As filed with the Securities and Exchange Commission on February 1,
1996. Registration No. 333-335
AMENDMENT NUMBER 1 TO FORM S-2
SECURITIES AND EXCHANGE COMMISSION
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact name of Registrant as specified in charter)
Washington 929 West Sprague Avenue
(State or other jurisdiction of Spokane, Washington 99204
incorporation or organization) (509) 838-3111
91-0609840 (Address, including zip code,
(I.R.S. Employer and telephone number,
Identification No.) including area code,
of registrant's
principal executive
offices)
C. Paul Sandifur, Jr.
President
Metropolitan Mortgage & Securities Co., Inc.
929 West Sprague Avenue
Spokane, WA 99204
Telephone No. (509) 838-3111
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box. /x /
|
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof,
pursuant to Item II(a)(1) of this form, check the following box. / /
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. / /.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /.
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /.
CALCULATION OF REGISTRATION FEE
<TABLE>
Title of each Amount Proposed Proposed Amount of
class of to be maximum maximum registration
securities to registered offering aggregate fee
be registered price per offering
unit price
<S> <C> <C> <C> <C>
Preferred Stock
Series E-6 Shares 250,000 $100 $25,000,000 $ 1,141
Investment Debentures,
Series II $96,500,000 $ 1 $96,500,000 $ 15,690
Installment Debentures
Series I
$ 3,500,000 $ 1 $ 3,500,000 $ 172
</TABLE>
The Registrant is hereby proposing to register Investment
Debentures, Series II, in the amount of $45,500,000, Installment
Debentures Series I in the amount of $500,000, and 33,100 shares of
Preferred Stock Series E-6 and is hereby amending Registration No. 33-
57061 pursuant to Rule 429 of which approximately $51,000,000 of
Investment Debentures, Series II, $3,000,000 of Installment
Debentures, and 216,900 shares of Preferred Stock Series E-6 remain
unsold. The registration fee is calculated on the amount being
registered hereunder.
The Registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until the registration statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a) may
determine.
PART I
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
Cross Reference Sheet
Showing Location in Prospectus of Items of the Form
Item
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover
Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges and Preferred Stock
Dividends..................................... Prospectus
Summary;
Summary
Consolidated
Financial Data;
Certain Investment
Considerations
- Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... *
6. Dilution...................................... *
7. Selling Security Holders...................... *
8. Plan of Distribution.......................... Plan of
Distribution
9. Description of Securities to be Registered.... Description of
Securities;
Description
of Debentures;
Description of
Capital Stock;
Description of
Preferred Stock
10. Interest of Named Experts and Counsel....... Legal Matters;
Experts
11. Information with Respect to the Registrant.. Front Cover Page;
Prospectus
Summary;
Capitalization;
Selected
Consolidated
Financial Data;
Management's
Discussion and
Analysis
of Financial
Condition
and Results of
Operations;
Business;
Management;
Principal
Shareholders;
Certain
Transactions;
Financial
Statements
12. Incorporation of Certain Information
by Reference.................................. Available
Information
13. Disclosure of Commission Position on Indem-
nification for Securities Act Liabilities..... Indemnification
*Not applicable or negative.
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 1996
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 (collectively, Debentures) and the shares of Variable Rate
Cumulative Preferred Stock, Series E-6 (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 parity with unsecured accounts payable and
accrued liabilities and on parity with all previously 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. (Metropolitan) 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>
$
$
$
$
<CAPTION>
INSTALLMENT DEBENTURES, SERIES I
<S> <C>
$
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK, SERIES E-6
PRICE DISTRIBUTION FORMULA
PER SHARE (Applicable Rate)
<S> <C>
$100.00 The greater per annum rate of the
Three-Month U.S. Treasury Bill Rate,
the Ten Year Constant Maturity Rate,
or the Twenty Year Constant Maturity Rate,
plus .5% (Minimum 6%/Maximum 14%)
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 its 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 on 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 Investment Securities, Inc. (MIS) 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 and risks 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>
<TABLE>
<CAPTION>
PRICE SALES PROCEEDS TO
TO PUBLIC COMMISSIONS (1) METROPOLITAN (2)
<S> <C> <C> <C>
Per
Debenture 100% 0% to 6% 100% to 94%
Total: $100,000,000 None - $6,000,000 $100,000,000-$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 MIS, 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
reinvestments or new purchases. See "PLAN OF DISTRIBUTION".
(2) Before deducting other expenses estimated at $210,000
The Debentures and Preferred Stock are being offered for sale on
a continuous, best efforts basis directly to investors through MIS, a
registered broker/dealer and member of the National Association of
Securities Dealers 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, 1997. The offering is subject to Schedule E
of the Bylaws of the NASD. See "PLAN OF DISTRIBUTION".
The date of this Prospectus is ____________________.
INSIDE FRONT COVER PAGE OF PROSPECTUS
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 and copied at the public reference
facilities maintained by the Commission in Washington, D.C. at 450
Fifth Street, N.W., Room 1024, Washington, DC 20549 and at certain of
its regional offices which are located in the New York Regional
Office, 7 World Trade Center, Suite 1300, New York, NY 10048, and the
Chicago Regional Office, 500 West Madison Street, Suite 1400, 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 on Form S-2
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.
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.
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.................................................
Legal Opinion...............................................
Legal Proceedings...........................................
Experts.......................................................
Plan of Distribution..........................................
Use of Proceeds...............................................
Capitalization................................................
Selected Consolidated Financial Data..........................
Management'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....................................................
Executive Compensation..................................
Indemnification...............................................
Ownership of Management.......................................
Principal Shareholders........................................
Certain Transactions..........................................
Index to Consolidated Financial Statements....................
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to, 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. (Metropolitan) was
established and incorporated in the State of Washington in January,
1953. Its principal executive offices are located at 929 West Sprague
Avenue, Spokane, WA. 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 and its
subsidiaries, they are jointly referred to as the "Consolidated
Group". Where reference herein is intended to refer to Metropolitan,
(e.g. 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 include real estate contracts, and
promissory notes collateralized by first position liens on residential
real estate. The Consolidated Group also invests in Receivables
consisting of real estate contracts and promissory notes
collateralized by second and lower position liens, structured
settlements, annuities, lottery prizes, and other investments. In
addition, the Consolidated Group also invests in U.S. Treasury
obligations, corporate bonds and other securities and also, engages in
real estate development. The Consolidated Group invests in
Receivables using funds generated from Receivable cash flows and the
sale of annuities, debentures and preferred stock, and securities
portfolio earnings. Metropolitan provides Receivable acquisition,
management and collection services, for a fee, to its insurance
subsidiary, Western United Life Assurance Company (Western United).
Other subsidiaries provide support and ancillary services to the
Receivable investment business. These services include the servicing
and collection of the Receivables by Spokane Mortgage Co., 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. (Summit) and to Old Standard Life
Insurance Company (Old Standard). 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."
At September 30, 1995, the Consolidated Group had 344 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.
Definitions:
For ease of reading, the following is a compilation of several of the
defined terms which appear regularly within this document. Also, See
"Business".
Consolidated Group: This term refers to the combined businesses
consisting of Metropolitan and all of its subsidiaries.
Debentures: Where this term is capitalized, it refers to the
Installment and Investment Debentures being offered herein. Where not
capitalized, it refers to debentures of Metropolitan generally.
MIS: Metropolitan Investment Securities, Inc.
Metropolitan: Metropolitan Mortgage & Securities Co., Inc., parent
company only.
Old Standard: Old Standard Life Insurance Company.
Preferred Stock: Where this term is capitalized, it refers to the
Series E-6 Preferred Stock being offered herein. Where it is not
capitalized, it refers to preferred stock of Metropolitan generally.
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate, structured settlements, annuities,
lottery prizes and other investments.
Summit: Summit Securities, Inc.
Western United: Western United Life Assurance Company.
ORGANIZATIONAL CHART
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(as of December 31, 1995)
____________________________________|______________________________
| | |
100% | 96.5%
Metropolitan | Consumers
Mortgage | Group
Hawaii, Inc. | Holding
| Co., Inc.
| |
| |
| 100%
| Consumers Insurance
| Co., Inc.
| |
| 75.5%
24.5% -> Western United
Life Assurance
Company
Metropolitan Mortgage & Securities Co., Inc. - Parent organization,
invests in Receivables and other investments, including real estate
development, with proceeds from investments and securities
offerings.
Consumers Group Holding Co., Inc. - A holding company, its sole
business activity currently being that of a shareholder of
Consumers Insurance Co., Inc.
Consumers Insurance Co., Inc. - Property and casualty insurer, its
sole business activity currently being that of 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 policy and annuity contract
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.
Other Subsidiaries
National Systems, Inc. - Performs real estate closing services, owned
100% by Metropolitan .
Beacon Properties, Inc. - Real estate broker and property manager,
owned 100% by Metropolitan.
Southshore Corporation - Lessee and operator of restaurant adjacent to
Lawai Beach Resort in Hawaii. Owned 100% by Metropolitan .
Spokane Mortgage Co. d/b/a MetWest Services - Performs Receivable
collection and servicing functions, owned 100% by Metropolitan.
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 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, 1995, Metropolitan had outstanding
approximately $201,312,000 (principal and accrued interest) of
Debenture debt and $25,552,000 (principal and compounded and accrued
interest) of collateralized debt and similar obligations. See
"CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this Debenture offering will
provide funds for Receivable investments, retiring maturing
debentures, Preferred Stock dividends, property development, other
investments (which may include investments in existing subsidiaries
and the acquisition of other companies, or the commencement of new
business ventures), and for general corporate purposes. See "USE OF
PROCEEDS" and "BUSINESS".
Principal and Interest Payments . . . . At the option of the holders
of Investment 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 this 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 is senior to those of the
common stock of Metropolitan, on parity with the liquidation rights of
all other previously issued and outstanding preferred stock and junior
to all debts of Metropolitan, including Metropolitan's previously
issued debentures and the Debentures offered herein. 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 $100 per share 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 MIS, 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 or more full
monthly distributions, per share. See "DESCRIPTION OF PREFERRED STOCK-
Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock offering
will provide funds for Receivable investments, retiring maturing
debentures, Preferred Stock dividends, property development, other
investments (which may include investments in existing subsidiaries
and the acquisition of other companies or the commencement of new
business ventures) and for general corporate purposes. 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 on Preferred Stock in that year
will constitute taxable income, as dividends, to the recipient to the
extent of such earnings and profits. 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".
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1995 and 1994 and for the years
ended September 30, 1995, 1994, and 1993 (other than the Ratio of Earnings to Fixed Charges and
preferred stock 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 of Financial Condition and Results of Operations appearing elsewhere herein. The
consolidated financial data shown as of September 30, 1993, 1992 and 1991 and for the years ended
September 30, 1992 and 1991 have been derived from audited financial statements not included herein.
The consolidated financial statements as of and for the years ended September 30, 1995, 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, and 1991 have been audited by BDO Seidman.
Year Ended September 30,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $ 138,107 $ 138,186 $133,113 $121,221 $107,253
========= ======= ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 6,376 $ 5,702 $ 8,558 $ 3,290 $ 356
Income allocated to
minority interests (73) (224) (255) (363) (177)
--------- - ----- -- ------ ----- -----
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 6,303 5,478 8,303 2,927 179
Extraordinary item (1) - - - 651 193
Cumulative effect of change
in accounting
for income taxes (2) - - (4,300) - -
-------- -------- -------- ------- ----------
Net income $ 6,303 $ 5,478 $ 4,003 $ 3,578 $ 372
Preferred stock dividends $ 4,038) $ (3,423) $ (3,313) $ (3,399) $ (4,072)
-------- -------- --------- --------- ---------
Income (loss)
applicable to common
stockholders $ 2,265 $ 2,055 $ 690 $ 179 $ (3,700)
======== ======== ======== ======== =========
Ratio of Earnings
to Fixed Charges and
Preferred Stock Dividends(4) 1.03 1.04 1.17
PER COMMON SHARE DATA (3):
Income (loss) before extraordinary
item and cumulative
effect of change in
accounting principle $ 17,288 $ 14,996 $ 37,239 $ (3,579) $(29,274)
Extraordinary item (1) - - - 4,932 1,454
Cumulative effect of change
in accounting principle (2) - - (32,089) - -
-------- -------- -------- -- ------ --------
Income (loss)
applicable to common
stockholders (5) $ 17,288 $ 14,996 $ 5,150 $ 1,353 $(27,820)
======== ======== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 131 137 134 132 133
======== ========= ======== ======== ========
Cash Dividends Per
Common Share $ 3,800 $ 675 $ 675 $ -- $ 900
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,078,468 $1,063,290 $1,031,958 $982,259 $824,385
Debt Securities and Other
Debt Payable 226,864 261,500 234,497 230,814 201,458
Stockholders' Equity 40,570 32,625 32,781 28,260 29,365
</Tab(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 1.03, 1.04 and 1.17 for the years ended
September 30, 1995, 1994 and 1993, respectively. Earnings were
insufficient to meet fixed charges and preferred dividends for the
years ended September 30, 1992, and 1991 by approximately $783,000,
and $6,071,000, 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 1.05,
1.34 and 1.06 for the years ended September 30, 1995, 1994 and 1993,
respectively. Earnings were insufficient to meet fixed charges and
preferred dividends for the years ended September 30, 1992, and 1991
by approximately $13,012,000, and $9,759,000, respectively.
The consolidated ratio of earnings to fixed charges excluding
preferred stock dividends was as follows for the years ended September
30, 1995 - 1.35; 1994 - 1.29; 1993 - 1.43; 1992 - 1.21; and 1991 -
1.02. The ratio of earnings to fixed charges for Metropolitan,
assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments was 1.40, 1.36 and 1.31 for the
years ended September 30, 1995, 1994 and 1993, respectively. Such
"parent only" earnings of Metropolitan were insufficient to meet fixed
charges for the years ended September 30, 1992 and 1991 by
approximately $7,701,000, an $3,296,000, 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.
CERTAIN INVESTMENT CONSIDERATIONS - RISK FACTORS
General
1. Impact of Interest Rates and General Economic Conditions:
During the twelve month period ending September 30, 1996, more of the
Consolidated Group's financial liabilities, principally annuities and
Debentures, are scheduled to reprice or mature than are its financial
assets, principally Receivables and fixed income investments.
Consequently, in a falling interest rate environment such as has
recently been experienced, the current level of profitability and the
fair value of the Consolidated Group's equity are likely to increase
as the spread between interest revenues and expense improves.
Conversely, in a rising interest rate environment, the net interest
income and the fair value of equity for the Consolidated Group would
likely decline. The fair value of equity is the difference between
the fair value of all assets less the fair value (as opposed to book
value) of all liabilities. The impact of a change in rates will be
reflected to the greatest extent in the fair value of assets and
liabilities having the longest maturities or time to their scheduled
repricing date. Additionally, borrowers tend to repay Receivable
loans when interest rates decline and as they may be able to refinance
such 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. The Consolidated Group purchases
the substantial majority of its Receivables collateralized by real
estate at a discount. The yield on these Receivables is improved when
recognition of the discount is accelerated through prepayments. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-Asset/Liability Management". A decline in
economic conditions could cause an increase in the number of
foreclosures on properties that collateralize the Receivables and a
reduction in the probable sales prices for property obtained through
such action which could adversely affect the results of operations and
financial position of the Consolidated Group. While interest rates
evidenced a declining trend as of the date of this prospectus,
management is unable to forecast with any certainty the fluctuations
in rates in the future.
2. Effect of Certain Insurance Regulations: At September 30,
1995 42% of Metropolitan's assets were invested in its subsidiaries,
principally Western United. Metropolitan is dependent upon its
ability to receive dividends and charge fees for services to
subsidiaries and affiliated companies 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 Western United may pay. Accordingly, to the extent of such
restrictions, assets and earnings of Western United 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 Western United was approximately $1,986,000 as of September
30, 1995. See "BUSINESS-Regulation" & "CERTAIN TRANSACTIONS".
Metropolitan charges Western United 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 of the State of Washington. To the extent that such fees
could be restricted by the Office of the Insurance 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, 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, other
investment income, 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 repayment of debentures which
mature during the period ending January 31, 1997, portions of the net
proceeds of this Debenture and Preferred Stock offering may be used
for such purpose. See "USE OF PROCEEDS". Approximately $27,000,000
in principal amount of debt securities will mature between February 1,
1996 and January 31, 1997. 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
amount of Debentures and Preferred Stocck that may be issued and
outstanding may be limited by the State of Washington See "BUSINESS-
Regulation".
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, 2000
based on amounts outstanding at September 30, 1995 and assuming no
reinvestment of maturing debentures:
</TABLE>
<TABLE>
<CAPTION>
OTHER PREFERRED
Fiscal Year Ending DEBENTURE DEBT STOCK
September 30, BONDS PAYABLE DIVIDENDS TOTAL
___________________ _________ _______ _________ ______
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1996 $ 28,788 $24,429 $3,963 $ 57,180
1997 54,706 285 3,963 58,954
1998 59,499 393 3,963 63,855
1999 50,480 200 3,963 54,643
2000 46,786 169 3,963 50,918
-------- ------- ------- --------
$240,259 $25,476 $19,815 $285,550
======== ======= ======= ========
</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 subsidiary's
earnings, (and in turn the Consolidated Group's earnings) by requiring
the expensing of unamortized deferred costs related to policy
surrenders. At September 30, 1995, deferred policy acquisition costs
on annuities were approximately 8.6% of annuity reserves. Surrender
charges typically do not exceed 5% of the annuity contract balance at
the annuity contract's inception, and such surrender charges decline
annually from that rate. Annuity termination rates, adjusted for
internal rollovers, for the calendar years 1994, 1993, and 1992 were
21.5%, 15.3%, and 12.0%, respectively. Deferred policy acquisition
costs on life insurance products were approximately 15.1% of life
reserves at September 30, 1995, Life insurance termination rates were
9.8%, 8.0%, and 8.2%, respectively, in calendar 1994, 1993, and 1992.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" & "Note 13, Consolidated Financial Statements".
5. Investments in Receivables:
Receivables Collateralized by Real Estate: The Consolidated Group
is engaged in the purchase of Receivables which principally consist of
Receivables collateralized 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 local 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 the buyer's credit. The Consolidated Group
purchases Receivables nationwide, allowing it to diversify its
investments geographically into areas where the market trends and
economic conditions may be more favorable. 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 collateralized 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 collateralized by real estate, these
Receivables are generally not collateralized by a specific asset.
Metropolitan's investment underwriting procedures vary with the type
of investment and may include any or all of the following: a review
of the credit rating of the payor, a review of corresponding state
laws including the potential 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 to minimize the occurrence of any
default. See "Business-Receivable Investments".
As of September 30, 1995, the Consolidated Group's Receivable
investments consisted of the following:
93.3 % Receivables collateralized by real estate
1.3% Annuities
5.4% Lotteries and loans collateralized by lotteries
The following table demonstrates the relative concentration of the
Consolidated Group's Receivable investments collateralized by real
estate and other investments as a percentage of assets.
<TABLE><CAPTION>
September 30,
-------------------------------------
1995 1994 1993
---- ---- ---
(Dollars in Thousands)
(Percentage of Total Assets)
<S> <C> <C> <C>
Carrying Value of Real Estate
Held For Sale and/or
Development $ 91,105 $ 76,765 $ 76,269
8% 7% 7%
Face Value of Real Estate
Receivables* $ 617,513 $ 606,324 $ 598,490
57% 57% 58%
Other Receivable Investments $ 41,591 - -
4% - -
Face Value of
Receivables in Arrears
for Three Months or More $ 17,500 $ 19,000 $ 25,850
Carrying value of 2% 2% 3%
Securities
Available for sale
and Held to
maturity
$ 219,904 $ 289,251 $ 224,812
20% 27% 22%
TOTAL ASSETS $1,078,468 $1,063,290 $1,031,958
100% 100% 100%
</TABLE>
* As of September 30, 1995, 99% of the Receivables collateralized
by real estate were collateralized by first position liens on real
estate and approximately 85% 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 and affiliates engage in similar business activities
which include investing in Receivables and other related activities.
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 its
subsidiary, Western United. It also provides these services to Old
Standard, and to Summit. Summit is controlled by C. Paul Sandifur
Jr., President of Metropolitan and President of most of the companies
within the Consolidated Group. On January 31, 1995, Summit purchased
MIS from Metropolitan, and acquired the Metropolitan property
development division. Also on May 31, 1995, Metropolitan sold Old
Standard to one of Summit's subsidiaries. Management does not believe
that these transactions will have had a material adverse impact on
either future earnings or equity of the Consolidated Group. See
"CERTAIN TRANSACTIONS". As a result of these affiliated
relationships, 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. See
"BUSINESS-Competition".
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 as 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 Debenture 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. Debenture holders 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 that
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
retirement of Debentures. On September 30, 1995, Metropolitan had
outstanding approximately $201,312,000 (principal and compounded and
accrued interest) of debentures and $25,552,000 (principal and accrued
interest) of collateralized debt. See Notes 8 and 9 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 parity with all
other outstanding debentures, unsecured accounts payable and unsecured
accrued liabilities. In the event of liquidation of the Consolidated
Group, the policyholders and creditors of Metropolitan's subsidiaries
would be paid prior to Debentureholders to the extent of the net
assets of the subsidiaries.
Relative to Preferred Stock
1. 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, including shares
of additional sub-series which may subsequently be authorized and
sold, are on 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, 1995,
total assets of the Consolidated Group were approximately
$1,078,468,000 and the total liabilities of the Consolidated Group
ranking senior in liquidation preference to Preferred Stock were
approximately $1,037,898,000 leaving $40,570,000 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, 1995, was $47,825,000.
Consequently, the liquidation rights of the outstanding preferred
stock had a book value of $.85 for each $1.00 of outstanding
liquidation rights as of September 30, 1995.
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.
2. Prior Years' Net Income Insufficient to Cover Preferred Stock
Distributions and Fixed Charges: Net income in 1995, 1994 and 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 1995 income
would have been insufficient to cover fixed charges by approximately
$6.8 million. Additionally, the elimination of similar items in 1994
and 1993 would have resulted in insufficient earnings to cover fixed
charges by approximately $4.2 million and $6.7 million, respectively.
SEE "CERTAIN INVESTMENT CONSIDERATIONS-RISK FACTORS" & "SELECTED
CONSOLIDATED FINANCIAL DATA". Net income for the years 1984 through
1992 was not sufficient to meet preferred stock distribution
requirements. During 1995, net income was approximately $6.3 million,
from which preferred stock dividends of approximately $4.0 million,
and common stock dividends of $502,000 were paid, which resulted in
$4.6 million of retained earnings at September 30, 1995 compared to
$2.7 million, $778,000, and $179,000 of retained earnings at September
30, 1994, 1993 and 1992, respectively. During fiscal year 1991,
Metropolitan's net income was insufficient to cover preferred stock
dividend requirements by approximately $3,700,000. See "SELECTED
CONSOLIDATED FINANCIAL DATA", and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
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
subsidiaries) were as follows for the periods indicated: 1995:1.03,
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 1995, 1994 and 1993
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 and 1991:
$6,071,000. See "SELECTED CONSOLIDATED FINANCIAL DATA." No assurance
can be given that earnings will be sufficient to cover preferred stock
dividend requirements in the future.
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 as tax free returns of capital for federal income tax
purposes. 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 and 1995. Prior year's
tax treatment should not be considered indicative of future years' tax
treatment. Management is unable to predict the future character of
its preferred stock 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 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 1995 and 1994, the average waiting time for a
shareholder wishing to sell preferred shares on this trading list was
10 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 or more full monthly
dividends 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".
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 Metropolitan.
Debentures may be transferred or exchanged for other Debentures
of the same series of a like aggregate principal amount subject to the
limitations set forth 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 date of issue 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, 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 in the order received and are
subject to review by 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 the redemption of the
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, 1995, Metropolitan had
outstanding approximately $201,312,000 (principal and compounded and
accrued interest) of Debentures and similar obligations, including
obligations of subsidiaries, and $25,552,000 (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 (Seafirst) is the Indenture Trustee
(Trustee). 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, 1995, 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. Seafirst has informed
Metropolitan of its intent to withdraw as Trustee. Metropolitan is
currently negotiating with several qualified businesses to substitute
for Seafirst as Trustee. It is not anticipated that this change will
have any impact on Metropolitan or its debentures.
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, 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). Preferred Stock is issued in book entry
form. Investments in Preferred Stock are evidenced by receipts and
not by negotiable stock certificates.
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 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.
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
Three-Month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), plus (ii) one half of one
percentage point. Each of the above rates shall be calculated as the
arithmetic average of the two most recent weekly per annum yields 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 the Preferred Stock is being determined. 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 Three-Month U.S. 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.
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 Board may increase, decrease or eliminate the additional
point at any time, in its sole discretion.
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, 1995, the total liabilities of Metropolitan
(consolidated) ranking senior in liquidation preference to Preferred
Stock were approximately $1,037,898,000. 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, 1995 were approximately
$47,825,000. 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 $100 per share plus 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: Preferred
Stock is 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,
consider such shares for redemption. Such redemption requests, when
received, are reviewed in the order received, 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, in
the opinion of Metropolitan's management, 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 redemption of such share, at the sole discretion
of Metropolitan, 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 be considered 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 1995 and 1994, the average
waiting time for a shareholder wishing to sell preferred shares on
this trading list was 10 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 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 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 or more 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 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).
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 Nontaxable Distributions
for the years 1984 through 1992 and 1994 with the Service.
Metropolitan believes that distributions paid during 1993 and 1995
were taxable.
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.
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 receives 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 several of 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 for authorized shares of
Series E preferred stock is $100.
** 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 after initial issuance,
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.
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
Vice President. She is also Assistant Corporate Counsel for
Metropolitan's subsidiaries. In addition, she is Assistant Corporate
Counsel for Summit and its subsidiaries, and Vice President,
Compliance Officer for MIS.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against any of the companies within the Consolidated Group
or to which its property is subject.
EXPERTS
The consolidated balance sheets of Metropolitan and its
subsidiaries as of September 30, 1995 and 1994 and the consolidated
statements of income, stockholders' equity and cash flows for each of
the three years in the period ended September 30, 1995 included in
this Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph describing changes in the
methods of accounting for investments in certain debt and equity
securities, repossessed real property and income taxes in fiscal 1993,
of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
The Debentures and Preferred Stock are offered directly to the
public on a continuing best efforts basis through 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 up to a maximum amount of 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. 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, 1995, MIS has received commissions of $4,851,051 from
Metropolitan on sales of approximately $187,680,000 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 $42,000 in fees and $15,000 in non-
accountable expenses plus its accountable expenses, which are not
expected to exceed $2,500.
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, undertakes to maintain
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 . . . . If all the Debentures offered are sold,
Metropolitan expects net proceeds from this Debenture offering of
$100,000,000 to $94,000,000 before deducting other expenses estimated
at $210,000 (combined total for both Debentures and Preferred Stock)
and after sales commissions. There can be no assurance, however, that
any of the Debentures can be sold. Sales commissions will range up to
a maximum of $6,000,000 (6%) depending on maturities of Debentures
sold and whether sales are reinvestments or new purchases. See
"BUSINESS - Method of Financing."
Preferred Stock Proceeds . . . .If all the Preferred Stock offered is
sold, Metropolitan expects net proceeds from this Preferred Stock
offering of $25,000,000 to $23,500,000 before deducting other expenses
estimated at $210,000 (combined total for both Debentures and
Preferred Stock) and after sales commissions of up to $1,500,000 (6%).
There can be no assurance, however, that any of the Preferred Stock
can be sold. See "BUSINESS-Method of Financing."
In conjunction with the other funds available to it through
operations and/or borrowings, Metropolitan will utilize the proceeds
of the Debenture and Preferred Stock offerings for funding
investments in Receivables and other investments, which may include
investments in subsidiaries and the acquisition of other companies or
the commencement of new business ventures, and development of real
estate now held or which may be acquired. The Consolidated Group
continues to evaluate possible acquisition candidates, but presently
is only in preliminary discussions with any such candidates. To the
extent internally generated funds are insufficient or unavailable for
the retirement of maturing debt securities through the period ending
January 31, 1997, 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 $27.0 million in principal amount of debt securities
will mature between February 1, 1996 and January 31, 1997 with
interest rates ranging from 5.5% to 10.5% and averaging approximately
8.7% 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 9 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 1
CAPITALIZATION
The following table sets forth the capitalization of Metropolitan
and its consolidated subsidiaries at September 30, 1995.
