended September 30, 1994, 1993 and 1992, the
Consolidated Group provided $5.5 million, $6.6 million and $3.9
million, respectively, for losses on real estate assets. In 1992, 1993
and 1994, the Consolidated Group had reserves of $9.1 million, $10.6
million and $9.6 million, respectively, on real estate assets of $578
million, $639 million and $644 million, respectively. See Note 4 to
the Consolidated Financial Statements.
Significant Changes in Operations
During 1991, the Consolidated Group conducted a review of its
securities investment portfolio. That review revealed the need to
institute a process to actively manage a portion of the portfolio. As
a result, the Consolidated Group hired an experienced portfolio manager
and Chartered Financial Analyst in 1992. The Consolidated Group
continued to upgrade its existing accounting and analytical software in
fiscal 1993 to better enable management to monitor and track the
results of the investment portfolios. Additionally, in 1993 the
portfolio manager reviewed and restructured the investment portfolios
prior to the implementation of SFAS No. 115.
Through active management of the portfolios, the implementation of
SFAS No.115 and a declining interest rate environment during a large
portion of the last three years, the Consolidated Group has been able
to realize net gains from investment sales of $1.1 million, $12.0
million and $5.8 million for 1994, 1993 and 1992, respectively.
Metropolitan buys and sells securities for its trading account and uses
hedging vehicles such as financial futures to manage its interest rate
risk. See "BUSINESS-Securities Investments".
The continued growth of the insurance subsidiaries prompted the
hiring of an in-house actuary in 1992 through mid-year 1994.
Management believes that this actuary improved the Consolidated Group's
ability to understand the impact of the changing economic environment
on financial results and should improve its ability to develop new,
profitable insurance products. The Consolidated Group has continued to
retain this individual as its outside consulting actuary for its
insurance subsidiaries.
During the 1993 fiscal year, the Consolidated Group began
implementation of an improved data processing system for annuities and
life insurance products developed by Vantage Computer Systems, Inc. of
Wethersfield, Connecticut. Management anticipates that utilization of
this system should further improve processing capabilities and
operating efficiencies in the Consolidated Group's annuity and life
insurance business.
Approximately two months before Hurricane Iniki, in September
1992, the Consolidated Group engaged an affiliate of the Shell Group,
Chicago, Illinois Shell-Lawai ("Shell") to provide management services
and sell timeshare units at Lawai Beach. See "Business-Real Estate
Development-Lawai Beach Resort". This agreement provides for a fixed
fee to Shell plus an incentive fee based upon future sales after a base
amount of cash flow is generated by the property. In the two months
before the hurricane, timeshare sales generated by Shell were
approximately $800,000 per month, versus approximately $300,000 per
month when managed by the Consolidated Group before Shell was engaged.
Shell continued to manage the property during the reconstruction phase
and continued to sell timeshares on a limited basis throughout 1993.
Even without the benefit of a fully reconstructed project, Shell
generated timeshare sales in excess of $1.5 million during fiscal 1993.
Sales in 1994 were approximately $17.6 million or an average of almost
$1.5 million per month. Additionally, Metropolitan is in the business
of holding and developing property for sale. The largest investment in
such activities at September 30, 1994 was a $7.8 million development
located in downtown Spokane adjacent to the central business district.
See "BUSINESS-Other Development Properties".
Interest Sensitive Income and Expense
Management monitors interest sensitive income and expense to
assist in monitoring the financial results of operations. Interest
sensitive income consists of interest on Receivables, earned discount
on Receivables, insurance revenues and other investment interest.
Interest sensitive expense consists of interest expense and insurance
policy and annuity benefits.
Interest sensitive income while showing a slight decrease in 1994
compared to 1993 has generally increased over the past three years,
primarily due to growth in the outstanding amount of Receivables and
investments. Since interest rates have been generally declining over
the past three years, with the exception of the last nine months of
1994, the Consolidated Group has benefitted from an increasing spread
between its yield on assets and costs of liabilities. See
"Asset/Liability Management". This factor has contributed to an
increasing spread between interest sensitive income and interest
sensitive expense of $14.8 million in 1992, $22.4 million in 1993 and
$28.1 million in 1994. A significant factor in the $7.6 million
increase during 1993 and the $5.1 million increase in 1994 was the
capitalization of approximately $3.0 million and $2.2 million,
respectively, of interest associated with various real estate
development projects owned by the Consolidated Group. Amounts
capitalized in 1992 were not significant as development activities were
limited.
The Consolidated Group realized benefits from lower interest rates
during 1992, 1993 and 1994 by selling certain higher rate fixed income
securities in its trading and investment portfolios at gains of $5.8
million, $12.0 million and $1.1 million, respectively. Though this
income was partly offset by the impact of having increased amounts of
securities invested at lower interest rates subsequent to recognizing
the gains, the net effect of the sales was to accelerate the present
value of future income from the securities sold. These sales may tend
to lower future income from bonds which replaced those which were sold
and may reduce future interest spreads. For further information
concerning the investment portfolio, See "BUSINESS-Life Insurance and
Annuity Operations" & "BUSINESS-Securities Investments".
Asset/Liability Management
The Consolidated Group is subject to interest rate risk because
most of its assets and liabilities are financial in nature. Generally,
the Consolidated Group's financial assets (primarily Receivables and
fixed income investments) reprice slower than the Consolidated Group's
financial liabilities (primarily debentures and annuities). In a
rising rate environment, this trend will tend to reduce earnings, while
in a falling rate environment, earnings will tend to increase.
During fiscal 1995, approximately $119 million of interest
sensitive assets are expected to reprice or mature. These assets
consist of approximately $77 million of Receivables and $42 million of
cash and investments.
For liabilities, most of the balance of life insurance and annuity
contracts may be repriced during fiscal 1995. Management estimates
this amount at $670 million. In addition, approximately $53 million of
debentures and $61 million of other debt will mature during that
period.
These estimates result in interest sensitive liabilities in
excess of interest sensitive assets of approximately $665 million, or
a ratio of interest sensitive assets to interest sensitive liabilities
of approximately 15%. The Consolidated Group is able to manage this
liability to asset mismatch of approximately 6:1 by the fact that
approximately 85% of the interest sensitive liabilities are life
insurance and annuity contracts which are subject to surrender charges.
These contracts have maturities which extend for as long as nine years
with surrender charges of decreasing amounts during their term. At the
option of the Consolidated Group, these contracts are subject to annual
repricing. In periods of declining interest rates, this annual
interest rate mismatch is beneficial as it allows the Consolidated
Group to quickly reprice its liabilities at lower market rates. In
periods of increasing interest rates, such liabilities are protected by
surrender charges of approximately $23.3 million. Depending on the
remaining surrender charges, the Consolidated Group is generally able
to extend any interest rate increase over a two to three year period as
it is not generally economical for an annuitant to pay the surrender
charge in order to receive payment in lieu of accepting a lower
interest rate. As a result, the Consolidated Group may respond more
slowly to market rate interest increases thereby diminishing the impact
of the current ratio mismatch.
Non-Interest Income and Expense
Non-interest income composed of "Fees, Commissions, Services, and
Other Income" on the income statement was $4.4 million in 1992, $4.8
million in 1993 and $5.0 million in 1994. Income sources include
service fees and late charges in connection with Receivables, rents,
commissions and other revenues primarily associated with the Lawai
Beach Resort.
Non-interest expense consists of all non-interest expenses except
the cost of real estate sold and the provision for losses on real
estate assets. Non-interest expense has grown from $18.9 million in
1992 to $24.0 million in 1993 and decreased slightly to $23.6 million
in 1994. These changes are due primarily to salaries and employee
benefits, which decreased $.4 million in 1993 while increasing $.6
million in 1994 and other overhead expenses, which increased $5.6
million in 1993 and decreased by $1.0 million in 1994. Salary and
benefits declined in 1993 primarily due to the Consolidated Group's
restaurant in Hawaii being closed for the entire year as a result of
damage from Hurricane Iniki. Increases in other operating expenses in
1993 were attributable primarily to the Consolidated Group's recording
an estimate of future insurance guaranty fund assessments of
approximately $3.9 million, and increased amortization of insurance
policy acquisition costs of $3.1 million. Additionally, during 1993,
the Consolidated Group established a cost control committee which
identified several areas in which the Consolidated Group was able to
reduce costs in 1994.
Real Estate Sales
The Consolidated Group is in the real estate market due primarily
to its repossession of properties following Receivable defaults. The
national commercial real estate market remained subdued in 1994, as was
interest in most of the Consolidated Group's larger commercial
properties. However, less than 16% of the Consolidated Group's real
estate is commercial, and approximately 92% of that is located in the
Pacific Northwest, which has experienced a stronger economy than most
of the nation during the past year. Approximately 47% of all real
estate owned by the Consolidated Group, both commercial and
residential, is located in the Pacific Northwest. Accordingly,
management believes its success or failure in the real estate market
will be largely dependent on the attractiveness of the Pacific
Northwest marketplace. See "BUSINESS-Real Estate Development."
The Consolidated Group is also engaged in the development of
various properties acquired in the ordinary course of business,
generally through repossessions. The Consolidated Group will
occasionally acquire a property adjoining a parcel already owned in
order to enhance the value of the original parcel. The development or
improvement of properties is undertaken for the purpose of enhancing
values to increase saleability and to maximize project potential.
Interest costs associated with the development of the real estate
projects are capitalized. During the years ended September 30, 1994,
1993, and 1992, the Consolidated Group capitalized interest associated
with its real estate development projects of approximately $2,152,000,
$3,013,000 and $270,000, respectively. See "BUSINESS-Real Estate
Development".
Real estate sales exceeded cost of those sales by $1.5 million in
1994, $.03 million in 1993 and $.9 million in 1992. Included in these
results are sales of repossessed and development property with gains of
$1.8 million in 1994, $.05 million in 1993, losses of $1.6 million in
1992; sales of timeshare units with losses of $.3 million in 1994, $.03
million in 1993, gains of $2.5 million in 1992; and sales of fixed
assets with small gains in both 1993 and 1992. The improved trend in
sales of repossessed and development property is the result of
increased development property sales in 1993 and 1994 with gains of
approximately $.5 million and $.2 million coupled with the effect of
applying SOP 92-3 which requires reserving for estimated closing costs.
During 1993, the Consolidated Group was in a reconstruction phase for
its timeshare project in Hawaii due to the damage it sustained from
Hurricane Iniki in September 1992.
The Consolidated Group had real estate sales, including timeshare
unit sales, of approximately $40.0 million, in 1994, $20.9 million in
1993 and $22.0 million in 1992. These sales have kept pace with yearly
additions due to repossessions and increased development costs and have
resulted in a relatively constant investment in real estate of
approximately $76.8 million at September 30, 1994, $76.2 million at
September 30, 1993 and $73.6 million at September 30, 1992. As a
percentage of assets, total real estate held for sale and development
declined from 7.5% in 1992 to 7.4% in 1993 to 7.2% in 1994.
Gains or losses on real estate sold (excluding time share units)
are a function of several factors. The Consolidated Group's experience
with the most significant of these factors during the last three fiscal
years is set forth below:
<TABLE>
<CAPTION>
For the Fiscal Year Ended
September 30,
1994 1993 1992
-------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of delinquencies
over three months at fiscal
year end $19,000 $25,850 $21,300
======= ======== ========
Amount of foreclosures
during fiscal year $19,117 $16,685 $14,233
======= ======== ========
Amount of foreclosed real
estate held for sale
at fiscal year end $40,430 $45,625 $48,923
======= ======== ========
Gain (loss) on sale of the
property during fiscal year $1,793 $ 50 $(1,571)
======= ======== ========
</TABLE>
The principal amount of Receivables in arrears for more than
ninety days as of September 30, 1994, 1993 and 1992 was 3.1%, 4.3% and
3.9%, respectively, stated as a percentage of the total outstanding
principal amount of Receivables. See Note 2 to the Consolidated
Financial Statements.
Provision for Losses on Real Estate Assets
These provisions have increased as the size of the portfolio of
real estate assets has grown. The provisions for losses on real estate
assets include allowances for Receivables and real estate held for sale
and development. Expense charges for the provision for losses on real
estate assets have been $5.5 million in 1994, $6.6 million in 1993 and
$3.9 million in 1992. At fiscal years ended 1994 and 1993, the
allowances were $9.1 million and $10.6 million, or 1.41% and 1.66% of
total real estate assets, respectively. These allowances are in
addition to unamortized purchase discounts of $47.0 million, or 7.40%
of net real estate assets at September 30, 1994, $45.3 million, or
7.21%, at September 30, 1993; and $42.6 million, or 7.50% of net real
estate assets, at September 30, 1992. SEE "BUSINESS-Receivable
Investments" & "BUSINESS-Allowance for Losses on Real Estate Assets".
Effect of Inflation
During the three year period ended September 30, 1994, the
relative lack of inflation has had a generally positive impact on the
Consolidated Group's operations. This impact has primarily been
indirect in that the level of inflation tends to influence inflationary
expectations, which impacts interest rates on the Consolidated Group's
assets and liabilities. Thus, moderate levels of inflation contributed
to a reduction in interest rates which declined over the majority of
the period, but began an increasing trend by late in calendar 1993.
This generally downward trend in interest rates has impacted earnings
positively. In addition, inflation has not had a materially adverse
effect on the Consolidated Group's operating expenses. The main reason
for the increase in operating expenses in 1993 was the accrual by the
Consolidated Group of approximately $3.9 million as an estimate of
future insurance guaranty fund assessments. This accrual was reduced
by $588,000 in 1994 and other operating expenses also decreased.
Revenues from real estate sold are influenced in part by
inflation, as, historically, real estate values have fluctuated with
the rate of inflation. However, the Consolidated Group is unable to
quantify the effect of inflation in this respect with any accuracy.
New Accounting Rules
In the fourth quarter of fiscal 1993, the Consolidated Group
adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109), retroactive to
October 1, 1992. The cumulative effect of adopting SFAS No. 109 was a
charge to operations of approximately $4,300,000. SFAS No. 109
requires a company to recognize deferred tax assets and liabilities for
the expected future income tax consequences of events that have been
recognized in a company's financial statements. Under this method,
deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the temporary differences are expected to
reverse. In 1992 and prior, the Consolidated Group accounted for
income taxes as required by Accounting Principles Board Opinion No. 11.
See Note 1 to the Consolidated Financial Statements.
In December, 1992, the Financial Accounting Standards board (FASB)
issued SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," which specifies the
accounting by insurance enterprises for the reinsuring (ceding) of
insurance contracts. SFAS No. 113 amends SFAS No. 60 and eliminates
the practice by insurance enterprises of reporting assets and
liabilities relating to reinsured contracts net of the effects of
reinsurance. The effect of adopting SFAS No. 113 in fiscal 1994 was
not material to the Consolidated Group's financial position or
operations. See Note 12 to the Consolidated Financial Statements.
In May, 1993, Statement of Financial Accounting Standards No. 114
(SFAS No. 114) "Accounting by Creditors for Impairment of a Loan" was
issued. SFAS No. 114 requires that certain impaired loans be measured
based on the present value of expected future cash flows discounted at
the loans' effective interest rate or the fair value of the collateral.
The Consolidated Group is required to adopt this new standard by
October 1, 1995. The Consolidated Group does not anticipate that the
adoption of SFAS No. 114 will have a material effect on the
consolidated financial statements. See Note 1 to the Consolidated
Financial Statements.
The Consolidated Group adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities," on September 30,
1993. The effect of applying this new standard was to increase
stockholders' equity by $607,182, which is net of a $275,933 income
tax effect. See Note 6 to the Consolidated Financial Statements. At
September 30, 1994, the Consolidated Group had net unrealized losses on
investments of $2,835,777. This amount is reported as a reduction in
stockholders' equity.
Liquidity and Capital Resources
As a financial institution, the Consolidated Group's liquidity is
tied to its ability to renew, maintain or obtain additional sources of
cash. The Consolidated Group has successfully met these requirements
during the past three years and has continued to invest funds generated
by operations, financing activities, Receivables and investments.
Available cash provided from operating activities has continued to
improve with net cash provided of $46.0 million in 1994; $43.9 million
in 1993; and $41.4 million in 1992. Cash utilized by the Consolidated
Group in its investing activities was $106.8 million in 1994, $6.7
million in 1993 and $130.7 million in 1992. Cash provided to the
Consolidated Group from its financing activities was $17.1 million in
1994 compared to cash utilized by the Consolidated Group of $14.6
million in 1993 while cash of $96.6 million in 1992 was provided by
financing activities. These cash flows have resulted in year end cash
and cash equivalent balances of $29.3 million in 1994; $72.9 million in
1993; and $50.3 million in 1992. At September 30, 1994, Management
considers these funds combined with its other sources of funds to be
adequate to finance any required debt retirements or planned asset
additions.
The State of Washington imposed certain temporary limitations on
the total amount of debentures and preferred stock that Metropolitan
could have outstanding during 1993 and 1994. During 1994, Metropolitan
could not have more than an aggregate total of $251.3 million in
outstanding debentures (including accrued and compound interest) and
outstanding preferred stock (based on original sales price). At
September 30, 1994, Metropolitan had total outstanding debentures of
approximately $199.4 million and total outstanding preferred stock of
approximately $43.3 million. In 1993, Metropolitan was limited by the
State of Washington to outstanding debentures (principal only) of
$178.0 million and outstanding values of preferred stock of $42.3
million. These limitations did not have any material adverse impact on
liquidity during 1994 or 1993 and management expects that this
limitation, should it be imposed again, will not have a material
negative effect on liquidity during 1995.
During fiscal 1994, anticipated principal, interest and dividend
payments on outstanding debentures, other debt payments and preferred
stock distributions are expected to be approximately $126 million.
During 1994, the principal portion of the payments received on the
Consolidated Group's Receivables and proceeds from sales of real estate
and Receivables was $134 million. A decrease in the prepayment rate on
these Receivables would reduce future cash flows from Receivables and
might adversely affect the Consolidated Group's ability to meet its
principal, interest and dividend payments.
The Consolidated Group expects to maintain high levels of
liquidity in the foreseeable future by continuing its securities
offerings and annuity sales. At September 30, 1993, the Consolidated
Group had $73 million in cash or cash equivalents, or 7.1% of assets.
At September 30, 1994, this amount was $29 million, or 2.8% of assets.
Including securities that are available for sale, total liquidity was
$118 million and $177 million as of September 30, 1994 and September
30, 1993, respectively, or 11.1% and 17.1 of total assets,
respectively.
For statutory purposes, Western United performs cash flow testing
under seven different rate scenarios. The results of these tests are
filed annually with the Insurance Commissioner of the State of
Washington. At the end of calendar year 1993, the results of this cash
flow testing process were satisfactory.
Transfers of assets and the payment of dividends from the
insurance subsidiaries to Metropolitan are subject to regulatory
restrictions. Metropolitan alone generated approximately $1.8 million
in cash from operations in 1994. Investing activities, which provided
approximately $4.8 million, were primarily: (1) investments in and
advances to subsidiaries which provided $6.3 million; (2) changes in
investments and Receivables, which provided $4.0 million; less (3)
capital expenditures and the net change in real estate held of $5.5
million. Cash used in financing activities of $11.0 million were
primarily used for: (1) net redemption of debenture bonds of $5.2
million; (2) repayment of borrowings from banks and others of $3.3
million; (3) cash dividends of $3.5 million: which were offset by (4)
net issuance of preferred stock less redemptions and retirement of
common stock of approximately $1.0 million. For 1994, Metropolitan
sustained a decrease in cash and cash equivalents of approximately $4.4
million resulting in a year end balance of approximately $9.4 million.
Metropolitan alone used approximately $8.8 million in cash for
operations in 1993. Investing activities, which provided approximately
$23.0 million, were primarily: (1) investments in and advances to
subsidiaries which provided $16.0 million; (2) changes in securities
investments and Receivables, which provided $9.2 million; (3) capital
expenditures of $1.2 million; and (4) the net change in real estate
held, which used $1.0 million. Financing activities were primarily:
(1) net issuance of debenture bonds of $6.1 million; (2) net issuance
of preferred and common stock of $3.3 million; (3) cash dividends of
$3.4 million; and (4) repayment of borrowings from banks of $9.8
million. Since financing activities used $3.8 million, cash increased
$10.4 million during the year.
Metropolitan alone generated $8.5 million in cash from operations
in 1992. Investing activities were primarily: (1) investments in and
advances to subsidiaries (primarily the equity portion of
Metropolitan's earnings in the subsidiaries) which used $40.3 million;
(2) changes in securities investments and Receivables, which provided
$24.9 million; (3) capital expenditures of $2 million; and (4) net
change in real estate held, which used $0.8 million. Since these
investing activities used $18.2 million, financing activities were
required to maintain a positive cash balance. Financing activities
were primarily: (1) net issuance of debenture bonds of $18.1 million;
(2) cash dividends of $3.4 million; and (3) repayment of borrowings
from banks of $2.1 million. Since financing activities provided $12.6
million, cash increased $2.9 million during the year.
Management believes that cash flow generated from the Consolidated
Group's operating activities and financing activities will be
sufficient to conduct its business and meet its anticipated obligations
as they mature during the next fiscal year. Metropolitan has never
defaulted on any of its obligations since its founding in 1953.
<PAGE>
BUSINESS
OVERVIEW
The Consolidated Group is a financial institution which consists
of a parent corporation, Metropolitan, and several subsidiaries
including insurance companies, receivable servicing companies, and
other related supporting entities and divisions. The Consolidated Group
is engaged in the business of investing in Receivables through funds
provided by annuity sales, Receivable investment proceeds, debenture
sales, preferred stock sales, and the sales of repossessed and
development real estate. The Consolidated Group's goal is to achieve
a positive spread between its return on its Receivable investments and
its cost of funds.
The Receivables consist primarily of notes secured by real estate
mortgages, deeds of trust and conditional real estate sales contracts.
To a lesser extent, Metropolitan and its subsidiaries also acquire
other types of Receivables, including but not limited to annuities and
lottery prizes. All such Receivables are purchased at prices
calculated to provide a desired yield. Often, in order to obtain the
desired yield, the Receivables will be purchased at a discount from
their face amount, or at a discount from their present value. See
"BUSINESS-RECEIVABLE INVESTMENTS".
In addition to investing for its own account, Metropolitan has
entered into agreements with its insurance subsidiaries, Western United
and Old Standard, to provide Receivable acquisition, collection and
management services to these subsidiaries for a fee. See "BUSINESS-
RECEIVABLE INVESTMENTS-Management, Receivable Acquisition and
Collection Services". Metropolitan has also entered into a similar
agreement to provide Receivable acquisition and collection services for
a fee to Summit Securities, Inc.. See "BUSINESS-RECEIVABLE INVESTMENTS-
Management, Receivable Acquisition and Collection Services & CERTAIN
TRANSACTIONS".
