<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE AT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_____________________
Commission file number 033-36775
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0609840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
West 929 Sprague Ave., Spokane, WA 99204
(Address of principal executive offices) (Zip Code)
(509)838-3111
(Registrant's telephone number, including area code)
__________________________________________________________
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be fined by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: (Not Applicable)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes / / No / /
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
130 SHARES - Common "A" at April 30, 1995
0 SHARES - Common "B" at April 30, 1995
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX
Part I - Financial Information: Page No.
Consolidated Condensed Balance Sheets --
March 31, 1995 (Unaudited) and
September 30, 1994
Consolidated Condensed Statements of Income
Three and Six Months Ended March 31, 1995
and 1994 (Unaudited)
Consolidated Condensed Statements of Cash Flows
Six Months Ended March 31, 1995 and 1994
(Unaudited)
Notes to Consolidated Condensed Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Part II - Other Information
<PAGE>
Part I - Financial Information
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 9,861,833 $ 29,275,716
Investments:
Trading Securities, at market 2,041,562
Available-for-Sale Securities,
at market 56,115,450 89,070,866
Held-to-Maturity Securities,
at amortized cost (market value
$186,674,410 and $184,740,248) 199,646,631 200,179,999
Accrued Interest on Investments 2,974,603 3,311,822
-------------- ------------
Total Cash and Investments 270,640,079 321,838,403
-------------- ------------
Real Estate Contracts and Mortgage
Notes 617,066,705 567,256,298
Real Estate for Sale and
Development - Including
Foreclosed Real Estate 80,568,745 76,765,465
-------------- ------------
Total Real Estate Assets 697,635,450 644,021,763
Less Allowance for Losses (8,867,377) (9,108,383)
-------------- ------------
Net Real Estate Assets 688,768,073 634,913,380
-------------- ------------
Deferred Acquisition Costs 76,150,415 74,107,517
Land, Building and Equipment - net
of accumulated depreciation 8,118,374 9,586,595
Other Assets, net of allowance 24,472,075 22,844,008
-------------- --------------
TOTAL ASSETS $1,068,149,016 $1,063,289,903
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
(Unaudited)
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 780,779,239 $ 744,644,625
Debenture Bonds 204,175,084 199,376,783
Other Debt Payable 13,716,653 62,123,139
Securities Sold, Not Yet Purchased 6,191,921
Accounts Payable and Accrued
Expenses 15,671,818 12,756,072
Deferred Income Taxes Payable 10,888,364 10,304,980
Minority Interest in Consolidated
Subsidiaries 1,465,901 1,458,980
-------------- --------------
TOTAL LIABILITIES 1,032,888,980 1,030,664,579
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D,
E Cumulative with Variable Rate,
$10 Par Value, Authorized 8,325,000
Issued 2,177,443 Shares and
2,143,691 Shares (Liquidation
Preference $46,709,754 and
$43,331,750, respectively) 21,774,432 21,436,910
Class A Common Stock - Voting,
$2,250 Par Value, Authorized
222 Shares, Issued 130 Shares,
respectively 293,417 292,121
Class B Common Stock - Non Voting,
$2,250 Par Value, Authorized 222 Shares,
Issued 0 and 2 Shares, respectively 4,500
Additional Paid-In Capital 13,832,345 10,981,492
Retained Earnings 1,175,125 2,745,678
Net Unrealized Gains (Losses) on
Investments (1,815,283) (2,835,377)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 35,260,036 32,625,324
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,068,149,016 $1,063,289,903
============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUES:
Insurance Premiums Earned $ 750,000 $ 625,000 $ 1,500,000 $ 1,250,000