<TABLE>
<CAPTION>
Amount
Class Outstanding
(Dollars in thousands)
<S> <C>
Debt Payable
Reverse repurchase agreements with various
securities brokers;
interest at 6.1% to 6.75% per annum due and
repaid during October 1995.................. $ 24,132
Real estate contracts and mortgage notes
payable, interest rates ranging from 3%
to 11% per annum, due through 2020........... 1,385
--------
Total Debt Payable....................... 25,517
--------
Debenture Bonds
Investment Debentures, Series II, maturing
1995 to 2000, at 5% to 11%.................. 176,075
Investment Debentures Series I, maturing
in 1995 to 2004 at 7 1/2% to 10 1/4%........ 740
Compound and accrued interest................. 24,497
--------
Total Debenture Bonds.................... 201,312
--------
Stockholders' Equity
Preferred Stock............................... 21,627
Common Stock.................................. 293
Additional paid-in capital.................... 14,918
Unrealized losses on investments............... (830)
Retained earnings............................. 4,562
--------
Total Stockholders' Equity.................... 40,570
--------
Total Capitalization.............................. $267,399
========
</Table
SELECTED CONSOLIDATED FINANCIAL DATA
</TABLE>
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1995 and 1994 and for the years
ended September 30, 1995, 1994, and 1993 (other than the Ratio of Earnings to Fixed Charges and
preferred stock 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 of Financial Condition and Results of Operations appearing elsewhere herein. The
consolidated financial data shown as of September 30, 1993, 1992 and 1991 and for the years ended
September 30, 1992 and 1991 have been derived from audited financial statements not included herein.
The consolidated financial statements as of and for the years ended September 30, 1995, 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, and 1991 have been audited by BDO Seidman.
Year Ended September 30,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA
Revenues $ 138,107 $ 138,186 $133,113 $121,221 $107,253
========= ======= ======== ======== ========
Income before minority
interest, extraordinary
item and cumulative effect
of change in accounting
principle $ 6,376 $ 5,702 $ 8,558 $ 3,290 $ 356
Income allocated to
minority interests (73) (224) (255) (363) (177)
--------- - ----- -- ------ ----- --------
Income before extraordinary
item and cumulative effect
of change in accounting
for income taxes 6,303 5,478 8,303 2,927 179
Extraordinary item (1) - - - 651 193
Cumulative effect of change
in accounting
for income taxes (2) - - (4,300) - -
-------- -------- --------- ------- ----------
Net income $ 6,303 $ 5,478 $ 4,003 $ 3,578 $ 372
Preferred stock dividends $ (4,038) $ (3,423) $ (3,313) $ (3,399) $ (4,072)
---------- --------- --------- --------- ----------
Income (loss)
applicable to common
stockholders $ 2,265 $ 2,055 $ 690 $ 179 $ (3,700)
========= ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges and
Preferred Stock Dividends(4) 1.03 1.04 1.17
PER COMMON SHARE DATA (3):
Income (loss) before extraordinary
item and cumulative
effect of change in
accounting principle $ 17,288 $ 14,996 $ 37,239 $ (3,579) $(29,274)
Extraordinary item (1) - - - 4,932 1,454
Cumulative effect of change
in accounting principle (2) - - (32,089) - -
-------- -------- -------- -- ------ --------
Income (loss)
applicable to common
stockholders (5) $ 17,288 $ 14,996 $ 5,150 $ 1,353 $(27,820)
======== ======== ======== ======== ========
Weighted Average Number of
Common Shares
Outstanding (3) 131 137 134 132 133
======== ========= ======== ======== ========
Cash Dividends Per
Common Share $ 3,800 $ 675 $ 675 $ -- $ 900
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total Assets $1,078,468 $1,063,290 $1031,958 $982,259 $824,385
Debt Securities and Other
Debt Payable 226,864 261,500 234,497 230,814 201,458
Stockholders' Equity 40,570 32,625 32,781 28,260 29,365
</Tab(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 1.03, 1.04 and 1.17 for the years ended
September 30, 1995, 1994 and 1993, respectively. Earnings were
insufficient to meet fixed charges and preferred dividends for the
years ended September 30, 1992, and 1991 by approximately $783,000,
and $6,071,000, 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 1.05,
1.34 and 1.06 for the years ended September 30, 1995, 1994 and 1993,
respectively. Earnings were insufficient to meet fixed charges and
preferred dividends for the years ended September 30, 1992, and 1991
by approximately $13,012,000, and $9,759,000, respectively.
The consolidated ratio of earnings to fixed charges excluding
preferred stock dividends was as follows for the years ended September
30, 1995 - 1.35; 1994 - 1.29; 1993 - 1.43; 1992 - 1.21; and 1991 -
1.02. The ratio of earnings to fixed charges for Metropolitan,
assuming no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments was 1.40, 1.36 and 1.31 for the
years ended September 30, 1995, 1994 and 1993, respectively. Such
"parent only" earnings of Metropolitan were insufficient to meet fixed
charges for the years ended September 30, 1992 and 1991 by
approximately $7,701,000, an $3,296,000, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Consolidated Group income before income taxes, minority interest
and the cumulative effect of change in the method of accounting for
income taxes was approximately $9.5 million for the fiscal year ended
September 30, 1995 as compared to $8.7 million for the comparable 1994
period and $13.0 million for the comparable 1993 period. The slight
increase in 1995 over 1994 was primarily attributable to a net
increase of $1.4 million in net gains from real estate sales, a
decrease of $1.4 million in the provision for losses on real estate
assets, an increase of $1.3 million in realized net gains from the
sales of investments and Receivables, an increase of $1.6 million in
expenses capitalized as deferred costs, net of amortization, and an
improvement of $.8 million in fees, commissions, service and other
income, offset by a decline of $1.6 million in net interest sensitive
income and expense, and an increase of $4.2 million in commissions to
agents. The decline of $4.3 million in 1994 as compared to 1993 was
primarily attributable to a decline of $9.2 million in realized net
gains from the sales of investments and Receivables, a decrease of
$3.8 million in gain recognized from an insurance settlement, and a
decrease of $3.0 million in expenses capitalized as deferred costs,
net of amortization, offset by an improvement of $5.4 million in net
interest sensitive income and expense, a decrease of $4.7 million in
other operating and underwriting expenses, and an improvement of $1.5
million in net gains from real estate sales.
During the three year period ended September 30, 1995, the
Consolidated Group operated in an environment of somewhat narrow
fluctuations in interest rate levels with rates generally declining in
1993 and late 1995 and with a generally increasing trend in late 1994.
The general decrease in interest rate levels positively impacted
earnings and increased the fair value of the portfolio of
predominantly fixed rate investments. A portion of this improvement
in value was recognized with the realization of gains from the sale of
investment securities and Receivables of $4.4 million, $3.1 million
and $12.3 million in 1995, 1994 and 1993, respectively. The net
effect of the sales was to recognize the present value of future
income from the securities sold and to reduce future income to the
extent that the proceeds from sales were invested at lower rates of
return. For further information concerning the investment portfolio,
See "BUSINESS-Life Insurance and Annuity Operations" & "BUSINESS-
Securities Investments". The Receivable portfolio also experienced
higher than normal prepayments during the period which increased
income by triggering the recognition of unamortized discounts at an
accelerated rate.
Although the national economy has experienced relatively slow
growth over the past three years, the Consolidated Group's financial
results were not adversely impacted in any material way 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.
During 1995, the Consolidated Group sold two of its subsidiary
operating companies and discontinued its property development
division. In January 1995, the Consolidated Group sold its
broker/dealer subsidiary, MIS, to Summit, the latter of which had
formerly been a subsidiary of the Consolidated Group until its sale in
1994. Old Standard was sold to Summit in May, 1995. The financial
results of these transactions were not material to the Consolidated
Group. Also, See "Certain Transactions".
During 1995, construction on a major timeshare development
project in Kauai, Hawaii neared completion. At completion, it is
estimated that $21 million will have been invested. The sale price of
each timeshare week is projected to range between $14 thousand and $18
thousand with an expected sellout within twenty-four months from
completion of the construction. See "Business-Real Estate
Development-Lawai Beach Resort".
Net income in 1995, 1994 and 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 1995 income would have been insufficient to cover
fixed charges by approximately $6.8 million. Additionally, the
elimination of similar items in 1994 and 1993 would have resulted in
insufficient earnings to cover fixed charges by approximately $4.2
million and $6.7 million, respectively. SEE "CERTAIN INVESTMENT
CONSIDERATIONS-RISK FACTORS" & "SELECTED CONSOLIDATED FINANCIAL DATA".
Revenues and Expenses
Revenue for the Consolidated Group of $138.1 million for the
fiscal year ended September 30, 1995 was relatively unchanged from the
$138.2 million reported for the same period in 1994. Revenue of
$133.1 million was recognized during the fiscal year ended September
30, 1993. The modest decline in 1995 included a reduction of $1.7
million in other investment interest and a decrease of $1.1 million in
realized net gains on sales of investments, offset by an increase of
$2.4 million in net gains from the sale of Receivables. The revenue
increase of $5.1 million in 1994 over 1993 was primarily attributable
to a significant increase in real estate sales, particularly the sale
of time-share units in Hawaii of $19.1 million, offset by a decline of
$9.2 million of net gains from the sales of investments and
Receivables, a slight reduction of $1.4 million from interest and
earned discount relating to both Receivables and other investments,
and the absence of $3.8 million in gains recognized in 1993 from the
settlement of insurance claims on property damage caused by Hurricane
Iniki in September 1992.
Expenses of operation for the Consolidated Group were $128.6
million, $129.5 million, and $120.1 million for fiscal year ended
September 30, 1995, 1994, and 1993, respectively. The slight decline
in expenses in 1995 as compared to 1994 included an increase of $3.6
million in the cost of insurance policy and annuity benefits and an
increase of $4.2 million in recognized commissions to agents due to an
increase in volume. These increases were offset by a $3.5 million
decrease in interest expense, a $2.0 million decrease in the cost of
real estate sold, a $1.4 million decrease in the provision for losses
on real estate, and an increase of $1.6 million in the amount of
expenses capitalized as deferred costs, net of amortization. The
increase of $9.4 million in 1994 over 1993 is primarily attributable
to an increase of $17.6 million in the cost of real estate sold and a
decrease of $3.0 million in the amount of expense capitalized, net of
amortization, offset by a decrease of $7.2 million in the cost of
insurance policy and annuity benefits, a reduction of $1.1 million in
the provision for losses on real estate sales, and a reduction of $4.7
million in other operating and underwriting expenses.
Interest Sensitive Income and Expense
Management monitors interest sensitive income and expense as it
manages objectives for 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 on borrowed
money and insurance policy and annuity benefits.
The Consolidated Group is in a "liability sensitive" position in
that its interest sensitive liabilities reprice or mature more quickly
than do its interest sensitive assets. Consequently, in a rising
interest rate environment, the net return from interest sensitive
assets and liabilities will tend to decrease. Conversely, in a
falling interest rate environment, the net return from interest
sensitive assets and liabilities will tend to improve. See
"Asset/Liability Management". Net interest sensitive income was $26.5
million for the fiscal year ended September, 30, 1995. The comparable
results for 1994 and 1993 were $28.1 million and $22.4 million,
respectively. Interest rates were generally increasing over 1995
before declining later in the year which contributed to the decrease
of $1.6 million in net interest sensitive income. The improvement of
$5.7 million in 1994 over 1993 resulted from several factors including
the interest rate environment and a decline in the comparative pricing
of interest rate sensitive annuity products. Also contributing to the
changes in net interest sensitive income was the capitalization of
approximately $2.7 million, $2.2 million, and $3.0 million for the
years 1995, 1994, 1993, respectively, of interest associated with
various real estate development projects owned by the Consolidated
Group.
Real Estate Sales
The Consolidated Group is in the real estate market due primarily
to its repossession of properties following Receivable defaults and
its investment in a major timeshare development project in Kauai,
Hawaii. See "BUSINESS-Real Estate Development."
Excluding timeshare development property, approximately 75% of
real estate owned by the Consolidated Group is located in the Pacific
Northwest (Alaska, Washington, Oregon, Idaho, Montana), which has
experienced a stronger economy than many areas of the nation in the
past several years. Consequently, management believes that the sale of
these assets will be largely dependent on the attractiveness of the
Pacific Northwest marketplace. Of the property owned in the Pacific
Northwest, approximately $20 million is invested in commercial
developments with approximately $28 million in undeveloped land.
The Consolidated Group is engaged in the development of various
properties acquired in the course of business through repossession and
as investment property. The development or improvement of properties
is undertaken for the purpose of enhancing values to increase
salability and to maximize profit potential.
Real estate sales exceeded cost of those sales by $2.9 million in
1995, $1.5 million in 1994 , and $.03 million in 1993. Included in
these results are sales of timeshare units with a net gain of $.9
million in 1995 and net losses of $.3 million and $.03 million in 1994
and 1993, respectively. The trend in the sale of repossessed and
other development property includes 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. Approximately two months before Hurricane Iniki,
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. Sales
of timeshare units in 1995 and 1994 were approximately $23.6 million
and $17.6 million, respectively. Without the benefit of a fully
reconstructed project, Shell generated timeshare sales in excess of
$1.5 million during fiscal 1993.
Real estate sales, including timeshare unit sales, totaled $39.4
million for 1995, $40.0 million for 1994, and $20.9 million for 1993.
Sales of repossessed properties have more than kept pace with yearly
additions resulting in a total investment in repossessed real estate
of $38.0 million at September 30, 1995, $39.0 million at September 30,
1994, and $45.6 million at September 30, 1993. The aggregate
investment in real estate held for sale and development increased to
$91.1 million at September 30, 1995, up from $76.8 million at
September 30, 1994 and $76.3 million at September 30, 1993. The
increase of $14.3 million in 1995 over 1994 is primarily attributable
to the continuing development of the timeshare project in Kauai,
Hawaii and the development of a factory outlet mall in Pasco,
Washington. In addition to timeshare unit development, the
Consolidated Group is in the general business of holding and
developing property for sale. The largest investments in such
activities at September 30, 1995 were a $9.4 million development
located in downtown Spokane adjacent to the central business district
and a $8.2 million factory outlet mall development located in Pasco,
Washington. See "Business-Other Development Properties".
Gains or losses on real estate sold (excluding timeshare units)
are a function of several factors. Management's experience with the
most significant of these factors during the last three fiscal years
is set forth below:
</TABLE>
<TABLE>
For the Fiscal Year Ended
September 30,
1995 1994 1993
(Dollars in Thousands)
<C> <C> <C>
Amount of delinquencies over
three months at fiscal year end $17,500 $19,000 $25,850
Amount of foreclosures during
the fiscal year $13,834 $19,117 $16,685
Amount of foreclosed real estate
held for sale at fiscal year end $38,004 $39,037 $45,625
Gain (loss) on sale of the property
during the fiscal year $1,992 $ 1,793 $ 50
</TABLE>
The principal amount of Receivables in arrears for more than
ninety days as of September 30, 1995, 1994 and 1993 was 2.8%, 3.1% and
4.3%, respectively, stated as a percentage of the total outstanding
principal amount of Receivables. See Note 2 to the Consolidated
Financial Statements. 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.
Provision for Losses on Real Estate Assets
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. See Note 1 to the
Consolidated Financial Statements. During the years ended September
30, 1995, 1994 and 1993, the Consolidated Group provided $4.2 million,
$5.5 million and $6.6 million, respectively, for losses on real estate
assets. At September 30, 1995, 1994 and 1993, the Consolidated Group
had aggregate allowances for losses on real estate assets of $8.1
million, $9.1 million and $10.6 million, respectively, on real estate
assets of $679 million, $644 million and $639 million, respectively.
See Note 4 to the Consolidated Financial Statements.
Non-Interest Income and Expense
Non-interest income, composed of "Fees, Commissions, Services,
and Other Income" on the income statement, was $5.8 million for the
fiscal year ended September 30, 1995, and $5.0 million and $4.8
million for the comparable periods in 1994 and 1993, respectively.
Income sources include service fees and late charges in connection
with Receivables, charges for loan servicing and other services
provided to outside affiliated companies, and rents, commissions and
other revenues primarily associated with the Lawai Beach Resort,
Kauai, Hawaii. The increase of $.8 million in 1995 over 1994 was
primarily attributable to charges for services rendered to three
former subsidiary companies which were sold in September of 1994, and
in January and May of 1995.
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 was $26.1 million for the fiscal
year ended September 30, 1995 as compared to $23.6 million and $24.0
million for the comparable periods of 1994 and 1993, respectively.
The increase in cost of $2.5 million in 1995 over 1994 was primarily
attributable to an increase of $4.2 million in the recognition of
commissions paid to insurance agents and other agents which were
offset only partially by an increase in the amount capitalized as
deferred costs, net of amortization. A decrease of $4.7 million in
other operating and underwriting expenses in 1994 as compared to 1993
was partially offset by an increase of $.7 million in commissions paid
to agents and a reduction of $3.0 million in the amount capitalized as
deferred costs, net of amortization. The change in other operating
and underwriting expenses was primarily attributable to the recording
in 1993 of $3.9 million as an estimate for potential future insurance
guaranty fund assessments. All states in which the current and former
insurance subsidiary of the Consolidated Group operate have laws
requiring solvent life insurance companies to pay assessments to state
guaranty funds to provide for and protect the interests of
policyholders of insolvent life insurance companies. The amount added
to expense in 1993 was net of approximately $1.2 million in discount;
the Consolidated Group having used a 7.75% annual discount rate
applied over the estimated term of approximately seven years. See
Note 13 to the Consolidated Financial Statements.
Gain on Insurance Settlement
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 the insurance
settlement during 1993. Additionally, during 1994 and 1995, the
Consolidated Group recorded gains from subsequent settlements of
approximately $.2 million and $.05 million, respectively.
Realized Net Gains (Losses) on Sales of Investments and Receivables
The Consolidated Group invests in securities and Receivables as
well as real estate investment properties. 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". From time to
time, gains or losses are recognized on trading positions and
securities classified as "available-for-sale" may be sold at a gain or
a loss. Net gains from the sale of investments were $.03 million,
$1.1 million, and $12.0 million for the fiscal year ended September
30, 1995, 1994, and 1993, respectively. See "Business-Securities
Investments". The Consolidated Group purchases Receivables
collateralized by real estate, lottery prizes structured settlements,
and annuities. See "BUSINESS-Receivable Investments" and Notes 2 and
3 to the Consolidated Financial Statements. Such assets are
generated through the ongoing production operations of the
Consolidated Group. At times production exceeds internal demand and
Receivables may be remarketed. Net gains from the sale of Receivables
were $4.4 million, $2.0 million, and $.3 million for the fiscal years
ended September 30, 1995, 1994, and 1993, respectively.
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 more slowly than the
Consolidated Group's financial liabilities (primarily debentures and
annuities). In a rising rate environment, this mismatch will tend to
reduce earnings, while in a falling rate environment, earnings will
tend to increase. During 1996, approximately $191 million of
interest sensitive assets are expected to reprice or mature. These
assets consist of approximately $99 million of Receivables and $92
million of cash and investments. For liabilities, most of the balance
of life insurance and annuity contracts may be repriced during 1996.
Management estimates this amount at $600 million. In addition
approximately $24 million of debentures and $24 of other debt will
mature during that period. At September 30, 1995, these estimates
result in interest sensitive liabilities in excess of interest
sensitive assets of approximately $457 million, or a ratio of interest
sensitive assets to interest sensitive liabilities of approximately
340%
The Consolidated Group is able to manage this liability to asset
mismatch of approximately 3.4:1 by the fact that approximately 93% 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 feature is beneficial as
it allows the Consolidated Group to reprice its liabilities at lower
market rates of interest. In periods of increasing interest rates,
such liabilities were protected by surrender charges of approximately
$24.7 million at September 30, 1995. Depending on the remaining
surrender charges, the Consolidated Group anticipates having the
option 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
rate of interest that is lower than current market rates of interest.
As a result, the Consolidated Group may respond more slowly to
increases in market interest rate levels thereby diminishing the
impact of the current mismatch in the interest sensitivity ratio.
Effect of Inflation
During the three year period ended September 30, 1995, 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 impact interest rates on both the Consolidated
Group's assets and liabilities. See "Interest Sensitive Income and
Expense". However, both interest rate levels in general and the cost
of the Consolidated Group's funds and the return on its investments
are influenced by additional factors such as the level of economic
activity and competitive or strategic product pricing issues. The net
effect of the combined factors on the earnings of the Consolidated
Group has been a slight improvement over the three year period in the
positive spread between the rate of return on interest earning assets
less the cost of interest paying liabilities. Inflation has not had a
material effect on the Consolidated Group's operating expenses.
Increases in operating expenses have resulted principally from
increased product volumes or other business considerations.
Revenues from real estate sold are influenced in part by
inflation, as, historically, real estate values have fluctuated with
the rate of inflation. However, management is unable to quantify the
effect of inflation in this respect with any degree of 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 13 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 was 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 7 to the Consolidated Financial Statements. At
September 30, 1995, the Consolidated Group had net unrealized losses
on investments of $829,417. This amount is reported as a reduction in
stockholders' equity.
In March 1995, Statement of Financial Accounting Standards No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," was issued. SFAS
No. 121 requires certain long-lived assets, such as the Consolidated
Group's real estate assets, be reviewed for impairment in value
whenever events or circumstances indicate that the carrying value of
an asset may not be recoverable. In performing the review, if
expected future undiscounted cash flows from the use of the asset or
the fair value, less selling costs, from the disposition of the asset
is less than its carrying value, an impairment loss is to be
recognized. The Consolidated Group is required to adopt this new
standard by October 1, 1996. The Consolidated Group does not
anticipate that the adoption of SFAS No. 121 will have a material
effect on the consolidated financial statements.
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.
Cash provided from operating activities was $40.8 million in
1995; $46.0 million in 1994; and $43.9 million in 1993. Cash utilized
by the Consolidated Group in its investing activities was $43.6
million in 1995, $106.8 million in 1994 and $6.7 million in 1993. Cash
provided to the Consolidated Group from its financing activities was
$6.3 million in 1995 and $17.2 million in 1994 compared to cash
utilized by the Consolidated Group of $14.6 million in 1993. These
cash flows have resulted in year end cash and cash equivalent balances
of $32.8 million in 1995; $29.3 million in 1994; and $72.9 million in
1993. At September 30, 1995, 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 1994 and 1995. During 1995,
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, 1995, Metropolitan had total outstanding
debentures of approximately $201.3 million and total outstanding
preferred stock of approximately $47.8 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 1993 through 1995; however,
management expects that should the same or a lower limitation be
imposed during 1996, it, could have a material negative effect on
liquidity.
During 1996, anticipated principal, interest and dividend
payments on outstanding debentures, other debt payments and preferred
stock distributions are expected to be approximately $57 million.
During 1995, the principal portion of the payments received on the
Consolidated Group's Receivables and proceeds from sales of real
estate and Receivables was $197 million. A decrease in the prepayment
rate on these Receivables or the ability to sell 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, 1995, cash or cash
equivalents were $33 million, or 3.0% of assets. Including securities
that are available for sale, total liquidity was $65 million and $118
million as of September 30, 1995 and September 30, 1994, respectively,
or 6.0% and 11.1% of total assets, respectively. At September 30,
1994, the Consolidated Group had $29 million in cash or cash
equivalents, or 2.8% of assets.
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 1994, the results of this
cash flow testing process were satisfactory.
Metropolitan alone generated approximately $2.4 million in cash from
operations in 1995. Net cash of approximately $3.9 million was used in
investing activities. Funds used included $18.4 million, $12.1
million, and $12.5 million for the purchase of Receivables,
investments, and additions to real estate held, respectively. An
additional $9.6 million was used for investment in and advances to
subsidiaries. Funds provided from investing activities included $34.9
million from the sale of Receivables collateralized by real estate and
$5.1 million of principal payments on such Receivables. Additional
funds of $1.9 million and $7.6 were provided from the sale of real
estate and investments, respectively. Net cash of $8.0 million
provided from financing activities in 1995 included $53.1 million in
proceeds from the sale of debentures which was partially offset by
$49.0 million in repayment of debentures. Additionally, $4.5 million
was obtained from the issuance of preferred stock and $4.2 million was
obtained in net borrowings while $4.5 million was paid out in cash
dividends.
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
had 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.
The Consolidated Group is currently negotiating the potential
securitization of portions of its Receivable portfolio, principally
for sale to institutional investors. If completed this transaction,
and potential future securitizations, may enhance the Consolidated
Group's liquidity position.
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.
BUSINESS
OVERVIEW
The Consolidated Group is a financial company which consists of a
parent corporation, Metropolitan, and several subsidiaries including a
life insurance company, and other related supporting entities and
divisions. The Consolidated Group is engaged in the business of
investing in Receivables and other assets through funds provided by
annuity sales, Receivable investment proceeds, other investment
income, 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, its other investments and its cost of funds.
The Receivables consist primarily of real estate contracts and
promissory notes collateralized by liens on real estate. To a lesser
extent, Metropolitan and its subsidiaries also acquire other types of
Receivables, including but not limited to structured settlements,
lottery prizes and annuities. 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 an agreement with its insurance subsidiary, Western
United, to provide Receivable acquisition, collection and management
services for a fee. See "BUSINESS-RECEIVABLE INVESTMENTS-Management,
Receivable Acquisition and Collection Services". Metropolitan has also
entered into a similar agreements to provide Receivable acquisition,
collection and management services for a fee to Summit and Old
Standard. See "BUSINESS-RECEIVABLE INVESTMENTS-Management, Receivable
Acquisition and Collection Services" & "CERTAIN TRANSACTIONS".
Western United, 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 subsidiary. See "LIFE INSURANCE
AND ANNUITY OPERATIONS".
The investments in Receivables, securities and other assets made
by the Consolidated Group are financed primarily by sales of annuities
through Metropolitan's insurance subsidiary, Western United, the cash
flow from Receivables and securities investments, the sale of real
estate, and Metropolitan's issuance of debentures and preferred stock.
Metropolitan, also sells and develops real estate primarily as a
result of repossessions of real estate arising from Receivable
investments. In addition, Metropolitan, 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 fifteen Receivable acquisition branch
offices in twelve states. The evaluation, underwriting, closing,
collection and servicing of the Receivables is performed at
Metropolitan's headquarters in Spokane, Washington. Receivable
investments are primarily collateralized by residential real estate,
but also include Receivables collateralized by other types of real
estate, structured settlements, lottery prizes, annuities and other
investments. At the time of acquisition, the face value of Receivables
collateralized by real estate generally range in size from
approximately $15,000 to $300,000. In 1995, the average Receivable
balance at the time of acquisition by the Consolidated Group was
approximately $45,000. See Note 2 to Consolidated Financial
Statements.
Sources of Receivables
Approximately 90% 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 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
collateralized by real estate.
In order to enhance its position in the Receivables market,
Metropolitan has developed a broker software program called BrokerNet.
BrokerNet is a menu driven program which assists brokers in preparing
and completing proposals to sell Receivables to Metropolitan. In
addition, the program assists in analyzing the quality of the
Receivable, and provides online quotes for the purchase price for the
Receivable. It is planned that this software will be further
developed to assist in preparing the legal documents needed to
purchase a Receivable, assist in monitoring the closing of a
Receivable purchase, and ultimately, transfer the Receivable data
directly into Metropolitan's Receivable servicing and collection
system. All of these efforts are intended to streamline the decision
making process, make the closing time quicker, and continue to enhance
Metropolitan's position in the Receivable purchasing industry.
Although the initial response from the Receivable broker's appears
positive, there can be no assurance that this software program will
create a competitive advantage.
Metropolitan's Receivable acquisition activities (total
activities for itself and for others), grew from approximately $156.6
million and $142.5 million in 1993 and 1994, respectively, to $259.8
million in 1995. At the same time, Metropolitan's average closing
time has improved to 23 days in 1995, in comparison to 24 days in
1994, and 27 days in 1993. Management considers closing time to be an
important factor in a seller's decision to sell a Receivable to
Metropolitan.