Metropolitan's insurance subsidiaries, and to a lesser extent
Metropolitan itself, also invest funds in securities which
predominantly consist of high grade corporate bonds, U.S. Treasury, and
government agency obligations and mortgage backed securities. Such
investing serves both the Consolidated Group's liquidity needs and also
certain regulatory requirements affecting the insurance subsidiaries.
See "LIFE INSURANCE AND ANNUITY OPERATIONS".
The investments in Receivables and in securities made by the
Consolidated Group are financed primarily by sales of annuities through
Metropolitan's insurance subsidiaries (Western United and Old
Standard), the cash flow from Receivables and securities investments,
the sale of real estate, and Metropolitan's issuance of debentures and
preferred stock.
Metropolitan, through subsidiaries, is also engaged in real estate
development and real estate sales primarily as a result of
repossessions of real estate arising from Receivable investments. In
addition, Metropolitan, through a subsidiary, is the developer of a
timeshare resort, Lawai Beach Resort, located on Kauai, Hawaii. See
"REAL ESTATE DEVELOPMENT".
RECEIVABLE INVESTMENTS
Introduction
Metropolitan has been investing in Receivables for its own account
for over forty years. Metropolitan's Receivable acquisition network
now stretches across the entire United States allowing Metropolitan and
its subsidiaries to diversify their Receivable investments throughout
the various regions of the United States. Metropolitan currently
maintains thirteen Receivable acquisition branch offices in 10 states.
The evaluation, underwriting, closing, collection and servicing of the
Receivables is performed at Metropolitan's headquarters in Spokane,
Washington. Receivable investments are primarily secured by residential
real estate, but also include annuities, lottery prizes and other
investments. At the time of acquisition, the face value, or present
value of the Receivables generally range in size from approximately
$15,000 to $300,000. In 1994, the average Receivable balance at the
time of acquisition by the Consolidated Group was approximately
$52,000. See Note 2 to Consolidated Financial Statements.
Sources of Receivables
Approximately 80% of the Receivables are acquired through
independent brokers located throughout the country. These brokers
typically deal directly with private individuals or organizations who
own and wish to sell a Receivable. These independent brokers contact
one of Metropolitan's branch offices to submit the Receivable for
evaluation by Metropolitan. In order to maintain strong professional
ties with these independent brokers, Metropolitan held its first annual
Broker's Convention, during the summer of 1994. In addition, various
bonus commission and incentive programs and new streamlined Receivable
submission procedures have been developed and continue to be developed.
It is the opinion of management that its responsiveness to the
independent Receivable brokers, and to Receivable sellers has been a
key to Metropolitan's ability to attract and purchase quality
Receivables at acceptable yields.
Metropolitan is also approached directly by prospective
Receivable sellers. These direct contacts are generally the result of
a referral or a previous business contact. Metropolitan has also
acquired portfolios of Receivables from banks, savings and loan
organizations, the Resolution Trust Corporation and the Federal Deposit
Insurance Corporation. To date, these portfolio, or institutional,
purchases have consisted exclusively of Receivables secured by real
estate.
Yield and Discount Considerations
Metropolitan negotiates Receivable purchases at prices calculated
to provide a desired yield. Often this results in a purchase price
less than the Receivable's unpaid balance, or less than its present
value (assuming a fixed discount rate). The difference between the
unpaid balance (or present value) and the purchase price is the
"discount." The amount of the discount will vary in any given
transaction depending upon the purchasing company's yield requirements
at the time of the purchase and the terms and nature of the Receivable.
Yield requirements are established in light of capital costs, market
conditions, the characteristics of particular classes or types of
Receivables and the risk of default by the Receivable payor. See Also
"BUSINESS-RECEIVABLE INVESTMENTS-Underwriting"
For Receivables of all types, the discounts originating at the
time of purchase, net of capitalized acquisition costs, are amortized
using the level yield (interest) method over the remaining contractual
term of the contract. For Receivables which were acquired after
September 30, 1992, these net purchase discounts are amortized on an
individual contract basis using the level yield method over the
contractual remaining life of the contract. For those Receivables
acquired before October 1, 1992, these net purchase discounts were
pooled by the fiscal year of purchase and by similar contract types,
and amortized on a pool basis using the level yield method over the
expected remaining life of the pool. For these older Receivables, the
amortization period, which is approximately 78 months, estimates a
constant prepayment rate of 10-12 percent per year on scheduled
payments, which is consistent with the Consolidated Group's prior
experience with similar loans and the Consolidated Group's
expectations.
YIELD CHART: REFER TO GRAPH APPENDIX ITEM 3
Management establishes the yield requirements for Receivable
investments by assuming that all payments on the Receivables will be
paid as scheduled. During fiscal 1994, the Consolidated Group's
initial yield requirement was generally between 11%-14%. However, to
the extent that Receivables are purchased at a discount and payments
are received earlier than anticipated, the discount is earned more
quickly resulting in an increase in the yield.
A greater effective yield can also be achieved through negotiating
amendments to the Receivable agreements. These amendments may involve
adjusting the interest rate and/or monthly payments, extension of
financing in lieu of a required balloon payment or other adjustments in
cases of delinquencies where the payor appears able to resolve the
delinquency. As a result of these amendments, the cash flow may be
maintained or accelerated, the latter of which increases the yield
realized on a Receivable purchased at a discount.
Underwriting
When Metropolitan is offered a Receivable, an initial study of the
terms of the Receivable, including any associated documents, is
performed by Metropolitan's underwriting and closing staff. If the
Receivable appears acceptable, the purchase price for the Receivable is
calculated based on yield requirements at that time. If the broker
and/or seller accepts the proposed purchase price, a written agreement
to purchase is executed, subject to Metropolitan's full underwriting
requirements. Metropolitan also negotiates the purchases of "partial"
interests in Receivables. Partial purchases are purchases of the right
to receive a portion of the Receivable's balance, and where the
seller's right to the unsold portion of the Receivable is subordinated
to the interest of Metropolitan or the company for which Metropolitan
negotiated the purchase. These "partials" generally result in a
reduced level of investment risk to the purchaser than if the entire
Receivable cash flow is purchased.
The underwriting guidelines adopted by Metropolitan for
Receivables secured by real estate include a requirement that the
ratio of the purchasing company's investment in a Receivable compared
to the appraised value of the property which secures the Receivable may
not exceed 75% on Receivables secured by single family residences; and
that the ratio of the investment to the property's appraised value may
not exceed 70% on Receivables secured by other types of improved
property; and 55% on unimproved raw land. These higher than
conventional investment to collateral ratios provide higher than
conventional levels of collateral to protect the purchasing company's
investment in the event of a default on a Receivable.
For each Receivable secured by real estate, a current market value
appraisal of the real estate providing security is obtained. These
appraisals are obtained through licensed independent appraisers or
through one of Metropolitan's licensed staff appraisers. These
appraisals are based on drive-by and comparative sales analysis. Each
independent appraisal is also subject to review by a staff appraiser.
(For additional information regarding appraisals following foreclosure
and repossession of properties, See "REAL ESTATE DEVELOPMENT").
Additionally, every proposed investment in a Receivable secured by
real estate is evaluated by Metropolitan's demography department
utilizing computerized data which identifies local trends in property
values, personal income, population and other social and economic
indicators. Other underwriting functions related to Receivables
secured by real estate may include obtaining and evaluating credit
reports on the Receivable payors; evaluation of the potential for
environmental risks; verifying payment histories and current payment
status; and obtaining title reports to verify the record status of the
Receivable and other matters of record.
Metropolitan also negotiates the purchase of Receivables which
are not secured by real estate, such as annuities and lottery prizes.
The annuities often arise out of the settlement of legal disputes where
the prevailing party is awarded a sum of money payable over a period of
time. In the case of such settlement annuity purchases, the
underwriting guidelines of Metropolitan generally include a review of
the settlement agreement. In the case of all annuity purchases,
Metropolitan's underwriting guidelines generally include a review of
the annuity policy, related documents, the credit rating of the payor
(generally an insurance company), determination of the existence of any
state insurance fund designed to protect annuity holders, and the
review of other factors relevant to the risk of purchasing a particular
annuity as deemed appropriate by the underwriting committee in each
circumstance. In the case of lottery prizes, the underwriting
guidelines generally include a review of the documents providing proof
of the prize, and a review of the credit rating of the insurance
company, or other entity, making the lottery prize payments. Where
the lottery prize is from a state run lottery, the underwriting
guidelines generally include a determination of whether the prize is
backed by the general credit of the state, and confirmation with the
respective lottery commission of the prize winners right to sell the
prize, and acknowledgment from the lottery commission of their notice
of the sale. In many states, in order to sell a state lottery prize,
the winner must obtain a court order permitting the sale. In those
states, Metropolitan requires a certified copy of the court order.
Receivable investments which the Underwriting Committee identifies
for legal review are referred to Metropolitan's in-house legal
department which currently includes a staff of five attorneys. All
Receivable purchases which involve investments greater than $150,000
($100,000 if the real property collateral is not an owner-occupied
single family residence) are submitted to an additional special risk
evaluation committee, are subject to legal department review, and
subject to the approval of Metropolitan's president. In addition,
transactions involving investments of more than $500,000 are subject
to approval by Metropolitan's Board of Directors.
Upon completion of the underwriting process and the approval of
the investment, appropriate closing and transfer documents are executed
by the seller and/or broker, and the transaction is funded.
Management believes that the underwriting functions that are
employed in its Receivable investment activity are as thorough as
reasonably possible considering the nature of this business.
Metropolitan's acquisition of Receivables secured by real estate should
be distinguished from the conventional mortgage lending business which
involves substantial first-hand contact by lenders with each borrower
and the ability to obtain an interior inspection appraisal prior to
granting a loan.
Current Mix of Receivable Investment Holdings
The Consolidated Group's investments in Receivables are
predominantly secured by first liens on single family residential
property. Management believes that this concentration in residential
real estate presents a lower credit risk than would a portfolio
predominantly secured by commercial property or raw land, and that much
of the risk in the portfolio is further dissipated by the large numbers
of relatively small Receivables, the geographic dispersion of the
security, and the collateral value to investment amount requirements.
Management continually monitors the economic and demographic
conditions throughout the country in an effort to avoid a concentration
of its real estate security in those areas experiencing economic
decline, which could result in higher than anticipated default rates
and subsequent investment losses.
Metropolitan and its subsidiaries have resold portfolios of
Receivables without recourse to others in the following respective
carrying amounts: 1994: $18.4 million; 1993: $4.4 million; and 1992:
$18.4 million, recognizing gains of $2.0 million, $.3 million, and $2.1
million, respectively. These Receivables were pooled together and
resold to take advantage of unique pricing opportunities in the
marketplace and to improve the overall yield on the Receivable
portfolio.
The following charts present information on the Consolidated
Group's portfolio of outstanding Receivables as of September 30, 1994
regarding geographical distribution, type of real estate collateral and
lien position:
PIE CHARTS SHOWING BREAKDOWNS OF RECEIVABLES BY TYPE, SECURITY
POSITION AND PIE CHART SHOWING BREAKDOWN OF THE CONSOLIDATED GROUPS'
ASSETS:
REFER TO GRAPH APPENDIX ITEM 4
<PAGE>
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABLE
INVESTMENTS BY STATE: REFER TO GRAPH APPENDIX ITEM 5
<PAGE>
The following tables present certain statistical information about
the Consolidated Group's Receivable investment activity during the
three fiscal years ended September 30, 1994.
<TABLE>
<CAPTION>
Year Ended or at September 30
-----------------------------
1994 1993 1992
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
DISCOUNTED REAL ESTATE RECEIVABLES
PURCHASED DURING PERIOD
Number..................... 2,906 3,410 3,301
Average Face Amount........ $ 52 $ 50 $ 46
-------- -------- --------
Face Amount................ $150,709 $171,747 $151,051
Unrealized Discounts, Net of
Acquisition Costs....... (21,186) ( 18,461) (22,083)
Underlying Obligations
Assumed (1)............. (191) (667) (399)
-------- -------- --------
Price Paid................. $129,332 $152,619 $128,569
======== ======== ========
DISCOUNTED REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD
Number..................... 13,994 14,592 14,132
-------- -------- --------
Face Amount................ $502,314 $513,113 $458,276
Unrealized Discounts, Net of
Unamortized Acquisition
Costs................... (46,989) (45,297) (42,599)
-------- -------- --------
Net Balance................ $455,325 $467,816 $415,677
======== ======== ========
TOTAL REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD (2)
Number..................... 18,820 18,578 18,030
-------- -------- --------
Face Amount Discounted
Receivables............. $502,314 $513,113 $458,276
Face Amount Non-Discounted
Receivables............. 104,011 85,377 81,051
-------- -------- --------
Total Outstanding Receivables 606,325 598,490 539,327
Unrealized Discounts, Net of
Unamortized Acquisition Costs (46,989) (45,297) (42,599)
Accrued Interest Receivable 7,920 9,247 7,364
-------- -------- --------
Net Balance................ $567,256 $562,440 $504,092
======== ======== ========
Average Net Balance per
Receivable (Excluding
Accrued Interest) $ 29.7 $ 29.8 $ 27.6
Average Annual Yield on
Discounted Receivables (3) 13.6% 14.2% 15.2%
<FN>
(1) Consisting of pre-existing first lien position contracts or mortgages which
remain when the Consolidated Group invests in second lien position Receivables.
(2) Approximately 17% of the portfolio at September 30, 1994, 14% of the
portfolio at September 30, 1993 and 15% at September 30, 1992 represented
financing for resales of repossessed properties and other non-discounted
Receivables.
(3) Yield on Receivables represent gross interest and earned discount revenues,
net of amortized acquisition costs, prior to any overhead allocation and losses
recorded following foreclosure. The reasons for changes in yield are (1)
fluctuations in the rate of actual prepayments; (2) the changing mix of
Receivable purchases between those originated from Metropolitan's network of
offices and those purchased in bulk; (3) the amortization of the existing
portfolio; (4) the interest rates on the Receivables offered for purchase; and
(5) the amount of discount on Receivables purchased.
</TABLE>
At September 30, 1994, the average contractual interest rate on
Receivables secured by real estate (weighted by principal balances) was
approximately 9.5%.
Delinquency Experience & Collection Procedures
The principal amount of Receivables (as a percentage of the total
outstanding principal amount of Receivables held by the Consolidated
Group) which was in arrears for more than ninety days at the end of the
following fiscal years was:
1994 --- 3.1%
1993 --- 4.3%
1992 --- 3.9%
The Consolidated Group's total principal amount of outstanding
Receivables was $606,324,456 at September 30, 1994, $598,489,606 at
September 30, 1993 and $539,327,134 at September 30, 1992.
The Receivables secured by real estate purchased by the
Consolidated Group are typically not of the same character as those
that are securitized and sold in the secondary mortgage market or
government backed mortgage market. Accordingly, higher delinquency
rates are expected which Management believes are offset through a
higher than standard property value requirement relative to the amount
invested. As a result, losses from resales of repossessed properties
are generally lower than might otherwise be expected given the higher
delinquency rates. In addition, the Consolidated Group is compensated
for the higher risk associated with higher delinquencies with yields
that are greater than typically available through more conventional
real estate secured Receivables. During 1994, the average initial
yield requirement on real estate secured Receivables was generally
between 11%-14%.
When a Receivable becomes delinquent, the payor is initially
contacted by telephone (generally on the 17th day following the payment
due date). If the default is not promptly cured (generally within
three to six days after the initial call), then additional collection
activity, including written correspondence and further telephone
contact, is pursued. If these collection procedures are unsuccessful,
then the account is referred to a committee who analyzes the basis for
default, the economics of the situation and the potential for
environmental risks. When appropriate, a phase I environmental study
is obtained prior to foreclosure. Based upon this analysis, the
Receivable is considered for a workout arrangement, further collection
activity, or foreclosure of any property providing security for the
Receivable. Collection activity may also involve the initiation of
legal proceedings against the payor of the Receivable payments. Such
legal proceedings, when necessary are generally initiated within
approximately ninety days after the initial default. If accounts are
reinstated prior to completion of the legal action, then attorney fees,
costs, expenses and late charges are generally collected from the
payor, or added to the receivable balance, as a condition of
reinstatement.
Allowance for Losses on Real Estate Assets
The Consolidated Group establishes an allowance for expected
losses on real estate assets (both Receivables and repossessed real
estate). This allowance is based upon an appraisal or evaluation of the
Consolidated Group's real estate holdings and each delinquent
Receivable having a principal balance greater than $100,000. In
addition, the Consolidated Group calculates an allowance for losses on
delinquent Receivables having a principal balance below the $100,000
threshold based upon its historical loss experience. The Consolidated
Group reviews the results of its resales of repossessed real estate,
both before and after year end, to identify any market trends and to
document the Groups's historical experience on such sales. The
Consolidated Group adjusts its reserve requirements, as appropriate,
based upon such observed trends in delinquencies and resales.
During 1992, the Consolidated Group updated its appraisal policy
to require annual appraisals on real estate and delinquent Receivables
when their values exceed a threshold equal to 1/2% of total assets of
the Consolidated Group or, in the case of the insurance subsidiaries,
5% of statutory capital and surplus. Biannual appraisals are required
for all other real estate holdings where an investment exceeds $50,000.
The following table outlines the Consolidated Groups's changes in
the allowance for losses on real estate assets:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------- ------------
<S> <C> <C> <C>
Beginning Balance $10,598,491 $ 9,583,718 $7,657,684
Provisions 5,533,193 6,596,933 3,886,894
Charge-Offs (7,023,301) (5,582,160) (1,960,860)
---------- ---------- ----------
Ending Balance $ 9,108,383 $10,598,491 $9,583,718
========== ========== ==========
Percentage of Ending
Balance of Allowances
to Outstanding
Real Estate Assets 1.4% 1.7% 1.7%
==== ==== ====
</TABLE>
Repossessions
In the course of its Receivable investment activity, the
Consolidated Group acquires various parcels of real estate as a result
of foreclosures and/or voluntary repossessions. It is the Consolidated
Group's general policy to attempt to resell such properties at the
earliest possible time following its acquisition. Improvements are
made to certain properties for the purposes of preservation or
restoration to maximize the resale price. The carrying value of a
repossessed property is determined as of the date of repossession of
the property and is based on an appraisal by a licensed independent
appraiser or one of Metropolitan's licensed staff appraisers either at
the time the Receivable was purchased or at the time the property was
repossessed in accordance with the Consolidated Group's appraisal
policy. In addition, a new appraisal is obtained not less frequently
than every two years on all real estate holdings previously valued at
$50,000 or more. Internal valuation reviews on all repossessed
properties are performed at least annually based on management's
knowledge of market conditions and comparable property sales.
Metropolitan manages and markets its repossessed properties, and
provides such services to its subsidiaries for a fee. Metropolitan also
manages and markets the repossessed properties of Summit Securities,
Inc. See "BUSINESS-Management, Receivable Acquisition and Collection
Services". The marketing status of all properties is reviewed at least
monthly by a committee which includes both sales personnel and
management.
The following table presents specific information about the
Consolidated Group's repossessed properties (including foreclosures in
process) with carrying values of $100,000 or more which were held at
September 30, 1994 and/or September 30, 1993. The carrying values of
certain properties may reflect additional costs incurred, such as taxes
and improvements, when such costs are estimated to be recoverable in
the sale of the repossessed property.
<TABLE>
<CAPTION>
Carrying Carrying Market Year of Gross
Property Type/ Value Value Value Fore- Monthly
State Location 9/30/93 9/30/94 9/30/94 closure Income
- ----------------- ------------ ------------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
House-CA $ 247,500 SOLD (A) 1991
26.73 Comm. Acres 215,668 $215,668 $290,000 1983 (1)
90 Acres-WA/20 Acres
WA 269,026 60,881 (B) 75,000 1983 (2)
445 Acres-WA 328,118 SOLD (C) 1983
18,000 Sq. Ft.
Commercial-WA 988,325 SOLD (D) 1988
31 Mobile Home Lots/
20 Acres-WA 244,800 49,387 (E) 54,874 1986 (3)
Farm & Ranch 1,927
Acres-WA 285,690 285,690 329,500 1988 (4) $4,666
Bar/Restaurant-AK 2,047,500 SOLD (F) 1991
.65 Acres-AZ 105,518 94,500 105,000 1990 (5)
.65 Acres-AZ 105,517 94,500 105,000 1990 (5)
.65 Acres-AZ 105,857 94,500 105,000 1990 (5)
3.47 Acres/4-Unit
Apartment Bldg-NJ 217,800 SOLD (G) 1991
50,000 Sq. Ft. Comm.
Building-WA 837,737 850,000 897,000 1989 (6) 750
34 Acres-WA 2,958,488 3,038,296 3,350,000 1991
1.35 Acre Comm.
Land-TN 228,517 228,517 294,000 1992
2 Lots/43 Acres-WA 146,000 SOLD (H) 1991
28 Condo Units-AZ
15 Condo Units
-AZ 1,198,080 607,050 (I) 639,000 1991
Land-AZ 102,600 102,600 114,000 1993
House-HI 100,800 SOLD (J) 1993
House-AZ 121,366 SOLD (K) 1993
House-AZ 109,531 SOLD (L) 1993
House-CA 233,100 SOLD (M) 1993
House-AZ 108,000 SOLD (N) 1993
House-NJ 157,500 108,000 120,000 1993
House-CA 108,900 SOLD (O) 1993
House-CA 238,500 SOLD (P) 1993
House-CA 117,000 SOLD (Q) 1993
House-CO 144,000 SOLD (R) 1993
House-NM 161,100 SOLD (S) 1993
House-CA 126,000 126,000 140,000 1993
House-FL 108,000 SOLD (T) 1993
House-ID 100,980 SOLD (U) 1993
House-GA 121,500 SOLD (V) 1993
House-VI 162,000 SOLD (W) 1993
House-CA 103,500 SOLD (X) 1993
House-CA 108,000 SOLD (Y) 1993
House-WA 0 117,450 130,500 1994
House-CA 0 225,360 250,400 1994
House-NM 0 117,000 130,000 1994
K-5 Grade School-CA 0 270,000 300,000 1994
House-FL 0 117,000 130,000 1994 1,050
Condo-CA 0 117,000 130,000 1994
House-CA 0 123,300 137,000 1994
House-CA 0 117,000 130,000 1994
Condo-NJ 0 121,500 135,000 1994
Duplex-NJ 0 117,000 130,000 1994
House-CA 0 108,000 120,000 1994
House-CA 0 134,100 149,000 1994
House-CA 0 118,710 155,000 1994
Duplex-NJ 0 130,500 145,000 1994 850
Land-AZ 0 126,000 140,000 1994
House-NJ 0 118,000 118,000 1994
House-CA 0 128,500 128,500 1994
----------- ----------- ----------- -------
$13,062,518 $8,262,009 $9,176,774 $7,316
=========== =========== =========== =======
</TABLE>
The sales prices of the referenced properties were as follows:
<TABLE>
<CAPTION>
<S> <C> <S>
A) $ 275,000
B) $ 231,075 70 Acres
C) $ 172,000
D) $ 1,350,000
E) $ 229,500 25 Lots and 20 Acres
F) $ 1,550,000
G) $ 255,000
H) $ 90,000
I) $ 715,500 13 Condo Units
J) $ 80,000
K) $ 160,000
L) $ 178,138
M) $ 220,000
N) $ 95,000
O) $ 108,500
P) $ 240,000
Q) $ 103,115
R) $ 158,000
S) $ 179,000
T) $ 110,000
U) $ 120,000
V) $ 120,000
W) $ 162,000
X) $ 80,000
Y) $ 100,000
-----------
TOTAL $ 7,081,828
===========
<FN>
The following are descriptions of the marketing status of all properties
listed above which were acquired by the Consolidated Group prior to fiscal 1991:
(1) Located in Pasco, Washington, the commercial property is in the area of a
planned freeway interchange.