Interest and Earned Discounts 21,492,296 21,379,596 43,226,148 43,299,522
Real Estate Sales 9,623,525 8,282,717 18,962,314 15,730,007
Fees, Commissions, Service
and Other Income 556,869 1,349,715 1,532,499 2,367,628
Realized Investment Gains (Losses) (154,882) 238,335 (320,480) 508,988
Realized Gains on Sales of
Receivables 468,013 1,115,157 468,013 1,169,657
---------- ---------- ---------- ----------
TOTAL REVENUES 32,735,821 32,990,520 65,368,494 64,325,802
---------- ---------- ---------- ----------
EXPENSES:
Insurance Policy and Annuity
Benefits 11,343,906 10,216,954 22,222,312 20,839,598
Interest Expense 4,263,856 4,921,491 8,835,621 9,977,734
Cost of Real Estate Sold 8,903,622 8,258,569 18,349,085 15,527,351
Provision for Losses on Real
Estate Assets 1,362,737 1,620,677 2,063,133 3,235,929
Salaries and Employee
Benefits 2,483,889 2,176,592 4,823,195 4,288,693
Commissions to Agents 3,506,917 1,792,131 6,202,463 3,480,926
Other Operating and
Underwriting Expenses 1,515,771 1,901,926 2,924,683 4,444,236
Less Increase in Deferred
Acquisition Costs (1,402,207) 127,720 (1,592,140) (35,788)
---------- ----------- ---------- -----------
TOTAL EXPENSES 31,978,491 31,016,060 63,828,352 61,758,679
---------- ---------- ---------- ----------
Income Before Income Taxes and
Minority Interest 757,330 1,974,460 1,540,142 2,567,123
Provision For Income Taxes (260,080) (689,760) (525,548) (900,714)
---------- ---------- ---------- ----------
Income Before Minority
Interest 497,250 1,284,700 1,014,594 1,666,409
Income of Consolidated
Subsidiaries Allocated to
Minority Stockholders (12,962) (67,262) (6,921) (128,808)
---------- ---------- ---------- ----------
NET INCOME $ 484,288 $1,217,438 $1,007,673 $1,537,601
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1995 1994
RESTATED
<S> <C> <C>
Net Cash Provided By
Operating Activities $ 26,298,999 $24,316,178
----------- -----------
Cash Flows From Investing Activities:
Principal Payments on Real Estate
Contracts and Mortgage Notes 48,344,932 56,283,431
Proceeds From Real Estate Sales 1,426,247 2,230,375
Proceeds From Investment Maturities 1,815,630 2,501,490
Proceeds from Sale of Available
for Sale Securities 65,022,519 58,401,932
Purchase of Available for Sale
Securities (32,348,934) (99,605,974)
Purchase of Held to Maturity
Investments (534,786) (4,226,917)
Proceeds From Sale Real Estate Contracts 16,162,286 12,178,261
Acquisition of Mortgage Notes (99,913,862) (59,595,011)
Additions to Real Estate Held (19,520,971) (10,757,100)
Capital Expenditures (503,109) (335,818)
----------- ------------
Net Cash Used In Investing Activities (20,050,048) (42,925,331)
------------ ------------
Cash Flows From Financing Activities:
Net Change Short Term Borrowings from
Brokers and Banks (48,306,875) (1,000,000)
Receipts From Life and Annuity Products 68,316,400 36,026,798
Withdrawals on Life and Annuity Products (52,582,614) (60,212,931)
Repayment to Banks and Others (367,714) (1,769,635)
Issuance of Debenture Bonds 33,192,131 23,664,949
Issuance of Preferred Stock 3,249,251 555,378
Repayment of Debenture Bonds (26,521,107) (22,317,716)
Cash Dividends (2,578,226) (1,659,705)
Redemption of Capital Stock (64,080) (325,568)
----------- -----------
Net Cash Used In Financing Activities (25,662,834) (27,038,430)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (19,413,883) (45,647,583)
Cash and Cash Equivalents at Beginning
of Period 29,275,716 72,903,375
----------- -----------
Cash and Cash Equivalents at End
of Period $ 9,861,833 $ 27,255,792
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to
present fairly the financial position as of March 31, 1995, and the
results of operations for the three and six months ended March 31,
1995 and 1994 and changes in cash flows for the six months ended March
31, 1995 and 1994. The results of operations for the six month period
ended March 31, 1995 and 1994 are not necessarily indicative of the
results to be expected for the full year.
