SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 2-63708.
METROPOLITAN MORTGAGE & SECURITIES CO., INC
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0609840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEST 929 SPRAGUE AVENUE, SPOKANE, WASHINGTON 99204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509)838-3111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Series:
C 441,794 shares E-3 108,369 shares
D 682,359 shares E-4 62,993 shares
E-1 748,578 shares E-5 13,747 shares
E-2 45,621 shares E-6 59,250 shares
______________________________________________________________________
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (229.405 of this Chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /x/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1995.
Class A Common Stock: 130
Documents incorporated by reference: None
PART I
ITEM 1. BUSINESS:
INTRODUCTION
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.
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 Obligation
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.
PART I (cont.)
ITEM 2. PROPERTIES.
See "Business - General; Business - Receivable Investments;
Business - Real Estate Development" under Item 1 and Notes 2 and
3, Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) There is no market for the registrant's common stock.
(b) There were 8 Class A Common stockholders
(c) See "Item 6. Selected Financial Data."
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED 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 $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.
ITEM 7. MD & A
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.
ITEM 8. Financial Statements and Supplementary Data
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
N/A.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
See "Management" under Item 1.
ITEM 11. EXECUTIVE COMPENSATION.
See "Executive Compensation" under Item 1.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See "Ownership of Management" and "Principal
Shareholders" under Item 1.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Certain Transactions" under Item 1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. FINANCIAL STATEMENTS
Included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1995, and 1994.
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1994, and l993
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1994, and l993.
Notes to Consolidated Financial Statements
(b) 2. FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this report:
Report of Independent Accountants on Financial Statement
Schedules.
Schedules Required by Article 7.
Schedule I -- Summary of Investments other than
Investments in Related Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Supplementary Reinsurance Information
Schedules Required by Article 5.
Schedule II -- Valuation and Qualifying Accounts and
Reserves
Schedule IV -- Loans on Real Estate
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is given in the financial statements
or notes thereto.
(c) 3. Exhibits
3(a). Restated Articles of Incorporation, as amended, dated
November 30, 1987. (Exhibit 3(a) to Metropolitan's
Annual Report on Form 10-K for fiscal 1987).
3(b). Amendment to Articles of Incorporation dated November
5, 1991. (Exhibit 3(c) to Registration No.
33-40220.)
3(c). Amendment to Articles of Incorporation dated
September 20, 1992. (Exhibit 3(c) to Metropolitan's
Annual Report on Form 10-K for fiscal 1992.)
3(d). Bylaws as amended to October 31, 1988. (Exhibit 3(b)
to Metropolitan's Annual Report on Form 10-K for
fiscal 1988.)
*3(e). (Restated Bylaws as amended to December 26 1995.
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
NationalBank, 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). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
C (Exhibit 4(g) to Registration No. 33-2699).
4(e). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series D (Exhibit 4(a)
to Registration No. 33-25702).
4(f). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-1, (Exhibit
4(a) to Registration No. 33-19238).
4(g). Amended Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-2 (Exhibit 4(a) to Registration No. 33-25702).
4(h). Statement of Rights, Designations and Preferences of
Variable Rate Preferred Stock, Series E-3 (Exhibit
4(a) to Registration No. 33-32586).
4(I). Statement of Rights, Designations and Preference of
Variable Rate Cumulative Preferred Stock, Series E-4
(Exhibit 4(h) to Registration No. 33-40221).
4(j). Form of Statement of Rights, Designations and
Preferences of Variable Rate Preferred Stock, Series
E-5. (Exhibit 4(i) to Registration No. 33-57396.)
4(k). Form of Statement of Rights, Designations and
Preferences of variable rate cumulative Preferred
Stock, Series E-6.
4(l). Form of Variable Rate Cumulative Preferred Stock
Certificate.
4(m). Form of Debenture Series II Certificate
4(n). Form of Debenture Series I Certificate.
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.
*27. Financial Data Schedule
(b) Reports on Form 8-K.