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 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 Receivable. For Receivables which were acquired after
September 30, 1992, these net purchase discounts are amortized on an
individual basis using the level yield method over the remaining life
of the Receivable. 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 Receivables, the amortization period, which is
approximately 78 months, is based on an estimated 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 2
Management establishes the yield requirements for Receivable
investments by assuming that all payments on the Receivables will be
paid as scheduled. During fiscal 1995, the Consolidated Group's
initial yield requirement was generally between 10% - 14% for
Receivables collateralized by real estate. 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. Conversely, to the extent that
payments are received later than anticipated, the discount is earned
less quickly resulting in a lower 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 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 collateralized by real estate include a requirement that
the ratio of the investment in a Receivable compared to the appraised
value of the property which collateralizes the Receivable may not
exceed 75%-80% (depending upon company, collateral type and collateral
quality) on Receivables collateralized by single family residences;
and that the ratio of the investment to the property's appraised value
may not exceed 70% of Receivables collateralized by other types of
improved property; and 55% on unimproved land. Management believes
these more stringent than conventional investment to collateral ratio
requirements generally 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 collateralized 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 generally 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
collateralized 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 collateralized 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 collateralized by real estate, such as structured settlements,
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 a review of other factors
relevant to the risk of purchasing a particular annuity as deemed
appropriate by management 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 receipt of 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.
Receivables which exceed specified amounts are submitted to an
additional special risk evaluation committee, and are subject to legal
department review. The investment amount which gives rise to special
risk evaluation is dependent upon the type and quality of collateral,
ranging from $250,000 for conventionally financiable residential
property to $100,000 for residential property which is not owner
occupied. 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 collateralized 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 includes
Receivables collateralized 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 collateralized by commercial property or unimproved
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 collateral, 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 Receivables 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: 1995:$68.5 million; 1994:$18.4 million; and 1993:
$4.4 million;, recognizing gains of $4.4 million, $2.0 million, and
$.3 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, 1995
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 3
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABLE
INVESTMENTS BY STATE: REFER TO GRAPH APPENDIX ITEM 4
The following tables present certain statistical information
about the Consolidated Group's Receivable investment activity during
the three fiscal years ended September 30, 1995.
<TABLE>
<CAPTION>
Year Ended or at September 30
-----------------------------
1995 1994 1993
-----------------------------
(Dollars in thousands)
<S> <C> <C> <C>
DISCOUNTED REAL ESTATE RECEIVABLES
PURCHASED DURING PERIOD
Number..................... 4,130 2,906 3,410
Average Face Amount........ $ 45 $ 52 $ 50
-------- -------- --------
Face Amount................ $187,305 $150,709 $171,747
Unrealized Discounts, Net of
Acquisition Costs....... (15,338) (21,186) ( 18,461)
Underlying Obligations
Assumed (1)............. (527) (191) (667)
-------- -------- --------
Price Paid................. $171,440 $129,332 $152,619
======== ======== ========
DISCOUNTED REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD
Number..................... 13,436 13,994 14,592
-------- -------- --------
Face Amount................ $505,441 $502,314 $513,113
Unrealized Discounts, Net
of Unamortized Acquisition
Costs................... (37,354) (46,989) (45,297)
-------- -------- --------
Net Balance................ $468,087 $455,325 $467,816
======== ======== ========
TOTAL REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD (2)
Number..................... 19,608 18,820 18,578
-------- -------- --------
Face Amount Discounted
Receivables............. $505,441 $502,314 $513,113
Face Amount Non-Discounted
Receivables............. 112,072 104,011 85,377
-------- -------- --------
Total Outstanding Receivables 617,513 606,325 598,490
Unrealized Discounts, Net of
Unamortized Acquisition Costs (37,354) (46,989) (45,297)
Accrued Interest Receivable 7,335 7,920 9,247
-------- -------- --------
Net Balance................ $587,494 $567,256 $562,440
======== ======== ========
Average Net Balance per
Receivable (Excluding
Accrued Interest) $29.6 $ 29.7 $ 29.8
Average Annual Yield on
Discounted Receivables (3) 12.8% 13.6% 14.2%
<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 18% of the portfolio at September 30, 1995, 17% of the
portfolio at September 30, 1994, and 14% of the portfolio at September 30,
1993 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 (i) fluctuations in the rate of actual prepayments;
(ii) the changing mix of Receivable purchases between those originated from
Metropolitan's network of offices and those purchased in bulk; (iii) the
amortization of the existing portfolio; and (iv) the amount of discount on
Receivables purchased.
</TABLE>
At September 30, 1995, the average contractual interest rate on
Receivables collateralized by real estate (weighted by principal
balances) was approximately 9.6%.
Prior to December 31, 1995, the Consolidated Group commenced, on
a limited basis, the direct investment in Receivables through the
origination of loans collateralized by residential real estate.
Management is currently evaluating the possible expansion of this
activity.
Delinquency Experience & Collection Procedures
The principal amount of Receivables collateralized by real
estate, held by the Consolidated Group (as a percentage of the total
outstanding principal amount of Receivables) which was in arrears for
more than ninety days at the end of the following fiscal years was:
1995 --- 2.8%
1994 --- 3.1%
1993 --- 4.3%
The Receivables collateralized by real estate purchased by the
Consolidated Group are typically not of the same quality as those that
are originated for sale to agencies such as the Federal National
Mortgage Association (Fannie Mae). 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, management believes 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 collateralized
Receivables. During 1995, the average initial yield requirement on
Receivables collateralized by real estate was generally between 10%
and 14%.
When a Receivable becomes delinquent, the payor is initially
contacted by letter approximately seven days after the delinquency
date. If the delinquency is not cured, the payor is contacted by
telephone (generally on the 17th day following the payment due date).
If the default is still not cured (generally within three to six days
after the initial call), then additional collection activity,
including further 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 collateral 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 Group's historical experience on such sales. The
Consolidated Group adjusts its allowance for losses requirement, as
appropriate, based upon such observed trends in delinquencies and
resales.
The Consolidated Group's current appraisal policy requires 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 subsidiary, 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 Group's changes in
the allowance for losses on real estate assets:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- ------------
<S> <C> <C> <C>
Beginning Balance $9,108,383 $10,598,491 $ 9,583,718
Provisions 4,174,644 5,533,193 6,596,933
Charge-Offs (5,166,962) (7,023,301) (5,582,160)
---------- ---------- ----------
Ending Balance $8,116,065 $ 9,108,383 $10,598,491
========== ========== ==========
Percentage of Ending
Balance of Allowances
to Outstanding
Real Estate Assets 1.2% 1.4% 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 and to Summit and Old
Standard for a fee. 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 with carrying values of
$100,000 or more which were held at September 30, 1995 and/or
September 30, 1994. 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 9/30/94 9/30/95 9/30/95 closure Income
- ----------------- ------------ ------------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
26.73 Commercial Acres $215,668 $252,875 $252,875 1983 (1)
Farm & Ranch 1,927
Acres, Washington 285,690 285,690 329,500 1988 (2) $4,610
50,000 Sq Ft Commercial
Building, Washington 850,000 850,000 897,000 1989 (3)
34 Acres, Washington 3,038,296 3,071,006 3,350,000 1991 (4)
1.35 Acre Commercial
Land, Tennessee 228,517 Sold A 1992
15 Condo Units,
Arizona 607,050 Sold B 1991
House, New Jersey 108,000 Sold C 1993
House, California 126,000 95,400 106,000 1993
House, Washington 117,450 Sold D 1994
Land, California $225,360 $225,360 $250,400 1994
House, New Mexico 117,000 Sold E 1994
K-5 Grade School,
California 270,000 202,500 225,000 1994
House, Florida 117,000 Sold F 1994
Condo, California 117,000 Sold G 1994
House, California 123,300 Sold H 1994
House, California 117,000 117,000 130,000 1994
Condo, New Jersey 121,500 Sold I 1994
Duplex, New Jersey 117,000 103,500 115,000 1994
House, California 108,000 Sold J 1994
House, California 134,100 103,500 115,000 1994
House, California 118,710 Sold K 1994
Duplex, New Jersey 130,500 Sold L 1994
Land, Arizona 126,000 Sold M 1994
House, New Jersey 118,000 Sold N 1994
House, California 128,500 Sold O 1994
House, New Jersey 0 121,500 135,000 1995
House, Michigan 0 116,100 129,000 1995
House, New York 0 138,600 154,000 1995
House, New York 0 189,000 210,000 1995
House, California 0 162,000 180,000 1995
House, California 0 127,800 142,000 1995
House, Arizona 0 146,700 163,000 1995
Condo, California 0 256,500 285,000 1995
House, California 0 130,500 145,000 1995
House, Connecticut 0 187,200 208,000 1995
House, Washington 0 135,900 151,000 1995
House, New York 0 140,400 156,000 1995
--------- --------- --------- --------
$7,765,641 $7,159,031 $7,828,775 $4,610
========= ========= ========= ========
</TABLE>
The sales prices of the referenced properties were as follows:
<TABLE>
<CAPTION>
<C> <S>
$140,000 A
690,000 B
120,000 C
103,000 D
108,000 E
130,000 F
124,000 G
115,000 H
120,000 I
116,800 J
135,000 K
110,000 L
89,000 M
99,900 N
105,000 O
--------
2,305,700
=========
The following are descriptions of the marketing status of all properties
listed above which were acquired by the Consolidated Group prior to fiscal 1992:
(1) Located in Pasco, Washington, the commercial property is in the area
of a planned freeway interchange.
(2) 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.
(3) Commercial building in Spokane, Washington. Sold in November,
1995 for $930,000.
(4) See discussion regarding "Renton" in "Real Estate Development-Other
Development Properties".
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 and Old Standard. 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 1995 on purchases of $176.5
million, including origination expenses, net of purchase discount was
$6.9 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 subsidiary, there is a
corresponding 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 subsidiary.
Underwriting fees charged to Summit and Old Standard are recognized as
revenues when the related fees are charged to Summit and Old Standard.
During 1995, Metropolitan charged Western United fees of $14.57
million, and charged Summit and Old Standard fees of $634,000 and
$663,000 respectively. The service agreements with Western United has
no effect upon the consolidated financial results of the Consolidated
Group. The service agreement with companies outside the Consolidated
Group, including Summit and Old Standard provided gains on the sale of
Receivables or provided fee income to Metropolitan. See "Certain
Transactions"
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 its
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 three four-story buildings containing a total of
170 residential condominium units. Related amenities include swimming
pools, tennis courts, a 180 car parking garage, modern exercise
facilities and a sewage treatment plant. Construction of the third
building began October, 1993 and was completed during the fall of
1995. Construction costs were 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, 1995 was $25,215,000.
Additional properties, all of which adjoin the Lawai Beach
Resort, include 11 condominium units in the Prince Kuhio Condominiums
with an aggregate carrying value of $1,117,000, a four-plex
condominium timeshare building with 28 weekly intervals remaining and
a carrying value of approximately $169,000; and a restaurant site
with a carrying value (land and building) of approximately $3,833,000
as of September 30, 1995.
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 made partial
settlement with Metropolitan for approximately $204,000 with
Metropolitan receiving a final settlement of $51,000 in 1995. The
restaurant was rebuilt and reopened in 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 and on a regular basis
during 1994 and 1995. In 1994, timeshare sales totaled approximately
$17.6 million for monthly average sales of approximately $1.5 million.
In 1995, timeshare sales totaled approximately $23.1 million for
monthly average sales of over $1.9 million. Although there can be no
assurance that sales will continue at the present pace, if the present
pace does continue, the remaining timeshares units would be completely
sold by approximately the end of calendar 1997.
Additional Information
Sales and revenue from timeshares decreased in 1993, due
primarily to the effects of Hurricane Iniki. The tables below set
forth additional historical information about the timeshare sales and
revenue 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 cash or other interest earning assets.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
TIMESHARE SALES
Number of Sales 1,485 1,500 161
Amount of Sales $23,120,888 $17,642,544 $ 1,540,528
Costs (7,353,510) (7,171,159) (530,250)
Expenses (14,996,260) (10,737,591) (1,041,807)
----------- ----------- -----------
Profit(Loss) $771,118 $ (266,206) $ (31,529)
=========== =========== ===========
WHOLE-UNIT CONDOMINIUM
SALES
Number of Units 1 - -
Amount of Sales $500,000 - -
Costs (321,855) - -
Expenses (1,787) - -
----------- ----------- -----------
Operating Profit $176,358 - -
=========== =========== ===========
</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, 1995, Metropolitan's outstanding
Lawai Beach Resort timeshare Receivables balance was approximately
$30.3 million. The loan delinquency rate (based on the principal
balances of loans more than ninety days in arrears) on that date was
approximately 3%.
Skier's Edge Resort
Metropolitan, owns approximately 450 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, 1995
was $1,337,000. The unsold total timeshare use periods in the project
were approximately 1,200 at September 30, 1995. Unsold timeshares,
while being held for sale, are included in a rental pool operated by
the resort owner's association. Net rental revenue was $21,956 in
1995, $31,454 in 1994 and $21,759 in fiscal 1993. The market value of
the property is estimated at $1,500,000 at September 30, 1995 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 salability and to maximize profit potential. Significant
development properties, all owned outright unless otherwise noted,
held by Metropolitan as of September 30, 1995 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 includes several developments in
close proximity to each other, including residential, commercial, and
industrial and business park developments. Several high-tech firms
including Hewlett Packard and Olivetti North America are on properties
adjacent to the business park.
MeadowWood Business Park Phase I: This site 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. The sale of
the remaining lot for $315,000 closed in October 1995. At September
30, 1995, the carrying value in the remaining lot had been $261,951.
The remaining asset in this phase is Madsen Court, a 46,351 square
foot commercial building constructed in 1994. The carrying value in
the commercial building was $2,520,210 and the appraised value is
$3,350,000 as of December 7, 1995. Itronix, a wholly-owned subsidiary
of Telxon, leases approximately 26,500 square feet..Madsen Court is
currently 68% leased and generated approximately $158,000 of rental
income in 1995.
MeadowWood Business Park Phase II: This phase of the business
park includes 9.86 acres owned and 62.1 acres under option by
Metropolitan at $10,500 per acre. A preliminary binding site plan for
Meadowwood Business Park - Phase II has been approved by the County of
Spokane. If approval of the the final binding site plan, as currently
envisioned, is obtained it will provide for approximately twenty-five
lots with sizes ranging from two to five acres. At September 30,
1995, Metropolitan's carrying value in the property was $2,983,470.
Sales adjacent to the property subsequent to the September 15, 1994
appraisal of the property indicate an increase in value of 12.7% to
$3,265,000.
MeadowWood Residential: Both residential phases adjoin a public
golf course. The Vistas, which was the site of the 1991 Spokane Home
Show, consisted of 71 lots which were developed and sold for
$2,492,500. Metropolitan holds an option to purchase an additional
37.66 acres at $10,500 per acre. This property, including the optioned
parcels, will include approximately ninety-seven (97) lots. At
September 30, 1995, Metropolitan's carrying value for the remaining
residential property under a purchase option was $593,300.
Approximately 32.06 acres are currently under contract negotiation for
a sale of the option at a sales price of $755,000.
* The Summit Property
This property consists of approximately 72 acres in downtown
Spokane adjacent to the central business district and is 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. The master plan and Shoreline Substantial
Development Use Permit were approved by the City of Spokane in 1995.
There are several warehouse buildings located on the property, which
are vacant and slated for demolition in 1996. At September 30, 1995,
the carrying value of the property was $9,202,323. The site has been
appraised at $14,217,000 as of February 20, 1995. This appraisal is
based, in part, upon certain assumptions including the occurrence of
substantial additional property development at substantial additional
cost, and which if completed are estimated to increase the property's
value to a completed value of approximately $43,474,000. This
appraisal suggests a current approximate property value of
$14,217,000, net of the development and financial assumptions
contained in the appraisal. 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 115.09 acre portion of an original tract of
440 acres which was purchased in 1979. It is located in the City 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 four-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, 1995, the carrying value was
$1,891,753. The site was appraised at $2,182,000 as of January 10,
1995.
* 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 carrying value at September 30, 1995 of $134,396. There is a
four-year option in which the purchase price of the property escalates
at 7% annually from a base price of $250,000. The option must be
exercised in part by 1997 and in full by 1999.
* Spokane Valley Plaza
The property is located at an Interstate 90 freeway interchange
just east of Spokane and consists of 33 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. There
is a pending sale to a national retailer for a portion of the property
at a price of $2,950,000. At September 30, 1995, 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
368 acres of land, at a freeway interchange in Pasco, Washington. The
property was zoned in 1994 for mixed residential and commercial use.
Water and sewer have been extended to the property. Access to the
property has been improved by construction of a new interior road.
Broadmoor Factory Outlet Mall: The Broadmoor Factory Outlet Mall
is 24.5 acres located on the north side of the freeway. Phase I,
consisting of 107,000 square feet, of the mall has been constructed.
At December 31, 1995, the mall was over 65% leased. The carrying
value of the property as of September 30, 1995 is $8,180,988. The
appraised value is $13,325,000 as of December 15, 1995. Lease
payments from the initial tenants commenced August, 1995. The mall
generated approximately $24,000 of rental income in fiscal 1995.
Broadmoor Park General: The remaining 344 acres is platted for
development as a business park; hotels, motels, fast food restaurants,
gas stations, a variety of stores; land for development of both single
and multi-family residential housing; and civic uses. The carrying
value as of September 30, 1995 is $2,530,895. The appraised value as
of November 1, 1994 of $15,960,000 is net of the cost of proposed
development plans. 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 multi-family development in Puyallup, Pierce County,
Washington and is located adjacent to a major shopping area.
Discussions with a local developer to sell the property are currently
in process. The property was acquired upon settlement of a lawsuit in
1988. At September 30, 1995, the carrying value was $1,358,840. Its
appraised value is $2,908,000 as of July 22, 1994 by an internal
Metropolitan appraiser.
* Everett
This property is a 97.42 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 as are discussions with several
parties to sell and/or jointly develop the property. At September
30, 1995, the carrying value in the property was $4,802,240. The
appraised value is $16,000,000 as of July 21, 1994 by an internal
Metropolitan appraiser. 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 approximately 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 over 200 residential units. Discussions with a
large house builder to jointly develop this property were initiated in
December, 1995. At September 30, 1995, the carrying value in the
property was $3,071,006. . The market value is estimated at $3,350,000
based on a 1994 external analysis.
The aggregate carrying value of the "other development
properties" as of September 30, 1995 is $44,911,372 and the aggregate
adjusted estimated market value is $83,457,000 which is net of the
cost of the projected improvements included in the valuations, and
subject to the uncertainties related to appraisals of substantially
unimproved land, as described further below. Metropolitan received
aggregate rental income of approximately $182,000 during fiscal 1995
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 experiencing relatively stable
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.
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
as indicated by the 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 1995 1994 1993
SALE AND DEVELOPMENT --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Property Held For
Sale and Development $53,101 $37,729 $ 30,644
Real Estate Acquired in
Satisfaction of Debt and
Foreclosures in Process 38,004 39,037 45,625
-------- -------- --------
Net Balance $91,105 $76,766 $ 76,269
======== ======== ========
SUMMARY OF CHANGES
Balance at Beginning of Year $76,766 $76,269 $ 73,556
Additions and Improvements:
Condominiums 26,276 19,563 8,923
Repossessed & Development
Real Estate 24,644 19,950 16,549
Transfer from Fixed and Other
Assets 1,599 259 53
Depreciation (1,731) (778) (272)
Basis Transfer on Real Estate
Sales Which Were Deferred Due
to Insufficient Down Payment --- --- ---
Basis Allocated to Involuntary
Conversion Gains --- --- (1,628)
Cost of Real Estate Sold:
Condominium Units (22,674) (17,909) 1,573)
Real Estate (13,775) (20,588) (19,339)
------- -------- --------
Balance at End of Year $91,105 $76,766 $ 76,269
======= ======== ========
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales $23,621 $17,643 $ 1,541
Unit Costs (7,676) (7,171) (530)
Associated Selling Costs (14,998) (10,738) (1,043)
------- -------- --------
Condominium - Gain 947 (266) (32)
------- -------- --------
Real Estate:
Sales 15,767 22,381 19,389
Equity Basis (13,775) (20,588) ( 19,339)
------- -------- --------
Real Estate - Gain (Loss) 1,992 1,793 50
------- -------- --------
Fixed Assets:
Sales - - 11
Asset Basis - - -
------- -------- --------
Fixed Assets - Gain - - 11
------- -------- --------
Total Gain on Sale of Real Estate $2,939 $ 1,527 $ 29
======= ======== ========
</TABLE>
LIFE INSURANCE AND ANNUITY OPERATIONS
Introduction
The Consolidated Group raises the majority of its funds through
its insurance subsidiary, Western United. Western United was
incorporated in Washington State in 1963. Since 1979, the assets of
the Western United have grown from $600,000 to over $922 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.
Western United markets its annuity and life insurance products
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 1994, the most recent year for which
statistical information is available, Western United's annuity market
share was 4.4% (ranking it sixth in production) in the six states in
which approximately 84% of its annuity business was produced:
Washington, Oregon, Idaho, Montana, North Dakota and Utah.
Management intends to expand the operations of Western United
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 Western United. See
"BUSINESS-RECEIVABLE INVESTMENTS-Management, Receivable Acquisition
and Collection Services". During 1995, 1994, and 1993, Metropolitan
charged Western United fees of approximately $14.6 million, $12.8
million, and $10.0 million, respectively. The 1995 and 1994 charge
was before loss reserves of $6.95 million and $4.75 million,
respectively, which were provided to Western United by Metropolitan as
a guarantee against future losses.
Western United may invest up to 65% of its statutory assets in
real estate related Receivables. The balance of Western United's
investments are principally invested in corporate and government
securities, but may be invested into a variety of other areas as
permitted by applicable insurance regulations. See "BUSINESS-
Securities Investments" and "BUSINESS-Regulation".
Annuities
Western United has actively marketed single and flexible premium
deferred annuities since 1980. During the past three years, over 97%
of premiums for Western United were 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.
Western United prices its new products and renewals on a basis
that is consistent with the availability of asset products in which to
invest its funds at desired yield spreads in consideration of market
rates of interest and competitive pressures. 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, 1995, deferred policy acquisition costs were
approximately 9.1% 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>
1994 1993 1992 Three Year
Average
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Investment
Earnings Rate 8.49% 9.11% 9.82% 9.14%
Average Credited
Interest Rate 5.59% 6.38% 7.72% 6.56%
Spread 2.90% 2.73% 2.10% 2.58%
</TABLE>
During 1995, 1994, and 1993, amortization of deferred policy
acquisition costs was $10.3 million, $7.0 million, and $4.2 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 1994, 1993, and 1992, lapse rates were 21.5%, 15.3%,
and 12.0%, respectively. Based upon results for the nine months ended
September 30, 1995, lapse rates were 20.9%. Lapse rates increased
during 1995 and 1994 due to lower credited rates offered by Western
United.
Life Insurance
Approximately 2.1% 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, 1995, life
insurance in force totaled $310,667,000, 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 including information about Old Standard through
May 31, 1995 when Old Standard was sold.
<TABLE>
<CAPTION>
Year Ended at September 30,
---------------------------
1995 1994 1993
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Insurance In Force
Individual Life $373,573 $398,837 $423,583
Less Ceded to other
Companies (62,906) (69,311) (77,970)
-------- -------- --------
$310,667 $326,526 $345,613
======== ======== ========
Life Insurance Premiums $ 3,365 $ 3,346 $ 3,121
Less Ceded Premiums (365) (388) (479)
-------- -------- --------
$3,000 $ 2,958 $ 2,642
======== ======== ========
Net Investment Income $64,970 $ 65,944 $ 66,132
======== ======== ========
Benefits, Claim Losses and
Settlement Expenses $45,484 $ 41,919 $ 49,151
======== ======== ========
Deferred Policy Acquisition
Costs $71,131 $ 71,075 $ 70,024
======== ======== ========
Reserves for Future Policy
Benefits, Losses,
Claims and Loss Expenses $781,716 $744,645 $744,632
======== ======== ========
Total Assets $922,556 $924,822 $859,267
======== ======== ========
Capital and Surplus $78,827 $ 77,142 $ 76,814
======== ======== ========
</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 $62,906,000 of life insurance risk at
September 30, 1995 which equaled 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 $373,573,000.
Western United 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, 1995,
approximately $35,444,000 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, 1995 were $364,553.
Reserves
Western United's reserves for both annuities and life insurance
are actuarially determined and prescribed by its state of domicile and
other states in which it does business through laws which are designed
to protect annuity contract owners and policy owners. Western United
utilizes 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 future obligations under annuity
contacts and life insurance policies currently in force. At September
30, 1995 such reserves amounted to $781,716,153. 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 actuarial
assumptions, no representation is made that ultimate liability will
not exceed these reserves.
Securities Investments
At September 30, 1995, 1994 and 1993, 96.8, 99.3% and 99.1% of
the Consolidated Group's securities investments were held by Western
United .
The following table outlines the nature and carrying value of
securities investments held by Western United at September 30, 1995:
<TABLE>
<CAPTION>
Available Held To Total Percent
For Sale Maturity
Portfolio Portfolio
---------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Amount $30,338 $182,489 $212,827 100.0%
======== ======== ======== ======
Invested in:
Fixed Income $30,338 $182,489 $212,827 100.0%
Equities 0 0 0 0.0%
-------- -------- -------- ------
$30,338 $182,489 $212,827 100.0%
======== ======== ======== ======
Fixed Income:
Taxable $30,338 $181,489 $211,827 99.5%
Non-taxable - 1,000 1,000 0.5%
-------- -------- -------- ------
$30,338 $182,489 $212,827 100.0%
======== ======== ======== ======
Taxable:
Government/
Agency $13,858 $ 64,739 $ 78,597 37.1%
Corporate 16,480 116,750 133,230 62.9%
-------- -------- -------- ------
$30,338 $181,489 $211,827 100.0%
======== ======== ======== =====
Corporate Bonds:
AAA $ - $ 43,814 $ 43,814 32.9%
AA 1,980 15,377 17,357 13.0%
A 11,536 50,848 62,384 46.8%
BBB 2,964 6,711 9,675 7.3%
Below Investment Grade - - - -
-------- -------- -------- ------
$16,480 $116,750 $133,230 100.0%
======== ======== ======== ======
Corporate:
Mortgage-backed $ - $ 37,437 $ 37,437 28.1%
Finance 8,599 41,288 49,887 37.4%
Industrial 6,899 27,372 34,271 25.7%
Utility 982 10,653 11,635 8.8%
-------- -------- -------- ------
$16,480 $116,750 $133,230 100.0%
======== ======== ======== ======
</TABLE>
Investments of Western United are subject to the direction and
control of an investment committee appointed by its Board of
Directors. All such investments must comply with applicable state
insurance laws and regulations. See "BUSINESS-REGULATION". Such
investments are principally 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 by its Board of Directors 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. Western United sells 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 or financial
futures instruments at September 30, 1995.
During the twelve month period ended September 30, 1995, the
consolidated group engaged in hedging activities to protect a portion
of its held-to-maturity securities portfolio from a potential increase
in interest rates. The portfolio being protected by the hedge
position generally improved in value due to a decrease in interest
rates while the position in financial futures contracts declined in
value by approximately $1.6 million. This loss is being amortized
using the interest method over the remaining life of the securities
which were being covered by the financial futures position, a term of
approximately eight years. There were no significant hedging
transactions for the comparable periods in 1994 and 1993.
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, 1995, the Consolidated Group
was not a party to any derivative financial instruments.
At September 30, 1995, 1994, and 1993, amounts in the available
for sale portfolio on a consolidated basis were $31.8 million, $89.1
million, and $104.0 million. The available for sale portfolio had net
unrealized losses of approximately $423,000 at September 30, 1995, net
unrealized losses of approximately $3,351,000 at September 30, 1994,
and net unrealized gains of approximately $755,000 at September 30,
1993. In the held to maturity portfolio, net unrealized losses were
approximately $6,010,000 at September 30, 1995, net unrealized losses
were approximately $15,440,000 at September 30, 1994 with net
unrealized gains of approximately $764,000 at September 30, 1993. See
Note 7 to Consolidated Financial Statements.