2. The principal amount of receivables as to which payments were in
arrears more than three months was $18,300,000 at March 31, 1995 and
$19,000,000 at September 30, 1994.
3. Metropolitan Mortgage & Securities Co., Inc had no outstanding legal
proceedings other than normal proceedings associated with receivable
foreclosures.
4. Certain amounts in the prior year's consolidated condensed 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. Additionally, the
consolidated condensed statement of cash flows for the prior year's
six month period has been restated to show short term borrowings from
brokers and banks as a net change item as compared to the previous
presentation showing gross borrowings and gross repayments. The
change had no effect on the total net cash used in financing
activities for the period.
5. On January 31, 1995 the Company concluded an agreement with Summit
Securities, Inc. (Summit), whereby it sold Metropolitan Investment
Securities, Inc. (MIS) to Summit, at a sale price of $288,950, which
approximated the current book value of MIS at date of sale.
Additionally, the Company is negotiating the sale of Old Standard Life
Insurance Company (OSL) to Summit. MIS was and OSL is currently
wholly-owned subsidiaries of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Completed Transactions:
On January 31, 1995, Metropolitan Mortgage & Securities Co., Inc.
(Metro of the Company) and Summit Securities, Inc. (Summit) completed a
sale/purchase transaction whereby the 100% owned interest in Metropolitan
Investment Securities, Inc. (MIS) was sold to Summit. The cash
sale/purchase price was $288,950, the approximate net book value of MIS at
closing. MIS is a limited-purpose broker dealer and the exclusive
broker/dealer for the securities sold by Metro and Summit. It is
anticipated that this sale will not materially affect the future business
operations of MIS. Additionally, by agreement, effective January 31, 1995,
Metro discontinued its property development division, which consisted of a
group of employees experienced in real estate development. On the same
date, Summit commenced the operation of a property development subsidiary
employing those same individuals who had previously been employed by Metro.
Summit Property Development Corporation, a 100% owned subsidiary of Summit,
has negotiated an agreement with Metro to provide future property
development services.
Pending Transaction:
Metro is currently negotiating the sale of Old Standard Life Insurance
Company (OSL) to Summit. OSL is a wholly-owned subsidiary of the Company,
engaged in the business of acquiring receivables using funds derived from
the sale of annuities and funds derived from receivable cash flows. It is
anticipated that this sale will occur during the second quarter of calendar
1995. The sale price is currently estimated at $2.7 million, the
approximate net book value of OSL, with future contingency payments based
on the earnings of OSL. The source of funds will be cash or cash
equivalents transferred to Metro from Summit in exchange for all the common
stock of OSL.
Financial Condition and Liquidity:
As of March 31, 1995, the Company had cash or cash equivalents of $9.9
million and liquid investments (trading or available-for-sale securities)
of $58.2 million compared to $5.3 million in cash or cash equivalents and
$80.6 million in liquid investments at December 31, 1994 and $29.3 million
in cash or cash equivalents and $89.1 million in liquid investments at
September 30, 1994. Management believes that cash, cash equivalents and
liquidity provided by other investments are adequate to meet any planned
asset additions, debt retirements or other business operational
requirements during the next twelve months. During the six month period
ended March 31, 1995 the $51.2 million decrease in cash, cash equivalents
and investments was used primarily to fund the $53.9 million increase in
the Company's portfolio of net real estate assets, consisting of real
estate receivables and real estate held for sale and development.
The real estate receivable portfolio totaled $617.1 million at March
31, 1995 compared to $585.4 million at December 31, 1994 and $567.3 million
at September 30, 1994. During the six months ended March 31, 1995, the
increase resulted from the acquisition of real estate receivables in the
amount of $99.9 million plus an additional $17.5 million in loans to
facilitate the sale of real estate being partially offset by principal
collections on receivables in the amount of $48.3 million, $16.2 million in
proceeds from the sale of real estate receivables along with a reduction of
$3.6 million associated with foreclosed receivables. Real estate held for
sale and development increased to $80.6 million at March 31, 1995 from
$78.3 million at December 31, 1994 and $76.8 million at September 30, 1994.