N/A
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
Our report on the consolidated financial statements of Metropolitan
Mortgage & Securities Co., Inc. and subsidiaries is included in Item 8
herein. In connection with our audits of such financial statements,
we have also audited the related financial statement schedules listed
in Item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information
required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Spokane, Washington
November 20, 1995
Schedule I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
September 30, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount At
Which Shown
Amortized Market On Balance
Cost Value Sheet
TYPE OF INVESTMENTS
<S> <C> <C> <C>
FIXED MATURITIES (Parent and
Other Subsidiaries)
Investments:
U.S. Government and Government
Agencies and Authorities $ 7,089,247 $5,401,237 $7,076,702
FIXED MATURITIES (Insurance
Subsidiaries)
Investments:
U.S. Government and Government
Agencies and Authorities 79,860,097 77,418,471 79,597,356
Corporate Bonds 84,286,900 83,078,388 84,156,438
Utility Bonds 11,652,738 11,373,900 11,635,580
Mortgage Backed Bonds 37,437,446 36,621,869 37,437,446
------------ ----------- ------------
TOTAL FIXED MATURITIES $220,326,428 $213,893,865 $219,903,522
============ =========== ============
Real Estate Contracts and
Mortgage Notes
Receivables $587,493,614 $587,493,614
Real Estate Held for Sale and
Development (Including
$38,004,011 Acquired in
Satisfaction of Debt) 91,105,003 91,105,003
------------ ------------
Total Real Estate Assets 678,598,617 678,598,617
Less Allowances for Losses on
Real Estate Assets (8,116,065) (8,116,065)
------------ ------------
NET REAL ESTATE ASSETS $670,482,552 $670,482,552
============ ============
OTHER RECEIVABLE INVESTMENTS $ 41,591,415 $ 41,591,415
=========== ===========
OTHER ASSETS - POLICY LOANS $ 13,651,794 $ 13,651,794
=========== ===========
TOTAL INVESTMENTS $946,052,189 $945,629,283
============ ============
</TABLE>
Schedule III
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Future
Policy
Benefits Other
Deferred Losses, Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
Cost Expenses Premiums Payable
<S> <C> <C> <C> <C>
September 30, 1994
Life Insurance
and Annuities $71,074,642 $744,644,625 $ --- $ ---
=========== ============ ========= ========
September 30, 1993
Life Insurance
and Annuities $70,024,363 $744,631,883 $ --- $ ---
=========== ============ ========= ========
September 30, 1995
Life Insurance
and Annuities $71,131,059 $781,716,153 $ --- $ ---
=========== ============ ========= ========
</TABLE>
Schedule III
METROPOLITAN MORTGAGE & SECURITIES CO., INC AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Benefits Amortization
Claims of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating
Revenue Income Expenses Costs Expenses
========= ========== ========== =========== =========
<S> <C> <C> <C> <C> <C>
September 30, 1995
Life Insurance
and Annuities $3,000,000 $64,970,470 $45,483,802 $10,300,547 $3,164,390
========== =========== =========== =========== ==========
September 30, 1994
Life Insurance
and Annuities $2,958,000 $65,944,437 $41,918,907 $7,015,570 $2,866,794
========== =========== =========== ========== ==========
September 30, 1993
Life Insurance
and Annuities $2,642,000 $66,132,075 $49,150,502 $4,187,323 $7,794,995
========== =========== =========== ========== ==========
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
SUPPLEMENTARY REINSURANCE INFORMATION
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended
<S> <C> <C> <C> <C> <C>
September 30, 1995
Life Insurance
in Force $373,573,000 $62,906,000 $ --- $310,667,000 ---
============ =========== ======= ============ =====
Premiums
Life Insurance $ 3,364,553 $ 364,553 $ --- $ 3,000,000 ---
============ =========== ======= ============ =====
September 30, 1994
Life Insurance
in Force $395,837,000 $69,311,000 $ --- $326,526,000 ---
============ =========== ======= ============ =====
Premiums
Life Insurance $ 3,345,503 $ 387,503 $ --- $ 2,958,000 ---
============ =========== ======= ============ =====
September 30, 1993
Life Insurance
in Force....... $423,583,000 $ 77,970,000 $ --- $345,613,000 ---
============ ============ ======= ============ ======
Premiums