(2) 20 acres near Spokane, Washington repossessed in 1983. The original parcel
consisted of 200 acres. This parcel was plagued with problems including
platting and water problems. The problems were solved in 1989 and 1992, and
180 of the 200 acres have been sold as of September 30, 1994. 10 acres were
sold in November, 1994 and a sale is pending on the remaining 10 acres.
(3) 6 mobile home lots in Benton City, Washington. 2 lots are currently
pending sale.
(4) Located in Grant County, Washington. A portion of the property is
currently leased. Approximately 940 acres of the property is in the
federal government's Crop Reduction Program.
(5) 3.65 acre lots located near a golf course in Scottsdale, Arizona.
(6) Commercial building in Spokane, Washington currently leasing about 6%
of space. The remaining space is not leaseable in its current
condition. Management is studying the options of either improving the
building or selling it in its current condition.
For further information regarding the Consolidated Group's activity in real
estate acquisitions and sales, including properties held for development,
See "REAL ESTATE DEVELOPMENT"
</TABLE>
Management, Receivable Acquisition and Collection Services
Metropolitan provides management, Receivable acquisition and
Receivable collection services for a fee to its subsidiaries and to
Summit. The Receivable acquisition fees are based upon a yield
requirement established by the purchasing company. Metropolitan
collects as its fee, the difference between the yield requirement and
the yield which Metropolitan actually negotiates. In the case of
Western United, beginning in 1994,the yield requirement established by
Western United is guaranteed by Metropolitan, and an intercompany
reserve is established to support the guarantee. Because of the
guarantee, and the corresponding decrease in risk, Western United's
stated yield requirement is relatively lower than the other companies.
The reserve established in 1994 on purchases of $97.75 million,
including origination expenses, net of purchase discount was $4.753
million. Metropolitan remains liable to Western United for any losses
in excess of the reserve. While this charge has the effect of
reducing the Receivable yield of the insurance subsidiaries, there is
a positive effect on Metropolitan. The fees are amortized into
Metropolitan's income, over the same period and in the same amount as
they are accrued as expenses by the insurance subsidiaries. During
1994, Metropolitan charged its insurance subsidiaries total fees of
$12.75 million and charged Summit fees of $497,000. The service
agreements with subsidiaries have no effect upon the consolidated
financial results of the Consolidated Group. The service agreement
with companies outside the Consolidated Group, including Summit, will
provide fee income to Metropolitan.
<PAGE>
REAL ESTATE DEVELOPMENT
Lawai Beach Resort
Description
A wholly-owned subsidiary of Metropolitan, Metropolitan Mortgage
Hawaii, Inc. (Met-Hawaii), is the owner and developer of Lawai Beach
Resort on the island of Kauai, Hawaii. Metropolitan also owns other
condominium units adjoining the resort and another subsidiary, the
Southshore Corporation, a restaurant operating company. For ease of
discussion, Metropolitan will be referred to as the owner of these
resort properties whether it owns the property directly or through a
wholly-owned subsidiary.
Lawai Beach Resort is located on 8.7 acres of deeded ocean-front
property on the south shore of Kauai near the area known as Poipu
Beach. It consists of two four-story buildings containing a total of
110 residential condominium units. Related amenities include swimming
pools, tennis courts, a 180 car parking garage, modern exercise
facilities and a sewage treatment plant. Metropolitan has received a
permit from the County of Kauai for construction of a third condominium
building which is to contain 60 residential condominium units and 5
commercial units. Construction of this building began October, 1993
and completion is expected during the fall of 1995. Construction costs
to date have been financed entirely with Metropolitan's internally
generated funds and the property remains unencumbered by external debt.
Metropolitan's total investment (carrying value) in Lawai Beach Resort
as of September 30, 1994 was $20,939,961.
Additional properties, all of which adjoin the Lawai Beach Resort,
include 10 condominium units in the Prince Kuhio Condominiums with an
aggregate carrying value of $1,047,330; a four-plex condominium
apartment building with a carrying value of $861,146; and a restaurant
site with a carrying value (land and building) of $3,918,295 as of
September 30, 1994.
Effect of Hurricane Iniki
On September 11, 1992, Hurricane Iniki caused substantial damage
at Lawai Beach Resort. During 1993, approximately $9.3 million was
received in final settlement of damage claims with the primary
insurance carrier, with approximately $5.6 million received on behalf
of Metropolitan and the remainder collected on behalf of the other
timeshare owners. Metropolitan also collected policy limits of
approximately $1.3 million from its primary business interruption
insurance carrier. In 1994 Metropolitan's secondary insurance carrier
for property content damage for its restaurant property settled with
Metropolitan for approximately $204,000. Management believes
Metropolitan will collect from $300,000 to $600,000 in additional
business interruption claims relating to its restaurant operations in
Hawaii. Such amounts have not been recognized in the financial
statements for the year ended September 30, 1994. Metropolitan has
rebuilt the resort and full operations were resumed in November 1993.
The restaurant was rebuilt and reopened August, 1994.
Marketing
Approximately two months before the hurricane, Metropolitan
engaged an affiliate of the Shell Group, Chicago, Illinois, Shell-Lawai
("Shell"), to provide management services and sell timeshare units at
Lawai Beach. In the two months before the hurricane, timeshare sales
generated by Shell were approximately $800,000 per month, versus
approximately $300,000 per month averaged while managed by Metropolitan
before Shell was engaged. Shell continued to manage the property
during the reconstruction phase and continued to sell timeshares on a
limited basis throughout 1993. Even without the benefit of a fully
reconstructed project, Shell generated timeshare sales in excess of
$1.5 million during fiscal 1993. In 1994, timeshare sales totaled
approximately $17.6 million for a monthly average sales of
approximately $1.5 million.
Additional Information
Sales and revenue from timeshare sales decreased in 1993, due
primarily to the effects of Hurricane Iniki. The tables below set
forth additional historical information about the timeshare sales of
Lawai Beach Resort. As noted in the table information, unit costs have
increased as a result of additional reconstruction costs after the
hurricane damage, and other expenses have increased due to the
management agreement with Shell. It is Metropolitan's intention to
sell the timeshares at favorable prices in order to convert the
inventory into other interest earning assets.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
TIMESHARE SALES
Number of Sales 1,500 161 308
Amount of Sales $17,642,544 $ 1,540,528 $ 3,639,895
Costs (7,171,159) (530,250) (921,099)
Expenses (10,737,591) (1,041,807) (696,613)
----------- ----------- -----------
Profit(Loss) $ (266,206) $ (31,529) $ 2,022,183
=========== =========== ===========
WHOLE-UNIT CONDOMINIUM
SALES
Number of Units - - 4
Amount of Sales - - $ 1,145,900
Costs - - (644,874)
Expenses - - (70,209)
----------- ----------- -----------
Operating Profit - - $ 430,817
=========== =========== ===========
</TABLE>
Receivable Financing
Most purchasers of timeshare weeks at Lawai Beach Resort finance
a portion of the purchase price through Metropolitan, subject to
approved credit. As of September 30, 1994, Metropolitan's outstanding
Lawai Beach Resort timeshare Receivables balance was approximately
$20.0 million. The loan delinquency rate (based on the principal
balances of loans more than ninety days in arrears) on that date was
approximately 3.3%. Although the Resort was temporarily closed during
the reconstruction period following Hurricane Iniki, Metropolitan did
not experience a material increase in the number of delinquent
timeshare Receivables during this time. Management believes that this
is at least in part due to offering alternative resort locations to
timeshare owners through the Resort Condominium International
organization (RCI).
Skier's Edge Resort
Metropolitan, owns approximately 500 timeshare use periods at
Skier's Edge, a timeshare condominium located near Breckenridge,
Colorado, together with approximately twenty-six acres of undeveloped
land adjoining the resort. The carrying value at September 30, 1994
was $1,484,820. The total timeshare use periods in the project are
1,377. Unsold timeshares, while being held for bulk sale, are included
in a rental pool operated by the resort owner's association. Net
rental income was $31,454 in 1994 and $21,759 in fiscal 1993 and
$30,220 in fiscal 1992. The market value of the property is estimated
at $2,000,000 based upon Metropolitan's review of the assessed
valuation of the property for tax purposes and an analysis of prior
timeshare sales.
Other Development Properties
In addition to the resort properties described above,
Metropolitan, is engaged in the development of various other
properties. These development properties were generally acquired in
the ordinary course of Metropolitan's business, generally through
repossessions. Metropolitan occasionally acquires a property adjoining
a parcel already owned in order to enhance the value of the original
parcel. Other repossessed properties are often used as consideration
for such acquisitions when management perceives a clear benefit to
Metropolitan from doing so. The development or improvement of
properties is undertaken for the purposes of enhancing values, to
increase saleability and to maximize profit potential. Significant
development properties, all owned outright unless otherwise noted, held
by Metropolitan as of September 30, 1994 are described below:
* The MeadowWood Properties
Located just east of Spokane, Washington near Liberty Lake, this
land was acquired by Metropolitan between 1989 and 1991 primarily
utilizing repossessed properties held for sale as consideration. The
property consists of a two phase residential development and a three
phase Business Park. MeadowWood is a planned community with several
housing developments and a business park. Several high-tech firms
including Hewlett Packard and Olivetti North America are located in the
business park.
MeadowWood Business Park Phase I: This site originally consisted
of 24.7 acres. Two lot sales closed in 1993 and two in 1994 for
aggregate sales proceeds of $581,898 and $441,952, respectively.
Construction of a 46,350 square foot commercial building (Madsen Court)
on another lot within this phase was completed by Metropolitan during
the third quarter of calendar 1994 leaving one undeveloped lot
available for sale. At September 30, 1994, the carrying value in the
single lot was $233,241. The carrying value in the commercial building
was $2,294,389. The appraised values are $275,000 and $2,600,000
respectively. Madsen Court is currently 38.5% leased, generating
approximately $25,000 of income in 1994.
MeadowWood Business Park Phase II: This phase of the business
park includes 18 acres owned and an additional 63 acres under option by
Metropolitan at $10,500 per acre. It is zoned with restrictive
covenants and provisions made for utilities. Approval of a binding
site plan for the property from Spokane County is expected in 1995. At
September 30, 1994, Metropolitan's carrying value in the property was
$2,541,741. Its appraised value is $2,898,245.
Residential: Both residential phases adjoin a public golf course.
The Vistas, which was the site of the 1991 Spokane Home Show, consists
of 71 lots which were developed and sold for $2,492,500. Metropolitan
holds an option on an additional 37.66 acres at $10,500 per acre. When
the owned and optioned properties are fully developed, this property
will include approximately one hundred twenty three lots. At September
30, 1994, Metropolitan's carrying value for the remaining residential
property was $582,721. Its appraised value is $1,316,570.
* The Summit Property.
This property consists of 69.86 acres in downtown Spokane adjacent
to the central business district and located along the north bank of
the Spokane River. It contains several parcels which were purchased
between 1982 and 1992. The property is zoned for mixed use from medium
density residential to office and retail. A final Environmental Impact
Statement on the proposed project was published in 1993. Site
improvements are expected to commence following approval of the master
plan by the City of Spokane. There are several warehouse buildings
located on the property, which are rented to generate current income,
($46,000 in 1994). Metropolitan has made a proposal to the state of
Washington for the state's purchase of approximately 164,000 square
feet of land at this site. If sold, the site is expected to be
developed to house two state office building of approximately 250,000
total square feet of office space. At September 30, 1994, the carrying
value of the property was $7,774,662. The site has been appraised at
$35,000,000 assuming an additional expenditure of $9,615,000 in site
development costs. The appraisal of substantially unimproved land is
subject to a number of assumptions. Actual results may differ
substantially from such appraisals.
* Airway Business Centre
This property is a 110 acre portion of an original tract of 440
acres which was purchased in 1979. It is located in the community of
Airway Heights, Washington, approximately ten miles west of Spokane.
A 160 acre parcel was sold to the State of Washington in 1991 at a
profit of $1.8 million. The property is zoned commercial/industrial
and fronts a five-lane highway. Phase I of the business park has a
binding site plan, recorded in 1993, for thirteen lots on 47 acres.
Infrastructure improvements for the first phase were substantially
complete in 1994. At September 30, 1994, the carrying value was
$1,581,359. The market value is estimated at $3,450,000 based on a 1994
internal analysis based upon an external market study.
Airway Heights Residential: This site is 33+ acres located
adjacent to Airway Business Centre in the city of Airway Heights. This
property is zoned residential and has a current carrying value at
September 30, 1994 of $98,520. There is currently an offer to purchase
this property at $198,000; and, the sale is scheduled to close in the
first quarter of 1995.
* Spokane Valley Plaza (Sullivan Road)
The property is located at an Interstate 90 freeway interchange
just east of Spokane and consists of 34 acres of commercially zoned
land. County approval for a 348,000 square foot shopping center was
received in 1991. A county roadway and sewer project has improved
access to, and enabled marketing of, the property. The property was
acquired in 1990 using repossessed property as consideration. At
September 30, 1994, the carrying value was $7,380,000. The appraised
value is $7,580,000.
* Broadmoor Park (Pasco)
This property, acquired through repossession in 1988, consists of
362 acres of undeveloped land, at a freeway interchange in Pasco,
Washington. The property was zoned in 1994 for mixed residential and
commercial use. Water has been extended to the property and
construction of a sewer extension is continuing. Access to the
property has been improved by construction of a new interior road.
Broadmoor Business Park: The Business Park is a site of 99 acres
located on the South side of the freeway. Water, sewer, and electrical
services are installed, and curbing for an interior road is under
construction. The property is being marketed in two acre or greater
lot sizes.
Broadmoor Factory Outlet Center: The Factory Outlet Center is 22
acres located on the north side of the freeway. Water, sewer, and
electrical are to the site and site grading for the first phase of the
outlet center has begun. Construction of the first phase is currently
scheduled for completion in 1995. As of December 1, 1994 approximately
24% of Phase I has been pre-leased. Metropolitan currently anticipates
that it will be 75% pre-leased by approximately mid February, 1995.
Broadmoor Park Remainder: The remaining 241 acres is platted for
development as hotels, motels, fast food restaurants, gas stations, and
a variety of stores; and for development of both single and multi-
family residential housing; and civic uses.
The total Broadmoor Project has a carrying value at September 30,
1994 of $1,971,581 and has been appraised at $30,000,000 assuming the
expenditure of additional development costs of $12,068,419. The
appraised value of substantially unimproved land is subject to a number
of assumptions. Actual results may differ substantially from such
appraisals.
* Puyallup
This property is approximately 20 acres of land zoned for
commercial and multifamily development in Puyallup, Pierce County,
Washington and located adjacent to a major shopping area. Discussions
with several parties to sell and/or jointly develop the property are
ongoing. The property was acquired upon settlement of a lawsuit in
1988. At September 30, 1994, its carrying value was $1,294,587. Its
appraised value is $2,908,000.
* Everett
This property is a 98.1 acre parcel of industrial-zoned property
located adjacent to Boeing's Paine Field plant at Everett, Washington.
Part of the property was acquired by repossession in 1987. Adjoining
parcels were purchased primarily using other repossessed property as
consideration until the property was of an optimum development size
taking into account the anticipated cost of utilities and other
development costs. Studies of utility services, access requirements
and environmental issues are ongoing. Discussions with several parties
to sell and/or jointly develop the property are ongoing. At September
30, 1994, the carrying value in the property was $4,719,980. The
appraised value is $16,000,000. The appraised value of unimproved land
is subject to a number of assumptions. Actual results may differ
substantially from such appraisals.
* Renton
This property is 35 acres and was acquired in 1987 through
repossession. It is characterized by heavily vegetated terrain and is
zoned residential. The City of Renton has annexed and rezoned the
property increasing its density from just over 100 residential units to
well over 200 residential units. Discussions with several parties to
sell and/or jointly develop the property are ongoing. At September 30,
1994, the carrying value in the property was $3,038,296. The market
value is estimated at $3,350,000 based on a 1994 external analysis.
The aggregate carrying value of the above described "Other
Development Properties" as of September 30, 1994 is $33,511,057 and the
aggregate estimated market value is $105,575,815 after the further
improvements of $21,683,419, and subject to the uncertainties related
to appraisals of substantially unimproved land, as described further
below. Metropolitan received aggregate rental income of $71,000 during
fiscal 1994 from two of the properties, with the remainder currently
not generating income. Risks associated with holding these properties
for development include possible adverse changes in zoning and land use
regulations and local economic changes each of which could preclude
development or resale. Because most of the properties are located in
Eastern Washington, which is currently enjoying prosperous economic
conditions, a regional economic downturn could have a material negative
impact on Metropolitan's ability to timely develop and sell a
significant portion of them. While approximately one-half of the
properties have little or no on-site development to date, substantial
planning, development design work and zoning and permit processing is
underway or has been completed for many of the properties.
The appraised value of substantially unimproved land is subject to
a number of assumptions. Actual sales results may differ substantially
from such appraisals. There can be no assurance that the sales prices
and indicated by appraisals will be realized.
The following table presents additional information about the
Consolidated Group's investments in and sales of real estate held for
sale and development:
<TABLE>
<CAPTION>
Year Ended or at September 30,
----------------------------------
REAL ESTATE HELD FOR 1994 1993 1992
SALE AND DEVELOPMENT --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Property Held For
Sale and Development $36,336 $ 30,644 $ 24,634
Real Estate Acquired in
Satisfaction of Debt and
Foreclosures in Process 40,430 45,625 48,922
-------- -------- --------
Net Balance $76,766 $ 76,269 $ 73,556
======== ======== ========
SUMMARY OF CHANGES
Balance at Beginning of Year $76,269 $ 73,556 $ 73,733
Additions and Improvements:
Condominiums 19,563 8,923 4,380
Repossessed & Development
Real Estate 19,950 16,549 17,327
Transfer from Fixed and Other
Assets 259 53 --
Depreciation (778) (272) (411)
Basis Transfer on Real Estate
Sales Which Were Deferred Due
to Insufficient Down Payment --- --- (333)
Basis Allocated to Involuntary
Conversion Gains --- (1,628) ---
Cost of Real Estate Sold:
Condominium Units (17,909) 1,573) (2,333)
Real Estate (20,588) (19,339) (18,807)
------- -------- --------
Balance at End of Year $76,766 $ 76,269 $ 73,556
======= ======== ========
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales $17,643 $ 1,541 $ 4,786
Unit Costs (7,171) (530) (1,566)
Associated Selling Costs (10,738) (1,043) (767)
------- -------- --------
Condominium - Gain (Loss) (266) (32) 2,453
------- -------- --------
Real Estate:
Sales 22,381 19,389 17,236
Equity Basis (20,588) ( 19,339) (18,807)
------- -------- --------
Real Estate - Gain (Loss) 1,793 50 (1,571)
------- -------- --------
Fixed Assets:
Sales - 11 4
Asset Basis - - -
------- -------- --------
Fixed Assets - Gain - 11 4
------- -------- --------
Total Gain on Sale of Real Estate $ 1,527 $ 29 $ 886
======= ======== ========
</TABLE>
LIFE INSURANCE AND ANNUITY OPERATIONS
Introduction
The Consolidated Group raises the majority of its funds through
insurance subsidiaries, Western United and Old Standard. Western United
was incorporated in Washington State in 1963 and Old Standard was
incorporated in Idaho in 1990. Since 1979, the combined assets of the
insurance companies have grown from $600,000 to over $924 million and
the number of policyholders and annuitants have increased from 200 to
about 44,000. Based on its assets, Western United ranks sixth in size
among the life insurance companies domiciled in the State of
Washington. Old Standard is domiciled in the State of Idaho and
represents $47 million of the total insurance related assets of the
Consolidated Group.
Western United acquires its annuity and life insurance business
through approximately 1,400 independent sales representatives under
contract. These representatives may also sell life insurance and/or
annuity products for other companies. Western United is licensed as an
insurer in the states of Alaska, Arizona, Hawaii, Idaho, Montana,
Nebraska, Nevada, North Dakota, Oregon, South Dakota, Texas, Utah,
Washington, and Wyoming. During 1993, the most recent year for which
statistical information is available, Western United's annuity market
share was 2.8% (ranking it ninth in production) in the six states in
which approximately 95% of its annuity business was produced:
Washington, Oregon, Idaho, Montana, North Dakota and Utah. Old
Standard is licensed as an insurer in the State of Idaho only. During
calendar 1993, Old Standard's annuity market share was 8.7%.
Management intends to expand the operations of the insurance
companies into other states as opportunities arise, which may include
the acquisition of other existing insurance companies.
Metropolitan provides management, Receivable acquisition and
Receivable collection services for a fee to its insurance subsidiaries.
See "BUSINESS-RECEIVABLE INVESTMENTS-Management, Receivable Acquisition
and Collection Services". During 1994, 1993, and 1992, Metropolitan
charged Western United fees of $12.751 million, $10.0 million, and
$14.0 million, respectively. The 1994 charge was before a loss reserve
of $4.75 million which was provided to Western by Metropolitan as a
guarantee against future losses.
Western United may invest up to 65% of its statutory assets in
real estate related Receivables. There is no regulatory limitation on
the amount Old Standard can invest in Receivables secured by real
estate. The balance of the insurance companies' investments are
currently invested in corporate and government securities, but may be
invested into a variety of other areas as permitted by applicable
insurance regulations. See "BUSINESS-REGULATION".
Annuities
Western United has actively marketed single and flexible premium
deferred annuities since 1980. Old Standard was incorporated in 1990
and immediately began offering annuity products. During the past three
years, over 97% of premiums for both companies have been derived from
annuity sales. Management believes that annuity balances have continued
to grow due to market acceptance of the products (due largely to a
competitive rate and a reputation for superior service), and changes in
tax laws that removed the attractiveness of competing tax-advantaged
products.