This increase was the result of additional construction at the Company's
condominium timeshare resort in Hawaii along with the development of
industrial and commercial property sites primarily in the Spokane and Tri
Cities areas of Washington.
Life insurance and annuity policy reserves increased $36.2 million
during the six months ended March 31, 1995 to approximately $780.8 million
from $744.6 million at September 30, 1994. This increase resulted from
credited earnings of $20.5 million along with $15.7 million of new cash
flow as receipts from sales of new life and annuity products of $68.3
million exceeded withdrawals of $52.6 million from existing policies. Net
debenture bonds payable increased by $4.8 million to $204.2 million at
March 31, 1995 from $199.4 million at September 30, 1994. Net cash flow
from the issuance of debentures less maturities was $6.7 million with an
additional reduction of $1.9 million associated with the withdrawal of
previously credited earnings on the outstanding debentures. Additionally,
the Company had net cash flow of approximately $3.2 million from the sale
of preferred stock during the six month period ended March 31, 1995.
During the six month period ended March 31, 1995, the Company reduced short
term borrowings by $48.3 million to an approximate outstanding amount of
$12.4 million at March 31, 1995. In addition the Company had liabilities
at March 31, 1995 of approximately $6.2 million from securities sold, but
not yet purchased.
Total assets increased $4.8 million to $1,068.1 million at March 31,
1995 from $1,063.3 million at September 30, 1994. There were no
significant changes in asset classifications during the six months ended
March 31, 1995, with the exception of the shifting of cash, cash
equivalents and liquid investments into new real estate receivable
investments and the use of new cash flow from operating activities,
insurance product sales, debenture sales and preferred stock sales to pay
down short-term borrowings.
At March 31, 1995, the Company had net unrealized losses on securities
available-for-sale in the amount of $1.8 million as compared to net
unrealized losses of $3.5 million at December 31, 1994 and net unrealized
losses of $2.8 million at September 30, 1994. Net unrealized losses on
securities available-for-sale is presented as a separate component of
stockholders' equity.
Results of Operations:
The Company recorded net income before preferred dividends for the six
months ended March 31, 1995 of $1,008,000 compared to $1,538,000 in the
prior year's period. Comparing the current year's six month period with
the prior year's, the earnings decrease is primarily attributable to
increased amortization of insurance related acquisition costs, which were
only partially offset by improvements in other areas.
The general increase in the level of interest rates over the recent
six months period has reduced the degree of interest spread earnings
available to the Company and competing investment alternatives have become
more attractive to customers thus increasing the level of policy
surrenders. The degree of amortization of insurance and annuity related
acquisition costs is a direct result of the projected rate of these
customer surrenders and of the future spread earnings. The projected rate
of surrenders and spread income is significantly influenced by the level of
current surrenders and the available interest spread. These factors have
acted in concert to increase the current year's amortization expense to
$5.2 million as compared to $3.5 million in the prior year's period.
Additionally, in the current year the Company has incurred other increased
expenses especially commissions related to increased sales of life and
annuity insurance products. These costs associated with the sales of
insurance products have been capitalized as deferred insurance acquisition
costs. In the current year's six month period capitalized acquisition
costs were $6.8 million less amortization of $5.2 million, resulting in a
net increase in acquisition cost of $1.6 million as compared to zero net
change in the prior year as capitalized acquisition costs of $3.5 million
were offset by $3.5 million in amortization.
For the six months ended March 31, 1995, the Company reported a
positive spread on its interest sensitive assets and liabilities of $13.7
million, the same amount earned in the prior year's period. The total
interest spread has remained relatively flat in the current rising interest
rate environment as the Company has successfully increased asset yields to
offset increased liability costs.