Life Insurance.. $ 3,120,724 $ 478,724 $ --- $ 2,642,000 ---
============ ============ ======= ============ ======
</TABLE>
Schedule II
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Additions
(Reductions) Deductions
Balance at charged to and
beginning costs and accounts Balance at
Description of year expenses written off end of year
<S> <C> <C> <C> <C>
Allowance for probable
losses on
real estate contracts
and mortgage notes
deducted from real estate
assets in balance sheet
1995 $7,199,984 $(190,470) $ 733,331 $6,276,183
1994 5,738,188 1,040,913 (420,883) 7,199,984
1993 3,005,075 3,815,897 1,082,784 5,738,188
Allowance for probable
losses on
real estate held
for sale deducted
from real estate
assets in balance
sheet
1995 $1,908,399 $4,365,114 $4,433,631 $1,839,882
1994 4,860,303 4,492,280 7,444,184 1,908,399
1993 6,578,643 2,781,036 4,499,376 4,860,303
Allowance for losses
on accounts and
notes receivable
deducted from
other assets in
balance sheet
1995 $ 193,497 $ (35,657) $ 80,801 $ 77,039
1994 172,843 204,650 183,996 193,497
1993 1,448,730 682,406 1,958,293 172,843
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1995
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States. At
September 30, 1995, the Consolidated Group held first position liens
associated with contracts and mortgage notes receivable with a face value
of approximately $610 million (99%) and second or lower position liens of
approximately $8 million (1%). 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
9% in the Southeast (Florida, Georgia, North Carolina and South Carolina)
and approximately 15% by property located in the Southwest (Texas and New
Mexico). The face value of the real estate contracts and mortgage notes
receivable range principally from $15,000 to $300,000 with 41 receivables,
aggregating approximately $22.5 million in excess of this range. 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 principally range from 7% to 14% per annum with
approximately 93% of the face value of these receivables within this
range. The weighted average contractual interest rate on these
receivables at September 30, 1995 is approximately 9.6%. Maturity dates
range from 1995 to 2025.
<TABLE>
<CAPTION>
Number Carrying Delinquent
of Interest Maturity Amount of Principal
Description Receivables Rates Dates Receivables Amount
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C>
First Mortgage >$100,000 582 7%-14% 1995-2025 $87,229,481 $2,842,178
First Mortgage > $50,000 2,032 7%-14% 1995-2025 136,531,451 3,675,440
First Mortgage < $50,000 13,770 7%-14% 1995-2025 279,102,436 7,619,058
Second or Lower>$100,000 3 7%-11% 2005-2018 686,087 339,801
Second or Lower> $50,000 11 8%-12% 2002-2017 672,012 166,846
Second or Lower< $50,000 313 7%-14% 1995-2025 4,123,093 73,302
COMMERCIAL
First Mortgage >$100,000 175 7%-14% 1995-2025 35,889,341 741,083
First Mortgage > $50,000 194 7%-14% 1995-2025 13,948,069 295,408
First Mortgage < $50,000 354 7%-14% 1995-2025 8,967,314 131,197
Second or Lower>$100,000 3 7%-9% 2010-2025 852,197 --
Second or Lower> $50,000 4 8%-9% 2000-2016 281,043 --
Second or Lower< $50,000 5 8%-10% 1997-2000 63,809 --
FARM, LAND AND OTHER
First Mortgage >$100,000 54 7%-10% 1995-2025 12,173,717 1,026,615
First Mortgage > $50,000 104 8%-11% 1995-2025 6,865,287 --
First Mortgage < $50,000 1,948 7%-14% 1995-2025 29,093,311 554,713
Second or Lower>$100,000 1 6% 2009 336,544 --
Second or Lower> $50,000 2 7%-9% 2005-2020 153,066 --
Second or Lower< $50,000 53 9%-12% 1996-2022 544,695 34,359
Unrealized discounts, net
of unamortized acquisition
costs, on receivables
purchased at a discount (37,354,378) --
Accrued Interest Receivable 7,335,039 --
------------ -----------
CARRYING VALUE $587,493,614 $17,500,000
============ ===========
</TABLE>
Schedule IV
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1995
The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
<TABLE>
<CAPTION>
For the Years Ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of
period: $567,256,298 $562,440,005 $504,091,643
------------ ------------ ------------
Additions during period:
New Receivables - cash: 203,525,666 142,479,298 156,576,783
Loans to facilitate the sale of
real estate held - non cash: 34,102,247 33,461,966 14,954,650
Assumption of other debt payable