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 flows 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. Western United markets
life insurance policies and annuities. 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
1995 1994 1993
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Principal Amount
Outstanding $176,815 $172,666 $197,944
Compound and Accrued
Interest 24,497 26,711 31,880
--------- -------- --------
TOTAL $201,312 $199,377 $229,824
========= ======== ========
Weighted Average
Interest Rate 8.24% 8.43% 9.01%
========= ======== ========
Range of Interest
Rates 5% - 11% 5% - 11% 5% - 13%
========= ======== ========
</TABLE>
The September 30, 1993 amount for total outstanding debt
securities includes $21,959,000, which was issued by Summit, a former
member of the Consolidated Group. Substantially all of the debt
securities outstanding at September 30, 1995 will mature during the
five-year period ending September 30, 2000. 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,
1995, 63% 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 1995: $197,069,000
Fiscal 1994: $134,010,000
Fiscal 1993: $105,332,000
Proceeds of preferred stock issuances less redemptions were
$4,250,000 in 1995, $1,773,000 in 1994, and $3,300,000 in 1993. The
liquidation preference of outstanding preferred stock at September 30,
1995 was $47,825,000. Preferred shareholders are entitled to monthly
distributions at a variable rate based on U.S. Treasury obligations.
The average monthly distribution rate during fiscal 1995 was 8.74%.
Preferred stock distributions paid by Metropolitan were $4,038,000 in
1995, $3,423,000, in 1994, and $3,313,000 in 1993. See Note 10 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, 1995, 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>
1996 $28,788 $24,429 $3,963 $57,180
1997 54,706 285 3,963 58,954
1998 59,499 393 3,963 63,855
1999 50,480 200 3,963 54,643
2000 46,786 169 3,963 50,918
------- ------- ------- --------
$240,259 $25,476 $19,815 $285,550
======= ======= ======= ========
</TABLE>
In addition to these contractual cash flow requirements, a
certain amount of the insurance subsidiary's 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 Financial
Services Company, Inc. a subsidiary of Ford Motor Company, 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 Receivables; 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. To the extent other competing Receivable investors may
develop faster closing procedures or more flexible investment
policies, they may experience a competitive advantage.
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.
From June, 1986 until June, 1995, Western United had been assigned a
"B+ (Very Good)" rating by A. M. Best Co., a nationally recognized
insurance company rating organization. During June, 1995 Western
United's Best rating was revised to B. Best bases its rating on a
number of complex financial ratios, the length of time a company has
been in business, the nature, quality, and liquidity 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" inn part 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
(the Department). 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, and to 5% for amounts in excess of $100,000,000. At
September 30, 1995 Metropolitan's required net worth for this purpose
was approximately $15,166,000 while its actual net worth
(stockholders' equity) was approximately $40,570,000. The Act
requires that 50% of the required net worth amount be maintained in
cash or other liquid assets. 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 such as Metropolitan to ascertain
compliance with the law. Finally, the Act and other applicable laws
and regulations provide the Department with authority to take
regulatory enforcement actions in the event of a violation of such
laws and regulations.
Throughout the offering which expires January 31, 1996,
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 the 12 month offering period ending January 31, 1996. 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.
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. 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
contractholders and policy owners, rather than investors in an
insurance company. Certain of these regulations may be subject to
additional federal regulation, such as the Secondary Mortgage Market
Enhancement Act, which is designed to enhance the movement of funds in
the national secondary mortgage market.
All states in which Western United operates 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 have and will
continue to result in substantially increased future assessments.
The net amounts expensed by Western United, and the amount
expensed prior to May 31, 1995 for Old Standard for guaranty fund
assessments and charged to operations for the years ended September
30, 1995, 1994, and 1993 were $782,000 $192,000, and $4,142,000,
respectively. These estimates were based on information provided by
the National Organization of Life and Health Insurance Guaranty
Associations regarding insolvencies occurring during 1988 through
1992. Management does not believe that the amount of future
assessments associated with known insolvencies after 1992 will be
material to its financial condition or results of operations. During
the year ended September 30, 1994, the insurance subsidiaries (Western
United and Old Standard) reduced their estimate of these losses by
$588,000 based upon updated information from the National Organization
of Life and Health Guaranty Associations. During the year ended
September 30, 1995, Western United did not make an adjustment based on
updated information. 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. The amount of guaranty fund assessment
that was originally accrued in 1993 has been recorded net of a 7.75%
discount rate applied to the estimated payment term of approximately
seven years. The remaining unamortized discount associated with this
accrual was approximately $1,132,000 at September 30, 1995.
Dividend restrictions are imposed by regulatory authorities on
Western United. The unrestricted statutory surplus of Western United
totaled approximately $1,986,000 as of September 30, 1995, $5,499,000
as of September 30, 1994, and $7,178,000 as of September 30, 1993. The
principal reason for this decrease during fiscal 1995 and 1994 was the
payment of dividends to Metropolitan.
For statutory purposes, Western United's capital and surplus and
its ratio of capital and surplus to admitted assets were as follows
for the dates indicated:
<TABLE>
<CAPTION>
As of As of December 31,
September 30, 1995 1994 1993 1992
------------------- ------ -------------- -------
<S> <C> <C> <C> <C>
Capital and Surplus
(Millions) $43.3 $45.7 $43.0 $40.3
Ratio of Capital and
Surplus to Admitted
Assets 5.1% 5.6% 5.7% 5.5%
</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.
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. Western
United's capital and surplus levels exceed the calculated minimum
requirements at September 30, 1995.
MANAGEMENT
Directors, Executive Officers and Certain Employees
(Information Current as of December 31, 1995)
Name Age Position
C. Paul Sandifur, Jr. * 54 President, CEO and
Chairman of the Board
Bruce J. Blohowiak * 42 Executive Vice President Corporate
Counsel and Director
Ernest Jurdana 51 Vice President Principal Accounting
Executive
Michael Kirk 44 Senior Vice President/Production
Jay Caferro 48 Senior Vice President/Underwriting
Steven Crooks 49 Vice President and Controller
Susan Thomson 35 Vice President and Assistant
Corporate Counsel
Doug Greybill 46 Vice President
Reuel Swanson * 57 Secretary and Director
Michael Barcelo 45 Treasurer
Irv Marcus 71 Director
Charles H. Stolz 87 Director
________________________
Neil Fosseen 77 Honorary Director
* Member of Executive Committee
Directors and officers are elected to one-year terms. The
average age of the individuals listed above (excluding the honorary
director) is 52.
C. Paul Sandifur, Jr. became Executive Vice President in 1980,
was elected President in 1981, succeeded his father as Chief Executive
Officer in 1991 and became Chairman of the Board in 1995. 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 former
subsidiaries of Metropolitan, Summit and Old Standard.
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. In 1995 he
was named Executive Vice President and Chief Operating Officer. 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.
Ernest Jurdana joined Metropolitan in June 1994 as its principal
accounting officer, he was elected Asst. Vice President in 1994, and
Vice President in 1995. 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.
Michael Kirk joined Metropolitan as a Receivable Contract Buyer
in 1982. He later became a member of the underwriting committee and
is currently the Receivable Production Team Manager. He was elected
Assistant Vice President in 1990, Vice President in 1992 and became
Senior Vice President in 1995.
Jay Caferro joined Metropolitan in 1990 as a member of its
Underwriting Committee. He was promoted to Underwriting Manager, and
to Senior Vice President during 1995. From 1986 to 1990 he was
employed by Seattle First National Bank as Vice President of
Commercial Real Estate Lending for Eastern Washington. Prior to 1986,
he had worked 15 years in residential lending. He has an BA and MBA
from Gonzaga University.
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 Thomson joined Metropolitan's legal staff in 1989. In 1993
she was appointed Assistant Secretary for Metropolitan and in 1995 was
appointed Vice President. Since 1992, she has been Vice President and
Compliance Officer with Metropolitan Investment Securities, the
underwriter for Metropolitan's securities offerings. She is a member
of the Washington State Bar Association and received her J.D. from
Gonzaga University School of Law in 1989.
Doug Greybill joined Metropolitan in 1992. From 1990 to 1992 he
was self employed as a Banking Consultant and Mortgage Trader. From
1983 to 1990 he was Chief Operating Officer for Willamette Savings and
Loan. He was elected Assistant Vice President in 1994, and Vice
President in 1995.
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.
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, all located in Washington State. Mr. Barcelo received a B.A. in
Economics in 1974 and a C.F.A. (Chartered Financial Analyst)
designation in 1992.
Irv Marcus had been an officer of Metropolitan from 1974 until
his retirement in 1995. At retirement he was Senior Vice President, a
title which he had held since 1990, and during which time he
supervised Metropolitan's Receivable investing operations. He had
previously been a loan officer with Metropolitan and has over 25 years
experience in the consumer finance business. He continues as a
director following his retirement.
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.
Neil Fosseen was elected honorary director of Metropolitan in
1995. As an honorary director, he is not entitled to vote at board
meetings. Mr. Fosseen was mayor of Spokane from 1960-1967. He has
over 30 years experience in banking and finance.
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.
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, 1995.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned % of Class
C. Paul Sandifur, Jr. Metropolitan Preferred
929 West Sprague Stock All Series 218 0.05%
Spokane, WA.... Metropolitan Class A
Common Stock 11.5258 8.84%
Consumers Group
Common Stock 19 3.49%
C. Paul Sandifur, Jr.
Trustee................. Metropolitan Class A
929 West Sprague Common Stock 82.4667(1) 63.24%
Spokane, WA
Summit Securities, Inc.. Metropolitan Preferred
929 West Sprague Avenue Stock, All Series 247,622(2) 5.44%
Spokane, WA 99204 Metropolitan Class A
Common Stock 9.2483(2) 7.09%
Irv Marcus.............. Metropolitan
929 West Sprague Preferred Stock,
Spokane, WA All Series 406 0.01%
Metropolitan Class A
Common Stock 1.0000 0.77%
Bruce J. Blohowiak...... Metropolitan Class A
929 West Sprague Common Stock 2.0000 1.53%
Spokane, WA 99208
Charles H. Stolz........ Metropolitan Preferred
929 West Sprague Stock, All Series 19,477 0.41%
Spokane, WA
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 267,723 5.91%
Metropolitan Class A 106.2408 81.47%
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>
Executive Compensation
The following table sets forth the aggregate compensation paid by
Metropolitan during the periods specified to its Chief Executive
Officer and other highly compensated executives. All other officers
and executives of Metropolitan received less than $100,000 in
compensation during the year ended September 30, 1995. 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 $70,000 was paid by Metropolitan pursuant to the 401(k)
plan during the year ended September 30, 1995. As of September 30,
1995 Metropolitan had no compensation plans or stock option plans in
effect. No compensation is paid to the directors of Metropolitan for
acting in such capacity.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------
- ---------(a)---------------------(b)----------------(c)---------------(d)
Name and Principal Year Salary ($) Bonus/
Position Commissions
- ------------------------------------------------------------------------
<S> <C> <C>
C. Paul Sandifur, Jr. 1995 $128,869 $1,004
Chief Executive Officer 1994 $107,063
1993 $97,563
Michael Kirk
Vice President 1995 $65,813 $38,050
Ernest Jurdana
Vice President 1995 $100,000
</TABLE>
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, 1995.
<TABLE>
<CAPTION>
Shares of Class A
Name and Address Common Stock % of Class
<S> <C> <C>
C. Paul Sandifur, Jr.
929 West Sprague
Spokane, Washington............. 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee...................... 82.4667 63.24%
Mary L. Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201............. 8.7156 6.68%
William F. Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201............ 8.9391 6.85%
Estate of
C. Paul Sandifur, Sr. and J. Evelyn Sandifur
West 601 Main, Suite 714
Spokane, Washington 99201...................... 6.5120 5.00%
Summit Securities, Inc.
929 West Sprague Avenue
Spokane, Washington....................... 9.2483 7.09%
</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, 1995, Consumers sold credit guaranty insurance to
Metropolitan for $540,000 in total premiums.
During the three year period ended September 30, 1995, Western
United purchased some of its Receivables from Metropolitan at
Metropolitan's cost. In these transactions, Western United paid
Metropolitan $9,351,600 for Receivables with aggregate outstanding
principal balances of $9,550,915. The difference represents
unrealized discounts net of acquisition costs.
Metropolitan charges Western United for Receivable acquisition
services. In 1995, 1994, and 1993` respectively, Metropolitan charged
Receivable acquisition fees of $14.6 million, $12.8 million, and $10
million to Western United. The charge to Western United for 1995 and
1994 is a gross amount before a loss reserve of $6.95 million in 1995
and $4.75 million in 1994 which was provided by Metropolitan. The
amounts of the Receivable acquisition fees were determined based on
the adjustment necessary to convert Receivables purchased by Western
United utilizing Metropolitan's services to a defined fair market
yield. The effect of the fees charged was to reduce Western United's
effective yields on the purchased Receivables to approximately 7.9% in
1995 8.3%, in 1994, 10.3% in 1993. The lower yield for 1995 and 1994
reflects the reduced risk to Western due to the loss guarantee reserve
provided by Metropolitan. The estimated value of the reserve,
increases the effective yield to Western United to approximately 9.3%
in 1995 and 9.7% in 1994. Management believes the adjusted yields
represent the yields which Western United could achieve by purchasing
similar Receivables in arms-length transactions with unrelated
vendors. In addition, Metropolitan charges Western United 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 when presented alone. See Note 19 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, 1995, these loans outstanding totaled $3,800,000 and
currently bear 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, 1995, 1994, and 1993 Metropolitan paid commissions to MIS in the
amounts of $1,461,033, $1,111,044, and $1,428,882 on sales of debt
securities in the amounts of $53,120,179, $46,414,738, and
$57,994,229, respectively. During the fiscal years ended September
30, 1995, 1994, and 1993, Metropolitan paid commissions to MIS in the
amounts of $152,427, $17,451, and $115,533 on sales of preferred stock
in the amounts of $4,665,720, $1,790,100, and $3,477,400,
respectively. Additionally, in 1995, 1994 and 1993, Metropolitan paid
commissions to MIS in the amounts of $140,555, $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 Metropolitan's cost and for the servicing of Summit's
Receivables by MetWest Services, Metropolitan's servicing subsidiary.
As of September 30, 1995, Summit held approximately $243 million
(face amount) in Receivables acquired through Metropolitan. In
September 1995, 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 $634,000,
and $497,000 in September 1995 and 1994, respectively, for services in
acquiring $17.8 million and $10.3 million of Receivables, providing a
net yield to Summit of 10.9% and 10.9%, respectively.
Old Standard entered into a similar service agreement with
Metropolitan and was charged a Receivable acquisition fee of $362,000
through May 31, 1995 with no fee charged in 1994 or 1993 due to
insignificant Receivable purchase volumes.
Management believes that the terms of the service 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, and $250,237 on sales of debt securities in amounts of
$10,539,684, and $9,677,843 for the years ended September 30, 1994,
and 1993, respectively.
On September 9, 1994, the controlling interest in Summit was
acquired by National Summit Corp., a Delaware corporation (National
Summit) 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, 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
has continued to provide, for a fee, principally all the management
services to Summit. See "BUSINESS-Management, Receivable Acquisition
and Collection Services."
On January 31, 1995, Metropolitan sold Metropolitan Investment
Securities (MIS) to Summit Securities, Inc. This sale was made
pursuant to a restructuring of the Consolidated Group and Summit. The
sale price of $288,950 was determined by the net book value for MIS at
December 31, 1994. Following this sale, MIS has continued its prior
business activities as the broker/dealer selling the securities of
Metropolitan and Summit.
On January 31, 1995, Metropolitan 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 division employing
those same individuals who had previously been employed by
Metropolitan. Metropolitan has negotiated an agreement with Summit
Property Development to provide property development services to
Metropolitan.
On May 31, 1995 Metropolitan sold Old Standard to Summit. The
sale price was $2,722,000 plus future contingency payments equal to
20% of statutory income prior to the accrual of income tax for the
fiscal years ending December 31, 1995, 1996 and 1997. The price was
based upon an independent appraisal of Old Standard. See Note 1 to
the Consolidated Financial Statements.
The sale of MIS and Old Standard and transfer of Metropolitan's
property development division, 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 as it becomes a national financial company as opposed to only
regional, and 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 and limited its growth potential. 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.
During fiscal 1994, the Boards of Directors 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 headquarters 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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Page
Report of Independent
Accountants...................................
Consolidated Balance Sheets...............................
Consolidated Statements of Income.........................
Consolidated Statements of Stockholders' Equity...........
Consolidated Statements of Cash Flows.....................
Notes to Consolidated Financial Statements................
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, 1995 and 1994, and the related consolidated
statements
of income, stockholders' equity and cash flows for each of the
three
years in the period ended September 30, 1995. 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 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, 1995 and 1994, and the consolidated results of
their
operations and their cash flows for each of the three years in
the
period ended September 30, 1995 in conformity with generally
accepted
accounting principles.
As discussed in Note 1, the Company changed its methods of
accounting
for its investments 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 20, 1995, except for the last paragraph
of Note 7, as to which the date is December 14, 1995
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and 1994
ASSETS 1995 1994
-------------- ----------
- ----
Cash and cash equivalents $ 32,798,627 $
29,275,716
Investments (Notes 7 and 8):
Available-for-sale securities,
at market 31,829,980
89,070,866
Held-to-maturity securities, at
amortized cost 188,073,542
200,179,999
Accrued interest on investments 2,372,891
3,311,822
-------------- ----------
- ----
Total cash and investments 255,075,040
321,838,403
-------------- ----------
- ----
Real estate contracts and mortgage
notes receivable, net (Notes 2
and 8) 587,493,614
567,256,298
Real estate held for sale and
development, including foreclosed
real estate received in satisfac-
tion of debt of $38,004,011 and
$39,037,197 (Notes 4 and 8) 91,105,003
76,765,465
-------------- ----------
- ----
Total real estate assets 678,598,617
644,021,763
Less allowance for losses on real
estate assets (Note 5) (8,116,065)
(9,108,383)
-------------- ----------
- ----
Net real estate assets 670,482,552
634,913,380
-------------- ----------
- ----
Other receivable investments (Note 3) 41,591,415
-------------- ----------
- ----
Other assets:
Deferred costs (Notes 9 and 12) 74,521,803
74,107,517
Land, buildings and equipment,
net of accumulated depreciation
(Note 6) 8,148,850
9,586,595
Other assets including receivables
from affiliates, net of allowances
of $77,039 and $193,497 (Note 18) 28,648,340
22,844,008
-------------- ----------
- ----
Total other assets 111,318,993
106,538,120
-------------- ----------
- ----
Total assets $1,078,468,000
$1,063,289,903
==============
==============
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, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
-------------- ----------
- ----
Liabilities:
Life insurance and annuity
reserves (Note 13) $ 781,716,153 $
744,644,625
Debenture bonds and accrued
interest (Note 9) 201,311,873
199,376,783
Debt payable (Note 8) 25,552,451
62,123,139
Accounts payable and accrued
expenses 15,558,818
12,756,072
Deferred income taxes (Note 11) 12,254,475
10,304,980
Minority interest in consolidated
subsidiaries 1,503,788
1,458,980
-------------- ----------
- ----
Total liabilities 1,037,897,558
1,030,664,579
-------------- ----------
- ----
Commitments and contingencies
(Notes 4 and 13)
Stockholders' equity (Notes 10 and 14):
Preferred stock, (liquidation
preference $47,825,310 and
$43,331,750) 21,627,106
21,436,910
Subordinate preferred stock, no par --
--
Common stock, $2,250 par 293,417
296,621
Additional paid-in capital 14,917,782
10,981,492
Retained earnings 4,561,554
2,745,678
Net unrealized losses on invest-
ments, net of income taxes of
$427,283 and $1,445,502 (Note 7) (829,417)
(2,835,377)
-------------- ----------
- ----
Total stockholders' equity 40,570,442
32,625,324
-------------- ----------
- ----
Total liabilities and stock-
holders' equity $1,078,468,000
$1,063,289,903
==============
==============
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, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Revenues:
Insurance premiums $ 3,000,000
$ 2,958,000 $ 2,642,000
Interest on receivables 56,553,869
56,420,184 56,499,817
Earned discount on receivables 13,786,977
13,790,211 14,542,834
Other investment interest 15,039,706
16,715,517 17,331,183
Real estate sales 39,388,086
40,023,974 20,941,094
Gain on insurance settlement (Note 17) 50,922
203,691 4,025,543
Fees, commissions, service and other income 5,847,020
4,992,505 4,820,623
Realized net gains on sales of investments 34,565
1,111,974 12,012,475
Realized net gains on sales of receivables
(Notes 2 and 3) 4,406,338
1,969,907 297,037
------------
------------ ------------
Total revenues 138,107,483
138,185,963 133,112,606
------------
------------ ------------
Expenses:
Insurance policy and annuity benefits 45,483,802
41,918,907 49,150,502
Interest, net (Note 1) 16,381,004
19,895,252 19,442,004
Cost of real estate sold 36,449,309
38,496,776 20,912,013
Provision for losses on real estate assets
(Note 5) 4,174,644
5,533,193 6,596,933
Salaries and employee benefits 8,803,131
8,846,677 8,268,962
Commissions to agents 12,588,546
8,430,654 7,719,035
Other operating and underwriting 7,414,502
7,420,022 12,096,137
Less amount capitalized as deferred costs, net of
amortization (Note 12) (2,671,195)
(1,050,279) (4,053,727)
------------
------------ ------------
Total expenses 128,623,743
129,491,202 120,131,859
------------
------------ ------------
Income before income taxes, minority interest,
and cumulative effect of change in accounting
principle 9,483,740
8,694,761 12,980,747
Provision for income taxes (Note 11) (3,107,897)
(2,992,476) (4,422,206)
------------
------------ ------------
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME, Continued
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Income before minority interest and cumulative
effect of change in accounting principle 6,375,843
5,702,285 8,558,541
Income of consolidated subsidiaries allocated to
minority stockholders (73,197)
(224,529) (255,483)
------------
------------ ------------
Income before cumulative effect of change in
accounting principle 6,302,646
5,477,756 8,303,058
Cumulative effect of change in the method of
accounting for income taxes (Note 1)
(4,300,000)
------------
------------ ------------
Net income 6,302,646
5,477,756 4,003,058
Preferred stock dividends (4,037,921)
(3,423,326) (3,312,997)
------------
------------ ------------
Income applicable to common stockholders $ 2,264,725
$ 2,054,430 $ 690,061
============
============ ============
Income (loss) per share applicable to common
stockholders (Note 10):
Before cumulative effect of change in
accounting principle $ 17,288
$ 14,996 $ 37,239
Cumulative effect of change in accounting
principle
(32,089)
------------
------------ ------------
Income per share applicable to common stockholders $ 17,288
$ 14,996 $ 5,150
============
============ ============
Weighted average number of shares of common stock
outstanding 131
137 134
============
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additional Net Unrealized
Preferred Common
Paid-in Gains (Losses) Retained
Stock Stock
Capital on Investments Earnings
----------- ----------- ----
- ------- -------------- -----------
<S> <C> <C> <C>
<C> <C>
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 7)
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
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additional Net Unrealized
Preferred Common
Paid-in Gains (Losses) Retained
Stock Stock
Capital on Investments Earnings
----------- ----------- ----
- ------- -------------- -----------
<S> <C> <C> <C>
<C> <C>
Balance, September 30, 1994 21,436,910 296,621
10,981,492 (2,835,377) 2,745,678
Net income
6,302,646
Net change in unrealized gains
(losses) on available-for-sale
securities, net of income taxes
of $1,018,219
2,005,960
Cash dividends, common ($3,800
per share)
(501,582)
Cash dividends, preferred
(variable rate)
(4,037,921)
Redemption and retirement of
stock (2 shares) and change
in minority interest (3,204)
(123,551)
Redemption and retirement of
stock (27,637 shares) (276,376)
13,120
Sale of variable rate preferred
stock, net (46,657 shares) 466,572
4,046,721
Excess sales price over historical
cost basis of subsidiaries sold
to related parties (Note 18)
52,733
----------- ----------- ----
- ------- -------------- -----------
Balance, September 30, 1995 $21,627,106 $ 293,417
$14,917,782 $ (829,417) $ 4,561,554
=========== ===========
=========== ============== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995
1994 1993
-------------
- -- --------------- ---------------
<S> <C>
<C> <C>
Cash flows from operating activities:
Net income $
6,302,646 $ 5,477,756 $ 4,003,058
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of trading securities
515,677,468 1,064,997,088
Purchase of trading securities
(515,570,230) (1,064,712,932)
Realized net gains on sales of investments
and receivables
(4,440,903) (3,081,881) (12,309,512)
Gain on sale of real estate
(2,938,777) (1,527,198) (29,081)
Gain on insurance settlement
(50,922) (203,691) (4,025,543)
Provision for losses on real estate assets
4,174,644 5,533,193 6,596,933
Provision for losses (recoveries) on other
assets
(35,657) 204,650 682,406
Depreciation and amortization
3,023,233 2,066,365 1,559,325
Minority interests
73,197 224,529 255,483
Deferred income tax provision and cumulative
effect of change in accounting for income
taxes (Note 11)
2,747,990 2,644,170 8,951,041
Changes in assets and liabilities, net of
effects from sale of subsidiaries:
Life insurance and annuity reserves
42,033,038 39,322,517 47,365,277
Deferred costs, net
(3,034,857) (1,349,405) (4,504,243)
Compound and accrued interest on bonds
(2,214,261) (2,096,810) (214,005)
Other
(4,910,909) (1,537,118) (4,429,525)
-------------
- -- --------------- ---------------
Net cash provided by operating
activities
40,835,700 45,961,233 43,901,614
-------------
- -- --------------- ---------------
Cash flows from investing activities:
Proceeds from sale of subsidiaries, net of
cash given
(1,406,873)
Principal payments on real estate contracts
and mortgage notes receivable
118,869,137 107,040,612 94,695,213
Principal payments on other receivable
investments
1,664,132
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995
1994 1993
-------------
- -- --------------- ---------------
<S> <C>
<C> <C>
Cash flows from investing activities, continued:
Proceeds from sales of real estate contracts and
mortgage notes receivable and other receivable
investments
72,914,006 20,407,270 4,650,619
Acquisition of real estate contracts and mortgage
notes receivable
(203,525,666) (142,479,298) (156,576,783)
Acquisition of other receivable investments
(56,229,758)
Proceeds from insurance settlement
50,922 203,691 5,654,000
Proceeds from real estate sales
5,285,839 6,562,008 5,986,444
Proceeds from maturities of held-to-maturity
investments
4,696,003 8,875,268 4,885,694
Proceeds from sale of held-to-maturity
investments
144,384,719
Purchases of held-to-maturity investments
(1,557,219) (5,263,021) (128,372,244)
Proceeds from sales of available-for-sale
investments
92,779,569 367,846,050 621,966,932
Purchases of available-for-sale investments
(34,387,059) (441,965,194) (590,094,217)
Purchases of and costs associated with real
estate held for sale and development
(41,841,982) (27,544,340) (12,636,507)
Capital expenditures
(894,673) (471,097) (1,228,289)
-------------
- -- --------------- ---------------
Net cash used in investing activities
(43,583,622) (106,788,051) (6,684,419)
-------------
- -- --------------- ---------------
Cash flows from financing activities:
Borrowings from banks and others
238,217,250 237,784,188 18,445,475
Repayments to banks and others
(275,339,671) (180,522,843) (29,086,938)
Receipts from life and annuity products
145,066,891 85,332,591 83,763,646
Withdrawals of life and annuity products
(105,469,442) (124,642,366) (101,126,340)
Issuance of debenture bonds
53,120,179 56,954,423 67,672,071
Repayment of debenture bonds
(48,970,828) (55,193,403) (54,202,693)
Issuance of preferred stock
4,513,293 1,772,649 3,361,867
Issuance of common stock
13,500
Redemption and retirement of stock
(327,336) (775,742) (60,936)
Cash dividends
(4,539,503) (3,510,338) (3,403,443)
-------------
- -- --------------- ---------------
Net cash (used in) provided by
financing activities
6,270,833 17,199,159 (14,623,791)
-------------
- -- --------------- ---------------
</TABLE>
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995
1994 1993
-------------
- -- --------------- ---------------
<S> <C>
<C> <C>
Net increase (decrease) in cash and cash
equivalents
3,522,911 (43,627,659) 22,593,404
Cash and cash equivalents:
Beginning of year
29,275,716 72,903,375 50,309,971
-------------
- -- --------------- ---------------
End of year $
32,798,627 $ 29,275,716 $ 72,903,375
=============== =============== ===============
See Note 15 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<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.