The Company realized net gains of $613,000 on sales of $19.0 million
of real estate in the current period compared to net gains of $203,000 on
sales of $15.7 million in the prior year. It has been the policy of
management to actively sell its real estate in order to return the
investment to an earning asset. In addition to returning these assets to
earning status, the Company has been able to reduce other operating
expenses associated with its real estate, such as insurance, taxes,
maintenance and amenities. These reductions in costs associated with real
estate holdings have been the primary items supporting the reduction in
other operating expenses by $1.5 million when comparing the current year's
period with the prior.
Based on trends beginning in fiscal 1994 and continuing during the six
month period ended March 1995, the Company has recorded marked improvement
in the delinquency rates for its real estate receivable portfolio. In
conjunction with these improved delinquency rates and a stable to improving
real estate market the Company has been able to moderate its additions to
its allowances for losses on real estate assets. In the six months ended
March 31, 1995 the Company made provisions to losses on real estate assets
of $2.1 million compared to $3.2 million in the prior year, for an
improvement of $1.1 million.
During the six months ended March 31, 1995, the Company realized net
losses from the sale of investments of $320,000 compared to net gains of
$509,000 in the prior year. Management made the decision to take a loss on
certain investments in order to take advantage of reinvesting in higher
yielding investment opportunities. Additionally, in the current year the
Company realized gains of $468,000 from the sale of real estate receivables
compared to gain of $1,170,000 in the prior year. The Company continues to
evaluate opportunities for the sale of selected assets.
During the six months ended March 31, 1995, the Company sustained a
reduction in fee, commission, service and other income of approximately
$835,000. This reduction is primarily the result of reduced rents due to
real estate properties being sold, losses generated from the start up of a
restaurant in Hawaii and a non-reoccurring item in the prior year where the
Company was able to negotiate a discounted payoff of a corporate liability.
New Accounting Rules:
In May 1993, Statement of Financial Accounting Standards No.114 (SFAS
No.114) "Accounting by Creditors for Impairment of a Loan" was issued.
Additionally, in October 1994, Statement of Financial Accounting Standards
No.118 (SFAS No.118) "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures" (an amendment to SFAS No.114) was
issued. SFAS No.114 (as amended by SFAS No.118) requires that certain
impaired loans be measured based on the present value of expected cash
flows discounted at the loans' effective interest rate or the fair value of
the collateral. The Company adopted this new standard on October 1, 1995.
This adoption of SFAS No.114 and SFAS No.118 had no material effect on the
consolidated financial statements.
In October 1994, Statement of Financial Accounting Standards No.119
(SFAS No.119) "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" was issued. SFAS No.119 requires certain
disclosure regarding derivative instruments held by the Company effective
for financial statements issued for their fiscal year ending September 30,
2995. This statement does not require application for interim financial
statements before this date.
<PAGE>
PART II - OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Registrant)
/s/ C. PAUL SANDIFUR, JR.
Date 5/15/95
-------------- -------------------------------------------------
C. Paul Sandifur, Jr., President
/s/ ERNEST JURDANA
Date 5/15/95
--------------- -------------------------------------------------
Ernest Jurdana, Chief Financial
Officer
/s/ STEVEN CROOKS
Date 5/15/95
--------------- -------------------------------------------------
Steven Crooks, Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 9,862
<SECURITIES> 260,778
<RECEIVABLES> 617,067
<ALLOWANCES> 8,867
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 17,259
<DEPRECIATION> 8,241
<TOTAL-ASSETS> 1,068,149
<CURRENT-LIABILITIES> 0
<BONDS> 224,084
<COMMON> 293
0
21,774
<OTHER-SE> 13,193
<TOTAL-LIABILITY-AND-EQUITY> 1,068,149
<SALES> 0
<TOTAL-REVENUES> 65,368
<CGS> 0
<TOTAL-COSTS> 52,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,063
<INTEREST-EXPENSE> 8,863
<INCOME-PRETAX> 1,540
<INCOME-TAX> 525
<INCOME-CONTINUING> 1,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,008
<EPS-PRIMARY> (8,223.00)
<EPS-DILUTED> (8,223.00)
</TABLE>