in conjunction with acquisition
of non receivables - non cash: 526,868 191,213 666,684
Increase in Accrued Interest: 912,348 -- 1,883,966
------------ ------------ ------------
Total Additions: 239,067,129 176,132,477 174,082,083
------------ ------------ ------------
Deductions During Period:
Collections of Principal -
cash: 118,869,137 107,040,612 94,695,213
Cost of Receivables Sold: 54,387,414 18,437,363 4,353,582
Reduction in Net Receivables
Associated with Sale of
Subsidiary - non cash 32,391,856 27,267,736 --
Foreclosures - non cash: 13,181,406 17,720,145 16,684,926
Decrease in Accrued Interest: -- 850,328 --
------------ ------------ ------------
Total Deductions 218,829,813 171,316,184 115,733,721
------------ ------------ ------------
Balance at End of Period $587,493,614 $567,256,298 $562,440,005
============ ============ ============
</TABLE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By /s/ C. PAUL SANDIFUR, JR.
_____________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ C. PAUL SANDIFUR, JR. President, Director and
Chief Executive Officer 1/16/96
________________________
C. Paul Sandifur, Jr.
/s/ Bruce J. Blohowiak Chief Operating Officer
Executive Vice President, 1/16/96
Director
________________________
/s/ ERNEST JURDANA Vice President 1/16/96
(Principal Financial Officer)
________________________
Ernest Jurdana
/s/ REUEL SWANSON Secretary and Director 1/16/96
________________________
Reuel Swanson
/s/ STEVEN CROOKS Controller and Vice
President 1/16/96
________________________
Steven Crooks
BYLAWS
OF
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
AS AMENDED TO DECEMBER 26, 1995
ARTICLE 1. OFFICES
The principal office of the corporation shall be located at 929
West Sprague Avenue, Spokane, WA 99204. The corporation may have
such other offices, either within or without the State of Washington
as the Board of Directors ("Board") may designate or as the business
of the corporation may require from time to time.
ARTICLE 2. SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of the shareholders shall
be held in February in each year at 929 West Sprague Avenue, Spokane,
Washington for the purpose of electing directors and transacting such
other business as may come before the meeting. If the election of
directors is not held on the day designated for the annual meeting of
the shareholders, or at any adjournment thereof, the election shall be
held at a special meeting of the shareholders called as soon
thereafter as practicable.
2.2 SPECIAL MEETINGS. The President or the Board may call
special meetings of the shareholders for any purpose. At the request
of the holders of not less than one-tenth of all of the outstanding
shares of the corporation entitled to vote at the meeting, the
President shall call a special meeting of the shareholders.
2.3 PLACE OF MEETING. All meetings shall be at the principal
office of the corporation or at such other place within or without the
State of Washington designated by the Board or by a waiver of notice
signed by all of the shareholders entitled to vote at the meeting.
2.4 NOTICE OF MEETING. The President or Board, when calling an
annual or special meeting of shareholders, shall cause to be delivered
to each shareholder entitled to vote at the meeting either personally
or by mail not less than 10 nor more than 50 days before the meeting
written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the
meeting is called.
2.5 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action
required or permitted to be taken at a shareholders' meeting may be
taken without a meeting if a written consent setting forth the action
so taken is signed by all shareholders entitled to vote with respect
to the subject matter thereof. Any such consent shall be inserted in
the minute book as if it were the minutes of a shareholders' meeting.
2.6 QUORUM. A majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a shareholders' meeting. If less than a
majority of the outstanding shares are represented at a meeting, a
majority of the shares so represented may adjourn the meeting from
time to time without further notice. At an adjourned meeting at which
a quorum is present or represented, any business may be transacted
that might have been transacted at the meeting as originally notified.