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
sales
price approximated the net book value of Summit at the date
of
acquisition. 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.
On January 31, 1995, Metropolitan and Summit consummated a
transaction whereby 100% of the common stock of
Metropolitan
Investment Securities, Inc. (MIS) was sold to Summit. The
cash
price was $288,950, the approximate historical cost basis
of MIS
at closing. MIS is a limited-purpose broker/dealer and the
exclusive broker/dealer for the securities sold by
Metropolitan
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,
Metropolitan 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
Metropolitan. Summit Property Development Corporation, a
100%
owned subsidiary of Summit, has negotiated an agreement
with
Metropolitan to provide future property development
services.
The results of operations of MIS are included in the
consolidated financial statements for periods prior to
January 31, 1995.
On May 31, 1995, Metropolitan and Summit consummated a
transaction whereby 100% of the common stock of Old
Standard
Life Insurance Company (OSL) was sold to Summit.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
PRINCIPLES OF CONSOLIDATION, CONTINUED
The cash price was $2,722,000, the approximate historical
cost
basis of OSL at closing, with future contingency payments
equal
to 20% of statutory income prior to the accrual of income
tax
for the fiscal years ending December 31, 1995, 1996 and
1997.
The cash sales price plus estimated future contingency
payments
approximate the appraised valuation of OSL. OSL is engaged
in
the business of acquiring receivables using funds derived
from
the sale of annuities, investment income and receivable
cash
flows.
The sale of OSL decreased total assets and liabilities by
approximately $46.2 million. The results of operations of
OSL
are included in the consolidated financial statements for
periods prior to May 31, 1995.
The total purchase price of MIS and OSL exceeded the
historical
cost bases of the net assets of the companies by
approximately
$53,000. Due to the common control of Metropolitan and
Summit,
this excess purchase price has been recorded as an increase
to
retained earnings.
Metropolitan is effectively controlled by C. Paul Sandifur,
Jr.
through his common stock ownership and voting control.
CASH AND CASH EQUIVALENTS
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 taxes
(see
Note 7). 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
investment
classifications are as follows:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS, CONTINUED
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
deferred income taxes.
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 decline in the value of a common
stock, preferred stock or publicly traded bond below 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE,
CONTINUED
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 on 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.
OTHER RECEIVABLE INVESTMENTS
Other receivables 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 on an individual receivable
basis
over the remaining contractual term of the receivable.
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
The Company holds real estate, stated at the lower of cost
or
fair value less costs to sell, for purposes of development
and
resale. The Company acquires real estate through direct
purchase and 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 related
costs are
charged to expense.
In March 1995, Statement of Financial Accounting Standards
No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-
Lived
Assets and for Long-Lived Assets to be Disposed Of," was
issued.
SFAS No. 121 requires certain long-lived assets, such as
the
Company's real estate assets, be reviewed for impairment in
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE AND DEVELOPMENT, CONTINUED
value whenever events or circumstances indicate that the
carrying value of an asset may not be recoverable. In
performing the review, if expected future undiscounted cash
flows from the use of the asset or the fair value, less
selling
costs, from the disposition of the asset is less than its
carrying value, an impairment loss is to be recognized.
The
Company is required to adopt this new standard by October
1,
1996. The Company does not anticipate that the adoption of
SFAS
No. 121 will have a material effect on the consolidated
financial statements.
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) that 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
has transfered 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 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 real estate
contracts
and mortgages receivable. Specific allowances are
established,
as necessary, for delinquent contract receivables with net
carrying values in excess of $100,000. Additionally, the
Company establishes 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 collateral
for
appropriate delinquent receivables, and adjusts the
allowance
for losses as necessary, such that the net carrying value
does
not exceed net realizable value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
percentage of the estimated gross profits (both realized
and
unrealized) 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 and developed for
internal
use. At September 30, 1995, total enhancement costs of
approximately $5,750,000 have been capitalized. These
costs are
being amortized over a ten-year period using the straight-
line
method.
INSURANCE AND ANNUITY RESERVES
Premiums for universal life contracts and annuities are
reported
as life insurance and annuity reserves. Reserves for life
insurance and annuities are equal to the sum of the account
balances including deferred service 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
Revenues for universal life contracts and annuities are
recognized either upon assessment or over the estimated
policy
term. These revenues consist primarily of mortality
expenses
and surrender charges.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
GUARANTY FUND ASSESSMENTS
The Company is subject to insurance guaranty laws in the
states
in which it writes business. These laws provide for
assessments
against insurance companies for the benefit of
policyholders and
claimants in the event of insolvency of other life
insurance
companies. 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.
As
of September 30, 1995, the Company has accrued an estimated
liability for guaranty fund assessments for known
insolvencies
net of estimated recoveries through premium tax offsets.
INTEREST COSTS
Interest costs associated with the development of real
estate
projects are capitalized. During the years ended September
30,
1995, 1994 and 1993, the Company capitalized interest of
$2,730,373, $2,151,651 and $3,012,556, respectively.
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.
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 common shares outstanding and per
share
amounts have been retroactively restated to reflect the
reverse
stock split which occurred in fiscal 1994 (see Note 10).
There
were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1995.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 1995, the Company held first
position
liens associated with contracts and mortgage notes receivable
with
a face value of approximately $610,000,000 (99%) and second
or
lower position liens of approximately $8,000,000 (1%). At
September 30, 1995, approximately 27% 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 20%
by property located in the Pacific Southwest (California,
Arizona
and Nevada), approximately 15% by property located in the
Southwest (Texas and New Mexico) and approximately 9% 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, 1995, the Company had 41 receivables
aggregating
approximately $22,500,000 which had face values in excess of
$300,000. No individual contract or note is in excess of
0.3% 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
93% 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, 1995 is approximately
9.6%.
Maturity dates range from 1995 to 2025.
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, 1995 and 1994:
1995 1994
------------ --------
- ----
Face value of discounted receivables $505,440,872
$502,313,634
Face value of originated receivables 112,072,081
104,010,822
Unrealized discounts, net of
unamortized acquisition costs (37,354,378)
(46,988,424)
Accrued interest receivable 7,335,039
7,920,266
------------ --------
- ----
Carrying value $587,493,614
$567,256,298
============
============
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $17,500,000 and $19,000,000 at September 30,
1995
and 1994, respectively. Real estate contracts and mortgage
notes
receivable with net carrying values of $54,387,668,
$18,437,363
and $4,353,582 were sold without recourse to various
financial
institutions resulting in gains of $2,645,338, $1,969,907 and
$297,037 in fiscal 1995, 1994 and 1993, respectively.
Aggregate amounts of receivables (face value) expected to be
received, based upon estimated prepayment patterns, are as
follows:
Fiscal Year Ending
September 30,
------------------
1996 $ 91,159,000
1997 79,679,000
1998 69,594,000
1999 60,736,000
2000 52,956,000
Thereafter 263,388,953
------------
$617,512,953
============
3. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow
investments
which are not collateralized by real estate, primarily
annuities
and lottery prizes. Annuities are general obligations of the
payor, generally an insurance company. Lottery prizes are
general
obligations of the insurance company or other entity making
the
lottery prize payments. Additionally, when the lottery
prizes are
from a state-run lottery, the lottery prizes are often backed
by
the general credit of the state.
These investments normally are non-interest bearing and are
purchased at a discount sufficient to meet the Company's
investment yield requirements. The weighted average constant
yield on these receivables at September 30, 1995 is
approximately
10.6%. Maturity dates range from 1995 to 2041.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
The following is a reconciliation of the face value of the
other
receivable investments to the Company's carrying value at
September 30, 1995:
Face value of receivables
$70,965,501
Unrealized discounts, net of unamortized
acquisition costs
(29,374,086)
-------
- ----
Carrying values
$41,591,415
===========
All such receivables at September 30, 1995 were performing in
accordance with their contractual terms.
During the year ended September 30, 1995, the Company sold
approximately $14,120,000 of these receivables without
recourse
and recognized a gain of approximately $1,761,000.
The following individual other receivable investments were in
excess of ten percent of stockholders' equity at September
30,
1995:
Aggregate
Carrying
Issuer Amount
----------------------- -----------
California State Agency $ 8,934,296
Arizona State Agency 6,630,281
New Jersey State Agency 4,931,025
New York State Agency 4,758,062
Aggregate amounts of other receivable investments (face
amounts)
expected to be received are as follows:
Fiscal Year Ending
September 30,
-------------------
1996 $ 7,791,000
1997 8,053,000
1998 7,385,000
1999 6,719,000
2000 7,505,000
Thereafter 33,512,501
-----------
$70,965,501
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. 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, 1995 is as follows:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling
Commercial Condominium Total
---------- ----------- ----------- ----------- ---
- -------- ----------- -----------
<S> <C> <C> <C> <C>
<C> <C>
Alabama $ 54,000
$ 54,000
Alaska $ 79,255 20,000
$ 79,868 179,123
Arizona 612,481 664,685 $
135,000 1,412,166
California 1,276,487 1,494,263
494,685 557,648 3,823,083
Colorado 292,000
1,098,300 1,390,300
Connecticut 210,360
67,000 277,360
Florida 280,081
280,081
Georgia 62,000
62,000
Hawaii
3,833,224 26,501,931 30,335,155
Illinois 28,000
28,000
Indiana 76,309
76,309
Iowa 9,227
9,227
Kansas 32,805
32,805
Maine
32,322 32,322
Maryland 172,533
172,533
Michigan 497,397
156,253 653,650
Minnesota 238,827
238,827
Mississippi 24,000
24,000
Missouri 40,500 268,347
88,131 396,978
Montana 27,083 3,137
30,220
New Hampshire 101,050
101,050
New Jersey 316,258
316,258
New Mexico 147,049
147,049
New York 789,853
789,853
North Carolina 36,205
36,205
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE HELD FOR SALE AND DEVELOPMENT, CONTINUED:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling
Commercial Condominium Total
---------- ----------- ----------- ----------- ---
- -------- ----------- -----------
<S> <C> <C> <C> <C>
<C> <C>
Ohio 227,639
157,872 385,511
Oklahoma 26,276 108,584
134,860
Oregon 5,659
5,659
Pennsylvania 32,399 169,982
202,381
South Carolina 19,000
89,000 108,000
Texas 36,649 677,447
30,000 744,096
Virginia 25,000
25,000
Washington 27,957,635 429,542
20,106,048 48,493,225
Wyoming 107,717
107,717
----------- ----------- ----------- ---
- -------- ----------- -----------
Balances at
September 30,
1995 $30,552,814 $ 7,124,907 $ 0
$24,844,210 $28,583,072 $91,105,003
=========== =========== ===========
=========== =========== ===========
Balances at
September 30,
1994 $28,502,992 $ 8,387,070 $ 662,424
$11,993,805 $27,219,174 $76,765,465
=========== =========== ===========
=========== =========== ===========
</TABLE>
At September 30, 1995, the Company had approximately
$75,200,000
invested in real estate development projects and
approximately
$5,000,000 in commitments for construction associated with
these
projects.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS:
The following is a summary of the changes in the allowance
for
losses on real estate assets for the years ended September
30,
1995, 1994 and 1993:
1995 1994
1993
----------- ----------- -------
- ----
Beginning balance $ 9,108,383 $10,598,491 $
9,583,718
Provisions 4,174,644 5,533,193
6,596,933
Charge-offs (5,166,962) (7,023,301)
(5,582,160)
----------- ----------- -------
- ----
Ending balance $ 8,116,065 $ 9,108,383
$10,598,491
=========== ===========
===========
6. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings, equipment and related accumulated
depreciation at
September 30, 1995 and 1994 consist of the following:
1995 1994
----------- -------
- ----
Land $ 561,794 $
561,794
Buildings and improvements 6,486,193
8,495,366
Furniture and equipment 9,415,754
8,836,714
----------- -------
- ----
16,463,741
17,893,874
Less accumulated depreciation (8,314,891)
(8,307,279)
----------- -------
- ----
Totals $ 8,148,850 $
9,586,595
===========
===========
7. 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." 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, 1995 and
1994,
there were no investments remaining in the trading portfolio.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENTS, CONTINUED:
The Company is authorized by its Board of Directors, subject
to
certain limitations, to use financial futures instruments for
the
purpose of hedging interest rate risk relative to the
securities
portfolio. The futures transaction is intended to reduce the
risk
associated with price movements for a balance sheet asset,
primarily investment securities. 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, 1995 or 1994.
The Company also purchases collateralized mortgage
obligations
(CMOs) 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
struc-
tured 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. During the year ended
September 30, 1995, the Company entered into financial
futures
contracts to hedge its interest rate risk on certain held-to-
maturity debt securities with remaining contractual terms of
approximately eight years against a potential increase in
interest
rates. After entering into the financial futures contracts,
interest rates declined which resulted in a $1.6 million loss
associated with such contracts. The hedging loss has been
deferred and is being amortized over the contractual term of
the
hedged debt securities using the interest method. The
remaining
unamortized hedging loss at September 30, 1995 was
approximately
$1,556,000. At September 30, 1995 and 1994, the Company was
not a
party to any derivative financial investments.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENTS, CONTINUED:
A summary of carrying and estimated market values of
investments
at September 30, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
1995
--------------------------------
- ---------------------------
Gross
Gross Estimated
Amortized Unrealized
Unrealized Market Values
Costs Gains
Losses (Carrying Values)
------------ ------------ --
- ---------- -----------------
<S> <C> <C>
<C> <C>
Government backed bonds $ 15,626,072 $ -- $
(275,286) $ 15,350,786
Corporate bonds 15,627,468 12,621
(143,083) 15,497,006
Utility bonds 999,346 --
(17,158) 982,188
------------ ------------ --
- ---------- ------------
Totals $ 32,252,886 $ 12,621 $
(435,527) $ 31,829,980
============ ============
============ ============
<CAPTION>
HELD-TO-MATURITY
1995
--------------------------------
- ---------------------------
Amortized
Costs Gross
Gross
(Carrying Unrealized
Unrealized Estimated
Values) Gains
Losses Market Values
------------ ------------ --
- ---------- -----------------
<S> <C> <C>
<C> <C>
Government backed bonds $ 71,323,272 $ 46,942 $
(3,901,292) $ 67,468,922
Corporate bonds 68,659,432 6,337
(1,084,387) 67,581,382
Utility bonds 10,653,392 --
(261,680) 10,391,712
Mortgage backed bonds 37,437,446 --
(815,577) 36,621,869
------------ ------------ --
- ---------- ------------
Totals $188,073,542 $ 53,279 $
(6,062,936) $182,063,885
============ ============
============ ============
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENTS, CONTINUED:
<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
------------ ------------ --
- ---------- ------------
Totals $ 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
------------ ------------ --
- ---------- ------------
Totals $200,179,999 $ 56,960
$(15,496,711) $184,740,248
============ ============
============ ============
</TABLE>
All bonds held at September 30, 1995 and 1994 were performing
in
accordance with their terms.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENTS, CONTINUED:
Net unrealized losses, net of deferred federal income taxes,
of
approximately $279,000 and $2,233,000, respectively, on the
available-for-sale portfolio at September 30, 1995 and 1994
are
reported as a separate component of stockholders' equity.
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,
1995, the
remaining unamortized loss of approximately $550,000, net of
deferred income taxes, is reported as a reduction of
stockholders'
equity.
The following individual investments (excluding U.S.
government
bonds) held by the Company at September 30, 1995 and 1994,
were in
excess of ten percent of stockholders' equity:
Carrying
Issuer
Amount
--------------------- -------
- ----
1995:
-----
Mortgage-backed bonds:
Countrywide Funding Corp. $
4,821,305
Chase Mortgage Finance Corp.
4,992,835
Prudential Home Mortgage Securities (two issues)
7,350,343
Residential Funding Mortgage Securities
(three issues)
14,450,307
1994:
-----
Corporate bonds:
FBTLC Trust II (private placement) $
3,964,807
International Lease Finance (three issues)
4,048,417
Nations Bank Corp.
3,489,827
Mortgage-backed bonds:
Countrywide Funding Corp. $
4,886,641
Chase Mortgage Finance Corp.
4,997,008
Prudential Home Mortgage Securities (two issues)
7,987,723
Residential Funding Mortgage Securities
(three issues)
14,531,974
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INVESTMENTS, CONTINUED:
The amortized costs and estimated market values of held-to-
maturity and available-for-sale debt securities at September
30,
1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because
issuers
may have the right to call or prepay obligations with or
without
call or prepayment penalties.
Available-for-sale debt securities:
Amortized
Estimated
Cost Market
Values
------------ --------
- ----
Due in one year or less $ 7,169,073 $
7,096,165
Due after one year through five
years 15,505,072
15,279,732
Due after five years through
ten years 9,578,741
9,454,083
------------ --------
- ----
$ 32,252,886 $
31,829,980
============
============
Held-to-maturity debt securities:
Amortized
Estimated
Cost Market
Values
------------ --------
- ----
Due in one year or less $ 27,951,844 $
27,724,929
Due after one year through five
years 59,064,146
57,878,462
Due after five years through
ten years 62,326,578
58,505,552
Due after ten years 1,293,528
1,333,073
------------ --------
- ----
150,636,096
145,442,016
Mortgage-backed bonds 37,437,446
36,621,869
------------ --------
- ----
$188,073,542
$182,063,885
============
============
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).
In accordance with a Special Report issued on November 15,
1995 by
the Financial Accounting Standards Board, the Company
reassessed
and reclassified held-to-maturity debt securities with a
carrying
value of approximately $72,500,000 to the available-for-sale
classification. At the date of the transfer, the debt
securities
were valued at fair value of approximately $72,000,000. The
difference between the carrying value and fair value of the
reclassified debt securities at the date of transfer of
approximately $500,000 is being amortized over the remaining
contractual term of the securities using the interest method.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. DEBT PAYABLE:
At September 30, 1995 and 1994, debt payable consists of the
following:
1995
1994
----------- -------
- ----
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
various securities brokers,
interest at 6.1% to 6.75% per annum;
due on October 2, 1995; collater-
alized by $25,000,000 in U.S.
Treasury bonds $24,131,625
Real estate contracts and mortgage
notes payable, interest rates
ranging from 3% to 11%, due in
installments through 2020;
collateralized by senior liens on
the Company's real estate con-
tracts, mortgage notes and real
estate held for sale 1,385,568
1,366,687
Accrued interest payable 35,258
26,452
----------- -------
- ----
$25,552,451
$62,123,139
===========
===========
Aggregate amounts of contractual principal payments due on
debt
payable at September 30, 1995 are as follows:
Fiscal Year Ending
September 30,
-------------------
1996 $24,326,000
1997 207,000
1998 334,000
1999 158,000
2000 138,000
Thereafter 389,451
-----------
$25,552,451
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEBENTURE BONDS:
At September 30, 1995 and 1994, debenture bonds consist of
the
following:
Annual Principally
Interest Maturing
Rates in 1995
1994
---------- ------------------- ------------ -------
- -----
5% to 6% 1996 and 1997 $ 2,486,000 $
9,975,000
6% to 7% 1996, 1997 and 1998 6,911,000
4,896,000
7% to 8% 1999 50,165,000
35,545,000
8% to 9% 1997, 1998 and 2000 85,258,000
57,045,000
9% to 10% 1996 and 1997 30,044,000
62,349,000
10% to 11% 1998 and 1999 1,951,000
2,856,000
------------ -------
- -----
176,815,000
172,666,000
Compound and accrued interest 24,496,873
26,710,783
------------ -------
- -----
$201,311,873
$199,376,783
============
============
Unamortized debenture issuance costs incurred in connection
with
the sale of debentures aggregated $3,390,744 and $3,032,875
at
September 30, 1995 and 1994, respectively, and are included
in
deferred costs on the consolidated balance sheets.
Debenture bonds at September 30, 1995 mature as follow:
Fiscal Year Ending
September 30,
-------------------
1996 $ 24,206,000
1997 46,930,000
1998 49,363,000
1999 39,995,000
2000 38,999,000
Thereafter 1,818,873
------------
$201,311,873
============
At September 30, 1995, 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, 1995, the Company
had
total outstanding debentures of approximately $201,312,000
and
total outstanding preferred stock of approximately
$47,825,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30,
1995 and
1994 is as follows:
<TABLE>
<CAPTION>
Issued and
Outstanding Shares
------------------------
- -----------------------------
1995
1994
Authorized ------------------------
- - -------------------------
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 4,417,943
441,794 4,484,423 448,442
Series D 1,375,000 6,823,587
682,359 6,879,192 687,919
Series E 5,000,000 10,385,576
1,038,558 10,073,295 1,007,330
--------- ----------- ----------
- - ----------- -----------
8,325,000 $21,627,106
2,162,711 $21,436,910 2,143,691
========= ===========
=========== =========== ===========
Common Stock
Class A 222 $ 293,417
130 $ 292,121 130
Class B 222 -- -
- - 4,500 2
--------- ----------- ----------
- - ----------- -----------
444 $ 293,417
130 $ 296,621 132
========= ===========
=========== =========== ===========
Subordinate Preferred
Stock 1,000,000 $ -- -
- - $ -- --
========= ===========
=========== =========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY, CONTINUED:
The Series E preferred stock has been issued in the following
sub-
series:
<TABLE>
<CAPTION>
Issued and
Outstanding Shares
------------------------
- -----------------------------
1995
1994
------------------------
- - -------------------------
Amount Shares
Amount Shares
----------- ----------
- - ----------- -----------
<S> <C> <C>
<C> <C>
Series E-1 $ 7,485,783
748,578 $ 7,640,542 764,054
Series E-2 456,208
45,621 455,782 45,578
Series E-3 1,083,685
108,369 1,083,669 108,367
Series E-4 629,929
62,993 629,923 62,992
Series E-5 137,475
13,747 137,455 13,746
Series E-6 592,496
59,250 125,924 12,593
----------- ----------
- - ----------- -----------
$10,385,576
1,038,558 $10,073,295 1,007,330
===========
=========== =========== ===========
</TABLE>
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 8.5%. 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY, CONTINUED:
PREFERRED STOCK, CONTINUED
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
proratably 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, were
sold to
the public at $100 per share and are callable at the sole
option
of the Board of Directors at $100 per share.
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, 1995, as required by state regulation, the
amount of the Company's aggregate total outstanding
preferred
stock and debentures was restricted (see Note 9).
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, 1995 and 1994, no subordinate
preferred
stock had been issued.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. 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 common shares 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.
All
series of common stock are subordinate in liquidation to
all
series of preferred stock.
Dividend restrictions are imposed by regulatory authorities
on
the insurance subsidiary 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
subsidiary which totaled approximately $1,986,000 at
September 30, 1995 (see Note 14).
11. INCOME TAXES:
The Company files a consolidated federal income tax return
with
all of its subsidiaries.
The income tax effects of the temporary differences giving
rise
to the Company's deferred tax assets and liabilities as of
September 30, 1995 and 1994 are as follows:
1995
---------------------
- ----
Assets
Liabilities
----------- -------
- ----
Allowance for contract losses $ 1,325,773
Reserves on repossessed real estate 867,550
Deferred contract acquisition costs
and discount yield recognition
$18,224,880
Office properties and equipment
1,529,695
Deferred policy acquisition costs
22,653,678
Annuity and life insurance reserves 6,395,750
Guaranty fund reserve 1,047,320
Investments
1,377,602
Tax credit carryforwards 1,115,000
Other 863,898
Net operating loss carryforwards 19,916,089
----------- -------
- ----
Total deferred income taxes $31,531,380
$43,785,855
===========
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
1994
---------------------
- ----
Assets
Liabilities
----------- -------
- ----
Allowance for contract losses $ 2,089,689
Reserves on repossessed real estate 817,425
Deferred contract acquisition costs
and discount yield recognition
$23,804,082
Office properties and equipment
1,091,948
Deferred policy acquisition costs
22,676,216
Annuity and life insurance reserves 8,528,029
Guaranty fund reserve 1,031,728
Investments
155,924
Tax credit carryforwards 451,000
Other
1,417,625
Net operating loss carryforwards 25,922,944
----------- -------
- ----
Total deferred income taxes $38,840,815
$49,145,795
===========
===========
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:
1995 1994
1993
---------- ---------- ------
- ----
Federal income taxes at
statutory rate $3,224,472 $2,956,219
$4,413,454
State taxes and other (116,575) 36,257
8,752
---------- ---------- ------
- ----
Income tax provision $3,107,897 $2,992,476
$4,422,206
========== ==========
==========
The components of the provision for income taxes are as
follows:
1995 1994
1993
---------- ---------- ------
- ----
Current $ 359,907 $ 348,306
Deferred 2,747,990 2,644,170
$4,422,206
---------- ---------- ------
- ----
$3,107,897 $2,992,476
$4,422,206
========== ==========
==========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. INCOME TAXES, CONTINUED:
At September 30, 1995, the Company and its subsidiaries had
unused
net operating loss carryforwards, for income tax purposes, as
follows:
Non-Life Life
Group Net Company Net Net
Operating Operating
Operating
Expiring in Losses Losses
Losses
----------- ----------- ----------- -------
- ----
2001 $ 7,947,142 $
7,947,142
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 $ 591,432
1,536,948
2008 23,278,814
23,278,814
----------- ----------- -------
- ----
$34,706,486 $23,870,246
$58,576,732
=========== ===========
===========
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.
At September 30, 1995, the Company has alternative minimum
tax
credits of approximately $667,000 and general business tax
credit
carryforwards of approximately $448,000 available to reduce
regular income taxes payable.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. DEFERRED COSTS:
An analysis of deferred costs related to policy acquisition
and
debenture issuance for the years ended September 30, 1995,
1994
and 1993 is as follows:
Policy Debenture
Acquisition Issuance
Total
----------- ----------- -------
- ----
Balance at September 30,
1992 $65,970,636 $ 2,696,870
$68,667,506
Deferred during the
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
the year (4,187,323) (1,420,050)
(5,607,373)
----------- ----------- -------
- ----
Balance at September 30,
1993 70,024,363 3,422,308
73,446,671
Deferred during the
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 the
year (7,015,570) (1,592,987)
(8,608,557)
Reduction upon sale
of subsidiary (688,559)
(688,559)
----------- ----------- -------
- ----
Balance at September 30,
1994 71,074,642 3,032,875
74,107,517
Deferred during the
year:
Commissions 9,383,938 1,461,033
10,844,971
Other expenses 3,587,804 280,196
3,868,000
----------- ----------- -------
- ----
Total deferred 84,046,384 4,774,104
88,820,488
Amortized during the
year (10,300,547) (1,383,360)
(11,683,907)
Reduction upon sale
of subsidiary (2,614,778)
(2,614,778)
----------- ----------- -------
- ----
Balance at September 30,
1995 $71,131,059 $ 3,390,744
$74,521,803
=========== ===========
===========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. 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 4.45%
to
10.65% and 3.85% to 10.4% during the years ended September
30,
1995 and 1994, respectively. Interest assumptions used to
compute
life insurance reserves ranged from 5.25% to 6.5% and 5.25%
to
8.0% during the years ended September 30, 1995 and 1994,
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
$62,906,000 and $69,311,000 at September 30, 1995 and 1994,
respectively. Life insurance premiums ceded were $364,553
and
$387,503 for fiscal 1995 and 1994, 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 subsidiary
operates
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 net amounts expensed by the Company's life insurance
subsidiary for guaranty fund assessments and amounts
estimated to
be assessed for the years ended September 30, 1995, 1994 and
1993
were $782,000, $192,000 and $4,142,000, respectively. The
Company's estimate of these liabilities is based upon updated
information from the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies
occurring
during the years 1988 through 1992. These estimates are
subject
to future revisions based upon the ultimate resolution of the
insolvencies and resultant losses. The Company does not
believe
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. LIFE INSURANCE AND ANNUITY RESERVES, CONTINUED:
that the amount of future assessments associated with known
insolvencies after 1992 will be material to its financial
condition or results of operations. The amount of estimated
future guaranty fund assessment has been recorded net of a
7.75%
discount rate applied to the estimated payment term of
approximately seven years. The remaining unamortized
discount
associated with this accrual was approximately $1,132,000 at
September 30, 1995.