Western United's annuities also qualify for use as either
Individual Retirement Annuities, Simplified Employee Pensions,
Qualified Corporate Pension Plans or Tax-Sheltered Annuities for
teachers and certain other nonprofit organization's retirement plans.
Under these qualified plans, the interest is tax deferred and the
principal contributions, within limits specifically established by the
Internal Revenue Service, are tax deductible during the accumulation
period. These annuities are subject to income tax only upon actual
receipt of proceeds, usually at retirement when an individual's tax
rate is anticipated to be lower.
Relatively high annuity interest rates during 1991, a period of
declining rates, and the Consolidated Group's need for additional cash
(due in part to Metropolitan's lack of a debenture offering in 1991)
resulted in an increase in premiums written, from $101 million in 1990
to $198 million in 1991. However, 1992 premiums were lower at $174
million, as the Consolidated Group was able to more accurately track
the decline in interest rates. During 1993, the Consolidated Group
matched premium flow with the availability of Receivable investments,
in order to maximize earnings. This resulted in a decrease in annuity
sales.
Flexible and single premium annuities are offered with short,
intermediate and traditional surrender fee periods. Other surrender
fee structures are applicable to other annuity products.
At September 30, 1994, deferred policy acquisition costs were
approximately 9.4% of life and annuity reserves. Since surrender
charges typically do not exceed 5%, increasing termination rates may
have an adverse impact on the insurance subsidiary earnings, requiring
faster amortization of these costs. Management believes that this
potentially adverse impact is mitigated by higher annuity interest
spreads, which are estimated to be about 250 basis points in future
years. This spread analysis, net of management fees paid to
Metropolitan, is shown in the following table, which applies to the
results of Western United during the past three calendar years, based
on insurance regulatory report filings:
<TABLE>
<CAPTION>
1993 1992 1991 Three Year
Average
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Investment
Earnings Rate 9.11% 9.82% 11.21% 10.05%
Average Credited
Interest Rate 6.40% 7.36% 7.68% 7.15%
Spread 2.71% 2.46% 3.53% 2.90%
</TABLE>
During 1994, 1993 and 1992, amortization of deferred policy
acquisition costs was $7.0 million, $4.2 million and $1.1 million,
respectively. All calculations have been reviewed by an independent
actuary.
Annuity lapse rates are calculated by dividing cash outflows
related to benefits and payments by average annuity reserves. For the
calendar years 1993, 1992 and 1991, lapse rates were 15.0%, 12.0%, and
12.8%, respectively. Based upon results for the nine months ended
September 30, 1994, lapse rates were 21.3%. Lapse rates increased
during 1994 due to lower credited rates offered by the insurance
subsidiaries. Management believes a reasonable estimate of future
lapse rates to be 16%, (including 5% for death and partial withdrawal,
and 11% for basic surrenders and surrenders occurring in the year the
surrender charge expires).
Life Insurance
Approximately 3.1% of Western United's statutory premiums are
derived from the sale of interest sensitive whole life insurance and
term life insurance policies. As of September 30, 1994, life insurance
in force totalled $326,526,000 net of amounts ceded to reinsurers. As
with annuities, gross profits are determined by the difference between
interest rates credited on outstanding policies and interest earned on
investment of premiums. In addition, profitability is affected by
mortality experience (i.e. the frequency of claims resulting from
deaths of policyholders). Although Western United's mortality rates to
date have been substantially lower than expected, higher credited
interest rates and higher issuing expenses combined with low volume
have resulted in lower profits than those experienced with its annuity
products.
The following table sets forth certain key financial information
about Western United's and Old Standard's insurance operations.
<TABLE>
<CAPTION>
Year Ended at September 30,
---------------------------
1994 1993 1992
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Insurance In Force
Individual Life $398,837 $423,583 $428,714
Less Ceded to other
Companies (69,311) (77,970) (82,977)
-------- -------- --------
$326,526 $345,613 $345,737
======== ======== ========
Life Insurance Premiums $ 3,346 $ 3,121 $ 3,170
Less Ceded Premiums (388) (479) (426)
-------- -------- --------
$ 2,958 $ 2,642 $ 2,744
======== ======== ========
Net Investment Income $ 65,944 $ 66,132 $ 67,550
======== ======== ========
Benefits, Claim Losses and
Settlement Expenses $ 41,919 $ 49,151 $ 50,839
======== ======== ========
Deferred Policy Acquisition
Costs $ 71,075 $ 70,024 $ 65,971
======== ======== ========
Reserves for Future Policy
Benefits, Losses,
Claims and Loss Expenses $744,645 $744,632 $714,629
======== ======== ========
Assets $924,822 $859,267 $818,060
======== ======== ========
Capital and Surplus $ 77,142 $ 76,814 $ 74,294
======== ======== ========
</TABLE>
Reinsurance
Reinsurance is the practice whereby an insurance company enters
into agreements (termed "treaties") with other insurance companies in
order to assign some of its insured risk, for which a premium is paid,
while retaining the remaining risk. Although reinsurance treaties
provide a contractual basis for shifting a portion of the insured risk
to other insurers, the primary liability for payment of claims remains
with the original insurer. Most life insurers obtain reinsurance on a
portion of their risks in the ordinary course of business. The amount
of mortality risk that a company is willing to retain is based
primarily on considerations of the amount of insurance it has in force
and upon its ability to sustain unusual mortality fluctuations.
Western United reinsured $69,311,000 of life insurance risk at
September 30, 1994, equal to all risk in excess of $100,000 on each
whole life policy and all risk in excess of $50,000 on each term life
policy. Life insurance in force at that time was $395,837,000.
Western is a party to seventeen separate reinsurance treaties with
seven reinsurance companies, the largest treaty (with Lincoln National
Life Insurance Company) providing, at September 30, 1994, approximately
$36,104,000 of reinsurance coverage. The majority of the remaining
coverage is with Business Mens Assurance Company of America and Phoenix
Home Life Mutual Insurance Company. Total reinsurance premiums paid by
Western United during the fiscal year ended September 30, 1994 were
$387,503.
Reserves
Western United's and Old Standard's reserves for both annuities
and life insurance are actuarially determined and prescribed by their
respective states of domicile and other states in which they do
business as insurance companies through laws which are designed to
protect annuity contract owners and policy owners. Both companies
utilize the services of a consulting actuary to review the amount of
these reserves for compliance with state law. These reserves are
amounts which, at certain assumed rates, are calculated to be
sufficient to meet Western United's and Old Standard's future
obligations under annuity contacts and life insurance policies
currently in force. At September 30, 1994 such reserves amounted to
$744,644,625. Reserves are recalculated each year to reflect amounts
of reinsurance in force, issue ages of new policy holders, duration of
policies and variations in policy terms. Since such reserves are based
on certain actuarial assumptions, no representation is made that
ultimate liability will not exceed these reserves.
Securities Investments
At September 30, 1994 and 1993, 99.3% and 99.1% of the
Consolidated Group's securities investments were held by its insurance
subsidiaries.
The following table outlines the nature and carrying value of
securities investments held by the insurance subsidiaries at September
30, 1994:
<TABLE>
<CAPTION>
Available Held To Total Percent
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount $87,621 $199,599 $287,220 100.0%
======== ======== ======== ======
Invested in:
Fixed Income $87,582 $199,599 $287,181 100.0%
Equities 39 --- 39 0.0%
-------- -------- -------- ------
$87,621 $199,599 $287,220 100.0%
======== ======== ======== ======
Fixed Income:
Taxable $87,582 $198,599 $286,181 99.7%
Non-taxable --- 1,000 1,000 .3%
-------- -------- -------- ------
$87,582 $199,599 $287,181 100.0%
======== ======== ======== ======
Taxable:
Government/
Agency $62,168 $74,099 $136,267 47.6%
Corporate 25,414 124,500 149,914 52.4%
-------- -------- -------- ------
$87,582 $198,599 $286,181 100.0%
======== ======== ======== =====
Corporate Bonds:
AAA $ --- $46,004 $46,004 30.7%
AA 4,892 18,419 23,311 15.5%
A 16,744 52,282 69,026 46.0%
BBB 3,778 7,795 11,573 7.8%
-------- -------- -------- ------
$ 25,414 $124,500 $149,914 100.0%
======== ======== ======== ======
Corporate:
Mortgage-backed $ --- $38,468 $38,468 25.7%
Finance 13,880 42,598 56,478 37.7%
Industrial 10,595 32,736 43,331 28.9%
Utility 939 10,698 11,637 7.7%
-------- -------- -------- ------
$ 25,414 $124,500 $149,914 100.0%
======== ======== ======== ======
</TABLE>
Investments of the insurance subsidiaries are subject to the
direction and control of an investment committee appointed by the
Boards of Directors of the respective insurance subsidiary. All such
investments must comply with applicable state insurance laws and
regulations. See "BUSINESS-REGULATION". Investments of the insurance
subsidiaries are in investment grade corporate, government agency, or
direct government obligations, in order to substantially limit the
credit risk in the portfolio.
Commencing in fiscal 1994, the Consolidated Group entered into
trading activities as defined and limited by its policies and
procedures. Results of the trading activities are reviewed by the
Investment Committee on a weekly basis. Transactions can be monitored
as incurred by accounting department personnel.
Metropolitan is authorized to use financial futures instruments
for the purpose of hedging interest rate risk relative to the
securities portfolio or potential trading situations. In both cases,
the futures transaction is intended to reduce the risk associated with
price movements for a balance sheet asset. The insurance subsidiaries
sell securities "short" (the sale of securities which are not currently
in the portfolio and therefore must be purchased to close out the sale
agreement) as another means of hedging interest rate risk, or to take
a trading position in an attempt to benefit from an anticipated
movement in the financial markets. There were no open short sales
transactions at September 30, 1994.
The Consolidated Group purchases collateralized mortgage
obligations (CMO's) for its investment portfolio. Such purchases have
been limited to tranches that perform in concert with the underlying
mortgages i.e., improving in value with falling interest rates and
declining in value with rising interest rates. The Consolidated Group
has not invested in "derivative products" that have been structured to
perform in a way that magnifies the normal impact of changes in
interest rates or in a way dissimilar to the movement in value of the
underlying securities. At September 30, 1994, the Consolidated Group
was not a party to any derivative financial instruments.
At September 30, 1994, 1993 and 1992, amounts in the available for
sale portfolio on a consolidated basis were $89.1 million, $104.0
million and $141.3 million. The available for sale portfolio had net
unrealized losses of $3,351,000 at September 30, 1994, net unrealized
gains of $755,000 at September 30, 1993 and net unrealized losses of
$72,000 at September 30, 1992. In the held to maturity portfolio, net
unrealized losses were $15,440,000 at September 30, 1994 with net
unrealized gains of $764,000 and $3,700,000 at September 30, 1993 and
1992, respectively.
<PAGE>
METHOD OF FINANCING
The Consolidated Group finances its business operations and growth
with the proceeds of the sale of life insurance and annuity products,
the cash flow from Receivables, bond investments, the sales of real
estate, and public offerings of securities. Metropolitan engages in a
substantially continuous public offering of debt securities
(debentures) and preferred stock. The insurance subsidiaries, Western
United and Old Standard, market life insurance policies and annuities.
For more detailed information about the life insurance and annuity
operations See "BUSINESS-LIFE INSURANCE AND ANNUITIES".
The following table presents information about the debt securities
issued by the Consolidated Group:
<TABLE>
<CAPTION>
As of September 30
1994 1993 1992
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Principal Amount
Outstanding: $172,666 $197,944 $184,474
Compound and Accrued
Interest: 26,711 31,880 32,094
--------- -------- --------
TOTAL $199,377 $229,824 $216,568
========= ======== ========
Weighted Average
Interest Rate: 8.43% 9.01% 9.45%
========= ======== ========
Range of Interest
Rates: 5% - 11% 5% - 13% 6% - 14%
========= ======== ========
</TABLE>
For additional information See "Note 8 to the Consolidated
Financial Statements". The September 30, 1993 and 1992 amounts for
total outstanding debt securities includes $21,959,000 and $13,623,000,
respectively, which were issued by Summit, a former member of the
Consolidated Group. Substantially all of the debt securities
outstanding at September 30, 1994 will mature during the five-year
period ending September 30, 1999. Management expects to fund net
retirements of debentures maturing during that period with cash flow
generated by Receivable investments, sales of real estate and issuances
of securities. During the year ended September 30, 1994, 56% of
Metropolitan's debentures were reinvested at maturity. Principal
payments received from the Consolidated Group's Receivable portfolio
and proceeds from sales of real estate and Receivables were as follows
for the periods indicated:
Fiscal 1994: $134,010,000
Fiscal 1993: $105,332,000
Fiscal 1992: $ 88,822,000
Proceeds of preferred stock issuances less redemptions were
$1,773,000 in 1994, $3,300,000 in 1993 and $40,000 in 1992. The
liquidation preference of outstanding preferred stock at September 30,
1994 was $43,332,000. Preferred stockholders are entitled to monthly
distributions at a variable rate based on U.S. Treasury obligations.
The average monthly distribution rate during fiscal 1994 was 8.027%.
Preferred stock distributions paid by Metropolitan were $3,423,000,
1994, $3,313,000 in 1993 and $3,399,000 in 1992. See Note 9 to the
Consolidated Financial Statements.
The following table summarizes Metropolitan's anticipated annual
cash principal and interest obligations on debentures, other debt
payable and anticipated annual cash dividend requirements on preferred
stock for the indicated periods based on outstanding debt and
securities at September 30, 1994, assuming no reinvestments of maturing
debentures:
<TABLE>
<CAPTION>
Debenture Other Preferred
Fiscal Year Ending Bonds Debt Stock
September 30, Payable Dividends Total
- ------------------ ---------- ----------- ----------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
1995 $60,797 $61,146 $4,130 $126,073
1996 22,313 264 4,130 26,707
1997 50,381 242 4,130 54,753
1998 57,673 231 4,130 62,034
1999 46,216 220 4,130 50,566
------- ------- ------- --------
$237,380 $62,103 $20,650 $320,133
======= ======= ======= ========
</TABLE>
In addition to these contractual cash flow requirements, a
certain amount of insurance subsidiaries' annuities may reprice
annually which could cause termination of such annuities subject to a
surrender charge. See "MANAGEMENT'S DISCUSSION AND ANALYSIS-Asset
Liability Management". Management believes that cash flows will remain
adequate during the next year to satisfy all obligations Metropolitan
owes to holders of its securities.
COMPETITION
The Consolidated Group competes with various real estate financing
firms, real estate brokers, banks and individual investors for the
Receivables it acquires. The largest single competitors are
subsidiaries of much larger companies such as Associates First Capital
Corporation while the largest number of competitors are a multitude of
individual investors. The primary competitive factors are the amounts
offered and paid to Receivable sellers and the speed with which the
processing and funding of the transaction can be completed.
Competitive advantages enjoyed by the Consolidated Group includes
Metropolitan's branch office system which allows it access to markets
throughout the country; its ability to purchase long-term contracts;
its availability of funds; its reputation for reliability established
by its long history in the business; and its in-house capabilities for
processing and funding transactions. Competitive disadvantages include
the length of time required to process and fund approved transactions
(up to thirty days); an investment policy which excludes purchases of
Receivables which involve discounts of less than $2,500; and relatively
high yield requirements.
Management is unaware of any competitors with acquisition networks
and Receivables investment portfolios comparable to the Consolidated
Group's and believes the Consolidated Group to be one of the largest
investors in such Receivables in the United States.
Metropolitan's securities products face competition for investors
from other securities issuers many of which are much larger, and from
other types of financial institutions.
The life insurance and annuity business is highly competitive.
Premium rates, annuity yields and commissions to agents are
particularly sensitive to competitive forces. Western United's
management believes that it is in an advantageous position in this
regard because of its earning capability through investments in
Receivables compared to that of most other life insurance companies.
Since June, 1986, Western United has been assigned a "B+ (Very Good)"
rating by A. M. Best Co., a nationally recognized insurance company
rating organization. Old Standard has also been assigned a Best rating
of "B+ (Very Good)". Best bases its rating on a number of complex
financial ratios, the length of time a company has been in business,
the nature and quality of investments in its portfolio, depth and
experience of management and various other factors. Best's ratings are
supplied primarily for the benefit of policyholders and insurance
agents.
REGULATION
The Consolidated Group is subject to laws of the State of
Washington which regulate "debenture companies" because it obtains
capital for its activities through offerings of debt securities to
residents of the State of Washington. These laws, known as the
Debenture Company Act (the"Act") are administered by the Securities
Division of the State Department of Financial Institutions. Designed to
protect the interests of investors, the Act limits the amount of debt
securities Metropolitan may issue by requiring the maintenance of
certain ratios of "net worth to outstanding debt securities". The
required ratio depends on the amount of debt securities outstanding,
declining from 20% for amounts of $1,000,000 or less, to 10% for
amounts between $1,000,000 and $100,000,000, to 5% for amounts in
excess of $100,000,000. At September 30, 1994 Metropolitan's required
net worth for this purpose was approximately $15,069,000 while its
actual net worth (stockholder's equity) was $32,625,324. In addition,
the Act limits equity investments by Metropolitan in a single project
or subsidiary to the greater of net worth or 10% of assets; aggregate
equity investments, with certain exceptions, to 20% of assets; loans to
any single borrower to 2.5% of assets; and investments in unsecured
loans to 20% of assets. Other provisions of the Act prohibit
Metropolitan from issuing more than 50% of its debentures for terms of
two years or less; prohibit transfer of control of Metropolitan without
regulatory approval; prohibit common control of another debenture
company, bank or trust company; and prohibit officers, directors and
controlling shareholders from directly or indirectly borrowing funds of
Metropolitan and from participating in certain other preferential
transactions with it. Metropolitan is required to notify its
debentureholders in writing fifteen to forty-five days in advance of
the maturity dates of their investments and to provide all
debentureholders with copies of its annual financial statements. The
Act also provides for periodic examinations of the accounts, books and
records of debenture companies to ascertain compliance with the law.
During 1994, Metropolitan's aggregate principal amount of
outstanding debentures, including accrued and compound interest, and
its aggregate amount of preferred stock outstanding were limited to
$251,300,000, by the terms of the securities sales permits issued by
the State of Washington pending improvement in Metropolitan's ratio of
earnings to its fixed charges and preferred stock dividends. For the
purposes of this calculation, the earnings of subsidiaries are excluded
unless actually paid to Metropolitan as dividends. These limitations
limited Metropolitan's ability to sell additional debentures and
preferred stock during 1994. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Met-Hawaii is subject to certain federal and Hawaii state laws and
regulations governing timeshare marketing procedures, licensing
requirements and interest rates. Hawaii also requires the registration
and periodic renewal of timeshare condominium projects prior to the
commencement or continuation of sales in the state. The law also
provides timeshare purchasers with a seven-day right of rescission
following execution of an agreement to purchase.
Western United and Metropolitan are subject to the Insurance
Holding Company Act as administered by the Office of the State
Insurance Commissioner of the State of Washington. The act regulates
transactions between insurance companies and their affiliates. It
requires that Metropolitan provide notification to the Insurance
Commissioner of certain transactions between the insurance company and
affiliates. In certain instances the Commissioner's approval is
required before a transaction with an affiliate can be consummated.
Old Standard and Metropolitan are subject to the Insurance Holding
Company Act as administered by the Office of the State Insurance
Commissioner of the State of Idaho. The act regulates transactions
between insurance companies and their affiliates. It requires that
Metropolitan notify, and in certain circumstances obtain the
Commissioner's approval before certain transaction can be consummated.
The pending proposed sale of Old Standard to Summit Securities will
require such approval. See "CERTAIN TRANSACTIONS".
Western United is subject to extensive regulation and supervision
by the Office of the State Insurance Commissioner of the State of
Washington as a Washington-domiciled insurer, and to a lesser extent by
all of the other states in which it operates. Old Standard is subject
to similar regulation and supervision by the State of Idaho. These
regulations are directed toward supervision of such things as granting
and revoking licenses to transact business on both the insurance
company and agency levels, approving policy forms, prescribing the
nature and amount of permitted investments, establishing solvency
standards and conducting extensive periodic examinations of insurance
company records. Such regulation is intended to protect annuity
contract and policy owners, rather than investors in an insurance
company.
Both insurance subsidiaries file detailed annual and quarterly
reports with their respective states of domicile as does Western United
with the other states in which it operates.
All states in which the insurance subsidiaries operate have laws
requiring solvent life insurance companies to pay assessments to
protect the interests of policyholders of insolvent life insurance
companies. Assessments are levied on all member insurers in each state
based on a proportionate share of premiums written by member insurers
in the lines of business in which the insolvent insurer engaged. A
portion of these assessments can be offset against the payment of
future premium taxes. However, future changes in state laws could
decrease the amount available for offset. The economy and other
factors have caused failures of substantially larger companies which
will result in substantially increased future assessments.
The net amounts expensed by the life insurance subsidiaries for
guaranty fund assessments and charged to operations for the years ended
September 30, 1994, 1993 and 1992 were $192,000, $4,142,000 and
$62,000, respectively. In the fourth quarter of fiscal 1993, the
insurance subsidiaries' accrued $3,950,000 of estimated future
assessments based on known insolvencies. This estimate was based on
information provided by the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies occurring during
1988, 1989 and 1990. During the year ended September 30, 1994, the
insurance subsidiaries reduced their estimate of these losses by
$588,000 based upon updated information from the National Organization
of Life and Health Guaranty Associations. These estimates are subject
to future revisions based upon the ultimate resolution of the
insolvencies and resultant losses. Management cannot reasonably
estimate the additional effects, if any, upon its future assessments
pending the resolution of the above described insolvencies.
Additionally, Management does not believe that the amount of future
assessments associated with known insolvencies after 1990 will be
material to its financial condition or results of operations. The
amount of guaranty fund assessment that was accrued in 1993 and revised
in 1994 has been recorded net of a 7% discount rate applied to the
estimated payment term of approximately seven years. The remaining
unamortized discount associated with this accrual was approximately
$1,069,500 at September 30, 1994.
Dividend restrictions are imposed by regulatory authorities on the
insurance subsidiaries. The unrestricted statutory surplus of the
insurance subsidiaries totaled approximately $6,800,000, as of
September 30, 1994, $8,700,000 as of September 30, 1993, and
$10,300,000 as of September 30, 1992. The principal reason for this
decrease was the payment of dividends.
For statutory purposes, Western United's capital and surplus and
its ratio of capital and surplus to admitted assets were as follows for
the periods indicated:
<TABLE>
<CAPTION>
As of As of December 31,
September 30, 1994 1993 1992 1991
------------------- ------ -------------- -------
<S> <C> <C> <C> <C>
Capital and Surplus
(Millions) $45.7 $43.0 $40.3 $38.1
Ratio of Capital and
Surplus to Admitted
Assets 5.6% 5.7% 5.5% 6.0%
</TABLE>
Although the State of Washington requires only $4,000,000 in
capital and surplus to conduct insurance business, Western United has
attempted to maintain a capital and surplus ratio of at least 5% which
management considers adequate for regulatory and rating purposes. Old
Standard had capital and surplus of $2.1 million, $2.1 million and $2.5
million as of December 31, 1992 and 1993 and as of September 30, 1994,
respectively. Its ratio of capital and surplus to admitted assets for
these dates was 6.5%, 5.0% and 5.6%, respectively.