The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum.
2.7 PROXIES. At all shareholders' meetings a shareholder may
vote by proxy executed in writing by the shareholder or by his
attorney in fact. Such proxy shall be filed with the Secretary of the
corporation before or at the time of the meeting. Unless otherwise
provided in the proxy, a proxy shall be invalid after 11 months from
the date of its execution.
2.8 VOTING OF SHARES. Each outstanding share entitled to vote
shall be entitled to one vote upon each matter submitted to a vote at
a meeting of shareholders.
ARTICLE 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS. The business and affairs of the corporation
shall be managed by the Board. Minutes of all Board meetings and
other proceedings of the Board and all committees thereof shall be
kept and recorded.
3.2 NUMBER, TENURE AND QUALIFICATIONS. The Board shall be
composed of five directors, provided, however, that the number of
directors may be changed from time to time to any number not less than
five or such greater number as shall be elected at an annual meeting
of stockholders but in no event shall the number of directors exceed
twenty five. No decrease in the number of directors shall have the
effect of shortening the term of any incumbent director. Each
director shall hold office until the next annual meeting and until his
successor shall have been elected and qualified unless he resigns or
is removed. Directors need not be shareholders of the corporation.
3.3 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall
be held without notice immediately after and at the same place as the
annual meeting of shareholders. By resolution, the Board may provide
the time and place either within or without the State of Washington
for holding regular meetings without other notice than such
resolution.
3.4 SPECIAL MEETINGS. Special Board meetings may be called by or
at the request of the President or any two directors. The person or
persons authorized to call special meetings may fix any place either
within or without the State of Washington as the place for holding any
special Board meeting called by them.
3.5 NOTICE. Written notice of each special Board meeting shall
be delivered personally or telegraphed to each director at his
business address at least two days before the meeting or mailed at
least five days before the meeting. If such notice is mailed, it
shall be deemed to be delivered when deposited in the United States
mail properly addressed, with postage prepaid. If the notice is
telegraphed, it shall be deemed to be delivered when the contents of
the telegram is delivered to the telegraph company. The attendance of
a director at a meeting shall constitute a waiver of notice of such
meeting, except where a director attends a meeting for express purpose
of objecting to the transaction of any business because the meeting is
not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of
the Board need be specified in the notice or waiver of notice of such
meeting.
3.6 QUORUM. A majority of the directors shall constitute a
quorum for the transaction of business at any Board meeting but, if
less than such majority be present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without
further notice.
3.7 MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of
the Board unless otherwise required by these Bylaws, the Articles of
Incorporation or applicable law.
3.8 VACANCIES. Any vacancy occurring on the Board may be filled
by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in
office. Any directorship to be filled by reason of an increase in the
number of directors shall be filled by election at an annual meeting
or at a special shareholders' meeting called for that purpose.
3.9 REMOVAL. At a meeting of shareholders called expressly for
that purpose, one or more members of the Board (including the entire
Board) may be removed, with or without cause, by a vote of the holders
of a majority of the shares then entitled to vote on election of
directors.
3.10 COMPENSATION. By Board resolution, directors may be paid
their expenses, if any, of attendance at each Board meeting or a fixed
sum for attendance at each Board meeting or a stated salary as
director or any combination of the foregoing. No such payment shall
preclude any director from serving the corporation in other capacity
and receiving compensation therefor.
3.11 PRESUMPTION OF ASSENT. A director of the corporation
present at a Board meeting at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless
his dissent is entered in the minutes of the meeting or unless he
files his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof or unless he
forwards such dissent by certified mail to the Secretary of the
corporation immediately after the adjournment of the meeting. A
director who voted in favor of such action may not dissent.
3.12 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required
or permitted to be taken at a meeting of the Board may be taken
without a meeting if a written consent setting forth the action to be
taken is signed by each of the directors. Any such written consent
shall be inserted in the minute book as if it were the minutes of a
Board meeting.