14. 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 statutory and the
GAAP
financial statement balances for these insurance subsidiaries
as
of and for the years ended September 30, 1995, 1994 and 1993
are
as follows:
Statutory
GAAP
----------- -------
- ----
Stockholders' equity:
1995 $43,340,817
$78,826,654
1994 48,206,960
77,142,373
1993 43,557,848
76,813,538
Net income:
1995 $ 2,634,919 $
2,717,893
1994 12,544,070
8,449,317
1993 8,556,467
8,838,248
Unassigned statutory surplus and
retained earnings:
1995 $ 1,985,817
$38,233,333
1994 6,826,960
38,559,708
1993 8,677,848
41,430,266
Due to the sale of OSL during fiscal year 1995, stockholders'
equity and unassigned statutory surplus and retained earnings
amounts above do not include OSL at September 30, 1995.
Also, the
1995 net income above only includes OSL through May 31, 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
The following table summarizes interest costs, net of amounts
capitalized and income taxes paid during the years ended
September 30, 1995, 1994 and 1993:
1995 1994
1993
----------- ----------- -------
- ----
Interest, net of amounts
capitalized $20,214,329 $23,541,173
$21,802,951
Income taxes 1,157,155 333,154
45,100
Non-cash investing and financing activities of the Company
during
the years ended September 30, 1995, 1994 and 1993 are as
follows:
1995 1994
1993
----------- ----------- -------
- ----
Loans to facilitate the
sale of real estate
held $34,102,247 $33,461,966
$14,954,650
Transfers between annuity
products 58,012,857 22,248,418
3,770,870
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 development 1,598,999 258,894
53,456
Change in net unrealized
(losses) gains on
investments, net 2,005,960 (3,371,012)
607,182
Conversion of investment
in corporate bonds
to equity securities
184,309
Real estate held for
sale and development
acquired through fore-
closure 13,850,388 19,245,977
17,242,436
Debt assumed upon fore-
closure of real estate
contracts 16,059 129,062
557,510
Assumption of other debt
payable in connection
with the acquisition of
real estate contracts
and mortgage notes 526,868 191,213
666,684
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS,
CONTINUED:
1995 1994
1993
----------- ----------- -------
- ----
Reduction in assets and
liabilities associated
with sale of subsidi-
aries:
Investment securities 9,401,577
Real estate contracts
and mortgage notes
receivable 32,391,856 27,267,736
Real estate held for
sale 514,889 503,000
Allowance for losses
on real estate
assets 322,548 287,439
Deferred costs 2,620,571 688,559
Equipment 13,395
Other assets 186,316 22,176
Annuity reserves 44,558,959
Debenture bonds and
accrued interest 30,111,270
Debt payable 120,953
Accounts payable and
accrued expenses 1,653,970 318,574
16. 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 INVESTMENT SECURITIES - Fair value is
determined
by quoted market prices.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - 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.
OTHER RECEIVABLE INVESTMENTS - The fair value of other
receivable
investments is based on the discounted value of contractual
cash
flows. The discount rate is estimated using the rates
currently
offered for investments with similar credit ratings and
similar
remaining maturities.
DEBENTURE BONDS AND DEBT PAYABLE - The fair value of
debenture
bonds and debt 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, 1995 and 1994 are as follows:
1995
-----------------------
- ----
Carrying
Amounts Fair
Value
------------ --------
- ----
Financial assets:
Cash and cash equivalents $ 31,702,599 $
31,702,599
Investments:
Available-for-sale securities 31,829,980
31,829,980
Held-to-maturity securities 188,073,542
182,063,885
Real estate contracts and mortgage
notes receivable 580,158,575
608,775,000
Other receivable investments 41,591,415
45,446,000
Financial liabilities:
Debenture bonds - principal and
compound interest 198,286,390
205,004,000
Debt payable - principal 25,517,193
25,564,000
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
1994
-----------------------
- ----
Carrying
Amounts Fair
Value
------------ --------
- ----
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
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.
17. 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 in fiscal 1994 and $50,922 in fiscal
1995
were received and recognized as gains in their respective
fiscal
years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. 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.
At September 30, 1995, the Company had receivables from
affiliates
of $1,962,923 related primarily to receivable acquisitions.
During the year ended September 30, 1995, the Company had the
following related-party transactions with Summit and other
affiliates since the date of their respective sales (see Note
1):
Real estate contracts and mortgage notes
receivable and other receivable investments
sold to Summit and OSL $
42,479,766
Contract acquisition costs charged to Summit
and OSL on sale of real estate contracts
and mortgage notes receivable and other
receivable investments, including manage-
ment underwriting fees
1,967,409
Real estate contracts and mortgage notes
receivable and other receivable investments
purchased from Summit and OSL
17,098,581
Gains on real estate contracts and mortgage
notes receivable and other receivable invest-
ments purchased from Summit and OSL
335,469
Service fees paid to Summit Property Development
1,250,017
Commissions and service fees paid to MIS
1,124,481
Dividends paid to Summit on preferred stock
256,991
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
The condensed balance sheets of Metropolitan Mortgage &
Securities Co., Inc. ("Metropolitan" or the "parent company")
at September 30, 1995 and 1994 are as follows:
1995 1994
------------ --------
- ----
ASSETS
Cash and cash equivalents $ 15,965,359 $
9,454,853
Investments 6,153,393
1,494,665
Real estate contracts and mortgage
notes receivable and other
receivable investments 30,429,638
49,750,653
Real estate held for sale and
development 48,574,018
39,158,411
Allowance for losses on real
estate assets (3,108,597)
(2,120,734)
Equity in subsidiary companies 117,281,602
119,046,505
Land, buildings and equipment, net 9,049,942
8,943,539
Prepaid expenses and other assets,
net 10,243,463
5,839,426
Accounts and notes receivable, net 893,983
1,006,300
Receivables from affiliates 43,812,436
26,339,624
------------ --------
- ----
Total assets $279,295,237
$258,913,242
============
============
LIABILITIES
Debenture bonds and accrued interest $201,311,873
$199,376,783
Debt payable 5,645,410
1,379,089
Accounts payable and accrued expenses 2,917,769
1,201,760
Deferred underwriting fee income 28,849,743
24,330,286
------------ --------
- ----
Total liabilities 238,724,795
226,287,918
------------ --------
- ----
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $47,825,310 and
$43,331,750, respectively) 21,627,106
21,436,910
Subordinate preferred stock, no par --
--
Common stock, $2,250 par 293,417
296,621
Additional paid-in capital 14,917,782
10,981,492
Retained earnings 4,561,554
2,745,678
Net unrealized losses on
investments (829,417)
(2,835,377)
------------ --------
- ----
Total stockholders' equity 40,570,442
32,625,324
------------ --------
- ----
Total liabilities and stock-
holders' equity $279,295,237
$258,913,242
============
============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of income for the years
ended
September 30, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Revenues:
Interest and earned discounts $ 8,721,451
$ 8,756,861 $ 8,299,933
Fees, commissions, service and other income 21,788,065
15,056,870 17,349,046
Real estate sales 4,700,560
7,607,652 8,544,848
Realized net gains (losses) on sales of
investments and receivables 1,134,510
366,409 (478,892)
------------
------------ ------------
Total revenues 36,344,586
31,787,792 33,714,935
------------
------------ ------------
Expenses:
Interest, net 16,205,083
17,616,074 18,441,790
Cost of real estate sold 3,719,349
7,330,073 8,440,547
Provision for losses on real estate assets 2,316,354
737,042 2,345,447
Salaries and employee benefits 10,035,360
9,332,118 8,672,446
Other operating expenses 816,134
2,142,358 2,801,620
------------
------------ ------------
Total expenses 33,092,280
37,157,665 40,701,850
------------
------------ ------------
Income (loss) from operations before income
taxes, equity in net income of subsidi-
aries and cumulative effect of change in
accounting principle 3,252,306
(5,369,873) (6,986,915)
Income tax benefit (provision) (1,105,581)
1,813,051 2,300,331
------------
------------ ------------
Income (loss) before equity in net income of
subsidiaries and cumulative effect of
change in accounting principle 2,146,725
(3,556,822) (4,686,584)
Equity in net income of subsidiaries 4,155,921
9,034,578 12,289,642
------------
------------ ------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Income before and cumulative effect of change
in accounting principle 6,302,646
5,477,756 7,603,058
Cumulative effect of change in the method of
accounting for income taxes
(3,600,000)
------------
------------ ------------
Net income $ 6,302,646
$ 5,477,756 $ 4,003,058
============
============ ============
</TABLE>
Metropolitan's condensed statements of cash flows for the
years
ended September 30, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Cash flows from operating activities:
Net income $ 6,302,646
$ 5,477,756 $ 4,003,058
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities (3,909,025)
(3,679,005) (12,847,715)
------------
------------ ------------
Net cash provided by (used in) operating
activities 2,393,621
1,798,751 (8,844,657)
------------
------------ ------------
Cash flows from investing activities:
Principal payments on real estate contracts
and mortgage notes receivable 5,069,237
10,550,918 10,217,346
Proceeds from sales of real estate contracts
and mortgage notes and other receivable
investments 34,946,274
Acquisition of mortgage notes receivable (18,449,630)
(6,520,436) (4,722,613)
Proceeds from real estate sales 1,876,900
2,915,452 3,172,619
Proceeds from sales of investments 7,647,099
361,132 4,192,641
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Cash flows from investing activities,
continued:
Purchase of investments (12,108,637)
(399,465) (493,520)
Additions to real estate held (12,483,117)
(7,945,133) (4,211,017)
Capital expenditures (803,302)
(469,475) (1,173,433)
Net change in investment in and advances to
subsidiaries (9,591,121)
6,332,550 16,002,272
------------
------------ ------------
Net cash provided by (used in)
investing activities (3,896,297)
4,825,543 22,984,295
------------
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) from banks and
others 4,156,501
(3,324,722) (9,783,336)
Issuance of debenture bonds 53,120,179
46,414,738 57,994,229
Issuance of preferred stock 4,513,293
1,772,649 3,361,867
Issuance of common stock
13,500
Repayment of debenture bonds (48,970,828)
(51,610,174) (51,902,606)
Cash dividends (4,539,503)
(3,510,338) (3,403,443)
Redemption and retirement of stock (266,460)
(775,742) (60,936)
------------
------------ ------------
Net cash provided by (used in)
financing activities 8,013,182
(11,033,589) (3,780,725)
------------
------------ ------------
Net increase (decrease) in cash and
cash equivalents 6,510,506
(4,409,295) 10,358,913
Cash and cash equivalents at beginning of year 9,454,853
13,864,148 3,505,235
------------
------------ ------------
Cash and cash equivalents at end of year $ 15,965,359
$ 9,454,853 $ 13,864,148
============
============ ============
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Non-cash investing and financing activities not included in
Metropolitan's condensed statements of cash flows for the
years
ended September 30, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Loans to facilitate the sale of real estate $ 2,823,660
$ 4,692,200 $ 5,372,229
Real estate acquired through foreclosure 1,219,983
2,166,655 1,652,140
Debt assumed with acquisition of real estate
contracts and mortgage notes and debt assumed
upon foreclosure of real estate contracts 113,876
81,530 1,224,194
Change in net unrealized gains (losses) on
investments 2,005,960
(3,371,012) 607,182
</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>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1995 and 1994, Metropolitan's debt payable
consists of the following:
1995
1994
---------- ------
- ----
Reverse repurchase agreement with a
securities broker, interest at 6.75%
per annum, due October 2, 1995;
collateralized by $5,000,000 in
U.S. Treasury bonds $4,606,625
Real estate contracts and mortgage notes
payable, interest rates ranging from
3% to 11%, due in installments through
2020; collateralized by senior liens
on the Company's real estate contracts,
mortgage notes and real estate held
for sale 1,016,616
$1,352,863
Accrued interest payable 22,169
26,226
---------- ------
- ----
$5,645,410
$1,379,089
==========
==========
Aggregate amounts of principal payments due on the parent
company's debt payable are expected to be as follows:
Fiscal Year Ending
September 30,
-------------------
1996 $ 4,767,000
1997 159,000
1998 160,000
1999 158,000
2000 106,000
Thereafter 295,410
------------
$ 5,645,410
============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
At September 30, 1995 and 1994, Metropolitan's debenture
bonds
payable consist of the following:
<TABLE>
<CAPTION>
Annual Principally
Interest Maturing
Rates in 1995
1994
-------- ------------------- ------------ -------
- -----
<S> <C> <C> <C>
5% to 6% 1996 and 1997 $ 2,486,000 $
9,975,000
6% to 7% 1996, 1997 and 1998 6,911,000
4,896,000
7% to 8% 1999 50,165,000
35,545,000
8% to 9% 1997, 1998 and 2000 85,258,000
57,045,000
9% to 10% 1996 and 1997 30,044,000
62,349,000
10% to 11% 1998 and 1999 1,951,000
2,856,000
------------ -------
- -----
176,815,000
172,666,000
Compound and accrued interest 24,496,873
26,710,783
------------ -------
- -----
$201,311,873
$199,376,783
============
============
</TABLE>
Unamortized debenture issuance costs totaled $3,390,744 at
September 30, 1995 and $3,032,875 at September 30, 1994.
Maturities of the parent company's debenture bonds are as
follows:
Fiscal years ending
September 30,
-------------------
1996 $ 24,206,000
1997 46,930,000
1998 49,363,000
1999 39,995,000
2000 38,999,000
Thereafter 1,818,873
------------
$201,311,873
============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan had the following related party transactions
with its
various subsidiaries and affiliated entites:
<TABLE>
<CAPTION>
1995
1994 1993
------------
------------ ------------
<S> <C>
<C> <C>
Dividends received:
Summit Securities, Inc.
$ 1,422,007
Old Standard Life Insurance Company $ 1,922,000
700,000
Metropolitan Mortgage & Securities Co.
of Alaska
225,000
Spokane Mortgage Co. 125,000
1,800,000 $ 31,310
Western United Life Assurance Company 288,208
2,604,875 2,850,250
Beacon Properties, Inc. 360,000
330,000 1,900,000
Consumers Group Holding Co., Inc. 723,250
6,791,358 3,618,865
Metropolitan Mortgage Hawaii, Inc.
1,770,000 650,000
Metropolitan Investment Securities, Inc. 138,950
100,000
------------
------------ ------------
$ 3,557,408
$ 15,643,240 $ 9,150,425
============
============ ============
Fees, commissions, service and other income $ 18,829,557
$ 13,814,334 $15,722,046
Interest income 4,152,257
3,218,813 2,321,030
</TABLE>
Metropolitan charged various subsidiaries and affiliated
entities
for underwriting fees related to contracts acquired to sell
to
these entities in the amount of $14,936,306 in 1995,
$13,248,132
in 1994 and $10,000,000 in 1993. These amounts are deferred
and
recognized as income over the estimated life of the
contracts.
Amounts amortized into service fee income were $10,416,849 in
1995, $6,596,877 in 1994 and $7,770,969 in 1993.
The underwriting fees are based upon a yield requirement
established by the purchasing entity. For contracts acquired
to
sell to Western United Life Assurance Co. (Western United),
one of
Metropolitan's subsidiaries, in 1995 and 1994, the yield is
guaranteed by Metropolitan through a holdback of $6,945,473
and
$4,751,000 at September 30, 1995 and 1994, respectively.
Metropolitan is liable to Western United for any losses on
the
contracts in excess of the holdback.
PART II
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
Form S-2 Registration Statement
Information Not Required in Prospectus
Item 14: Other Expenses of Issuance and Distribution
SEC Registration Fee.......................... $17,003
NASD Filing Fee............................... 13,000
* Blue Sky qualification fees and expenses.... 30,500
Independent Underwriter Fee................... 59,500
* Accounting fees and expenses................ 30,000
* Legal fees and disbursements................ 20,000
* Trustee's fees and expenses................. 5,000
* Debenture certificates...................... 2,000
* Printing expenses........................... 30,000
* Miscellaneous expenses...................... 2,997
Total Expenses................................ $ 210,000
* Estimated
Item 15: Indemnification of Directors and Officers
Article X of the registrant's Articles of Incorporation provides as
follows:
Any person made a party to any civil or criminal action, suit, or
proceeding by reason of the fact that he, his testator or intestate
is, or was, a director, officer or employee of this corporation or of
any other corporation which he served as such at the request of this
corporation, shall be indemnified by the corporation against
reasonable expenses, including, without limitation, attorney's fees
and amounts paid in satisfaction of judgment or in settlement, other
than amounts paid to the Corporation by him, actually and necessarily
incurred by or imposed upon him in connection with, or resulting from
the defense of such civil or criminal action, suit or proceedings, or
in connection with or resulting from any appeal therein, except in
relation to matters as to which it shall be adjudged in such civil or
criminal action, suit or proceeding that such officer, director, or
employee is liable by reason of his willful malfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office. In the case of a criminal action, suit or
proceeding, a conviction (whether based on a plea of guilty or nolo
contendere or its equivalent, or after trial) shall not of itself be
deemed an adjudication that such officer, director, or employee is
liable for negligence or misconduct in the performance of his duties
to the corporation. Such right of indemnification shall not be
exclusive of any other right which such officers, directors, and
employees of the corporation, and the other persons above mentioned,
may have or hereafter acquire and, without limiting the generality of
such statement, any such director, officer, employee or other person
shall be entitled to any rights of indemnification under any Bylaw,
agreement, vote of stockholders, provisions of law or otherwise, as
well as their rights under this Article."
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1(a). Selling Agreement between Metropolitan and Metropolitan
Investment Securities, Inc. dated as of August 14,
1980 (Exhibit l(a) to Registration No. 2-70595).
1(b). Amendment to Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
August 14, 1980, (Exhibit l(b) to Registration No.
2-70595).
1(c)(i). Selling Agreement between Metropolitan and Metropolitan
Investment Securities, Inc., dated as of December 21,
1984, with respect to Installment Debentures, Series
I (Exhibit 1(c) to Registration No. 2-95146).
1(d). Amendment to Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
January 10, 1989. (Exhibit 1(f) to Registration No.
33-25700).
1(e). Selling Agreement between Metropolitan and Metropolitan
Investment Securities, Inc. dated as of January 31,
1990. (Exhibit 1(c) to Registration No. 33-32586).
*1(f)(ii). Form of Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. with respect
to Preferred Stock Series E-6.
*1(g)(i). Form of Agreement to Act as "Qualified
IndependentUnderwriter," between Metropolitan,
Metropolitan Investment Securities, Inc. and Welco
Securities, Inc. with respect to Debentures to be
registered.
*1(g)(ii). Form of Agreement to Act as "Qualified Independent
Underwriter," between Metropolitan, Metropolitan
Investment Securities, Inc. and Welco Securities,
Inc. with respect to Preferred Stock to be
registered.
*1(h)(i). Form of Pricing Opinion of Welco Securities, Inc. with
respect to Debentures to be registered.
*1(h)(ii). Form of Pricing opinion of Welco Securities with
respect to Preferred Stock to be registered.
1(i)(i). Form of Selected Dealer's Agreement with respect to
Debentures filed as Exhibit 1(h) to Registration No.
33-57398.
1(i)(ii). Form of Selected Dealer's Agreement with respect to
Preferred Stock filed as Exhibit 1(h) to Registration
No. 33-57396.
4(a). Indenture, dated as of July 6, 1979, between
Metropolitan and Seattle-First National Bank, Trustee
(Exhibit 3 to Metropolitan's Annual Report on Form
10-K for fiscal 1979).
4(b). First Supplemental Indenture, dated as of October 3,
1980, between Metropolitan and Seattle-First National
Bank, Trustee (Exhibit 4 to Metropolitan's Annual
Report on Form 10-K for fiscal 1980).
4(c). Second Supplemental Indenture, dated as of November 12,
1984, between Metropolitan and Seattle-First National
Bank, Trustee (Exhibit 4(d) to Registration No.
2-95146).
4(d). Statement of Rights, Designations and Preferences of
variable rate cumulative Preferred Stock, Series E-6.
(Exhibit 4 (l) to Registration No. 33-51905)
4(e). Form of Variable Rate Cumulative Preferred Stock
Certificate. (Exhibit 4(m) to Registration No.
33-51905).
4(f). Form of Investment Debenture Series II Certificate.
(Exhibit 4(n) to Registration No. 33-51905)
4(g). Form of Installment Debenture Series I Certificate.
(Exhibit 4(o) to Registration No.33-59105)
*5(a). Opinion of Susan A. Thomson, Attorney at Law, as to
validity of Investment Debentures.
*5(b). Opinion of Susan A. Thomson, Attorney at Law, as to
validity of Preferred Stock.
7. Opinion re liquidation preference. See Exhibit 5(b).
9. Irrevocable Trust Agreement (Exhibit 9(b) to
Registration No. 2-81359).
11. Statement Indicating Computation of Per-Share Earnings.
(SEE "CONSOLIDATED FINANCIAL STATEMENTS".)
*12. Statement setting forth computations of ratios of
earnings to combined fixed charges and preferred
stock dividends.
*24(a)(i). Consent of Coopers & Lybrand, Independent Public
Accountants.
24(b). Consent of counsel. Reference is made to Exhibit 5(a)
and (b).
*25. Statement on Form T-1 of Seattle-First National Bank.
(Exhibits to this Exhibit have been filed in paper
pursuant to a continuing hardship exemption granted
January 24, 1994).
*27. Financial Data Schedules.
* Filed herewith.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent post
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time shall
be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers, and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised 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. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by
a director, officer, or controlling persons of the
Registrant in the successful defense of any action, suit,
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities
being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has reasonable grounds to belienve that it meets all
requirements for filing on Form S-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Spokane, State of
Washington, on this 1st day of February, 1996.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By /s/ C. PAUL SANDIFUR, JR.
_____________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons
in the capacities and on the dates indicated.
Signature Title Date
/s/ C. PAUL SANDIFUR, JR. President, Chief Executive
Officer, Chairman of the Board 2/1/96
________________________
C. Paul Sandifur, Jr.
/s/ Bruce J. Blohowiak Executive Vice President, Chief
Operating Officer, Director 2/1/96
________________________
/s/ ERNEST JURDANA Vice President 2/1/96
(Principal Financial Officer)
________________________
Ernest Jurdana
/s/ REUEL SWANSON Secretary and Director 2/1/96
________________________
Reuel Swanson
/s/ STEVEN CROOKS Controller and Vice
President 2/1/96
________________________
Steven Crooks
GRAPHS APPENDIX
1. 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.
2. 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.
3. This page contains three pie charts with the following headings
and breakdowns in the charts:
a. Distribution of Receivable By Collateral Type (September 30,
1995)
Residential 82%
Commercial 8%
Farms, land
Other 10%
b. Distribution of Receivables (collateralized by real estate)
By Security Position (September 30, 1995)
First Lien Position 99%
Second Lien or Lower
Position 1%
c. Distribution of Assets
Cash and Cash
Equivalents 3%
Investments 21%
Receivables Collateralized
by real estae 54%
Other Receivables (structured
settlements, lotteries and
annuities) 4%
Real Estate Held 8%
Deferred Costs 7%
Other 3%
4. 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
(collateralized by real estate) as of September 30, 1995 by state, for
the states with 1% or more invested.
The following amounts are shown for the following states:
Washington 17.1%
Oregon 5.4%
California 10.3%
Arizona 8.4%
Idaho 2.5%%
New Mexico 3.2%
Texas 11.3%
Colorado 1.1%
Michigan 2.1%
Georgia 1.6%
Florida 5.6%
New York 3.2%
Hawaii 4.8%
Minnesota 1.1%
Nevada 1.1%
FORM OF
VARIABLE RATE CUMULATIVE PREFERRED STOCK
SELLING AGREEMENT
This Agreement made as of the day of ____________, 1995, by
and between METROPOLITAN MORTGAGE & SECURITIES CO., INC., a Washington
corporation ("Metropolitan") and METROPOLITAN INVESTMENT SECURITIES,
INC., a Washington corporation (the "Selling Agent").
WHEREAS, Metropolitan proposes to issue and sell 250,000 shares
WITNESSETH:
Variable Rate Cumulative Preferred Stock, Series E-6 (par value $10.00
per share) ("Preferred Stock") pursuant to a Registration Statement
(or Registration Statements) and a Prospectus (or Prospectuses) filed
under the Securities Act of 1933; and
WHEREAS, the Selling Agent, for good and valuable consideration
the receipt of which is hereby acknowledged, desires to assist in the
sale of the Preferred Stock upon the terms and in reliance upon the
representations, warranties and agreements set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. APPOINTMENT OF SELLING AGENT.
Metropolitan hereby appoints the Selling Agent as its agent to
offer and sell the Preferred Stock at the prices and in the manner
described in the Registration Statement and the Prospectus and in
compliance with the terms and conditions thereof. Metropolitan agrees
to provide the Selling Agent with such number of Registration
Statements and Prospectuses as it reasonably requests to enable it to
offer the Preferred Stock and authorizes the Selling Agent to
distribute the Registration Statements and Prospectuses.
2. UNDERTAKING OF SELLING AGENT.
The Selling Agent agrees to use its best efforts to sell the
Preferred Stock on the terms stated herein and in the Registration
Statement and Prospectus and to notify Metropolitan of the number of
shares of Preferred Stock with respect to which subscription
agreements have been executed by subscribers. It is understood that
the Selling Agent has no commitment to sell the Preferred Stock other
than to use its best efforts. The Selling Agent will deliver all cash
and checks received from subscribers to Metropolitan by noon of the
next business day. All checks received by the Selling Agent from
subscribers shall be made payable to Metropolitan.
The Selling Agent will not maintain discretionary customer
accounts and undertakes that it will not in any event make
discretionary purchases of the Preferred Stock for the accounts of
customers.
3. AMENDMENT OF THE REGISTRATION STATEMENT AND PROSPECTUS.
Metropolitan agrees, at its expense, to amend or supplement that
Registration Statement or the Prospectus and to provide the Selling
Agent with sufficient copies thereof for distribution as contemplated
in the Registration Statement or the Prospectus or otherwise for
purposes contemplated by federal and state securities laws, if (i) the
Selling Agent advises Metropolitan that in its opinion and that of its
counsel, such amendment or supplement is necessary or advisable, or
(ii) such amendment or supplement is necessary to comply with federal
or state securities laws or the rules or regulations promulgated
thereunder or is necessary to correct any untrue statement therein or
eliminate any material omissions therein which make any of the
statements therein misleading. The representation, warranties, and
obligations to indemnify all parties thereto contained herein relating
to the Registration Statement or the Prospectus shall attach to any
such amendment or supplement.
4. UNDERTAKINGS OR METROPOLITAN.
Metropolitan will promptly notify the Selling Agent in the event
of the issuance by the Securities and Exchange Commission ("SEC") of
any stop order or other orders us pending the Registration of the
Preferred Stock, or in the event of the institution or intended
institution of any action or preceding for that purpose. In the event
that the SEC shall enter a stop order suspending or otherwise suspend
the Registration of the Preferred Stock, Metropolitan will make every
reasonable effort to obtain as promptly as possible the entry of an
appropriate order setting aside such stop order or otherwise reinstate
the Registration of the Preferred Stock.
5. REPRESENTATIONS AND WARRANTIES.
Metropolitan represents and warrants to the Selling Agent that:
(i) The Registration Statement and the Prospectus comply as to
form in all material respects with the Securities Act of
1933; and the rules and regulations of the SEC thereunder,
accurately describe the operations of Metropolitan and do
not contain any misleading or untrue statements of a
material fact or omit to state a material fact which is
necessary to prevent the statements therein from being
misleading.
(ii) Metropolitan is a corporation duly organized and validly
existing under the Washington Business Corporation Act
with full corporate power to perform its obligations as
described in the Registration Statement and the
Prospectus.