In 1993, Washington State enacted the Risk Based Capital Model law
which requires an insurance company to maintain minimum amounts of
capital and surplus based on complex calculations of risk factors that
encompass the invested assets and business activities. The insurance
subsidiaries capital and surplus levels exceed the calculated minimum
requirements.
<PAGE>
MANAGEMENT
Directors, Executive Officers and Certain Employees
(Information Current as of December 31, 1994)
Name Age Position
C. Paul Sandifur * 91 Chairman of the Board of Directors
C. Paul Sandifur, Jr. * 53 President, Director and Chief
Executive Officer
Irv Marcus * 70 Senior Vice President and Director
Reuel Swanson * 56 Secretary and Director
Charles H. Stolz 86 Director
Ernest Jurdana * 50 Chief Financial Officer
Bruce J. Blohowiak * 41 Vice President and Corporate Counsel
Steven Crooks * 48 Vice President and
Controller
Susan A. Thomson 34 Assistant Secretary and Assistant
Corporate Counsel
Paul Chalmers * 53 Assistant Vice President and
Director of Human Resources
Michael Barcelo* 44 Treasurer
* Member of Executive Committee
Directors and officers are elected to one-year terms. The average age
of Metropolitan's officers is 57.
C. Paul Sandifur was one of the founders of Metropolitan in 1953 and
has served as a Director continuously since that time. He was Chief
Executive Officer from 1953 until 1991. Mr. Sandifur is also a
director and officer of the subsidiaries of Metropolitan and has been
associated with real estate, finance and insurance businesses in the
State of Washington for over forty years. C. Paul Sandifur, Jr. is his
son.
C. Paul Sandifur, Jr. became Executive Vice President in 1980, was
elected President in 1981 and succeeded his father as Chief Executive
Officer in 1991. He has been a Director since 1975. Mr. Sandifur was
a real estate salesman with Diversified Properties in Kennewick,
Washington during 1977 and 1978 and then with Century 21 Real Estate in
Kennewick. In June 1979, he became an associate broker with Red Carpet
Realty in Kennewick before rejoining Metropolitan in 1980. He is a
director and officer of most of the subsidiary companies. He is the
sole shareholder of National Summit Corp., which in turn is the sole
shareholder of a former subsidiary of Metropolitan, Summit.
Irv Marcus has been a Vice President and a Director since 1974.
Appointed Senior Vice President in 1990, Mr. Marcus supervises
Metropolitan's Receivable investing operations. He was previously a
loan officer with Metropolitan and has over 25 years experience in the
consumer finance business.
Reuel Swanson has worked for Metropolitan since 1960 and has been a
Director since 1969. From 1972 to 1975, Mr. Swanson was Metropolitan's
Treasurer. In 1976, he became Secretary. He is also a director and
officer of most of the subsidiary companies.
Charles H. Stolz has been a Director of Metropolitan since 1953. Mr.
Stolz was one of the founders of Metropolitan. He is a licensed public
accountant and has been a realtor for over 25 years. He is a former
Chairman of the Washington State Real Estate Commission and President
of the Spokane Board of Realtors.
Ernest Jurdana joined Metropolitan as Chief Financial Officer in June
of 1994. From 1990 to June 1994 he was Senior Vice President and Chief
Financial Officer for Continental Savings of America. Prior to that
time, he was Senior Vice President for Financial Management with
Washington Mutual Savings Bank where he served in various accounting
and financial positions from 1966. He received a MBA designation from
City University, and was licensed as a Certified Public Accountant in
1986.
Bruce J. Blohowiak joined Metropolitan's legal staff in 1979 and became
its Corporate Counsel in 1986. In 1987 he became an Assistant Vice
President and was appointed a Vice President in 1990. He is also a
Vice President of Western United. A member of the Washington State
bar, Mr. Blohowiak received his J. D. degree from Gonzaga University
School of Law in 1979.
Steven Crooks has been employed in Metropolitan's accounting department
since 1972. He became Controller and Assistant Vice President in 1990,
and Vice President in 1994. Mr. Crooks has been a Washington licensed
Certified Public Accountant since 1974.
Susan A. Thomson joined Metropolitan's legal staff in 1989. In 1993
she was appointed Assistant Secretary for Metropolitan. Since 1992,
she has been Vice President and Compliance Officer with Metropolitan
Investment Securities, the broker/dealer for Metropolitan's securities
offerings. Prior to joining Metropolitan she attended law school and
worked as a legal intern. She is a member of the Washington State Bar
Association and received her J.D. from Gonzaga University School of Law
in 1989.
Paul Chalmers joined Metropolitan in 1989 as Director of Human
Resources and became an Assistant Vice President in 1991. From
1986-1989 he was the Director of Human Resources of ISC Systems
Corporation. Mr Chalmers holds a Bachelor of Arts degree from the
University of Massachusetts and is a graduate of the Pacific Coast
Banking School at the University of Washington. He has held management
positions in human resources for over twenty years.
Michael Barcelo joined Metropolitan in August of 1992, as Portfolio
Manager and was promoted to Treasurer in October of 1993. Mr. Barcelo
has over 12 years of experience in managing investment portfolios and
treasury functions which he acquired at Pacific First Bank, Great
Western Federal Savings Bank and Washington Mutual Savings Bank. Mr.
Barcelo received a B.A. in Economics in 1974 and a C.F.A. (Chartered
Financial Analyst) designation in 1992.
<PAGE>
INDEMNIFICATION
Metropolitan's Articles of Incorporation provide for indemnification of
Metropolitan's directors, officers and employees for expenses and other
amounts reasonably required to be paid in connection with any civil or
criminal proceedings brought against such persons by reason of their
service of or position with Metropolitan unless it is adjudged in such
proceedings that the person or persons are liable due to willful
malfeasance, bad faith, gross negligence or reckless disregard of his
duties in the conduct of his or her office. Such right of
indemnification is not exclusive of any other rights that may be
provided by contract or other agreement or provision of law. Such
indemnification is not currently covered by insurance.
As of the date of this Prospectus no contractual or other agreements
providing for indemnification of officers, directors or employees were
in existence other than as set forth above. Pursuant to Washington
State law Metropolitan is required to indemnify any director for his
reasonable expenses incurred in the successful defense of any
proceeding in which such director was a party because he was a director
of Metropolitan.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Metropolitan's officers, directors or
controlling persons pursuant to the foregoing provisions, Metropolitan
has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is therefore unenforceable against Metropolitan.
<PAGE>
OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as to each class of
equity securities of Metropolitan and its subsidiaries beneficially
owned by Metropolitan officers and directors as of September 30, 1994.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned %of Class
<S> <C> <C> <C> <C>
C. Paul Sandifur........ Metropolitan Class A
S. 4327 Pittsburg Common Stock 6.5120 5.02%
Spokane, WA
C. Paul Sandifur, Jr.... Metropolitan Class A
E. 1108-27th Common Stock 11.5258 8.88%
Spokane, WA Consumers Group
Common Stock 19 3.49%
C. Paul Sandifur, Jr.
Trustee................. Metropolitan Class A
E. 1108 27th Common Stock 82.4667 (1)63.52%
Spokane, WA
Summit Securities, Inc.. Metropolitan Preferred
W. 929 Sprague Avenue Stock, All Series 247,622 (2) 6.01%
Spokane, WA 99204 Metropolitan Class A
Common Stock 9.2483 (2)7.12%
Irv Marcus.............. Metropolitan
S. 2212 Blake Rd. Preferred Stock,
Spokane, WA All Series 406 0.01%
Metropolitan Class A
Common Stock 1.4240 1.10%
Metropolitan Class B
Common Stock 1.0000 50.00%
Bruce J. Blohowiak...... Metropolitan Class A
N. 9503 Loganberry Court Common Stock 1.0000 0.77%
Spokane, WA 99208 Metropolitan Class B
Common Stock 1.0000 50.00%
Charles H. Stolz........ Metropolitan Preferred
W. 504 14th Avenue Stock, All Series 18,475 0.43%
Spokane, WA
<PAGE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned %of Class
<S> <C> <C> <C>
All officers and
directors as a
group .. Metropolitan
Preferred Stock, All Series 266,503 6.45%
Metropolitan Class A 112.1768 86.40%
Common Stock
Metropolitan Class B 2.0000 100%
Common Stock
Consumers Group 19 3.49%
<FN>
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J. Evelyn
Sandifur irrevocable trust and has voting and investment control over these
shares of stock. The trust beneficiaries are C. Paul Sandifur, Jr., Mary L.
Sandifur and William F. Sandifur.
(2) Summit Securities, Inc. is a wholly owned subsidiary of National Summit
Corp., a Delaware Corporation which is wholly owned by C. Paul Sandifur, Jr.
</TABLE>
<PAGE>
Executive Compensation
The following table sets forth the aggregate compensation paid by
Metropolitan during the periods specified to its Chief Executive
Officer and Chairman of the Board. All other officers and executives of
Metropolitan received less than $100,000 in compensation during the
year ended September 30, 1994. No executive officer is a party to, or
a participant in, any pension plan, contract or other arrangement
providing for cash or non-cash forms of remuneration except
Metropolitan's 401(k) qualified retirement plan adopted as of January
1, 1992, which is available generally to all employees of Metropolitan.
The 401(k) Plan provides for maximum annual contributions equal to 1.5%
of each participant's salary. Approximately $62,000 was paid by
Metropolitan pursuant to the 401(k) plan during the year ended
September 30, 1994. As of September 30, 1994 Metropolitan had no
compensation plans or stock option plans in effect. No compensation is
paid to the directors of Metropolitan for acting in such capacity.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------
- ---------(a)----------------------------(b)------------------(c)--------
Name and Principal Year Salary ($)
Position
- ------------------------------------------------------------------------
<S> <C> <C>
C. Paul Sandifur, Jr. 1994 $107,063
Chief Executive Officer 1993 $97,563
1992 $84,047
C. Paul Sandifur, Sr. 1994 $100,212
Chairman of the Board
</TABLE>
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial owners of more than five percent of Metropolitan's voting
stock as of September 30, 1994.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
<S> <C> <C>
C. Paul Sandifur, Jr.
E. 1108 27th Ave.
Spokane, Washington............. 11.5258 8.88%
C. Paul Sandifur, Jr.
Trustee...................... 82.4667 63.52%
Mary L. Sandifur
13821 176th Pl. N.E.
Redmond, Washington............. 8.7156 6.71%
William F. Sandifur
857 Fairmont
St. Paul, Minnesota.............. 8.9391 6.29%
C. Paul Sandifur, Sr. and J. Evelyn Sandifur
S. 4327 Pittsburg
Spokane, WA...................... 6.5120 5.02%
Summit Securities, Inc.
W. 929 Sprague Avenue
Spokane, WA....................... 9.2483 7.12%
</TABLE>
CERTAIN TRANSACTIONS
In the normal course of business, Metropolitan and its
subsidiaries engage in inter-company transactions. As the holder of a
minority interest (3.49%) in the shares of Consumers Group Holding Co.,
Inc., C. Paul Sandifur, Jr. the President, controlling shareholder, and
a director of Metropolitan, may indirectly benefit from such
transactions. Consumers Group Holding Co. is a subsidiary which owns
Consumers Insurance Company (Consumers) which in turn owns a majority
interest in Western United. In the three years ended September 30,
1994, Consumers sold credit guaranty insurance to Metropolitan for
$540,000 in total premiums.
During the three year period ended September 30, 1994, Western
United purchased some of its Receivables from Metropolitan at
Metropolitan's cost. In these transactions, Western United paid
Metropolitan $24,713,452 for Receivables with aggregate outstanding
principal balances of $26,046,029. The difference represents
unrealized discounts net of acquisition costs.
Metropolitan charges Western United and Old Standard for
Receivable acquisition services. In 1994, 1993 and 1992, respectively,
Metropolitan charged Receivable acquisition fees of $12.751 million,
$10 million and $14 million to Western United and $0, $ 0 and $1.45
million to Old Standard. The charge to Western United for 1994 is a
gross amount before a loss reserve of $4.75 million which was provided
by Metropolitan. Old Standard was not charged a Receivable acquisition
fee in 1994 or 1993 due to insignificant Receivable purchase volumes.
The amounts of the Receivable acquisition fees were determined based on
the adjustment necessary to convert Receivables purchased by the
subsidiaries utilizing Metropolitan's services to a fair market yield.
The effect of the fees charged was to reduce the subsidiaries effective
yields on the purchased Receivables to approximately 8.3% in 1994,
10.3% in 1993 and 11% in 1992. The lower yield for 1994 reflects a
loss guarantee reserve to Western United by Metropolitan. The
estimated value of the reserve increases the effective yield to Western
United to 9.7%. Management believes the adjusted yields represent the
yields which the subsidiaries could achieve by purchasing similar
Receivables in arms-length transactions with unrelated vendors. In
addition, Metropolitan charges its subsidiaries for management
services, Receivable collection services and rental of offices and
equipment. These charges have no effect on the Consolidated Financial
Statement, but create fee income for Metropolitan alone. See Note 18
to the Consolidated Financial Statements.
From time to time, since December of 1979, Metropolitan has made
loans to Consumers Group Holding Co. for purposes of increasing the
capital and surplus of Consumers and Western United. These loans are
in the form of surplus certificates and are repayable on demand
provided total capital and surplus meets statutory requirements. As of
September 30, 1994, loans outstanding totaled $3,800,000 currently
bearing no interest.
Metropolitan Investment Securities (MIS), a broker-dealer and
former subsidiary of Metropolitan, sells the publicly registered
securities of Metropolitan and Summit. Metropolitan pays commissions
to MIS for the sale of its securities pursuant to the terms of written
Selling Agreements. During the fiscal years ended September 30, 1994,
1993 and 1992, Metropolitan paid commissions to MIS in the amounts of
$1,111,044, $1,428,882 and $1,015,329 on sales of debt securities in
the respective amounts of $46,414,738, $57,994,229, and $44,185,895
respectively. During the fiscal years ended September 30, 1994, 1993
and 1992, Metropolitan paid commissions to MIS in the amounts of
$17,451, $115,533 and $180,059 on sales of preferred stock in the
amounts of $1,790,100, $3,477,400, and $3,899,447, respectively.
Additionally, in 1994 and 1993, Metropolitan paid commissions to MIS in
the amounts of $198,180 and $117,251 on sales of preferred stock
through an in-house trading list.
Summit and Metropolitan entered into agreements in September, 1990
to provide for Summit's acquisition of Receivables from Metropolitan at
the Metropolitan cost and for the servicing of Summit's Receivables by
MetWest Services, the servicing affiliate. As of September 30, 1994,
Summit held approximately $28.4 million (face amount) in Receivables
acquired through Metropolitan. In September 1994, Summit and
Metropolitan entered into a non-exclusive agreement for Metropolitan to
provide certain administrative, servicing, and Receivable acquisition
services to Summit for a fee. Under this agreement, Summit paid to
Metropolitan a fee of $497,000 in September 1994, for services in
acquiring $10.3 million of Receivables, providing a net yield to Summit
of 10.9%. Management believes that the terms of the agreements are at
least as favorable as could have been obtained from non-affiliated
parties. In addition, Summit paid commissions to MIS in the amounts of
$326,057, $250,237 and $167,285 on sales of debt securities in amounts
of $10,539,684, $9,677,843 and $5,864,051 for the years ended September
30, 1994, 1993 and 1992, respectively.
On September 9, 1994, the controlling interest in Summit
Securities, Inc. (Summit) was acquired by National Summit Corp., a
Delaware corporation which is wholly owned by C. Paul Sandifur, Jr.
The change in control was made pursuant to a reorganization wherein
Summit redeemed all the common shares held by its former parent
company, Metropolitan which consisted of 100% of the outstanding common
stock of Summit. Contemporaneously with this redemption, Summit issued
10,000 shares of common stock to National Summit Corp., a Delaware
Corporation, for $100,000. In addition, various investors in
Metropolitan's common and preferred stock, including members of Mr.
Sandifur's immediate family acquired 30,224 shares of Summit's
Preferred Stock Series S-1 for $100 per share in exchange for preferred
and common shares of Metropolitan with a value of approximately $3
million dollars. Following this sale, Metropolitan will continue to
provide, for a fee, principally all the management services to Summit.
See "BUSINESS-Management, Receivable Acquisition and Collection
Services."
On December 15, 1994 Metropolitan and Summit entered into an
understanding that on January 31, 1995, Metropolitan Investment
Securities (MIS) will be sold to Summit Securities, Inc. This sale was
made pursuant to a restructuring of the Consolidated Group and Summit.
The sale price was determined by the net book value of equity for MIS
at December 31, 1994. Following this sale, MIS will continue its prior
business activities as the broker/dealer selling the securities of
Metropolitan and Summit.
On December 15, 1994, Metropolitan and Summit entered into an
understanding that on January 31, 1995, Metropolitan will discontinue
its property development division, which consisted of a group of
employees experienced in real estate development. On the same date,
Summit will commence the operation of a property development division
employing those same individuals who had previously been employed by
Metropolitan. Metropolitan is negotiating an agreement with Summit
Property Development to provide property development services to
Metropolitan.
The parties are currently negotiating the potential sale of one of
Metropolitan's insurance subsidiaries, Old Standard. It is currently
anticipated that the sale of Old Standard will occur during the first
calendar quarter of 1995, and that the sale price will be based upon an
independent evaluation of Old Standard.
The sale of MIS and transfer of Metropolitan's property
development division, along with the proposed sale of Old Standard are
all part of the continuation of a general reorganization which was
commenced in 1994, with the sale of Summit. Metropolitan considers
this reorganization to be in its best interest due to regulatory
considerations principally arising within Metropolitan's state of
domicile. It is the opinion of Management that these regulations have
penalized Metropolitan for its corporate structure. These include
excluding subsidiary earnings from an earnings to fixed charges ratio
requirement unless those subsidiary earnings are actually paid to
Metropolitan. This effectively made these subsidiaries, non-earning
assets of Metropolitan unless the dividends were actually paid. In
light of these regulations and the expansion of Metropolitan and its
subsidiaries beyond the Northwestern United States, it is the opinion
of Metropolitan's Management that this reorganization may provide it
with greater flexibility for future growth.
On November 23, 1994 Western United submitted a proposal to
acquire certain assets and liabilities of a failed insurance company
domiciled in Hawaii. If Western's proposal is successful, it will
generate an estimated $70 million of additional life and annuity policy
reserves. The purchase of assets is limited to certain equipment and
100% of the stock in an inactive life subsidiary of the failed company.
If successful in its proposal, Western United intends to place the
acquired reserves in the purchased life subsidiary and to operate the
newly constituted company as a subsidiary of Western United, domiciled
in Hawaii. The funds for this purchase will be derived from Western
United.
During fiscal 1994, the Board of Director's for Metropolitan and
certain subsidiaries authorized a reverse split of their stock. The
effect of these reverse stock splits was to obtain the business
efficiencies available with fewer minority shareholders. There was no
change in control or significant impact on stockholders' equity as a
result of these transactions.
During 1994, Metropolitan became aware that an oil spill on
property adjacent to its headquarters, may have migrated under the
headquarters facility. The spill has emanated from a steam plant which
is no longer operating, which was operated by and is owned by The
Washington Water Power Company. The steam plant is located
approximately one and one-half blocks from the headquarter's facility.
The Washington Water Power Company has acknowledged responsibility for
the spill and is in the process of identifying the extent of it and
analyzing appropriate remedial measures. Metropolitan does not expect
a significant impact on its operations as a result of this event.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
Page
Reports of Independent Certified
Public Accountants...................................
Consolidated Balance Sheets...............................
Consolidated Statements of Income.........................
Consolidated Statements of Stockholders' Equity...........
Consolidated Statements of Cash Flows.....................
Notes to Consolidated Financial Statements................
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Metropolitan Mortgage &
Securities Co., Inc. for the year ended September 30, 1992. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows for the year ended September 30, 1992 of Metropolitan
Mortgage & Securities Co., Inc. in conformity with generally accepted
accounting principles.
/s/ BDO Seidman
BDO Seidman
Spokane, Washington
December 7, 1992.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
We have audited the accompanying consolidated balance
sheets of Metropolitan Mortgage & Securities Co., Inc. and
subsidiaries as of September 30, 1994 and 1993, and the related
consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Metropolitan Mortgage &
Securities Co., Inc. and subsidiaries as of September 30, 1994
and 1993 and the consolidated results of their operations and
their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1, the Company changed its methods of
accounting for its investment in certain debt and equity
securities, repossessed real property and income taxes in 1993.