3.13 EXECUTIVE AND OTHER COMMITTEES.
3.13.1 Creation and Authority of Committees. The Board may
appoint, from among its members, standing or temporary committees,
including an Executive Committee, and invest such committees with such
powers as it may see fit, subject to such conditions as may be
prescribed by the Board and by applicable law; but no such committee
shall have the power or authority of the Board in reference to (a)
amending the Articles of Incorporation, (b) adopting a plan of merger,
consolidation or exchange of shares not requiring shareholder
approval, (c) authorizing distribution or the issuance of shares
unless a resolution of the Board, these bylaws or the Articles of
Incorporation so provide, (d) approving or recommending to
shareholders actions or proposals required by law to be approved by
shareholders, (e) filling vacancies on the Board or on any committee
thereof, (f) amending these bylaws, (g) fixing compensation of any
director for serving on the Board or on any committee, or (h)
appointing other committees of the Board members thereof.
3.13.2 Minutes of Meetings. All committees appointed by the
board shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose.
3.13.3 Quorum and Manner of Acting. A majority of the number of
committee members composing any committee of the Board, as established
and fixed by resolution of the Board, shall constitute a quorum for
the transaction of business at any meeting of such committee but, if
less than a majority are present at a meeting, a majority of such
directors present may adjourn the meeting from time to time without
further notice. The act of a majority of the members of a committee
present at a meeting at which a quorum is present shall be the act of
such committee.
3.13.4 Resignation. Any member of any committee may resign at
any time by delivering written notice thereof to the Chairman of the
Board, the President, the Secretary, the Board or the Chairman of the
committee. Any such resignation shall take effect at the time
specified therein, or if the time is not specified, upon delivery
thereof and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
3.13.5 Removal. The Board may remove from office any member of
any committee elected or appointed by it or by an Executive Committee,
but only by the affirmative vote of not less than a majority of the
number of Directors fixed by or in the manner provided in these By-
Laws.
3.14 HONORARY DIRECTORS
3.14.1 Number, Tenure and Appointment. The Board may include one
or more Honorary Directors as shall be elected at any meeting of
stockholders but in no event shall the number of Honorary Directors
exceed five. Each Honorary Director shall hold office until the next
annual meeting unless he or she resigns or is removed. Honorary
Directors need not be shareholders.
3.14.2 Attendance at Meetings. Honorary Directors shall be
provided with notice of all annual regular meetings of the Board in
the manner specified in paragraph 3.5.
3.14.3 Quorum. For the purpose of determining the presence of a
quorum at any Board Meeting, the presence or absence of an Honorary
Director shall not be considered in determining the presence of a
quorum.
3.14.4 Voting. Honorary Directors shall not be entitled to vote
at Board Meetings or at meetings of any special committees to which
the Honorary Director may be appointed.
3.14.5 Compensation. By Board resolution, Honorary Directors may
be paid their expense, if any, of attendance at each Board Meeting or
a fixed sum for attendance at each meeting or a stated salary as
Honorary Director or any combination of the foregoing. No such
payment shall preclude any Director from serving the corporation in
any other capacity and receiving compensation therefor.
3.14.6 Action by Director Without a Meeting. Any action of the
Board permitted by 3.12 may be taken without obtaining written consent
to such action by any Honorary Director. However, any Honorary
Director shall be provided with notice of any such action within ten
(10) days after signature of the last voting Board member is obtained.
ARTICLE 4. Officers
4.1 NUMBER. The officers of the corporation shall be a
President, one or more Vice Presidents, a Secretary and a Treasurer,
each of whom shall be elected by the board. Such other officers and
assistant officers as may be deemed necessary may be elected or
appointed by the Board. The Board may also elect or appoint a Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer
and a Controller if it is deemed necessary in its sole discretion.
Any two or more offices may be held by the same person, excepting the
offices of President and Secretary.
4.2 ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected by the Board, either at the annual Board
meeting held after the annual meeting of the shareholders or at any
Special Meeting of the Board held therefor. Additional corporate
officers may be elected or appointed, as necessary, at any Special
Meeting of the Board. Each officer shall hold office until the next
annual meeting and until his successor shall have been elected and
qualified, unless he resigns or is removed.