(iii) The Preferred Stock, when issued and sold pursuant to the
terms hereof and of the Registration Statement, Prospectus
and subscription agreements, will be legally issued, fully
paid and nonassessable.
(iv) This Agreement has been duly and validly authorized,
executed, and delivered on behalf of Metropolitan and is a
valid and binding agreement of Metropolitan in accordance
with its terms.
6. INDEMNIFICATION.
Metropolitan and the Selling Agent each (a) agree to indemnify and
hold harmless the other (and each person, if any, who controls the
other) against any loss, claim, damage, charge or liability to which
the other or such charge or liability (or actions in respect thereof)
(i) arises out of or is based upon any misrepresentation or breach of
warranty of such party herein or any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or the Prospectus (or any amendment or supplement thereto)
which relates to or was supplied by such party, or (i) arises out of
or is based upon the omission or alleged omission to state therein a
material fact relating to such party required to be stated therein or
necessary to make the statements therein not misleading, including
liabilities under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and (b) agree to
reimburse such other party (and any controlling persons) for any legal
or other fees or expenses reasonably incurred in connection with
investigating or defending any action or claim arising out of or based
upon any of the foregoing.
7. FEES AND EXPENSES.
Metropolitan will pay all expenses incurred in connection with the
offering and sale of the Preferred Stock, including without
limitation, fees and expenses of counsel, blue sky fees and expenses
(including legal fees), printing expenses, and accounting fees and
expenses. Provided, however, that in the event of termination of the
offering, Selling Agent will only be reimbursed for its actual,
accountable, out-of-pocket expenses.
The maximum commissions payable upon sale of the Preferred Stock
shall be 6% of the investment amount.
8. This agreement shall not in any way affect, modify or change
the terms of those certain Selling Agreements, dated August 14, 1980
and December 21, 1984, as amended, between the parties hereto which
provides for the sale of Investment Debentures, Series II and
Installment Debentures, Series I, respectively.
9. GOVERNING LAW.
This Agreement shall be deemed to be made under and governed by the
laws of the State of Washington.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above mentioned.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By /S/ C. PAUL SANDIFUR, JR.
________________________________________
C. Paul Sandifur, Jr., President
METROPOLITAN INVESTMENT SECURITIES, INC.
By /S/ SUSAN A. THOMSON
________________________________________
Susan A. Thomson, Vice President
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of ,
1995, by and between Metropolitan Mortgage & Securities Co., Inc., a
Washington corporation ("Metropolitan"), Metropolitan Investment
Securities, Inc., a Washington corporation ("MIS"), and Welco
Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Metropolitan intends to offer $96,500,000 in Investment
Debentures Series II and $3,500,000 in Installment Debentures, Series
I (hereinafter referred to as "Debentures"), which will be offered in
reliance on a registration statement filed on Form S-2, bearing SEC
file number 33- ; and,
WHEREAS, MIS, a wholly-owned broker/dealer and a member of the
National Association of Securities Dealers ("NASD"), will be engaged
as the sole selling agent for Metropolitan; and,
WHEREAS, pursuant to Section 3 of Schedule E of the Bylaws of the
NASD, MIS, as a NASD member, may participate in such underwriting only
if the yield at which the Debentures offered to the public is not
lower than the yield recommended by a "Qualified Independent
Underwriter" as that term is defined in Section 2(l)(1) through
2(l)(6) of Schedule E to the Bylaws of the NASD, and who participates
in the preparation of the registration statement and prospectus
relating to the offering and exercises customary standards of due
diligence, with respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms on which
Metropolitan is retaining Welco to serve as such a "Qualified
Independent Underwriter" in connection with this offering of
Debentures;
NOW, THEREFORE, in consideration of the recitations set forth above,
and the terms, promises, conditions, and covenants herein contained,
the parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise require,
the term "Registration Statement" means the registration statement on
Form S-2 (including the related preliminary prospectus, financial
statements, exhibits and all other documents to be filed as a part
thereof or incorporated therein) for the registration of the offer and
sale of the debentures under the Securities Act of 1933, as amended,
and the rules and regulations thereunder (the "Act") filed with the
Securities and Exchange Commission (the "Commission"), and any
amendment thereto, and the term "Prospectus" means the prospectus
including any preliminary or final prospectus (including the form of
prospectus to be filed with the Commission pursuant to Rule 424(b)
under the Act) and any amendment or supplement thereto, to be used in
connection with the offering.
1. SCHEDULE E REQUIREMENT. Welco hereby confirms its agreement as
set forth in clause (6) of paragraph (l) of Section 2 of Schedule E of
the Bylaws of the NASD and represents that, as appropriate, Welco
satisfies or at the times designated in such paragraph (l) satisfies
the other requirements set forth therein or will receive an exemption
from such requirements from the NASD.
2. CONSENT. Welco hereby consents to be named in the Registration
Statement and Prospectus as having acted as a "Qualified Independent
Underwriter" solely for the purposes of Schedule E referenced herein.
Except as permitted by the immediately preceding sentence or to the
extent required by law, all references to Welco in the Registration
Statement or Prospectus or in any other filing, report, document,
release or other communication prepared, issued or transmitted in
connection with the offering by Metropolitan or any corporation
controlling, controlled by or under common control with Metropolitan,
or by any director, officer, employee, representative or agent of any
thereof, shall be subject to Welco's prior written consent with
respect to form and substance.
3. PRICING FORMULA AND OPINION. Welco agrees to render a written
opinion as to the yields below which Metropolitan's Debentures may not
be offered based on the pricing formula that is set forth in Schedules
"A" and "B," copies of which are attached hereto, and incorporated
herein by reference. It is understood and agreed by Welco that the
securities to which this Agreement relates will be offered on a
continuous, best efforts basis by MIS, as the sole selling agent of
Metropolitan pursuant to the selling agreement in effect between MIS
and Metropolitan which are filed as exhibits to the Registration
Statement referred to above. Metropolitan, through MIS, will continue
to offer the debt securities according to the terms and conditions of
said agreement, including, without limitation, Schedules "A" and B" in
accordance with this Agreement. Welco reserves the right to review
and amend its opinion upon the filing of any post-effective amendment
to this Registration Statement or upon occurrence of any material
event which may or may not require such an amendment to be filed, or
at such time as the offering under this registration shall terminate
or otherwise lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Metropolitan shall
reimburse Welco for its expenses on a nonaccountable basis in the
amount of 10,000 of which $5,000 has been paid to date, and the
balance to be paid at closing. It is further agreed that Welco shall
be paid an additional amount of 37,000 at the time the pricing opinion
and pricing formula are rendered, concurrent with the closing. Welco
agrees to pay all fees and expenses to any legal counsel whom it may
employ to represent it separately in connection with or on account of
its actions contemplated herein. All mailing, telephone, travel,
hotel, meals, clerical, or other office costs incurred or to be
incurred by Welco in conjunction with Metropolitan's proposed offering
which is the subject of this Agreement shall be reimbursed to Welco by
Metropolitan at closing on an accountable basis upon receipt of an
itemization of said expenses.
5. MATERIAL FACTS. Metropolitan represents and warrants to Welco
that at the time the Registration Statement or any amendment thereto
becomes effective, the Registration Statement and, at the time the
Prospectus is filed with the Commission (including any preliminary
prospectus and the form of prospectus filed with the Commission
pursuant to Rule 424(b)) and at all times subsequent thereto, to and
including the date on which payment for, and delivery of, the
Debentures to be sold in the Offering is made by the underwriter or
underwriters, as the case may be, participating in the Offering and by
Metropolitan (such date being referred to herein as the "Closing
Date"), the Prospectus (as amended or supplemented if it shall have
been so amended or supplemented) will contain all material statements
which are required to be stated therein in accordance with the Act and
will conform to all other requirements of the federal securities laws,
and will not, on such date include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and that all
contracts and documents required by the Act to be filed or required as
exhibits to said registration statement have been filed. Metropolitan
further represents and warrants that any further filing, report,
document, release or communication which in any way refers to Welco or
to the services to be performed by Welco pursuant to this Agreement
will not contain any untrue or misleading statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Metropolitan further warrants and represents that:
(a) All leases, contracts and agreements referred to in or filed as
exhibits to the Registration Statement to which Metropolitan or its
subsidiaries is a party or by which any of them is bound are in full
force and effect.
(b) Metropolitan and it subsidiaries have good and marketable
title, except as otherwise indicated in the Registration Statement and
Prospectus, to all of their assets and properties described therein as
being owned by them, free and clear of all liens, encumbrances and
defects except such encumbrances and defects which do not, in the
aggregate, materially affect or interfere with the use made and
proposed to be made of such properties as described in the
Registration Statement and Prospectus; and the Company and its
subsidiaries have no material leased properties except as disclosed in
the Prospectus.
(c) Metropolitan is duly organized under the laws of the State of
Washington and, as of the effective date of the Registration Statement
and at Closing Metropolitan will be validly existing and in good
standing under the laws of the State of Washington with full corporate
power and authority to own its properties and conduct its business to
the extent described in the Registration Statement and Prospectus;
Metropolitan and its subsidiaries are duly qualified to do business as
foreign corporations and in good standing in all jurisdictions in
which the nature of the business transacted by them or their ownership
of properties or assets makes their qualification necessary; the
authorized and outstanding capitalization of Metropolitan is as set
forth in the Prospectus and the description in the Prospectus of the
capital stock of Metropolitan conforms with and accurately describes
the rights set forth in the instruments defining the same;
(d) Metropolitan and its subsidiaries are not in violation of their
respective certificates of incorporation or Bylaws or in default in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any bond, debenture, note, or other
evidence of indebtedness, contract or lease or in any indenture or
loan agreement to which any of them is a party or by which any of them
is bound.
(e) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary corporate action on the part of
Metropolitan and MIS and performance of the foregoing agreement and
the consummation of the transactions contemplated thereby, will not
conflict with or result in a breach of any of the terms or constitute
a violation of the respective certificates of incorporation or Bylaws
of Metropolitan or MIS, or any deed of trust, lease, sublease,
indenture, mortgage, or other agreement or instrument to which
Metropolitan or MIS is a party or by which any of them or their
property is bound, or any applicable law, rule, regulation, judgment,
order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Metropolitan or
MIS or their properties or obligations; and no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated herein
and in the other agreements previously referred to in this paragraph
except as may be required under the Act or under any state securities
or Blue Sky Laws.
(f) Any certificate signed by an officer of Metropolitan and
delivered to Welco pursuant to this Agreement shall be deemed a
representation and warranty by Metropolitan to Welco, to have the same
force and effect as stated herein, as to the matters covered thereby.
(g) If any event relating to or affecting Metropolitan or any of
its subsidiaries shall occur as a result of which it is necessary, in
Welco's opinion, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, Metropolitan
undertakes to inform Welco of such events within a reasonable time
thereafter, and will forthwith prepare and furnish to Welco, without
expense to them, a reasonable number of copies of an amendment or
amendments or a supplement or supplements to the Prospectus (in form
and substance satisfactory to Welco) which will amend or supplement
the Prospectus so that as amended or supplemented it will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading.
(h) Metropolitan hereby warrants and represents that it will offer
the debt securities described herein in accordance with the pricing
formula set forth in Schedules "A" and "B" which are incorporated by
reference herein.
(i) All representations, warrantees and agreements contained in
this Agreement, or contained in certificates of officers of
Metropolitan submitted pursuant hereto, shall remain operative and in
full force and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Metropolitan hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters as
Welco may deem relevant based on the standards of reasonableness and
good faith and shall request in connection with Welco's performance
under this Agreement, including, without limitation, copies of all
correspondence with the Commission, certificates of its officers,
opinions of its counsel and comfort letters from its auditors. The
above-mentioned certificates, opinions of counsel and comfort letters
shall be provided to Welco as Welco may request on the effective date
of the Registration Statement and on the Closing Date. Metropolitan
will make reasonably available to Welco, its auditors, counsel, and
officers and directors to discuss with Welco any aspect of
Metropolitan which Welco may deem relevant. In addition,
Metropolitan, at Welco's request, will cause to be delivered to Welco
copies of all certificates, opinions, letters and reports to be
delivered to the underwriter or underwriters, as the case may be,
pursuant to any underwriting agreement executed in connection with the
Offering or otherwise, and shall cause the person issuing such
certificate, opinion, letter or report to authorize Welco to rely
thereon to the same extent as if addressed directly to Welco.
Metropolitan represents and warrants to Welco that all such
information and documentation provided pursuant to this paragraph 6
will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statement therein not
misleading. In addition, Metropolitan will promptly advise Welco of
all telephone conversations with the Commission which relate to or may
affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by law,
Metropolitan hereby agrees that it will indemnify and hold Welco and
each person controlling, controlled by or under common control with
Welco within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules and regulations thereunder (individually, an "Indemnified
Person") harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever to which such Indemnified Person
may become subject under the Act, the Exchange Act, or other federal
or state statutory law or regulation, at common law or otherwise,
arising out of, based upon, or in any way related or attributed to (i)
this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or
Prospectus or any other filing, report, document, release or
communication, whether oral or written, referred to in paragraph 5
hereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any application or other document
executed by Metropolitan or based upon written information furnished
by Metropolitan filed in any jurisdiction in order to qualify the
Debentures under the securities or Blue Sky laws thereof, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or (iv) the breach of any representation or warranty made
by Metropolitan in this Agreement. Metropolitan further agrees that
upon demand by an Indemnified Person at any time or from time to time,
it will promptly reimburse such Indemnified Person for, or pay, any
loss, claim, damage, liability, cost or expense as to which
Metropolitan has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this paragraph 7, any such
payment or reimbursement by Metropolitan of fees, expenses or
disbursement incurred by an Indemnified Person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all
appeals or the expiration of time to appeal) is entered against such
Indemnified Person as a direct result of such person's negligence, bad
faith or willful misfeasance will be promptly repaid to Metropolitan.
In addition, anything in this paragraph 7 to the contrary
notwithstanding, Metropolitan shall not be liable for any settlement
of any action or proceeding effected without its written consent.
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against Metropolitan under paragraph (a), notify Metropolitan in
writing of the commencement thereof; but the omission to so notify
Metropolitan will not relieve Metropolitan from any liability which it
may have to any Indemnified Person otherwise than under this paragraph
7 if such omission shall not have materially prejudiced Metropolitan's
ability to investigate or to defend against such claim. In case any
such action is brought against any Indemnified Person, and such
Indemnified Person notifies Metropolitan of the commencement thereof,
Metropolitan will be entitled to participate therein and, to the
extent that it may elect by written notice delivered to the
Indemnified Person promptly after receiving the aforesaid notice from
such Indemnified Person, to assume the defense thereof with counsel
reasonably satisfactory to such Indemnified Person; provided, however,
that if the defendants in any such action include both the Indemnified
Person and Metropolitan or any corporation controlling, controlled by
or under common control with Metropolitan, or any director, officer,
employee, representative or agent of any thereof, or any other
"Qualified Independent Underwriter" retained by Metropolitan in
connection with the Offering and the Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it
which are different from or additional to those available to such
other defendant, the Indemnified Person shall have the right to select
separate counsel to represent it. Upon receipt of notice from
Metropolitan to such Indemnified Person of its election so to assume
the defense of such action and approval by the Indemnified Person of
counsel, Metropolitan will not be liable to such Indemnified Person
under this paragraph 7 for any fees of counsel subsequently incurred
by such Indemnified Person in connection with the defense thereof
(other than the reasonable costs of investigation subsequently
incurred by such Indemnified Person) unless (i) the Indemnified Person
shall have employed separate counsel in accordance with the provision
of the next preceding sentence (it being understood, however, that
Metropolitan shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Metropolitan,
within a reasonable time after notice of commencement of the action,
shall not have employed counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person, or (iii)
Metropolitan shall have authorized in writing the employment of
counsel for the Indemnified Person at the expense of Metropolitan, and
except that, if clause (i) or (iii) is applicable, such liability
shall be only in respect of the counsel referred to in such clause (i)
or (iii).
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Metropolitan to Welco on
grounds of policy or otherwise, Metropolitan and Welco shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which Metropolitan and Welco
may be subject in such proportion so that Welco is responsible for
that portion represented by the percentage that its fee under this
Agreement bears to the public offering price appearing on the cover
page of the Prospectus and Metropolitan is responsible for the
balance, except as Metropolitan may otherwise agree to reallocate a
portion of such liability with respect to such balance with any other
person, including, without limitation, any other "Qualified
Independent Underwriter"; provided, however, that (i) in no case shall
Welco be responsible for any amount in excess of the fee set forth in
paragraph 4 above and (ii) no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (c), any
person controlling, controlled by or under common control with Welco,
or any partner, director, officer, employee, representative or any
agent of any thereof, shall have the same rights to contribution as
Welco and each person who controls Metropolitan within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each officer
of Metropolitan who shall have signed the Registration Statement and
each director of Metropolitan shall have the same rights to
contribution as Metropolitan, subject in each case to clause (i) of
this paragraph (c). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against the other party under this paragraph
(c), notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this paragraph (c). The
indemnity and contribution agreements contained in this paragraph 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY METROPOLITAN. Metropolitan represents and
warrants to Welco that this Agreement has been duly authorized,
executed and delivered by Metropolitan and constitutes a valid and
binding obligation of Metropolitan.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Metropolitan that this Agreement has been duly authorized, executed
and delivered by Welco and constitutes a valid and binding obligation
of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed by
first class mail, postage prepaid, addressed (a) if to Welco, at 101
West City Avenue, Suite 2130, Bala Cynwyd, PA 19004-9967, Attention:
Kenneth S. Shapiro, and (b) if to Metropolitan, at West 917 Sprague
Avenue, Spokane, Washington 99204, Attention: C. Paul Sandifur, Jr.
12. GOVERNING LAW. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with and governed
by the laws of the State of Washington applicable to agreements made
and to be performed wholly within such jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above mentioned.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/S/ C. PAUL SANDIFUR, JR.
By:_________________________________________________
C. Paul Sandifur, Jr., President
/S/ REUEL SWANSON
By:_________________________________________________
Reuel Swanson, Secretary
METROPOLITAN INVESTMENT SECURITIES, INC.
/S/ SUSAN A. THOMSON
By:_________________________________________________
Susan A. Thomson, Vice President
/S/ REUEL SWANSON
By:_________________________________________________
Reuel Swanson, Secretary
WELCO SECURITIES, INC.
/S/ KENNETH S. SHAPIRO
By:_________________________________________________
Kenneth S. Shapiro, President
EXHIBIT A
The opinion of Welco is conditioned upon Metropolitan's undertaking
to maintain the rates on its Debentures at least equal to an "assumed
floor." Based upon the pricing formula described below:
1. The interest rate to be paid on the Debentures shall be fixed
by Metropolitan from time to time. However, the rate shall
not be lower than the computation made per the worksheet on
Exhibit B, which is attached and incorporated by reference
herein.
2. The "assumed floor" for 6 to 11 month Debentures shall be at
least 1.25% above the lesser of the interest rate on the 6
month U.S. Treasury Bills, on a discount basis, based upon
the auction average (which is published widely in newspapers
throughout the country, normally on the day following the
auction) and composite average of the offering rates on 6
month certificates of deposit currently being offered by
banks and savings institutions in the northwestern section
of the United States. For purposes of this composite
average of certificate of deposit rates, the rates being
offered by the following institutions shall be considered
initially:
a. First Interstate
b. Great American Bank
c. Idaho First
d. U.S. Bank of Washington
e. Security Pacific
f. Seafirst
g. Washington Mutual
h. Washington Trust
Welco and Metropolitan agree to review on an ongoing basis the
group which comprises the composite average, and may
substitute another institution in the composite group from
time-to-time by mutual agreement, as the case may be.
3. The "assumed floor" for 60 to 71 month Debenture shall be
computed in like manner as that described in paragraph "2"
above, except that the latest auction average on 5 year U.S.
Treasury Notes shall be considered in place of the 6 month
U.S. Treasury Bills, and 5 year Certificates of Deposit
currently offered in the composite group shall be considered
in lieu of the 6 month rate.
4. Rates on 12 to 23 month, 24 to 35 month, 36 to 47 month and 48
to 59 month Debentures shall be at lease equal to the
interpolated differences between the computation of the
"assumed floor" of 6 to 11 month Debentures and 60 to 71
month Debentures, based upon the computation set forth in
Exhibit B.
5. Rates on 72 to 125 month Debentures shall be no lower than the
"assumed floor" for 60 to 71 month Debentures.
6. Rates on Installment Debentures, Series I, shall be no lower
than .25% below the "assumed floor" for 60 to 71 month
Debentures.
7. The computation of the "assumed floor" shall be made monthly,
as of the first Tuesday of each month, or at such other
times during any month that Metropolitan causes the offering
rates to change from those in effect on the first Tuesday of
each month ("the computation date"). Metropolitan agrees to
furnish Welco with a computation of the "assumed floor" by
completing the worksheet on Exhibit B. Should the offering
rates at the time on Metropolitan's Debentures be less than
the "assumed floor" as computed, Metropolitan agrees to
raise the rates on its Debentures to at least the "assumed
floor" within 10 calendar days of the computation date.
Should Metropolitan fail to raise its offering rates within
the 10 day period referred to above, Welco reserves the
right, in its uncontrolled discretion, to withdraw its
opinion regarding the offering rates on the Debentures.
EXHIBIT B
METROPOLITAN MORTGAGE
PRICING FORMULA
<TABLE>
<CAPTION>
C.D. RATE GOVERNMENT RATE
Average rate between a composite of 8 selected Most current of 8 selected auction rate
Banks and Savings and Loans as of the 1st Tuesday available on the 1st Tuesday of each month.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
CERTIFICATE OF DEPOSIT GOVERNMENT RATE ENTER LESSER SUMMIT'S
(CD) CALCULATION CALCULATION OF COLUMN A OR B ASSUMED FLOOR CURRENT RATE
<S> <C> <S> <C> <C> <C> <C> <C>
5 yr CD rate = ________ 5 yr Govt Rate = ________
6 mo CD Rate = ________ 6 mo Govt Rate = ________
DIFFERENCE = ________ DIFFERENCE = ________
x .20 x .20
________ ________
Differential = ________ Differential = ________
(enter in (a) (enter in (a)
below) below)
6 mo (actual) 6 mo (actual)
rate = ________ rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 6-11 mos.
________ ________
1 year rate = ________ 1 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 12-23
mos.
________ ________
2 year rate = ________ 2 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 24-35
mos.
________ ________
3 year rate = ________ 3 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 36-47
mos.
________ ________
4 year rate = ________ 4 year rate = ________ ____________________ + 1% ____________________
___________
(a) + (a) + 48-59
mos.
________ ________
5 - 10 year 5 year
(actual) rate ________ (actual) rate ________ ____________________ + 1% ____________________
___________
60-120
mos.
- .25
____________________
<CAPTION>
<S> <C> <C>
INSTALLMENT PAYMENTS (Floor equal to Five Yr. rate MINUS .25)......................... ____________________
___________*
Install.
* The rate for installment payment bonds is .5% less than those specified for comparable terms.
</TABLE>
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of
__________________, by and between Metropolitan Mortgage & Securities
Co., Inc., a Washington corporation ("Metropolitan"), Metropolitan
Investment Securities, Inc., a Washington corporation ("MIS"), and
Welco Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Metropolitan intends to offer 250,000 shares of
Preferred Stock, designated as "Variable Rate Cumulative Preferred
Stock, Series E-6," (hereinafter referred to as the "Preferred
Stock"), which will be offered in reliance on a post-effective
amendment to a registration statement filed on Form S-2, bearing SEC
file number 33- ;and,
WHEREAS, MIS, a broker/dealer and a member of the National
Association of Securities Dealers ("NASD"), will be engaged as the
sole selling agent for Metropolitan; and,
WHEREAS, pursuant to Section 3 of Schedule E of the Bylaws
of the NASD, MIS, as a NASD member, may participate in such
underwriting only if the price at which the Preferred Stock is offered
to the public is no higher than the price recommended by a "Qualified
Independent Underwriter" as that term is defined in Section 2(l) (1)
through 2(l) (6) of Schedule E to the Bylaws of the NASD, and who
participates in the preparation of the registration statement and
prospectus relating to the offering and exercises customary standards
of due diligence, with respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms on
which Metropolitan is retaining Welco to serve as such a "Qualified
Independent Underwriter" in connection with this offering of Preferred
Stock;
NOW, THEREFORE, in consideration of the recitations set
forth above, and the terms, promises, conditions, and covenants herein
contained, the parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise
require, the term "Registration Statement" means the registration
statement on Form S-2(including the related preliminary prospectus,
financial statements, exhibits and all other documents to be filed as
a part thereof or incorporated therein) for the registration of the
offer and sale of the preferred stock under the Securities Act of
1933, as amended, and the rules and regulations thereunder (the "Act")
filed with the Securities and Exchange Commission (the "Commission"),
and any amendment thereto, and the term "Prospectus" means the
prospectus including any preliminary or final prospectus (including
the form of prospectus to be filed with the Commission pursuant to
Rule 424(b) under the Act) and any amendment or supplement thereto, to
be used in connection with the offering.
1. SCHEDULE E REQUIREMENT. Welco hereby confirms its agreement
as set forth in clause (6) of paragraph (l) of Section 2 of Schedule E
of the Bylaws of the NASD and represents that, as appropriate, Welco
satisfies or at the times designated in such paragraph (l) satisfies
the other requirements set forth therein or will receive an exemption
from such requirements from the NASD.
2. CONSENT. Welco hereby consents to be named in the
Registration Statement and Prospectus as having acted as a "Qualified
Independent Underwriter" solely for the purposes of Schedule E
referenced herein. Except as permitted by the immediately preceding
sentence or to the extent required by law, all references to Welco in
the Registration Statement or Prospectus or in any other filing,
report, document, release or other communication prepared, issued or
transmitted in connection with the offering by Metropolitan or any
corporation controlling, controlled by or under common control with
Metropolitan, or by any director, officer, employee, representative or
agent of any thereof, shall be subject to Welco's prior written
consent with respect to form and substance.
3. PRICING FORMULA AND OPINION. Welco agrees to render a
written opinion as to the price above which Metropolitan's Preferred
Stock may not be offered based on the computation of dividends to be
declared on those shares that is set forth in Schedule "A," a copy of
which is attached hereto, and incorporated herein by reference. It is
understood and agreed by Welco that the securities to which this
Agreement relates will be offered on a best efforts basis by MIS, as
the sole selling agent of Metropolitan pursuant to the selling
agreement to be entered into between MIS and Metropolitan which is
filed as exhibit to the Registration Statement referred to above.
Metropolitan, through MIS, will continue to offer the preferred stock
according to the terms and conditions of said agreement, in accordance
with this Agreement. Welco reserves the right to review and amend its
opinion upon the filing of any post-effective amendment to this
Registration Statement or upon occurrence of any material event which
may or may not require such an amendment to be filed, or at such time
as the offering under this registration shall terminate or otherwise
lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Metropolitan shall
reimburse Welco for its expenses on a nonaccountable basis in the
amount of $5,000 to be paid irrespective of closing at the request of
Welco. It is further agreed that Welco shall be paid an additional
amount of $15,000 at the time the pricing opinion is rendered,
concurrent with the closing. Welco agrees to pay all fees and
expenses to any legal counsel whom it may employ to represent it
separately in connection with or on account of its actions
contemplated herein. All mailing, telephone, travel, hotel, meals,
clerical, or other office costs incurred or to be incurred by Welco in
conjunction with Metropolitan's proposed offering which is the subject
of this Agreement shall be reimbursed to Welco by Metropolitan at
closing on an accountable basis upon receipt of an itemization of said
expenses.