/S/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Spokane, Washington
November 21, 1994
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1994 and 1993
____________
<TABLE>
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
Cash and cash equivalents $ 29,275,716 $ 72,903,375
Investments (Notes 6 and 7):
Available-for-sale securities,
at market 89,070,866 104,005,322
Held-to-maturity securities, at
amortized cost 200,179,999 120,806,340
Accrued interest on investments 3,311,822 2,807,245
-------------- -------------
Total cash and investments 321,838,403 300,522,282
-------------- -------------
Real estate contracts and mortgage
notes receivable, net (Notes 2 and 7) 567,256,298 562,440,005
Real estate held for sale and development,
including foreclosed real estate received
in satisfaction of debt of $40,429,745 and
$45,624,903, respectively (Notes 3 and 7) 76,765,465 76,268,847
-------------- -------------
Total real estate assets 644,021,763 638,708,852
Less allowance for losses on real
estate assets (Note 4) (9,108,383) (10,598,491)
-------------- -------------
Net real estate assets 634,913,380 628,110,361
-------------- -------------
Other assets:
Deferred costs (Notes 8 and 11) 74,107,517 73,446,671
Land, buildings and equipment, net of
accumulated depreciation (Note 5) 9,586,595 10,173,490
Other assets, net of allowances of
$193,497 and $172,843,
respectively 22,844,008 19,704,971
-------------- --------------
Total other assets 106,538,120 103,325,132
-------------- --------------
Total assets $1,063,289,903 $1,031,957,775
============== ==============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
September 30, 1994 and 1993
____________
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
<S> <C> <C>
Liabilities:
Life insurance and annuity reserves (Note 12) $ 744,644,625 $744,631,883
Debenture bonds and accrued interest (Note 8) 199,376,783 229,823,843
Debt payable (Note 7) 62,123,139 4,672,729
Accounts payable and accrued expenses 12,756,072 8,215,470
Deferred income taxes (Note 10) 10,304,980 9,726,445
Minority interest in consolidated
subsidiaries 1,458,980 2,105,916
------------ ------------
Total liabilities 1,030,664,579 999,176,286
------------ ------------
Commitments and contingencies (Notes 2, 3,
9 and 12)
Stockholders' equity (Notes 9 and 13):
Preferred stock, $10 par (liquidation
preference $43,331,750 and $42,041,130,
respectively) 21,436,910 21,402,599
Subordinate preferred stock, no par -- --
Common stock, $2,250 par 296,621 310,485
Additional paid-in capital 10,981,492 9,754,510
Retained earnings 2,745,678 778,260
Net unrealized gains (losses) on investments, net of
income taxes of $1,445,502 (Note 6) (2,835,377) 535,635
-------------- ------------
Total stockholders' equity 32,625,324 32,781,489
-------------- ------------
Total liabilities and stockholders' equity $1,063,289,903 $1,031,957,775
============== ==============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 2,958,000 $ 2,642,000 $ 2,744,000
Interest on receivables 56,420,184 56,499,817 52,226,737
Earned discount on receivables 13,790,211 14,542,834 14,437,196
Other investment interest 16,715,517 17,331,183 17,485,699
Real estate sales 40,023,974 20,941,094 22,025,378
Gain on insurance settlement
(Note 16) 203,691 4,025,543
Fees, commissions, service and
other income 4,992,505 4,820,623 4,416,928
Realized net gains on sales of
investments 1,111,974 12,012,475 5,760,313
Realized net gains on sales of
receivables (Note 2) 1,969,907 297,037 2,124,709
----------- ------------ ------------
Total revenues 138,185,963 133,112,606 121,220,960
----------- ------------ ------------
Expenses:
Insurance policy and annuity
benefits 41,918,907 49,150,502 50,839,440
Interest expense, net (Note 1) 19,895,252 19,442,004 21,299,321
Cost of real estate sold 38,496,776 20,912,013 21,139,584
Provision for losses on real
estate assets (Note 4) 5,533,193 6,596,933 3,886,894
Salaries and employee benefits 8,846,677 8,268,962 8,703,033
Commissions to agents 8,430,654 7,719,035 12,387,981
Other operating and underwriting
expenses 7,420,022 12,096,137 9,298,099
Less amount capitalized as
deferred costs, net of
amortization (Note 11) (1,050,279) (4,053,727) (11,494,878)
----------- ------------ ------------
Total expenses 129,491,202 120,131,859 116,059,474
----------- ------------ ------------
Income before income taxes, minority
interest, extraordinary item and
cumulative effect of change in
accounting principle 8,694,761 12,980,747 5,161,486
Provision for income taxes (Note 10) (2,992,476) (4,422,206) (1,871,175)
----------- ------------ ------------
Income before minority interest,
extraordinary item and
cumulative effect of change
in accounting principle 5,702,285 8,558,541 3,290,311
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, Continued
for the years ended September 30, 1994, 1993 and 1992
____________
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Income of consolidated subsidiaries
allocated to minority stockholders (224,529) (255,483) (363,387)
----------- ------------ ------------
Income before extraordinary item and
cumulative effect of change in
accounting principle 5,477,756 8,303,058 2,926,924
Extraordinary item - utilization of
net operating loss carryforwards
(Note 10) 651,103
Cumulative effect of change in the
method of accounting for income
taxes (Note 10) (4,300,000)
----------- ------------ ------------
Net income 5,477,756 4,003,058 3,578,027
Preferred stock dividends (3,423,326) (3,312,997) (3,399,382)
----------- ------------ ------------
Income applicable to common
stockholders $ 2,054,430 $ 690,061 $ 178,645
=========== ============ ============
Income (loss) per common share (Note 9):
Before extraordinary item and
cumulative effect of change in
accounting principle $ 14,996 $ 37,239 $ (3,579)
Extraordinary item 4,932
Cumulative effect of change in
accounting principle (32,089)
----------- ----------- ------------
Net income per common share $ 14,996 $ 5,150 $ 1,353
=========== =========== ============
Weighted average number of shares
of common stock outstanding (Note 1) 137 134 132
=========== =========== ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1994, 1993 and 1992
Additional Net Unrealized
Preferred Common Paid-in Gains (Losses) Retained
Stock Stock Capital on Investments Earnings
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1991 $22,828,857 $296,985 $ 4,987,716 $ 1,251,166 $ --
Net income 3,578,027
Net change in unrealized gains (losses)
on investments (1,322,713)
Cash dividends, preferred (variable rate) (3,399,382)
Stock acquired and retired (210,301 shares) (2,103,007) (1,576,776)
Sale of variable rate preferred
stock, net (38,995 shares) 389,945 3,329,443
----------- -------- ----------- ----------- -----------
Balance, September 30, 1992 21,115,795 296,985 6,740,383 (71,547) 178,645
Net income 4,003,058
Adoption of SFAS No. 115, net of
income taxes of $275,933 (Note 6) 607,182
Cash dividends, common ($675 per share) (90,446)
Cash dividends, preferred (variable rate) (3,312,997)
Stock acquired and retired
(6,094 shares) (60,936)
Sale of common stock (6 shares) 13,500
Sale of variable rate preferred
stock, net (34,744 shares) 347,740 3,014,127
----------- -------- ----------- ----------- -----------
Balance, September 30, 1993 21,402,599 310,485 9,754,510 535,635 778,260
Net income 5,477,756
Net change in unrealized gains (losses)
on available-for-sale securities,
net of income taxes of $1,721,435 (3,371,012)
Cash dividends, common ($675 per share) (87,012)
Cash dividends, preferred (variable rate) (3,423,326)
Redemption and retirement of stock
(14,470 shares) (144,699) (353,743)
Redemption and retirement of stock
(6 shares) and change in minority
interest (Note 1) (13,864) ( 12,914)
Sale of variable rate preferred
stock, net (17,901 shares) 179,010 1,593,639
----------- -------- ------------ ------------ -----------
Balance, September 30, 1994 $21,436,910 $296,621 $ 10,981,492 $(2,835,377) $ 2,745,678
=========== ======== ============ ============ ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1994, 1993 and 1992
____________
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,477,756 $ 4,003,058 $ 3,578,027
Adjustments to reconcile net income
to net cash provided by operating
activities:
Proceeds from sale of trading
securities 1,064,997,088
Purchase of trading securities (1,064,712,932)
Realized net gains on sale of
investments and receivables (3,081,881) (12,309,512) (7,885,022)
Gain on sale of real estate (1,527,198) (29,081) (885,794)
Gain on insurance settlement (203,691) (4,025,543)
Provision for losses on real
estate assets 5,533,193 6,596,933 3,886,894
Provision for losses on other
assets 204,650 682,406 835,950
Depreciation and amortization 2,066,365 1,559,325 1,836,201
Minority interests 224,529 255,483 363,387
Deferred income tax provision and
cumulative effect of change in
accounting for income taxes (Note 10) 2,644,170 8,951,041 775,404
Increase (decrease) from changes in:
Life insurance and annuity
reserves 39,322,517 47,365,277 50,127,749
Deferred costs, net (1,349,405) (4,504,243) (11,518,695)
Compound and accrued interest on
bonds (2,096,810) (214,005) 5,691,570
Other (1,537,118) (4,429,525) (5,357,748)
---------- ---------- ----------
Net cash provided by operating
activities 45,961,233 43,901,614 41,447,923
---------- ---------- ----------
Cash flows from investing activities:
Principal payments on real
estate contracts and mortgage
notes receivable 107,040,612 94,695,213 63,664,611
Proceeds from sales of real estate
contracts and mortgage notes
receivable 20,407,270 4,650,619 20,538,120
Acquisition of real estate contracts
and mortgage notes receivable (142,479,298) (156,576,783) (136,577,515)
Proceeds from insurance settlement 203,691 5,654,000
Proceeds from real estate sales 6,562,008 5,986,444 4,619,526
Proceeds from maturities of held-to-
maturity investments 8,875,268 4,885,694 74,271
Proceeds from sale of held-to-
maturity investments 144,384,719 26,844,053
Purchases of held-to-maturity
investments (5,263,021) (128,372,244) (21,081,437)
Proceeds from sales of available-
for-sale securities 367,846,050 621,966,932 915,736,513
Purchases of available-for-sale
securities (441,965,194) (590,094,217) (995,385,591)
Purchases of and costs
associated with real estate held (27,544,340) (12,636,507) (6,928,324)
Capital expenditures (471,097) (1,228,289) (2,221,409)
----------- ---------- ----------
Net cash used in investing
activities (106,788,051) (6,684,419) (130,717,182)
---------- ------------ ----------
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1994, 1993 and 1992
____________
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings from banks and others 237,784,188 18,445,475 19,997,000
Repayments to banks and others (180,522,843) (29,086,938) (22,252,794)
Receipts from life and annuity
products 85,332,591 83,763,646 159,537,751
Withdrawals of life and annuity
products (124,642,366) (101,126,340) (80,300,910)
Issuance of debenture bonds 56,954,423 67,672,071 50,049,946
Repayment of debenture bonds (55,193,403) (54,202,693) (27,037,866)
Issuance of preferred stock 1,772,649 3,361,867 3,719,388
Issuance of common stock 13,500
Redemption and retirement of stock (775,742) (60,936) (3,679,783)
Cash dividends (3,510,338) (3,403,443) (3,399,382)
---------- ---------- ----------
Net cash (used in) provided
by financing activities 17,199,159 (14,623,791) 96,633,350
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (43,627,659) 22,593,404 7,364,091
Cash and cash equivalents:
Beginning of year 72,903,375 50,309,971 42,945,880
------------ ------------ ------------
End of year $29,275,716 $ 72,903,375 $ 50,309,971
============ ============ ============
<FN>
See Note 14 for supplemental cash flow information.
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________
1. SUMMARY OF ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Metropolitan Mortgage & Securities Co., Inc. and its majority-
owned subsidiaries (the Company or Metropolitan). All
significant intercompany transactions and balances have been
eliminated in consolidation. Summit Securities, Inc. (Summit),
one of the Company's wholly-owned subsidiaries, was sold on
September 9, 1994. (See Note 17). Therefore, the results of
operations of Summit are included in the consolidated financial
statements for the periods prior to September 9, 1994. Also,
during the year ended September 30, 1994, some of the Company's
majority-owned subsidiaries had reverse stock splits and
fractional shares were redeemed and retired for cash.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated balance sheets and statements
of cash flows, the Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months
or less to be cash equivalents. Cash includes all balances on
hand and on deposit in banks and financial institutions. The
Company periodically evaluates the credit quality of its
depository financial institutions. Substantially all cash and
cash equivalents are on deposit with one financial institution
and exceed the FDIC insurance limit.
INVESTMENTS
The Company adopted the provisions of Statement of Financial
Accounting Standards No._115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities," on September
30, 1993. The effect of applying this new standard was to
increase stockholders' equity at September 30, 1993 by $607,182,
which is net of $275,933 of deferred income tax effect (see Note
6). The Company has classified its investments in debt and
equity securities as "available-for-sale," "held-to- maturity"
or "trading." The accounting policies related to these
investments are as follows:
Available for Sale Securities: Available for sale securities,
consisting primarily of government-backed securities, public
utility and corporate bonds, are carried at market value.
Realized gains and losses on the sale of these securities are
recognized on a specific identification basis in the
consolidated statement of income in the period the securities
are sold. Unrealized gains and losses are presented as a
separate component of stockholders' equity, net of related
income taxes.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
Held to Maturity Securities: Held to maturity securities,
consisting primarily of bonds and mortgage- and government-
backed securities having fixed maturities, are carried at
amortized cost. The Company has the ability and intent to
hold these investments until maturity.
Trading: Trading securities, consisting primarily of
government-backed securities and corporate bonds, are bought
and held principally for the purpose of selling them in the
near term and are recorded at market value. Realized and
unrealized gains and losses are included in the consolidated
statements of income.
For other than a temporary declinein the value of a common
stock, preferred stock or publicly traded bondbelow cost or
amortized cost, the investment is reduced to its net
realizable value, which becomes the new cost basis of the
investment. The amount of the reduction is reported as a
loss. Any recovery of market value in excess of the
investment's new cost basis is recognized as a realized gain
only upon sale, maturity or other disposition of the
investment. Factors which the Company evaluates in
determining the existence of an other than temporary decline
in value include the length of time and extent to which market
value has been less than cost; the financial condition and
near-term prospects of the issuer; and the intent and ability
of the Company to retain its investment for the anticipated
period of recovery in market value.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
Real estate contracts and mortgage notes held for investment
purposes are carried at amortized cost. Discounts originating
at the time of purchase, net of capitalized acquisition costs,
are amortized using the level yield (interest) method. For
contracts acquired after September 30, 1992, net purchase
discounts are amortized on an individual contract basis using
the level yield (interest) method over the remaining
contractual term of the contract. For contracts acquired
before October 1, 1992, the Company accounts for its portfolio
of discounted loans using anticipated prepayment patterns to
apply the level yield (interest) method of amortizing
discounts. Discounted contracts are pooled by the fiscal year
of purchase and by similar contract types. The amortization
period, which is approximately 78 months, estimates a constant
prepayment rate of 10-12 percent per year and scheduled
payments, which is consistent with the Company's prior
experience with similar loans and the Company's expectations.
In May 1993, Statement of Financial Accounting Standards No.
114 (SFAS No. 114), "Accounting by Creditors for Impairment
of a Loan," was issued. SFAS No. 114 requires that certain
impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or the fair value of the collateral. The
Company is required to adopt this new standard by October 1,
1995. The Company does not anticipate that the adoption of
SFAS No. 114 will have a material effect on the consolidated
financial statements.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
The Company holds real estate, stated at the lower of cost or
market, for purposes of development and resale. The Company
acquires real estate through direct purchaseand foreclosure.
Cost is determined by the purchase price of the real estate or,
for real estate acquired by foreclosure, at the lower of (a) the
fair value of the property at date of foreclosure less estimated
selling costs, or (b) cost (unpaid contract carrying value).
Periodically, the Company reviews its carrying values of real
estate held for sale and development by obtaining new or updated
appraisals and adjusts its carrying values to the lower of cost
or net realizable value, as necessary. Occasionally, properties
are rented, with the revenue being included in other income and
holding costs are charged to expense.
Profit on sales of real estate is recognized when the buyers'
initial and continuing investment is adequate to demonstrate
(1)_a commitment to fulfill the terms of the transaction, (2)_
collectibility of the remaining sales price due is reasonably
assured, and (3)_the Company maintains no continuing involvement
or obligation in relation to the property sold and transfers all
the risks and rewards of ownership to the buyer.
In April 1992, the Accounting Standards Division of the American
Institute of Certified Public Accountants issued Statement of
Position (SOP) No._92-3, "Accounting for Foreclosed Assets,"
which provides guidance on determining the accounting treatment
for foreclosed assets. SOP 92-3 requires that foreclosed assets
be carried at the lower of (a)_fair value minus estimated costs
to sell, or (b)_cost. The Company applied the provisions of SOP
92-3 effective October 1, 1992. The adjustment arising from the
initial application of SOP 92-3, was approximately $725,000
before the application of related income taxes, and is included
as a charge to continuing operations for the year ended
September 30, 1993.
ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS
The established allowances for losses on real estate assets
include amounts for estimated probable losses on both real
estate held for sale and development and receivables. Specific
allowances are established for all delinquent contract
receivables with net carrying values in excess of $100,000.
Additionally, the Company establishes general allowances, based
on historic delinquency and loss experience, for currently
performing receivables and smaller delinquent receivables.
Allowances for losses are determined based upon the net carrying
values of the contracts, including accrued interest.
Accordingly, the Company continues to accrue interest on
delinquent loans until foreclosure, unless the principal and
accrued interest on the loan exceeds the fair value of the
collateral, net of the estimated selling costs. The Company
obtains new or updated appraisals on appropriate delinquent
receivables, and adjusts the allowance for losses as necessary,
such that the net carrying value does not exceed estimated net
realizable value.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
DEFERRED COSTS
Commission expense and other insurance policy, annuity and
debenture issuance costs are deferred. For debentures,
amortization is computed over the expected term which ranges
from 6 months to 5 years, using the level yield (interest)
method. For annuities and life insurance, the portion of the
deferred policy acquisition cost that is estimated not to be
recoverable from surrender charges is amortized as a constant
proportion of the estimated gross profits associated with the
policies in force.
LAND, BUILDINGS, EQUIPMENT AND DEPRECIATION
Land, buildings and equipment are stated at cost. Buildings,
improvements, furniture and equipment are depreciated using both
straight-line and accelerated methods over their estimated
useful lives which, as to buildings and improvements, range from
5 to 40 years, and as to furniture and equipment, range from 3
to 10 years. Repairs, maintenance and minor renewals are
charged to expense as incurred. When assets are sold or
retired, the costs and related accumulated depreciation are
eliminated from the accounts and any resulting gain or loss is
reflected in operations.
COMPUTER SOFTWARE COSTS
The Company capitalizes direct costs of enhancements to computer
software operating systems acquired for internal use. At
September 30, 1994, total enhancement costs of approximately
$4,714,000 have been capitalized. These costs are being
amortized over a ten-year period using the straight-line method.
INSURANCE AND ANNUITY RESERVES
Reserves for life insurance and annuities are equal to the sum
of the account balances including deferred revenue charges.
Based on past experience, consideration is given in actuarial
calculations to the number of policyholder and annuitant deaths
that might be expected, policy lapses, surrenders and
terminations.
RECOGNITION OF INSURANCE REVENUES
Premiums for universal life contracts and annuities are not
reported as revenue, but as life insurance and annuity reserves.
Revenues for these contracts and annuities are recognized either
upon assessment or over the estimated term . These revenues
include mortality expenses and surrender charges.
INTEREST COSTS
Interest costs associated with the development of real estate
projects are capitalized. During the years ended September 30,
1994, 1993 and 1992, the Company capitalized interest of
$2,151,651, $3,012,556 and $269,536, respectively.
<PAGE>
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES
In the fourth quarter of fiscal 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS No. 109), retroactive
to October 1, 1992. The cumulative effect of adopting SFAS No.
109 was a charge to operations of approximately $4,300,000.
SFAS No. 109 requires deferred tax liabilities and assets to be
determined based on the temporary differences between the
financial statement carrying amounts and tax bases of assets and
liabilities and tax attributes using enacted tax rates in effect
in the years in which the temporary differences are expected to
reverse. In 1992, the Company accounted for income taxes as
required by Accounting Principles Board Opinion No. 11.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by deducting preferred
stock dividends from net income and dividing the result by the
weighted average number of shares of common stock outstanding.
All weighted average shares outstanding and per share amounts
have been retroactively restated to reflect the reverse stock
split which occurred in fiscal 1994 (see Note 9). There were
no common stock equivalents or potentially dilutive securities
outstanding during any of the three years in the period ended
September 30, 1994.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1992 consolidated financial
statements have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on
net income or retained earnings as previously reported.
<PAGE>
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
Real estate contracts and mortgage notes receivable include
mortgages collateralized by property located throughout the United
States. At September 30, 1994, the Company held first position
liens associated with contracts and mortgage notes receivable with
a face value of approximately $588,000,000 (97%) and second or
lower position liens of approximately $18,000,000 (3%). At
September 30, 1994, approximately 28% of the face value of the
Company's real estate contracts and mortgage notes receivable are
collateralized by property located in the Pacific Northwest
(Washington, Alaska, Idaho, Montana and Oregon), approximately 21%
by property located in the Pacific Southwest (California, New
Mexico, Arizona and Nevada), approximately 14% by property located
in the Southwest (Texas and New Mexico) and approximately 8% in
the Southeast (Florida, Georgia, North Carolina and South
Carolina). The face value of the real estate contracts and
mortgage notes receivable range principally from $15,000 to
$300,000. At September 30, 1994, the Company had 59 receivables
aggregating approximately $39,900,000 which had face values in
excess of $300,000. No individual contract or note is in excess
of 0.5% of the total carrying value of real estate contracts and
mortgage notes receivables, and less than 4% of the contracts are
subject to variable interest rates. Contractual interest rates
for 90% of the face value of receivables fall within a range from
7% to 14% per annum. The weighted average contractual interest
rate on these receivables at September 30, 1994 is approximately
9.5%. Maturity dates range from 1994 to 2024.
The following is a reconciliation of the face value of real estate
contracts and mortgage notes receivable to the Company's carrying
value at September 30, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Face value of discounted receivables $502,313,634 $513,112,727
Face value of originated receivables 104,010,822 85,376,879
Unrealized discounts, net of
unamortized acquisition costs (46,988,424) (45,297,065)
Accrued interest receivable 7,920,266 9,247,464
------------ ------------
Carrying value $567,256,298 $562,440,005
============ ============
</TABLE>
The originated receivables are collateralized primarily by first
position liens and result from loans made by the Company to
facilitate the sale of its repossessed property. No unrealized
discounts are attributable to originated receivables.
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $19,000,000 and $25,850,000 at September_30, 1994
and 1993, respectively. Real estate contracts and mortgage notes
receivable with net carrying values of $18,437,363, $4,353,582 and
$18,413,411 were sold without recourse to various financial
institutions resulting in gains of $1,969,907, $297,037 and
$2,124,709 in fiscal 1994, 1993 and 1992, respectively.
Aggregate amounts of receivables (face value) expected to be
received, based upon estimated prepayment patterns, are as
follows:
<TABLE>
<CAPTION>
Fiscal year ending
September 30,
<S> <C>
1995 $ 76,958,000
1996 69,974,000
1997 63,707,000
1998 57,910,000
1999 52,667,000
Thereafter 285,108,456
------------
$606,324,456
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3. REAL ESTATE HELD FOR SALE AND DEVELOPMENT:
A detail of the Company's real estate held for sale and development by state as of September
30, 1994 is as follows:
Single- Multi-
Family Family
State Land Dwelling Dwelling Commercial Condominiums Total
<S> <C> <C> <C> <C> <C> <C>
Alabama $ 199,000 $ 199,000
Alaska $ 35,522 13,233 $ 79,868 128,623
Arizona 1,862,984 1,297,658 $ 143,000 $ 36,136 203,000 3,542,778
Arkansas 13,000 13,000
California 1,391,531 1,813,211 384,634 193,734 3,783,110
Colorado 292,000 1,192,820 1,484,820
Florida 594,296 130,000 724,296
Georgia 30,500 68,000 98,500
Hawaii 25,166,352 25,166,352
Idaho 11,933 58,000 69,933
Illinois 30,000 30,000
Iowa 163,227 163,227
Kansas 36,000 36,000
Maine 26,000 26,000
Maryland 99,500 99,500
Massachusetts 115,000 115,000
Michigan 233,919 40,000 273,919
Minnesota 9,900 275,968 80,782 366,650
Mississippi 24,000 24,000
Missouri 48,000 137,183 185,183
Montana 27,083 14,737 41,820
Nebraska 86,770 11,883 98,653
Nevada 19,000 62,500 81,500
New Jersey 499,000 145,000 274,000 135,000 1,053,000
New Mexico 58,280 433,410 60,759 552,449
New York 54,039 233,116 57,900 345,055
North Carolina 74,500 53,000 127,500
Ohio 107,150 107,150
Oklahoma 25,374 57,769 70,000 153,143
Oregon 30,658 166,469 197,127
Pennsylvania 17,500 89,000 106,500
South Carolina 234,035 234,035
South Dakota 37,951 15,000 52,951
Tennessee 228,517 59,507 288,024
Texas 36,649 907,403 23,000 967,052
Virginia 4,000 4,000
Washington 24,316,071 347,792 11,054,035 35,717,898
Wyoming 107,717 107,717
----------- ---------- ---------- ----------- ----------- -----------
Balances at
September 30,
1994 $28,502,992 $8,387,070 $ 662,424 $11,993,805 $27,219,174 $76,765,465
=========== ========== ========== =========== =========== ===========
Balances at
September 30,
1993 $26,734,375 $9,497,051 $1,070,081 $12,977,139 $25,990,201 $76,268,847
=========== ========== ========== =========== =========== ===========
<FN>
At September 30, 1994, the Company had approximately $59,000,000 invested in real estate
development projects and approximately $8,500,000 in commitments for construction associated
with these projects.