4.3 REMOVAL. Any officer or agent elected or appointed by the
Board may be removed by the Board whenever in its judgment the best
interest of the corporation would be served thereby.
4.4 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by
the Board for the unexpired portion of the term.
4.5 CHIEF EXECUTIVE OFFICER. So long as the office of Chairman
of the Board and President are held by the same person, that person
shall be the Chief Executive Officer of the Corporation. Otherwise,
the Chief Executive Officer shall be the Chairman of the Board or the
President, as designated by the Board of Directors. The Chief
Executive Officer shall have general supervision and control over all
the business and property of the corporation and shall be responsible
at all times to the Board of Directors.
4.6 CHAIRMAN OF THE BOARD. If elected, the Chairman of the Board
shall preside as Chairman over all meetings of the Board of Directors
at which he shall be present, and shall have such other powers,
responsibilities and duties as shall be assigned to him by the Board.
4.7 PRESIDENT. The President shall have such powers,
responsibilities and duties as shall be assigned to him by the Board
of Directors. With the Secretary or other officer of the corporation
authorized by the Board, he may sign certificates for shares of the
corporation, deeds, mortgages, bonds, contracts, or other instruments
that the Board has authorized to be executed, except when the signing
and execution thereof has been expressly delegated by the Board or by
these Bylaws to some other officer or agent of the corporation or is
required by law to be otherwise signed or executed by some other
officer or in some other manner. The President shall also have the
authority to appoint advisory committees to assist him in the
supervision and control of the business affairs of the corporation.
4.8 CHIEF OPERATING OFFICER. If elected, the Chief Operating
Officer shall have such power and duties as the Chief Executive
Officer, the President, or the Board may, from time to time,
prescribe. In the absence of the President or in the event of his
death, inability or refusal to act, the Chief Operating Officer shall
perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the
President.
4.9 VICE PRESIDENT. Vice Presidents shall perform such other
duties as from time to time may be assigned to them by the President
or by the Board.
4.10 THE SECRETARY. The Secretary shall: (a) keep the minutes
of shareholders' and Board meetings in one or more books provided for
that purpose; (b) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (c) be
custodian of the corporate records and of the seal of the corporation
and see that the seal of the corporation is affixed to all documents,
the execution of which on behalf of the corporation under its seal is
duly authorized; (d) keep a register of the post office address of
each shareholder as furnished to the Secretary by each shareholder;
(e) sign with the President, or a Vice President certificates for
shares of the corporation, the issuance of which has been authorized
by resolution of the Board; (f) have general charge of the stock
transfer books of the corporation; and (g) in general perform all
duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him by the President or by the
Board.
4.11 THE TREASURER. If required by the Board, the Treasurer
shall give a bond for the faithful discharge of this duties in such
sum and with such surety or sureties as the Board shall determine. He
shall have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for moneys
due and payable to the corporation from any source whatsoever, and
deposit all such moneys in the name of the corporation in such banks,
trust companies or other depositories as shall be selected in
accordance with the provisions of these Bylaws and in general perform
all the duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the Chief
Executive Officer, President, or by the Board.
4.12 CHIEF FINANCIAL OFFICER. If elected, the Chief Financial
Officer shall have such power and duties as the the Board, Chief
Executive Officer, or the President may, from time to time, prescribe.
4.13 CONTROLLER. The controller shall exercise general
supervision of the Accounting Departments of the Corporation, render
reports relating to the general financial condition of the
corporation. He shall render such other reports and perform such
other duties as the Board, the Chief Executive Officer, or the
President may, from time to time, prescribe.
ARTICLE 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS. The Board may authorize any officer or officers,
agent or agents, to enter in to any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and
such authority may be general or confined to specific instances.
5.2 LOANS TO OFFICERS AND DIRECTORS. No loans shall be made by
the corporation to its officers or directors, unless first approved by
the holders of two-thirds of the shares, and no loans shall be made by
the corporation secured by its shares.
5.3 CHECK, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued
in the name of the corporation shall be signed by such officer or
officers, agent or agents, of the corporation and in such manner as is
from time to time determined by resolution of the Board.
5.3 DEPOSITS. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the
corporation in such banks, trust companies or other depositaries as
the Board may select.