5. MATERIAL FACTS. Metropolitan represents and warrants to
Welco that at the time the Registration Statement and, at the time the
Prospectus is filed with the Commission (including any preliminary
prospectus and the form of prospectus filed with the Commission
pursuant to Rule 424(b)) and at all times subsequent thereto, to and
including the date on which payment for, and delivery of, the
Preferred Stock to be sold in the Offering is made by the underwriter
or underwriters, as the case may be, participating in the Offering and
by Metropolitan (such date being referred to herein as the "Closing
Date"), the Prospectus (as amended or supplemented if it shall have
been so amended or supplemented) will contain all material statements
which are required to be stated therein in accordance with the Act and
will conform to all other requirements of the federal securities laws,
and will not, on such date include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and that all
contracts and documents required by the Act to be filed or required as
exhibits to said registration statement have been filed. Metropolitan
further represents and warrants that any further filing, report,
document, release or communication which in any way refers to Welco or
to the services to be performed by Welco pursuant to this Agreement
will not contain any untrue or misleading statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Metropolitan further warrants and represents that:
(a) All leases, contracts and agreements referred to in or filed
as exhibits to the Registration Statement to which Metropolitan or its
subsidiaries is a party or by which any of them is bound are in full
force and effect.
(b) Metropolitan and it subsidiaries have good and marketable
title, except as otherwise indicated in the Registration Statement and
Prospectus, to all of their assets and properties described therein as
being owned by them, free and clear of all liens, encumbrances and
defects except such encumbrances and defects which do not, in the
aggregate, materially affect or interfere with the use made and
proposed to be made of such properties as described in the
Registration Statement and Prospectus; and the Company and its
subsidiaries have no material leased properties except as disclosed in
the Prospectus.
(c) Metropolitan is duly organized under the laws of the State
of Washington and, as of the effective date of the Registration
Statement and at Closing Metropolitan will be validly existing and in
good standing under the laws of the State of Washington with full
corporate power and authority to own its properties and conduct its
business to the extent described in the Registration Statement and
Prospectus; Metropolitan and its subsidiaries are duly qualified to do
business as foreign corporations and in good standing in all
jurisdictions in which the nature of the business transacted by them
or their ownership of properties or assets makes their qualification
necessary; the authorized and outstanding capitalization of
Metropolitan is as set forth in the Prospectus and the description in
the Prospectus of the capital stock of Metropolitan conforms with and
accurately describes the rights set forth in the instruments defining
the same;
(d) Metropolitan and its subsidiaries are not in violation of
their respective certificates of incorporation or Bylaws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any bond, debenture,
note, or other evidence of indebtedness, contract or lease or in any
indenture or loan agreement to which any of them is a party or by
which any of them is bound.
(e) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary corporate action on the part
of Metropolitan and MIS and performance of the foregoing agreement and
the consummation of the transactions contemplated thereby, will not
conflict with or result in a breach of any of the terms or constitute
a violation of the respective certificates of incorporation or Bylaws
of Metropolitan or MIS, or any deed of trust, lease, sublease,
indenture, mortgage, or other agreement or instrument to which
Metropolitan or MIS is a party or by which any of them or their
property is bound, or any applicable law, rule, regulation, judgment,
order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Metropolitan or
MIS or their properties or obligations; and no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated herein
and in the other agreements previously referred to in this paragraph
except as may be required under the Act or under any state securities
or Blue Sky Laws.
(f) Any certificate signed by an officer of Metropolitan and
delivered to Welco pursuant to this Agreement shall be deemed a
representation and warranty by Metropolitan to Welco, to have the same
force and effect as stated herein, as to the matters covered thereby.
(g) If any event relating to or affecting Metropolitan or any of
its subsidiaries shall occur as a result of which it is necessary, in
Welco's opinion, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, Metropolitan
undertakes to inform Welco of such events within a reasonable time
thereafter, and will forthwith prepare and furnish to Welco, without
expense to them, a reasonable number of copies of an amendment or
amendments or a supplement or supplements to the Prospectus (in form
and substance satisfactory to Welco) which will amend or supplement
the Prospectus so that as amended or supplemented it will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading.
(h) Metropolitan hereby warrants and represents that it will
offer the preferred stock in accordance with the pricing formula set
forth in Schedule "A" which is incorporated by reference herein.
(i) All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of
Metropolitan submitted pursuant hereto, shall remain operative and in
full force and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Metropolitan hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters as
Welco may deem relevant based on the standards of reasonableness and
good faith and shall request in connection with Welco's performance
under this Agreement, including, without limitation, copies of all
correspondence with the Commission, certificates of its officers,
opinions of its counsel and comfort letters from its auditors. The
above-mentioned certificates, opinions of counsel and comfort letters
shall be provided to Welco as Welco may request on the effective date
of the Registration Statement and on the Closing Date. Metropolitan
will make reasonably available to Welco, its auditors, counsel, and
officers and directors to discuss with Welco any aspect of
Metropolitan which Welco may deem relevant. In addition,
Metropolitan, at Welco's request, will cause to be delivered to Welco
copies of all certificates, opinions, letters and reports to be
delivered to the underwriter or underwriters, as the case may be,
pursuant to any underwriting agreement executed in connection with the
Offering or otherwise, and shall cause the person issuing such
certificate, opinion, letter or report to authorize Welco to rely
thereon to the same extent as if addressed directly to Welco.
Metropolitan represents and warrants to Welco that all such
information and documentation provided pursuant to this paragraph 6
will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statement therein not
misleading. In addition, Metropolitan will promptly advise Welco of
all telephone conversations with the Commission which relate to or may
affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by law,
Metropolitan hereby agrees that it will indemnify and hold Welco and
each person controlling, controlled by or under common control with
Welco within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the rules and regulations thereunder (individually, an "Indemnified
Person") harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever to which such Indemnified Person
may become subject under the Act, the Exchange Act, or other federal
or state statutory law or regulation, at common law or otherwise,
arising out of, based upon, or in any way related or attributed to (i)
this Agreement, (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or
Prospectus or any other filing, report, document, release or
communication, whether oral or written, referred to in paragraph 5
hereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any application or other document
executed by Metropolitan or based upon written information furnished
by Metropolitan filed in any jurisdiction in order to qualify the
Debentures under the securities or Blue Sky laws thereof, or the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or (iv) the breach of any representation or warranty made
by Metropolitan in this Agreement. Metropolitan further agrees that
upon demand by an Indemnified Person at any time or from time to time,
it will promptly reimburse such Indemnified Person for, or pay, any
loss, claim, damage, liability, cost or expense as to which
Metropolitan has indemnified such person pursuant hereto.
Notwithstanding the foregoing provisions of this paragraph 7, any such
payment or reimbursement by Metropolitan of fees, expenses or
disbursement incurred by an Indemnified Person in any proceeding in
which a final judgment by a court of competent jurisdiction (after all
appeals or the expiration of time to appeal) is entered against such
Indemnified Person as a direct result of such person's negligence, bad
faith or willful misfeasance will be promptly repaid to Metropolitan.
In addition, anything in this paragraph 7 to the contrary
notwithstanding, Metropolitan shall not be liable for any settlement
of any action or proceeding effected without its written consent.
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against Metropolitan under paragraph (a), notify Metropolitan in
writing of the commencement thereof; but the omission to so notify
Metropolitan will not relieve Metropolitan from any liability which it
may have to any Indemnified Person otherwise than under this paragraph
7 if such omission shall not have materially prejudiced Metropolitan's
ability to investigate or to defend against such claim. In case any
such action is brought against any Indemnified Person, and such
Indemnified Person notifies Metropolitan of the commencement thereof,
Metropolitan will be entitled to participate therein and, to the
extent that it may elect by written notice delivered to the
Indemnified Person promptly after receiving the aforesaid notice from
such Indemnified Person, to assume the defense thereof with counsel
reasonably satisfactory to such Indemnified Person; provided, however,
that if the defendants in any such action include both the Indemnified
Person and Metropolitan or any corporation controlling, controlled by
or under common control with Metropolitan, or any director, officer,
employee, representative or agent of any thereof, or any other
"Qualified Independent Underwriter" retained by Metropolitan in
connection with the Offering and the Indemnified Person shall have
reasonably concluded that there may be legal defenses available to it
which are different from or additional to those available to such
other defendant, the Indemnified Person shall have the right to select
separate counsel to represent it. Upon receipt of notice from
Metropolitan to such Indemnified Person of its election so to assume
the defense of such action and approval by the Indemnified Person of
counsel, Metropolitan will not be liable to such Indemnified Person
under this paragraph 7 for any fees of counsel subsequently incurred
by such Indemnified Person in connection with the defense thereof
(other than the reasonable costs of investigation subsequently
incurred by such Indemnified Person) unless (i) the Indemnified Person
shall have employed separate counsel in accordance with the provision
of the next preceding sentence (it being understood, however, that
Metropolitan shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Metropolitan,
within a reasonable time after notice of commencement of the action,
shall not have employed counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person, or (iii)
Metropolitan shall have authorized in writing the employment of
counsel for the Indemnified Person at the expense of Metropolitan, and
except that, if clause (i) or (iii) is applicable, such liability
shall be only in respect of the counsel referred to in such clause (i)
or (iii).
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Metropolitan to Welco on
grounds of policy or otherwise, Metropolitan and Welco shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which Metropolitan and Welco
may be subject in such proportion so that Welco is responsible for
that portion represented by the percentage that its fee under this
Agreement bears to the public offering price appearing on the cover
page of the Prospectus and Metropolitan is responsible for the
balance, except as Metropolitan may otherwise agree to reallocate a
portion of such liability with respect to such balance with any other
person, including, without limitation, any other "Qualified
Independent Underwriter"; provided, however, that (i) in no case shall
Welco be responsible for any amount in excess of the fee set forth in
paragraph 4 above and (ii) no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this paragraph (c), any
person controlling, controlled by or under common control with Welco,
or any partner, director, officer, employee, representative or any
agent of any thereof, shall have the same rights to contribution as
Welco and each person who controls Metropolitan within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each officer
of Metropolitan who shall have signed the Registration Statement and
each director of Metropolitan shall have the same rights to
contribution as Metropolitan, subject in each case to clause (i) of
this paragraph (c). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for
contribution may be made against the other party under this paragraph
(c), notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it or they may
have hereunder or otherwise than under this paragraph (c). The
indemnity and contribution agreements contained in this paragraph 7
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Indemnified Person or
termination of this Agreement.
8. AUTHORIZATION BY METROPOLITAN. Metropolitan represents and
warrants to Welco that this Agreement has been duly authorized,
executed and delivered by Metropolitan and constitutes a valid and
binding obligation of Metropolitan.
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Metropolitan that this Agreement has been duly authorized, executed
and delivered by Welco and constitutes a valid and binding obligation
of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed by
first class mail, postage prepaid, addressed (a) if to Welco, at 101
West City Avenue, Suite 2130, Bala Cynwyd, PA 19004-9967, Attention:
Kenneth S. Shapiro, and (b) if to Metropolitan, at West 917 Sprague
Avenue, Spokane, Washington 99204, Attention: C. Paul Sandifur, Jr.
12. GOVERNING LAW. This Agreement shall be construed (both as to
validity and performance) and enforced in accordance with and governed
by the laws of the State of Washington applicable to agreements made
and to be performed wholly within such jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above mentioned.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/S/ C. PAUL SANDIFUR, JR.
By:__________________________________________
C. Paul Sandifur, Jr., President
/S/ REUEL SWANSON
By:__________________________________________
Reuel Swanson, Secretary
METROPOLITAN INVESTMENT SECURITIES, INC.
/S/ SUSAN A. THOMSON
By:__________________________________________
Susan A. Thomson, Vice President
/S/ REUEL SWANSON
By:__________________________________________
Reuel Swanson, Secretary
WELCO SECURITIES, INC
/S/ KENNETH S. SHAPIRO
By:________________________________________
Kenneth S. Shapiro, President
SCHEDULE A
The opinion of Welco is conditioned upon Metropolitan's
undertaking to maintain the distribution rate of the Preferred Stock
in accordance with the formula set forth below:
Notwithstanding anything to the contrary herein the Applicable
Rate for any monthly distribution period shall not, in any event, be
less than 6% or greater than 14% per annum. The Board of Directors
may, however, by resolution, authorized distributions in excess of the
Applicable Rate. The Applicable Rate for any monthly distribution
period shall be 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 one half of one percentage point
for such dividend period. In the event that the Company determines in
good faith that for any reason one or more of such rates cannot be
determined for any distribution period, then the Applicable Rate for
such period shall be the higher of whichever of such rates can be so
determined.
Exhibit B
VARIABLE RATE, CUMULATIVE
PREFERRED STOCK, SERIES E-2, E-3, E-4, E-5 and E-6
PRICING
For Distributions Payable On:________________________________________
Distributions Record Date:________________________________________
Effective
Date Date Average Rate
3 Mo. Treasury Bill_____________________________ +.5%
10 Yr Constant Rate_____________________________ +.5%
20 Year _____________________________ +.5%
HIGHEST EFFECTIVE RATE: _______________________________
Add any additional Distribution
authorized by Metropolitan's
Board. _________________
MONTHLY DISTRIBUTION PER SHARE: _______________________
As resolved by the Board of Directors, distribution will be deemed
declared on the 1st day of each month, payable on the 20th of each
month to the holders of record on the 5th of each month.
_______________________________________________________
Reuel Swanson, Secretary
Form of
Pricing Opinion of Welco Securities, Inc.
January , 1996
C. Paul Sandifur, Jr., President
Metropolitan Investment Securities, Inc.
917 W. Sprague Avenue
Spokane, Washington 99210
Re: Metropolitan Mortgage & Securities Co., Inc. Offering of
$96,500,000 in Principal Amount of Investment
Debentures, Series II and $3,500,000 in Principal Amount
of Installment Debentures, Series I ("The Debentures")
Dear Mr. Sandifur:
This letter will serve to confirm our engagement as a "qualified
independent underwriter" as that term is defined in Sections 2(l) (1)
to (7) of Schedule E to the NASD bylaws, as amended ("Schedule E").
Based upon our review of the registration statement, and the
performance of "due diligence" as required in Section 3 (c) (1) to
Schedule E, it appears that the yields on the Debentures (which are
based upon the computation set forth in Exhibits A and B to the
Agreement to Act as "Qualified Independent Underwriter" dated ______
which is filed as Exhibit ___________ to the registration statement
referred to hereafter,) are no lower than those which we would
recommend.
We hereby consent to the use of our name as a "qualified
independent underwriter," in the Registration Statement (SEC File No.
33- ).
Very truly yours,
WELCO SECURITIES, INC.
By:_________________________________________
SHAPIRO Kenneth S. Shapiro, President
KSS/mm
cc: National Association of Securities Dealers, Inc.
Form of
Pricing Opinion of Welco Securities, Inc.
January , 1996
C. Paul Sandifur, Jr., President
Metropolitan Investment Securities, Inc.
917 W. Sprague Avenue
Spokane, Washington 99210
Re: Metropolitan Mortgage & Securities Co., Inc. Offering of
$25,000,000 of Variable Rate Cumulative Preferred Stock,
Series E-6
Dear Mr. Sandifur:
This letter will serve to confirm our engagement as a "qualified
independent underwriter" as that term is defined in Sections 2(l)
(1) - (7) of Schedule E to the NASD bylaws, as amended ("Schedule E").
Based upon our review of the registration statement, and the
performance of "due diligence" as required in Section 3 (c) (1) to
Schedule E, it appears that the price of $100.00 per share on the
Variable Rate Cumulative Preferred Stock, Series E-6 (provided that
the manner in which the computation of dividends are those set forth
in Schedule A to the Agreement to Act as "Qualified Independent
Underwriter" dated _____________________, which is filed as Exhibit
____________________ to the registration statement referred to
hereafter,) is no higher than that which we would recommend.
We hereby consent to the use of our name as a "qualified independent
underwriter," in the post-effective amendment to the Registration
Statement (SEC File No. 33- ).
Very truly yours,
WELCO SECURITIES, INC.
By:_______________________________________
Kenneth S. Shapiro, President
KSS/mm
cc: National Association of Securities Dealers, Inc.
OPINION OF SUSAN A. THOMSON
February 1, 1996
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to you in connection with the proceedings
for the authorization and issuance of $100,000,000 principal amount of
Investment and Installment Debentures of the Company and the
preparation of a Registration Statement (Form S-2) under the
Securities Act of 1933, as amended, which you have filed with the
Securities and Exchange Commission with respect to the Debentures.
(SEC Registration No. 333-335).
I have examined the Registration Statement referred to above and
such documents and records of the Company and other documents as I
have deemed necessary for the purpose of this opinion.
Based upon the foregoing, I am of the opinion that upon the
happening of the following events,
(a) due action by the Board of Directors of the Company
authorizing the issuance and sale of the Debentures pursuant
to the Indenture dated as of July 6, 1979, between the Company
and Seattle-First National Bank, as Trustee, as amended and
supplemented by a First Supplemental Indenture dated as of
October 3, 1980, and a Second Supplemental Indenture dated as
of December 12, 1984, (the "Indenture");
(b) the Registration Statement referred to above becoming
effective;
(c) compliance with the terms and conditions of the Indenture with
respect to the creation, authentication and delivery of the
Debentures, the due execution by the Company and
authentication and delivery by the Trustee of the Debentures,
and the sale thereof by the Company as contemplated in the
Registration Statement and in accordance with the above-
mentioned corporate and governmental authorizations,
The Debentures will constitute in the hands of the holders thereof
valid, binding and legal outstanding obligations of the Company, in
accordance with their terms, subject to applicable bankruptcy and
insolvency laws.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me in the Prospectus
under the caption "Legal Opinion."
Sincerely,
/S/ SUSAN A. THOMSON
Susan A. Thomson
Assistant Corporate Counsel
OPINION OF SUSAN A. THOMSON
February 1, 1996
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to Metropolitan Mortgage & Securities Co.,
Inc. (the "Company") in connection with the proceedings for the
authorization and issuance of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-6 ("Preferred Stock, Series E")
including the preparation of a Registration Statement (Form S-2) under
the Securities Act of 1933, as amended, which has been filed with the
Securities and Exchange Commission. (SEC Registration No. 333-335).
I have examined the Registration Statement referred to above and
such other documents and records as I have deemed necessary for the
purpose of this opinion.
Based upon the foregoing, and subject to the Board of Directors'
adoption of Articles of Amendment to the Company's Article of
Incorporation which incorporate the Statement of Rights, Designation
and Preferences of variable Rate Cumulative Preferred Stock, Series
E-6, and the filing of same with the Secretary of State of the State
of Washington in accordance with RCW 23B.06.020, I am of the opinion
that:
(1) the Preferred Stock, Series E-6 of the Company which is being
registered, when issued and sold in the manner and for the
consideration contemplated by the Registration Statement, will
be legally issued, fully paid and non-assessable; and
(2) in the event of dissolution, liquidation or winding up of the
affairs of the Company, whether voluntary or involuntary, the
holders of Preferred Stock, Series E-6 will be entitled to
receive, on parity with all other issued and outstanding
preferred stock, before any payment or distribution is made
on the Company's Class A or Class B Common Stock, the amount
of ($100.00 per share plus an amount equal to all accrued and
unpaid dividends thereon to the date of distribution or
payment; and
(3) The liquidation preference of the preferred stock exceeds the
par value thereof. There are no restrictions upon surplus by
reason of such excess and there are no remedies available to
security holders by reason of such excess before or after
payment of any dividend that would reduce suplus to an amount
less than the amount of such excess and which remedies arise
by reason of such excess.
This opinion is furnished pursuant to the requirements of Item
601(b)(5) of Regulation S-K.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me in the Prospectus
under the caption "Legal Opinion."
Sincerely,
/S/ SUSAN A. THOMSON
Susan A. Thomson
Assistant Corporate Counsel
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
The ratio of adjusted earnings to fixed charges and preferred stock
dividends was computed using the following tabulations to compute
adjusted earnings and the defined fixed charges and preferred stock
dividends.
<TABLE>
<CAPTION>
Year Ended
September 30
(Dollars in Thousands)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Income (loss) before extra-
ordinary item................ $6,303 $ 5,478 $8,303 $ 2,927 $ 179
Add:
Interest..................... 16,381 19,895 19,442 21,299 21,504
Taxes (benefit) on income.... 3,108 4,422 1,871 213
Adjusted Earnings............... $25,792 $28,365 $32,167 $26,097 $21,896
Preferred stock dividend require-
ments........................ $ 4,038 $ 3,423 $3,313 $ 3,399 $ 4,072
Ratio factor of income after
provision for income taxes to
income before provision for
income taxes................. 67% 66% 66% 64% 63%
Preferred stock dividend factor on
pretax basis................. 6,006 5,220 5,020 5,311 6,463
Fixed Charges
Interest..................... 16,381 19,895 19,442 21,299 21,504
Capitalized Interest......... 2,730 2,152 3,013 270
Fixed charges and preferred
stock dividends............. $25,117 $27,267 $27,475 $26,880 $27,967
Ratio of Adjusted Earnings to
Fixed Charges and Preferred
Stock Dividends.............. 1.03 1.04 1.17 .97 .78
</TABLE>
CONSENT OF
INDEPENDENT ACCOUNTANTS
Metropolitan Mortgage & Securities Co., Inc.
Spokane, Washington
We consent to the inclusion in this Registration Statement on Form
S-2 (File No. 333-335) of our report, which includes an explanatory
paragraph describing changes in the methods of accounting for
investments in certain debt and equity securities, repossessed real
property and income taxes in fiscal 1993, dated November 20, 1995 on
our audit of the consolidated financial statements of Metropolitan
Mortgage & Securities Co., Inc. and subsidiaries.
We also consent to the reference to our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
February 1, 1996
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Statement of Eligibility and Qualification Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
SEATTLE-FIRST NATIONAL BANK
(Exact Name of Trustee as Specified in its Charter)
- --------------------------------- 91-0402650
(State of Incorporation (I.R.S. Employer
if not a National Bank Identification No.)
701 Fifth Avenue 98124
Seattle, WA (Zip Code)
(Address of Principal Executive Offices)
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(Exact Name of Obligor 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 Avenue
Spokane, WA 99204
(Address of Principal Executive Offices)
(Title of the Indenture Securities)
Installment Debentures, Series I
and
Installment Debentures, Series II
1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington D.C. 20521
Federal Deposit Insurance Corporation, Washington, D.C.
Board of Governors of the Federal Reserve System, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor and Underwriters. If the Obligor or any
underwriter for the obligor is an affiliate of the Trustee,
describe each such affiliation.
No such affiliation exists with the Trustee, Seattle-First National
Bank or its Parent, Bank of America Corporation.
3. Voting Securities of the Trustee. Furnish the following information
as to each class of voting securities of the Trustee:
As of November 29, 1995
Col. A Col. B
Title of Class Amount Outstanding
Common Stock 150 shares
4. Trusteeships Under Other Indentures. If the Trustee is a trustee
under another indenture under which any other securities, or
certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following
information:
(a) Title of securities outstanding under each such other
indenture:
None
(b) A brief statement of the facts relied upon as a basis for the
claim that no conflicting interest within the meaning of
Section 310(b)(1) of the Act arises as a result of the
trusteeship under any such other indenture, including a
statement as to how the indenture securities will rank as
compared with the securities used under such other
indenture.
Not applicable.
5. Interlocking Directories and Similar Relationships with the Obligor
or its Officials. If the trustee or any of the directors or
executive officers of the trustee is a director, officer,
partner, employee, appointee, or representative of the obligor,
identify each such person having any such connection and state
the nature of each such connection.
None.
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials. Furnish the following information as to the voting
securities of the trustee owned beneficially by the obligor and
each director, partner and executive officer of the obligor.
As of November 29, 1995
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- ---------------------------------------------------------------------
None
7. Voting Securities of the Trustee Owned by Underwriters or Their
Officials. Furnish the following information as to the voting
securities of the Trustee owned beneficially by each underwriter
for the obligor and each director, partner and executive officer
of each such underwriter.
As of November 29, 1995
Col. A Col. B Col. C Col. D
Name of Title Amount Owned Percentage of
Owner of Class Beneficially Voting Securities
Represented by
Amount Given
in Col. C.
- ---------------------------------------------------------------------
None.
8. Securities of the Obligor Owned or Held by the Trustee. Furnish the
following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in
default by the Trustee:
As of November 29, 1995
Col. A Col. B Col. C Col. D
Title of Whether the Amount Owned Percent of Class
Securities are Beneficially or Represented by
Voting or Held as Collateral Amount Given
Nonvoting for Obligations in Col. C.
Securities in Default Trustee
- ---------------------------------------------------------------------
None.
9. Securities of Underwriters owned or Held by the Trustee. If the
Trustee owns beneficially or holds as collateral security for
obligations in default any securities or an underwriter for the
obligor, furnish the following information as to each class of
securities of such underwriter any of which as so owned or held
by the Trustee.
As of November 29, 1995
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of
and Title of Outstanding Beneficially Class Represented
Class or Held as by Amount Given
Collateral for in Col. C
Obligations in
Default by Trustee
- ---------------------------------------------------------------------
None.
10. Ownership or Holdings by the Trustee of Voting Securities of
Certain Affiliates or Security Holders of the Obligor. If the
Trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the
knowledge of the trustee (1) owns 10% or more of the voting
securities of the obligor or (2) is an affiliate, other than a
subsidiary, of the obligor, furnish the following information as
to the voting securities of such person.
As of November 29, 1995
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class or Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
- ---------------------------------------------------------------------
None.
11. Ownership or Holdings by the Trustee of any Securities of a
Person Owning 50% or More of the voting Securities of the
Obligor. If the Trustee owns beneficially or holds as collateral
security for obligations in default any Securities of a person
who, to the knowledge of the trustee, owns 50% or more of the
voting securities of the obligor, furnish the following
information as to each class of securities of such person any of
which are so owned or held by the trustee.
As of November 29, 1995
Col. A Col. B Col. C Col. D
Name of Issuer Amount Amount Owned Percent of Class
and Title of Outstanding Beneficially Represented by
Class Held as Amount Given
Collateral In Col. C
Security for
Obligations in
Default by Trustee
- ---------------------------------------------------------------------
None.
12. Indebtedness of the Obligor to the Trustee. Except as noted in
the instructions, if the obligor is indebted to the Trustee,
furnish the following information:
As of November 29, 1995
Col. A Col. B Col. C
Nature of Amount Outstanding Date Due
Indebtedness
None.
13. Defaults by the Obligor.
(a) State whether there is or has been a default with respect to
the securities under this indenture. Explain the nature of
any such default.
Not applicable.
(b) If the trustee is a trustee under another indenture under which
any other securities, or certificates of interest or
participation in any other securities, of the obligor are
outstanding, or is trustee for more than one outstanding
series of securities under the indenture, state whether
there has been a default under any such indenture or series,
identify the indenture or series affected, and explain the
nature of any such default.
Not applicable
14. Affiliations with the Underwriters. If any underwriter is an
affiliate of the trustee, describe each such affiliation.
Not applicable.
15. Foreign Trustee. Identify the order or rule pursuant to which
the foreign trustee is authorized to act as sole trustee under
indentures qualified or to be qualified under the Act.
Not applicable.
16. List of Exhibits. List below all exhibits filed as part of
this statement of eligibility and qualification.
1. Articles of association of Seattle-First National Bank.
(Attached)
2. Certificate of Authority of Seattle-First National Bank to
Commence Business.
3. Authorization of the Trustee to exercise corporate trust
powers.
4. Bylaws of Seattle-First National Bank. (Attached)
5. Consents of Seattle-first National Bank required by Section
321(b) of the Act. (Attached)
6. Latest Report of Condition of Seattle-First National Bank.
(Attached)
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, Seattle-First National Bank, a national banking association
organized under the laws of the United States, has duly caused this
statement of eligibility and qualification to be signed on its behalf
by the undersigned, thereunto duly authorized, all in the City of
Seattle, and State of Washington, on the 29th day of November 1995.
SEATTLE-FIRST NATIONAL BANK
by BankAmerica State Trust Company
as Authorized Agent
/S/ Dyan M. Huhta
By____________________________________
Dyan M. Huhta
Assistant Vice President
Exhibit 6 (to Form T-1)
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939 in connection with the proposed issuance by Metropolitan
Mortgage & Securities Co., Inc. of Installment Debentures, Series I
and Investment Debentures, Series II, we hereby consent that reports
of examinations by federal, state, territorial and district
authorities may be furnished by such authorities to the Securities and
Exchange Commission upon its request therefor.
SEATTLE-FIRST NATIONAL BANK
BY BankAmerica State Trust Company
as Authorized Agent
/S/ Dyan M. Huhta
By__________________________________
Dyan M. Huhta
Assistant Vice President
Dated:
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