</TABLE>
<PAGE>
4. ALLOWANCES FOR LOSSES ON REAL ESTATE ASSETS:
The following is a summary of the changes in the allowances for
losses on real estate assets for the years ended September 30,
1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Beginning balance $10,598,491 $ 9,583,718 $ 7,657,684
Provisions 5,533,193 6,596,933 3,886,894
Charge-offs (7,023,301) (5,582,160) (1,960,860)
----------- ----------- -----------
Ending balance $ 9,108,383 $10,598,491 $ 9,583,718
=========== =========== ===========
During the fourth quarter of fiscal 1992, the Company increased its
provision for losses on real estate assets from $2,300,000 to $3,900,000.
This adjustment was made as the result of the Company obtaining current
appraisals on significant real estate properties held by the Company or
pledged as collateral on delinquent receivables.
</TABLE>
5. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings, equipment and related accumulated depreciation at
September 30, 1994 and 1993 consist of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Land $ 561,794 $ 561,794
Buildings and improvements 8,495,366 8,725,630
Furniture and equipment 8,836,714 8,684,055
----------- -----------
17,893,874 17,971,479
Less accumulated depreciation (8,307,279) (7,797,989)
----------- -----------
Total $ 9,586,595 $10,173,490
=========== ===========
</TABLE>
<PAGE>
6. INVESTMENTS:
As discussed in Note 1, effective September 30, 1993, the Company
adopted the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, the
Company evaluated its investments in certain debt and equity
securities and classified them as "Held-to-Maturity" or
"Available-for-Sale" based upon management's intent with respect
to the securities. Additionally, to facilitate the adoption of
SFAS No. 115, the Company restructured its investment portfolio to
better match the average terms of its investments in debt
securities with those of its debentures and annuities. During the
year ended September 30, 1994, the Company established a "trading"
portfolio. However, at September 30, 1994, there were no
investments remaining in the trading portfolio.
The Company is authorized to use financial futures
instruments for the purpose of hedging interest rate risk
relative to the securities portfolio potential trading
situations. In both cases, the futures transaction is
intended to reduce the risk associated with price movements
for a balance sheet asset. The insurance subsidiaries sell
securities "short" (the sale of securities which are not
currently in the portfolio and therefore must be purchased to
close out the sale agreement) as another means of hedging
interest rate risk, or to take a trading position in an
attempt to benefit from an anticipated movement in the
financial markets. There were no open short sales
transactions at September 30, 1994.
The Company also purchases collateralized mortgage
obligations (CMO's) for its investment portfolio. Such
purchases have been limited to tranches that perform in
concert with the underlying mortgages i.e., improving in
value with falling interest rates and declining in value with
rising interest rates. The Company has not invested in
"derivative products" that have been structured to perform in
a way that magnifies the normal impact of changes in interest
rates or in a way dissimilar to the movement in value of the
underlying securities. At September 30, 1994, the Company
was not a party to any derivative financial investments.
A summary of carrying and estimated market values of investments
at September 30, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Costs Gains Losses (Carrying Values)
<S> <C> <C> <C> <C>
Government backed
bonds $ 66,222,683 $(2,604,512) $ 63,618,171
Corporate bonds 25,151,875 $ 33,567 (710,150) 24,475,292
Utility bonds 999,109 (60,206) 938,903
------------ -------- ---------- ------------
Total fixed
maturities 92,373,667 33,567 (3,374,868) 89,032,366
Equity securities 47,700 (9,200) 38,500
------------ -------- ----------- ------------
Total $ 92,421,367 $ 33,567$(3,384,068) $ 89,070,866
============ ======== =========== ============
<CAPTION>
HELD-TO-MATURITY 1994
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Values) Gains Losses Market Values
<S> <C> <C> <C> <C>
Government backed
bonds $ 75,336,893 $ 33,048$ (7,989,247) $ 67,380,694
Corporate bonds 75,334,252 18,488 (3,867,922) 71,484,818
Utility bonds 10,698,231 2,089 (706,443) 9,993,877
Mortgage backed bonds 38,810,623 3,335 (2,933,099) 35,880,859
------------ -------- ------------ ------------
Total $200,179,999 $ 56,960$(15,496,711) $184,740,248
============ ======== ============ ============
</TABLE>
<PAGE>
6. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE 1993
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Costs Gains Losses (Carrying Values)
<S> <C> <C> <C> <C>
Government backed
bonds $ 59,129,706 $ 158,509 $ (85,082) $ 59,203,133
Corporate bonds 40,005,109 576,048 (6,837) 40,574,320
Utility bonds 3,981,107 108,912 4,090,019
------------ -------- ---------- ------------
Total fixed
maturities 103,115,922 843,469 (91,919) 103,867,472
Equity securities 134,700 3,150 137,850
------------ -------- ---------- ------------
Total $103,250,622 $846,619 $ (91,919) $104,005,322
============ ======== ========== ============
<CAPTION>
HELD-TO-MATURITY 1993
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Values) Gains Losses Market Values
<S> <C> <C> <C> <C>
Government backed
bonds $ 9,877,392 $ 126,680 $ (12,674) $ 9,991,398
Corporate bonds 57,573,905 363,989 (35,838) 57,902,056
Utility bonds 11,739,369 87,863 (38,585) 11,788,647
Mortgage-backed bonds 41,615,674 373,048 (100,296) 41,888,426
------------ ---------- ----------- ------------
Total $120,806,340 $ 951,580 $ (187,393) $121,570,527
============ ========== =========== ============
</TABLE>
All bonds held at September 30, 1994 and 1993 were performing in
accordance with their terms.
Net unrealized gains and losses on the available-for-sale
portfolio at September 30, 1994 and 1993 are reported as a
separate component of stockholders' equity, net of federal income
taxes. During the year ended September 30, 1994, the Company
transferred approximately $79,000,000 of investments from the
available-for-sale portfolio to the held-to-maturity portfolio.
At the date of transfer, these investments had net unrealized
losses of approximately $1,060,000 before income taxes. These
unrealized losses are being amortized over the term of the
investments transferred using the interest method. At September
30, 1994, the remaining unamortized loss of approximately
$624,000, net of income taxes, is reported as a reduction of
stockholders' equity.
The amortized costs and estimated market values of debt securities
held-to-maturity and available-for-sale at September 30, 1994, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
<PAGE>
Available-for-sale debt securities:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Values
<S> <C> <C>
Due in one year or less $ 13,104,574 $ 12,962,591
Due after one year through five years 32,898,402 31,565,305
Due after five years through ten years 43,370,691 44,504,470
------------ ------------
$ 92,373,667 $ 89,032,366
============ ============
</TABLE>
Held-to-maturity debt securities:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Values
<S> <C> <C>
Due after one year through
five years $ 86,394,544 $ 82,298,630
Due after five years through
ten years 73,974,820 65,533,809
Due after ten years 1,000,012 1,026,950
------------ ------------
161,369,376 148,859,389
Mortgage-backed bonds 38,810,623 35,880,859
------------ ------------
$200,179,999 $184,740,248
============ ============
</TABLE>
The Company intends to maintain an available-for-sale portfolio
which may be shifted between investments of differing types and
maturities to attempt to maximize market returns without assuming
unacceptable levels of credit risk. Future purchases assigned to
the held-to-maturity portfolio will be to replace maturing
investments, or increase the overall size of the portfolio (while
maintaining its overall composition).
7. DEBT PAYABLE:
<TABLE>
<CAPTION>
At September 30, 1994 and 1993, debt payable consists of the following:
1994 1993
<S> <C> <C>
Reverse repurchase agreements with
various securities brokers, interest
at 4.3% to 5.25% per annum; due on
October 3, 1994; collateralized
by $64,000,000 in U.S. Treasury bonds $ 60,730,000
Reverse repurchase agreements with a
bank, interest at 3 3/8% per annum;
due and repaid October 1, 1993;
collateralized by $1,000,000 in U.S.
Treasury bonds $ 1,000,000
Real estate contracts and mortgage
notes payable, interest rates
ranging from 3% to 14%, due in
installments through 2020;
collateralized by senior liens
on the Company's real estate
contracts, mortgage notes and
real estate held for sale 1,366,687 3,635,396
Accrued interest payable 26,452 37,333
----------- -----------
$62,123,139 $ 4,672,729
=========== ===========
</TABLE>
<PAGE>
7. DEBT PAYABLE, CONTINUED:
Aggregate amounts of principal payments due on debt payable at
September 30, 1994 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending
September 30,
<S> <C>
1995 $61,036,000
1996 195,000
1997 186,000
1998 188,000
1999 191,000
Thereafter 327,139
-----------
$62,123,139
===========
</TABLE>
8. DEBENTURE BONDS:
At September 30, 1994 and 1993, debenture bonds consist of the
following:
<TABLE>
<CAPTION>
Annual Principally
Interest Maturing
Rates In 1994 1993
<S> <C> <C> <C>
5% to 6% 1995, 1996
and 1997 $ 9,975,000 $ 438,000
6% to 7% 1995, 1996
and 1998 4,896,000 13,126,000
7% to 8% 1999 35,545,000 5,329,000
8% to 9% 1997 and 1998 57,045,000 65,434,000
9% to 10% 1995, 1996
and 1997 62,349,000 72,484,000
10% to 11% 1998 and 1999 2,856,000 41,133,000
------------ ------------
172,666,000 197,944,000
Compound and accrued interest 26,710,783 31,879,843
------------ ------------
$199,376,783 $229,823,843
============ ============
</TABLE>
The 1994 outstanding debentures consist entirely of debentures
issued by the parent company. The 1993 outstanding debentures
consist of $21,959,425 issued by the Company's former consolidated
subsidiary, Summit Securities, Inc., and $207,864,418 issued by
the parent company.
<PAGE>
8. DEBENTURE BONDS, CONTINUED:
Unamortized debenture issuance costs incurred in connection with
the sale of debentures aggregated $3,032,875 and $3,422,308 at
September 30, 1994 and 1993, respectively, and are included in
deferred costs on the consolidated balance sheets.
Debenture bonds at September 30, 1994 mature as follow:
<TABLE>
<CAPTION>
Fiscal year ending
September 30,
<S> <C>
1995 $ 53,277,000
1996 17,720,000
1997 42,942,000
1998 46,367,000
1999 35,401,000
Thereafter 3,669,783
------------
$199,376,783
============
</TABLE>
At September 30, 1994, as required by Washington State regulation,
the parent company could not have more than an aggregate total of
$251,300,000 in outstanding debentures, (including accrued and
compound interest) and outstanding preferred stock (based on
original sales price). At September 30, 1994, the Company had
total outstanding debentures of approximately $199,377,000 and
total outstanding preferred stock of approximately $43,332,000.
<PAGE>
9. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
Authorized 1994 1993
Shares Amount Shares Amount Shares
Preferred
Stock
<S> <C> <C> <C> <C> <C>
Series A 750,000 $ -- -- $ -- --
Series B 200,000 -- -- -- --
Series C 1,000,000 4,484,423 448,442 4,490,440 449,044
Series D 1,375,000 6,879,192 687,919 6,962,163 696,216
Series E 5,000,000 10,073,295 1,007,330 9,949,996 995,000
--------- ----------- --------- --------- -------
8,325,000 21,436,910 2,143,691 21,402,599 2,140,260
========= =========== ========= =========== =========
<CAPTION>
Common
Stock
<S> <C> <C> <C> <C> <C>
Class A 222 $292,121 130 $ 297,918 132
Class B 222 4,500 2 12,567 6
--------- ----------- --------- ----------- ---------
444 $ 296,621 132 $ 310,485 138
========= =========== ========= =========== =========
<CAPTION>
Subordinate
Preferred
Stock
<S> <C> <C> <C> <C> <C>
1,000,000 $ -- -- $ -- --
========= =========== ========= =========== =========
The Series E preferred stock has been issued in the following sub-series:
</TABLE>
<TABLE>
<CAPTION>
Issued and Outstanding Shares
1994 1993
Amount Shares Amount Shares
<S> <C> <C> <C> <C>
Series E-1 $ 7,640,542 764,054 $ 7,656,824 765,683
Series E-2 455,782 45,578 456,906 45,691
Series E-3 1,083,669 108,367 1,098,580 109,858
Series E-4 629,923 62,992 641,944 64,194
Series E-5 137,455 13,746 95,742 9,574
Series E-6 125,924 12,593
------------ --------- ------------ ---------
$ 10,073,295 1,007,330 $ 9,949,996 995,000
=========== ========= =========== =========
</TABLE>
<PAGE>
9. STOCKHOLDERS' EQUITY, CONTINUED:
PREFERRED STOCK
Series A preferred stock has a par value of $1 per share, is
cumulative and the holders thereof are entitled to receive
annual dividends at the annual rate of 8 1/2%. Series B
preferred stock is cumulative and the holders thereof are
entitled to receive monthly dividends at the annual rate of
two percentage points over the rate payable on six-month U.S.
Treasury Bills as determined by the Treasury Bill auction last
preceding the monthly dividend declaration. Series C, D and
E-1 are also cumulative and the holders thereof are entitled
to receive monthly dividends at an annual rate equal to the
highest of the "Treasury Bill Rate," the "Ten Year Constant
Maturity Rate" or the "Twenty Year Constant Maturity Rate"
determined immediately prior to declaration date. The Board
of Directors may, at its sole option, declare a higher
dividend rate; however, dividends shall be no less than 6% or
greater than 14% per annum. Series E-2, E-3, E-4, E-5 and E-6
are also cumulative and the holders thereof are entitled to
receive monthly dividends at an annual rate of one-half of one
percent more than the rate in effect for the E-1 series;
however, dividends shall be no less than 6% or greater than
14% per annum.
Series B, C, D and E-1 preferred stock have a par value of
$10, were sold to the public for $10 and are callable at the
sole option of the Board of Directors at $10.50 per share
reduced pro-ratably to $10.20 per share as of the date five
years from the date of issuance. Series E-2, E-3, E-4, E-5
and E-6 preferred stock have a par value of $10 per share and
were sold to the public at $100 per share. Series E-2, E-3,
E-4 and E-5 preferred shares are callable at the sole option
of the Board of Directors at $100 per share. Series E-6
shares are callable at the sole option of the Board of
Directors at $102 per share prior to January 1, 1995 and $100
per share thereafter.
All preferred stock series have liquidation preferences equal
to their issue price, are non-voting and are senior to the
common shares as to dividends. All preferred stock dividends
are based upon the original issue price.
At September 30, 1994, as required by regulation, the
Company's aggregate total outstanding preferred stock and
debentures was restricted (see Note 8).
SUBORDINATE PREFERRED STOCK
Subordinate preferred shares, no par value, shall be entitled
to receive dividends as authorized by the Board of Directors,
provided that such dividend rights are subordinate and junior
to all series of preferred stock. Subordinate preferred
shares shall be entitled to distributions in liquidation in
such priority as established by the Board of Directors prior
to the issuance of any such shares. These liquidation rights
shall at all times be subordinate and junior to all series of
preferred stock. At September 30, 1994 and 1993, no
subordinate preferred stock had been issued.
<PAGE>
9. STOCKHOLDERS' EQUITY, CONTINUED:
COMMON STOCK
Prior to September 30, 1994, Class A and B common stock had a
par value of $1 per share. On September 30, 1994, the
Company's Board of Directors authorized a 2,250:1 reverse
stock split and changed the par value from $1 per share to
$2,250 per share. All shares in the preceding tables reflect
the reverse stock split. Class B is senior to Class A common
stock as to liquidation up to the amount of the original
investment. Any remaining amounts are then distributed pro
rata to Class A and Class B common stockholders. Class B
common stock has no voting rights.
Dividend restrictions are imposed by regulatory authorities on
the insurance subsidiaries in which the Company has a 96.5% or
greater stock ownership interest. These restrictions are
limited to the unassigned statutory surplus of the insurance
subsidiaries which totaled approximately $6,827,000 at
September 30, 1994 (see Note 13).
10. INCOME TAXES:
The Company files a consolidated federal income tax return with
all of its subsidiaries.
<PAGE>
10. INCOME TAXES, CONTINUED:
The income tax effect of the temporary differences giving rise
to the Company's deferred tax assets and liabilities as of
September 30, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1994
Asset Liability
<S> <C> <C>
Allowance for contract losses $ 2,089,689
Reserves on repossessed real estate 817,425
Deferred loan fees $23,804,082
Office properties and equipment 1,091,948
Deferred acquisition costs 22,676,216
Annuity and life insurance reserves 8,528,029
Guaranty fund reserve 1,031,728
Investments 155,924
Other 1,840,808
Net operating loss carryforwards
and credits 26,797,127
----------- -----------
Total deferred income taxes $39,263,998 $49,568,978
=========== ===========
<CAPTION>
1993
Asset Liability
<S> <C> <C>
Allowance for contract losses $ 2,308,767
Reserves on repossessed real estate 1,980,004
Deferred loan fees $18,503,003
Office properties and equipment 1,207,644
Deferred acquisition costs 22,392,995
Annuity and life insurance reserves 8,276,996
Guaranty fund reserve 1,291,898
Investments 275,933
Other 1,040,584
Net operating loss carryforwards
and credits 19,836,049
----------- -----------
Total deferred income taxes $33,693,714 $43,420,159
=========== ===========
</TABLE>
No valuation allowance has been established to reduce deferred tax
assets as it is more likely than not that these assets will be
realized due to the future reversals of existing taxable temporary
differences.
Following is a reconciliation of the provision for income taxes to
an amount as computed by applying the statutory federal income tax
rate to income before income taxes:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Federal income
taxes at statutory rate $ 2,956,219 $ 4,413,454 $ 1,754,905
State taxes and other 36,257 8,752 116,270
----------- ----------- ---------
Income tax provision $ 2,992,476 $ 4,422,206 $ 1,871,175
=========== =========== ===========
<CAPTION>
The components of the provision for income taxes are as follows:
1994 1993 1992
<S> <C> <C> <C>
Current $ 348,306 $ 22,022
Deferred 2,644,170 $ 4,422,206 1,849,153
----------- ----------- -----------
$ 2,992,476 $ 4,422,206 $ 1,871,175
=========== =========== ===========
</TABLE>
<PAGE>
10. INCOME TAXES, CONTINUED:
The deferred provision for income taxes for each of the fiscal
years ended September 30, 1994, 1993 and 1992 results from the
following:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Underwriting fee $ 4,180,010
Insurance policy
acquisition costs $ 283,221 $ 1,320,943 $ 2,690,390
Earned discounts, net of
contract acquisition costs 5,301,079 608,033 2,076,756
Allowance for possible
losses 219,076 (92,997) (809,512)
Life insurance reserves (251,033) (1,238,082) (1,024,289)
Guaranty fund assessment 260,170 (1,342,898)
Involuntary conversion 603,940
Basis difference of
investments 2,960,291 (447,045)
Capitalized software (115,696) 196,493
Net operating losses
used to change deferred tax liabilities (6,961,078)
5,417,759 (5,264,202)
Reduction in deferred taxes due
to sale of Summit Securities,
Inc. 344,200
----------- ----------- -----------
$ 2,644,170 $ 4,422,206 $ 1,849,153
=========== =========== ===========
</TABLE>
At September 30, 1994, the Company and its subsidiaries had unused
net operating loss carryforwards, for income tax purposes, as
follows:
<TABLE>
<CAPTION>
Non-Life Life
Group Net Company Net Net
Operating Operating Operating
Expiring in Losses Losses Losses
<S> <C> <C> <C>
1998 $ 992,379 $ 992,379
1999 6,935,241 6,935,241
2000 1,558,762 1,558,762
2001 12,774,016 12,774,016
2002 1,498,000 1,498,000
2003 4,959,503 4,959,503
2004 7,334,008 7,334,008
2005 6,409,762 6,409,762
2006 5,612,555 5,612,555
2007 945,516 $ 3,945,397 4,890,913
2008 23,278,814 23,278,814
----------- ----------- -----------
$49,019,742 $27,224,211 $76,243,953
=========== =========== ===========
</TABLE>
Federal tax regulations require non-life net operating losses to
be offset first against non-life income for the tax year and then
against a maximum of 35% of taxable life income for the year, if
any.
During the year ended September 30, 1992, the Company recognized
extraordinary credits of approximately $651,000 for the
utilization of net operating loss carryforwards of approximately
$1,915,000.
At September 30, 1994, the Company has alternative minimum tax
credits of $308,000 and general business tax credit carryforwards
of $167,000 available to reduce regular income taxes payable.
<PAGE>
11. DEFERRED COSTS:
An analysis of deferred costs related to policy acquisition and
debenture issuance for the years ended September 30, 1994 and 1993
is as follows:
<TABLE>
<CAPTION>
1994
Policy Debenture
Acquisition Issuance Total
<S> <C> <C> <C>
Balance at beginning
of year $70,024,363 $ 3,422,308 $73,446,671
Deferred during year:
Commissions 5,572,146 1,381,525 6,953,671
Other expenses 2,493,703 510,588 3,004,291
----------- ----------- -----------
Total deferred 78,090,212 5,314,421 83,404,633
Amortized during year (7,015,570) (1,592,987) (8,608,557)
Reduction upon sale
of subsidiary (688,559) (688,559)
----------- ----------- -----------
Balance at end of year $71,074,642 $3,032,875 $74,107,517
=========== =========== ===========
<CAPTION>
1993
Policy Debenture
Acquisition Issuance Total
<S> <C> <C> <C>
Balance at beginning
of year $65,970,636 $ 2,696,870 $68,667,506
Deferred during year:
Commissions 5,114,640 1,786,411 6,901,051
Other expenses 3,126,410 359,077 3,485,487
----------- ----------- -----------
Total deferred 74,211,686 4,842,358 79,054,044
Amortized during year (4,187,323) (1,420,050) (5,607,373)
----------- ----------- -----------
Balance at end of year $70,024,363 $ 3,422,308 $73,446,671
=========== =========== ===========
</TABLE>
<PAGE>
12. LIFE INSURANCE AND ANNUITY RESERVES:
Annuity reserves are based on the annuity contract terms. Such
terms call for reserves covering all principal paid plus accrued
interest. Annuity contract interest rates ranged from 3.85% to
6.7% and 4.3% to 8.5% during the years ended September 30, 1994
and 1993, respectively. Interest assumptions used to compute life
reserves ranged from 5.25% to 8.0% and 5.0% to 9.5% during the
years ended September 30, 1994 and 1993, respectively.