ARTICLE 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES. No shares of the corporation shall be
issued unless authorized by the Board, which authorization shall
include the maximum number of shares to be issued and the
consideration to be received for each share.
6.2 CERTIFICATES FOR SHARES. Certificates representing shares of
the corporation shall be signed by the Chairman of the Board or the
President or a Vice President and by the Secretary or an Assistant
Secretary and shall include on their face written notice of any
restrictions which the Board may impose on the transferability of such
shares. Any or all of the signatures on such certificates may be by
facsimile. All certificates shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the
shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the stock transfer books of the
corporation. All certificates surrendered to the corporation for
transfer shall be canceled and no new certificates shall be issued
until the former certificates for a like number of shares shall have
been surrendered and canceled, except that in case of a lost,
destroyed or mutilated certificate, a new one may be issued therefor
upon such terms and indemnity to the corporation as the Board may
prescribe.
6.3 TRANSFER OF SHARES. Transfer of shares of the corporation
shall be made only on the stock transfer books of the corporation by
the holder of record thereof or by his legal representative, who shall
furnish proper evidence of authority to transfer, or by his attorney
in fact authorized by power of attorney duly executed and filed with
the Secretary of the corporation, and on surrender for cancellation of
the certificates for such shares. The person in whose name shares
stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
ARTICLE 7. FISCAL YEAR
The fiscal year of the corporation shall begin on October 1 and
end on September 30 of each year.
ARTICLE 8. SEAL
The seal of this corporation shall consist of the name of the
corporation, the state of its incorporation and the year of its
incorporation.
ARTICLE 9. WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or
director of the corporation under the provisions of these Bylaws or
under the provisions of the Articles of Incorporation or under the
provisions of the Washington Business Corporation Act, a waiver
thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be
deemed equivalent to the giving of such notice.
ARTICLE 10. INDEMNIFICATION
To the full extent permitted by the Washington Business
Corporation Act the corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any civil, criminal,
administrative or investigative action, suit or proceeding (whether
brought by or in the right of the corporation or otherwise) by reason
of the fact that he is or was a director, honorary director, or
officer of the corporation, or is or was serving at the request of the
corporation as a director, honorary director, or officer of another
corporation, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding; and the
Board of Directors may , t any time, approve indemnification of any
other person which the corporation has the power to indemnify under
the Washington Business Corporation act. The indemnification provided
by this section shall not be deemed exclusive of any other rights to
which a person may be entitled as a matter of law or by contract.
ARTICLE 11. AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws
may be adopted by The Board at any regular or special meeting of the
Board. The shareholders may also amend and repeal these Bylaws or
adopt new Bylaws. All Bylaws made by the Board may be amended or
repealed by the shareholders.
ARTICLE 12. RECORDS
The Secretary shall cause to be maintained at the registered
office of the corporation a complete set of records, statements and
accounts concerning the total operation of the corporation, in which
shall be entered, fully and accurately, each transaction pertaining to
the corporation. All books shall be open at all times during regular
business hours for inspection and examination by the shareholders. To
facilitate the maintenance of said records, the officers shall
promptly forward to the corporation all statements, invoices,
accounts, contracts, leases, and other records pertaining to the
corporation.
Adopted by Board of Directors on December 26, 1995.
/s/ C. Paul Sandifur, Jr.
By _______________________________
C. Paul Sandifur, Jr., President
Attest:
/s/ Reuel Swanson
________________________________
Reuel Swanson, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 32,799
<SECURITIES> 222,276
<RECEIVABLES> 629,085
<ALLOWANCES> 8,116
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 16,464
<DEPRECIATION> 8,315
<TOTAL-ASSETS> 1,078,468
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<BONDS> 226,864
<COMMON> 293
0
21,627
<OTHER-SE> 18,650
<TOTAL-LIABILITY-AND-EQUITY> 1,078,468
<SALES> 0
<TOTAL-REVENUES> 138,107
<CGS> 0
<TOTAL-COSTS> 108,067
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<LOSS-PROVISION> 4,175
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<INCOME-PRETAX> 9,484
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