The Company's subsidiaries have ceded a portion of certain life
insurance risks and the related premiums to other companies.
These insurance transactions permit the Company to recover defined
portions of losses from claims on life insurance policies issued
by the Company. The reinsured risks are treated as though they
are risks for which the subsidiaries are not liable. Life
insurance reserves, as reported in these financial statements, do
not include reserves on the ceded business. The face value of
life insurance policies ceded to other companies was approximately
$69,311,000 and $77,970,000 at September 30, 1994 and 1993,
respectively. Life insurance premiums ceded were $387,503 and
$478,724 for fiscal 1994 and 1993, respectively. The Company is
contingently liable for claims on ceded life insurance business in
the event the reinsuring companies do not meet their obligations
under those reinsurance agreements.
All states in which the Company's insurance subsidiaries operate
have laws requiring solvent life insurance companies to pay
assessments to protect the interests of policyholders of insolvent
life insurance companies. Assessments are levied on all member
insurers in each state based on a proportionate share of premiums
written by member insurers in the lines of business in which the
insolvent insurer engaged. A portion of these assessments can be
offset against the payment of future premium taxes. However,
future changes in state laws could decrease the amount available
for offset.
<PAGE>
12. LIFE INSURANCE AND ANNUITY RESERVES, CONTINUED:
The net amounts expensed by the Company's life insurance
subsidiaries for guaranty fund assessments and charged to
operations for the years ended September 30, 1994, 1993 and 1992
were $192,000, $4,142,000 and $62,000, respectively. In the
fourth quarter of fiscal 1993, the Company accrued $3,950,000 of
estimated future assessments based on known insolvencies. This
estimate was based on information provided by the National
Organization of Life and Health Insurance Guaranty Associations
regarding insolvencies occurring during 1988, 1989 and 1990.
During the year ended September 30, 1994, the Company reduced its
estimate of these losses by $588,000 based upon updated
information from the National Organization of Life and Health
Insurance Guaranty Associations. These estimates are subject to
future revisions based upon the ultimate resolution of the
insolvencies and resultant losses. The Company cannot reasonably
estimate the additional effects, if any, upon its future
assessments pending the resolution of the above described
insolvencies. Additionally, the Company does not believe that the
amount of future assessments associated with known insolvencies
after 1990 will be material to its financial condition or results
of operations. The amount of guaranty fund assessment that was
accrued in 1993 and revised in 1994 has been recorded net of a 7%
discount rate applied to the estimated payment term of
approximately seven years. The remaining unamortized discount
associated with this accrual was approximately $1,069,500 at
September 30, 1994.
<PAGE>
13. STATUTORY ACCOUNTING (UNAUDITED):
Life insurance subsidiaries of the Company are required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare these
statutory financial statements differ from generally accepted
accounting principles (GAAP). Selected differences between the
statutory and the GAAP financial statements for these insurance
subsidiaries as of and for the years ended September 30, 1994,
1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Statutory GAAP
<S> <C> <C>
Stockholders' equity:
1994 $ 48,206,960 $ 77,142,373
1993 43,557,848 76,813,538
1992 45,164,819 74,773,456
Net income:
1994 $ 12,544,070 $ 8,449,317
1993 8,556,467 8,838,248
1992 14,229,287 13,774,833
Unassigned statutory surplus
and retained earnings:
1994 $ 6,826,960 $38,559,708
1993 8,677,848 41,430,266
1992 10,284,819 40,017,018
</TABLE>
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
The following table summarizes interest costs, net of amounts
capitalized and income taxes paid during the years:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Interest, net of amounts
capitalized $ 19,696,361 $19,557,391 $20,846,655
Income taxes 333,154 45,100 444,668
</TABLE>
<PAGE>
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
Non-cash investing and financing activities of the Company during
the years ended September 30, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Loans to facilitate
the sale of real
estate held $ 33,461,966 $14,954,650 $17,892,602
Transfers between
annuity products 22,248,418 3,770,870 11,133,034
Transfer of investments from
available-for-sale
portfolio to held-to-
maturity portfolio 79,001,795
Transfer of property
from land,
buildings and
equipment to real
estate held for
sale and develop-
ment 258,894 53,456
Change in net
unrealized (losses)
gains on investments 3,371,012 607,182 (1,322,713)
Conversion of
accounts payable
to debt payable 420,000
Conversion of
investment in
corporate bonds
to equity
securities 184,309 1,179,916
Real estate held
for sale and
development
acquired through
foreclosure 19,245,977 17,242,436 14,778,024
Debt assumed upon
foreclosure of
real estate
contracts 129,062 557,510 545,214
</TABLE>
<PAGE>
14. SUPPLEMENTAL DISCLOSURES FOR STATEMENT OF CASH FLOWS, CONTINUED:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Assumption of
other debt
payable in
connection with
the acquisition
of real estate
contracts and
mortgage notes $ 191,213 $ 666,684 $ 1,940,543
Reduction in assets and
liabilities associated
with sale of subsidiary:
Real estate contracts and
mortgage notes receivable 27,267,736
Real estate held for sale 503,000
Allowance for losses on
real estate assets 287,439
Deferred costs 688,559
Other assets 22,176
Debenture bonds and
accrued interest 30,111,270
Debt payable 120,953
Accounts payable and other 318,574
</TABLE>
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined using available market
information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data and to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value. Potential income tax
ramifications related to the realization of unrealized gains and
losses that would be incurred in an actual sale and/or settlement
have not been taken into consideration.
PUBLICLY TRADED SECURITIES - Fair value is determined by quoted
market prices.
REAL ESTATE CONTRACTS - For loans, the discount rate is
estimated using rates currently offered for loans of similar
characteristics that reflect the credit and interest rate risk
inherent in the loan. For residential mortgage loans, fair
value is estimated by discounting contractual cash flows
adjusted for prepayment estimates. The prepayment estimates are
based upon internal historical data.
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
DEBENTURE BONDS AND DEBT PAYABLE - The fair value of debenture
bonds payable is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates
currently offered for debt with similar remaining maturities.
OTHER ASSETS AND LIABILITIES - The carrying amount of financial
instruments in these classifications, including insurance policy
loans receivable, is a reasonable estimate of fair value.
Policy loans are charged interest on a variable rate subject to
current market conditions, thus carrying amounts approximate
fair value.
The estimated fair values of the following financial instruments
as of September 30, 1994 are as follows:
<TABLE>
<CAPTION>
Carrying
Amounts Fair Value
<S> <C> <C>
Financial assets:
Cash and cash equivalents $29,275,716 $29,276,716
Investments:
Available-for-sale securities 89,070,866 89,070,866
Held-to-maturity securities 200,179,999 184,740,248
Real estate contracts and
mortgage notes receivable 559,336,032 564,200,000
Financial liabilities:
Debenture bonds - principal and
compound interest 196,342,676 207,636,000
Debt payable - principal 62,096,687 62,175,000
</TABLE>
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for a significant portion of these financial instruments,
fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Accordingly, the estimates presented herein are not necessarily
indicative of what the Company could realize in a current market
exchange.
<PAGE>
16. GAIN ON INSURANCE SETTLEMENT:
In September 1992, the island of Kauai was struck by Hurricane
Iniki resulting in significant damage to the Company's Lawai Beach
Resort and other related properties. The Company sells time share
condominium units relating to this property. Insurance proceeds
for property damage exceeded the Company's carrying value of the
property by $4,025,543 and, accordingly, the Company recognized
this amount as a gain in fiscal 1993. Additional insurance
proceeds of $203,691 were received and recognized as a gain in
fiscal 1994.
17. RELATED PARTY TRANSACTIONS:
During the year ended September 30, 1993, the Company purchased a
building from the Chairman of the Board for $350,000. Subsequent
to the acquisition, the Company sold the building and recognized
a small gain.
During the year ended September 30, 1993, the Company acquired the
14% minority interest in one of its subsidiaries from the
Company's Chief Executive Officer for approximately $252,000.
On September 9, 1994, the Company sold its entire interest in one
of its subsidiaries, Summit Securities, Inc. (Summit), to National
Summit Corp., a Delaware corporation which is wholly owned by C.
Paul Sandifur, Jr., the Company's Chief Executive Officer. The
change in control was made pursuant to a reorganization wherein
Summit redeemed all the common shares held by its former parent
company. Summit redeemed the common shares for $3,600,000 paid in
cash to the Company. The sale price represented the approximate
net book value of Summit at the date of acquisition (see Note 14).
The Company is effectively controlled by C. Paul Sandifur, Jr.
through common stock ownership and voting control.
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Metropolitan Mortgage & Securities
Co., Inc. ("Metropolitan" or the "parent company") at September
30, 1994 and 1993 are as follows:
<TABLE>
<CAPTION> 1994 1993
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 9,454,853 $ 13,864,148
Investments 1,494,665 1,566,054
Real estate contracts and mortgage
notes receivable 49,750,653 51,026,354
Real estate held for sale and
development 39,158,411 39,968,058
Allowance for losses on real
estate assets (2,120,734) (5,200,024)
Equity in subsidiary companies 119,046,505 124,601,156
Land, buildings and equipment, net 8,943,539 9,213,765
Prepaid expenses and other assets, net 5,839,426 6,577,787
Accounts and notes receivable, net 1,006,300 500,473
Receivables from affiliates 26,339,624 21,347,285
------------ ------------
Total assets $258,913,242 $263,465,056
============ ============
LIABILITIES
Debenture bonds and accrued interest $199,376,783 $207,864,418
Debt payable 1,379,089 4,623,996
Accounts payable and accrued expenses 1,201,760 516,122
Deferred underwriting fee income 24,330,286 17,679,031
------------ ------------
Total liabilities 226,287,918 230,683,567
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $43,331,750 and
$42,041,130, respectively) 21,436,910 21,402,599
Subordinate preferred stock, no par
Common stock, $2,250 par 296,621 310,485
Additional paid-in capital 10,981,492 9,754,510
Retained earnings 2,745,678 778,260
Net unrealized gains (losses) on
investments (2,835,377) 535,635
------------ ------------
Total stockholders' equity 32,625,324 32,781,489
------------ ------------
Total liabilities and stockholders'
equity $258,913,242 $263,465,056
============ ============
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of income for the years
ended September 30, 1994, 1993 and 1992 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Interest and earned
discounts $ 8,756,861 $8,299,933 $ 9,457,022
Fees, commissions,
service and
other income 15,056,870 17,349,046 8,330,749
Real estate sales 7,607,652 8,544,848 7,936,953
Realized net gains (losses)
on sales of investments
and receivables 366,409 (478,892) 113,210
----------- ----------- -----------
Total revenues 31,787,792 33,714,935 25,837,934
----------- ----------- -----------
Expenses:
Interest, net 17,616,074 18,441,790 20,131,768
Cost of real estate sold 7,330,073 8,440,547 8,953,295
Provision for losses on
real estate assets 737,042 2,345,447 3,114,751
Salaries and employee
benefits 9,332,118 8,672,446 7,883,060
Other operating expenses 2,142,358 2,801,620 3,290,115
----------- ----------- -----------
Total expenses 37,157,665 40,701,850 43,372,989
----------- ----------- -----------
Loss from operations before
income taxes, equity in
net income of subsidiaries,
extraordinary item and
cumulative effect of change
in accounting principle (5,369,873) (6,986,915) (17,535,055)
Income tax benefit 1,813,051 2,300,331 5,820,326
----------- ----------- -----------
Loss before equity in net
income of subsidiaries,
extraordinary item and
cumulative effect of change
in accounting principle (3,556,822) (4,686,584) (11,714,729)
Equity in net income of
subsidiaries 9,034,578 12,289,642 14,641,653
----------- ----------- -----------
Income before extraordinary
item and cumulative effect
of change in accounting
principle 5,477,756 7,603,058 2,926,924
</TABLE>
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Extraordinary item-
utilization of net
operating loss
carryforwards $ 651,103
Cumulative effect of
change in the
method of
accounting for
income taxes $(3,600,000)
----------- ----------- -----------
Net income $ 5,477,756 $ 4,003,058 $ 3,578,027
=========== =========== ===========
</TABLE>
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of cash flows for the years ended
September 30, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 5,477,756 $ 4,003,058 $ 3,578,027
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities (3,679,005) (12,847,715) 4,969,115
------------ ----------- ----------
Net cash provided by (used
in) operating activities 1,798,751 (8,844,657) 8,547,142
------------ ----------- ----------
Cash flows from investing
activities:
Principal payments on real
estate contracts and
mortgage notes
receivable 10,550,918 10,217,346 29,776,225
Acquisition of mortgage
notes receivable (6,520,436) (4,722,613) (4,822,981)
Proceeds from real
estate sales 2,915,452 3,172,619 3,338,385
Proceeds from sale of
investments 361,132 4,192,641
Purchase of investments (399,465) (493,520)
Net change in investments (104,863)
Additions to real estate
held (7,945,133) (4,211,017) (4,088,039)
Capital expenditures (469,475) (1,173,433) (2,013,191)
Net change in investment
in and advances to
subsidiaries 6,332,550 16,002,272 (40,285,840)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 4,825,543 22,984,295 (18,200,304)
----------- ----------- -----------
</TABLE>
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Cash flows from financing
activities:
Net borrowings from banks
and others $(3,324,722) $(9,783,336) $(2,098,280)
Issuance of debenture bonds 46,414,738 57,994,229 44,185,895
Issuance of preferred stock 1,772,649 3,361,867 3,719,388
Issuance of common stock 13,500
Repayment of debenture bonds (51,610,174) (51,902,606) (26,134,640)
Cash dividends (3,510,338) (3,403,443) (3,399,382)
Redemption and retirement
of stock (775,742) (60,936) (3,679,783)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (11,033,589) (3,780,725) 12,593,198
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (4,409,295) 10,358,913 2,940,036
Cash and cash equivalents at
beginning of year 13,864,148 3,505,235 565,199
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 9,454,853 $13,864,148 $ 3,505,235
=========== =========== ===========
</TABLE>
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Non-cash investing and financing activities not included in
Metropolitan's condensed statement of cash flow are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1994 1993 1992
<S> <C> <C> <C>
Loans to facilitate the sale
of real estate $ 4,692,200 $ 5,372,229 $ 5,139,818
Real estate acquired through
foreclosure 2,166,655 1,652,140 2,663,254
Debt assumed with acquisition
of real estate contracts and
mortgage notes and debt
assumed upon foreclosure of
real estate contracts 81,530 1,224,194 2,115,782
Change in net unrealized
gains (losses)
on investments (3,371,012) 607,182 (1,322,713)
</TABLE>
Accounting policies followed in the preparation of the preceding
condensed financial statements of Metropolitan (parent company
only) are the same as those policies described in the consolidated
financial statements except that the equity method was used in
accounting for the investments in and net income from
subsidiaries.
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
At September 30, 1994 and 1993, Metropolitan's debt payable consists of
the following:
1994 1993
<S> <C> <C>
Reverse repurchase agreement with a
bank, interest at 3 3/8% per annum,
due and repaid October 1, 1993;
collateralized by $1,000,000 in U.S.
Treasury bonds $1,000,000
Real estate contracts and mortgage
notes payable, interest rates
ranging from 3% to 14%, due in
installments through 2020 $1,352,863 3,596,055
Accrued interest payable 26,226 27,941
---------- -----------
$1,379,089 $4,623,996
========== ===========
<CAPTION>
Aggregate amounts of principal payments due on the parent company's debt
payable are expected to be as follows:
Fiscal year ending
September 30,
<S> <C>
1995 $ 302,000
1996 193,000
1997 184,000
1998 185,000
1999 188,000
Thereafter 327,089
----------
$1,379,089
==========
</TABLE>
Debt payable of the parent company is collateralized by senior
liens on the Company's real estate sales contracts, mortgage notes
and real estate held for sale and development.
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1994 and 1993, Metropolitan's debenture bonds
payable consist of the following:
<TABLE>
<CAPTION>
Annual Principally
Interest Maturing
Rates In 1994 1993
<S> <C> <C> <C>
5% to 6% 1995, 1996
and 1997 $ 9,975,000 $ 438,000
6% to 7% 1995, 1996
and 1998 4,896,000 11,861,000
7% to 8% 1999 35,545,000 4,311,000
8% to 9% 1997 and 1998 57,045,000 57,487,000
9% to 10% 1995, 1996
and 1997 62,349,000 68,860,000
10% to 11% 1998 and 1999 2,856,000 34,904,000
------------ ------------
172,666,000 177,861,000
Compound and accrued interest 26,710,783 30,003,418
------------ ------------
$199,376,783 $207,864,418
============ ============
<CAPTION>
Unamortized debenture issuance costs totaled $3,032,875 at September 30,
1994 and $2,897,932 at September 30, 1993.
Maturities of the parent company's debenture bonds are as follows:
Fiscal year ending
September 30,
<S> <C>
1995 $ 53,277,000
1996 17,720,000
1997 42,942,000
1998 46,367,000
1999 35,401,000
Thereafter 3,669,783
------------
$199,376,783
============
</TABLE>
<PAGE>
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan had the following related party transactions with its
various subsidiaries:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Dividends received:
Summit Securities, Inc. $ 1,422,007
Old Standard Life Insurance
Company 700,000
Metropolitan Mortgage
& Securities Co. of
Alaska 225,000 $ 3,954
Spokane Mortgage Co. 1,800,000 $ 31,310
Western United Life
Assurance Company 2,604,875 2,850,250 2,408,565
Beacon Properties,
Inc. 330,000 1,900,000
Consumers Group
Holding Co., Inc. 6,791,358 3,618,865
Metropolitan
Mortgage Hawaii,
Inc. 1,770,000 650,000
Metropolitan
Investment
Securities, Inc. 100,000
----------- ---------- ----------
$15,643,240 $9,150,425 $2,412,519
=========== ========== ==========
Fees, commissions,
service and other
income $13,814,334 $15,722,046 $6,757,499
Interest income 3,218,813 2,321,030 512,845
</TABLE>
Additionally, Metropolitan charged various subsidiaries for
underwriting fees related to contracts purchased on behalf of
these subsidiaries in the amount of $13,248,132 in 1994,
$10,000,000 in 1993 and $15,450,000 in 1992. These amounts are
deferred and recognized as income over the estimated life of the
contracts. Amounts amortized into service fee income were
$6,596,877 in 1994, $7,770,969 in 1993 and $0 in 1992.
The underwriting fees are based upon a yield requirement
established by the purchasing subsidiary. For contracts purchased
on behalf of Western United Life Assurance Co. (Western United),
one of Metropolitan's subsidiaries, in 1994, the yield is
guaranteed by Metropolitan through a holdback of $4,753,000 at
September 30, 1994. Metropolitan is liable to Western United for
any losses on the contracts in excess of the holdback.
<PAGE>
GRAPHS APPENDIX
1. INSIDE FRONT COVER PAGE: Full cover page with Registrants name
and logo on top of page. Center of page contains a color map of the
United States, and indicates the location of the Company's headquarters
and its branch offices. The page contains a background image of a
tapestry which matches the image to be used on the outside cover of
Metropolitan's annual report
2. A circular diagram with an arrow from one paragraph to the next,
depicting how the investor's proceeds are used. The graphic contains
the following introductory statement: "The following diagram depicts
a standard model for how an investor's money is used by Metropolitan
for investment in Receivables. This model is for illustrative
purposes, and is not intended to be exhaustive. It is qualified in its
entirety and should be read in conjunction with the detailed
information provided elsewhere in the prospectus."
The graphic includes the following paragraphs within the circular
diagram. The diagram contains an arrow from one paragraph to the next:
Election is made to invest/reinvest in Preferred Stock. Metropolitan
invests the money in Receivables secured by real estate. The Receivable
obligors make principal and interest payments to Metropolitan. Some of
the money received as payment is used to finance the cost of doing
business. Dividend payments are paid or reinvested at the direction of
the investor.
The graphic contains the following statement in bold in the center of
the circular diagram: DIAGRAM SHOWING HOW INVESTORS' MONEY IS USED IN
THE PURCHASE OF RECEIVABLES.
3. Two graphs depicting how Metropolitan earns a greater yield on a
Receivable through purchasing the Receivables at a discount from the
face amount. Both graphs have a vertical axis which show
Metropolitan's investment in the receivable, the face value and the
interest earned. The horizontal axis shows years. A line is drawn
from each of the three points on the vertical axis, sloping down to the
15 year mark on the horizontal axis. The areas between these lines are
identified as A, B and C.
The first graph contains the following explanatory heading: Receivable
Purchased At a Discount - Example of a $50,000 Receivable purchased
at a discount. Interest rate is 10%, term is 15 years. Metropolitan
pays A and receives B &C as income.
The second graph contains the following explanatory heading:
Receivable Purchased Without a Discount - Example of a $50,000
Receivable purchased without a discount. Interest rate if 10%, term is
15 years. Metropolitan pays A & B, and receives C as income.
4. This page contains three pie charts with the following headings
and breakdowns in the charts:
a. Distribution of Receivable By Collateral Type (September 30,
1993)
Residential 76%
Commercial 10%
Improved Land 10%
Other 4%
b. Distribution of Receivables By Security Position (September
30, 1993)
First Lien Position 97%
Second Lien or Lower
Position 3%
c. Distribution of Assets
Cash and Cash
Equivalents 3%
Investments 28%
Real Estate Contract
Receivables 53%
Real Estate Held 7%
Deferred Costs 7%
Other 2%
5. This graph contains a map of the United States and indicates the
branch and headquarter offices and identifies the percent of
distribution of the principal amount of Receivable investments as of
September 30, 1993 by state, for the states with 1% or more invested.
The following amounts are shown for the following states:
Washington 18.1%
Oregon 5.6%
California 10.7%
Arizona 9.5%
Idaho 2.5%
New Mexico 3.5%
Texas 10.4%
Colorado 1.1%
Michigan 2.1%
Georgia 1.6%
Florida 5.0%
New Jersey 1.6%
New York 2.4%
Hawaii 3.1%
Minnesota 1.0%
Nevada 1.0%
6. INSIDE BACK COVER:
A full color page containing Metropolitan's name and logo. The page has
a background of a tapestry.
