<PAGE> Page 2
As filed with the Securities and Exchange Commission on May 2, 1997,
1997. Registration No.333-19755
Amendment No. 1 to
FORM S-2
SECURITIES AND EXCHANGE COMMISSION
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
A Washington Corporation--IRS No. 91-0609840
929 West Sprague Avenue
Spokane, Washington 99204
(509) 838-3111
Agent for Service
C. Paul Sandifur, Jr., President
Metropolitan Mortgage & Securities Co., Inc.
929 West Sprague Avenue
Spokane, WA 99204
Telephone No. (509) 838-3111
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box. /x/
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof,
pursuant to Item 11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
<PAGE> Page 3
statement number of the earlier effective registration statement for
the same offering. / /.
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /.
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /.
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
Title of each Amount Proposed Proposed Amount
of
class of to be maximum maximum
registration
securities to registered offering aggregate fee
be registered price per offering
unit price
Investment Debentures,
Series II $96,500,000 $ 1 $96,500,000 $32,168
Installment Debentures
Series I $ 3,500,000 $ 1 $ 3,500,000 $ 1,702
Preferred Stock
Series E-7 Shares 250,000 $100 $25,000,000 $ 7,576
</TABLE>
The Registrant is hereby proposing to register Investment
Debentures, Series II, in the amount of $26,500,000, Installment
Debentures, Series I in the amount of $500,000, and 250,000 shares of
Preferred Stock, Series E-7. The amount of the filing fee associated
with such newly registered securities is $8,030, $667, and $7,576
respectively. The Registrant is hereby amending Registration No. 333-
335 pursuant to Rule 429 of which approximately $70,000,000 of
Investment Debentures, Series II, $3,000,000 of Installment
Debentures, Series I remain unsold. The amount of the filing fee
associated with such previously registered securities, which fee was
previously paid with prior Registration Statements, was $24,138 and
$1,035 respectively (which fee was based upon the prior filing fee
amount).The amount of the registration fee shown above is the
combined fee for the previously registered securities (based on prior
filing fees) and the fee for the newly registered securities.
<PAGE> Page 4
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, as amended, or until this Registration Statement shall become
effective on such date as the Commission acting pursuant to said
Section 8(a) may determine.
<PAGE> Page 5
PART I
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
Cross Reference Sheet
Showing Location in Prospectus of Items of the Form
Item
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................... Inside Front
Cover
Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges and Preferred Stock
Dividends..................................... Prospectus
Summary;
Summary
Consolidated
Financial Data;
Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... *
6. Dilution...................................... *
7. Selling Security Holders...................... *
8. Plan of Distribution.......................... Plan of
Distribution
9. Description of Securities to be Registered.... Description of
Securities;
Description
of Debentures;
Summary of
Capital Stock
Description of
Common Stock;
Description of
Preferred Stock
10. Interest of Named Experts and Counsel....... Legal Matters;
Experts
11. Information with Respect to the Registrant.. Front Cover Page;
Prospectus
Summary;
Capitalization;
<PAGE> Page 6
Selected
Consolidated
Financial Data;
Management's
Discussion and
Analysis
of Financial
Condition
and Results of
Operations;
Business;
Management;
Principal
Shareholders;
Certain
Relationships and
Related
Transactions;
Financial
Statements
12. Incorporation of
Certain Information
by Reference.................................. Available
Information
Incorporation of
Certain Documents
By Reference
13. Disclosure of
Commission Position on Indem-
nification for Securities Act Liabilities..... Indemnification
*Not applicable or negative.
<PAGE> Page 7
SUBJECT TO COMPLETION, DATED May 2, 1997
PROSPECTUS
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
$96,500,000 Investment Debentures, Series II
$ 3,500,000 Installment Debentures, Series I
250,000 Shares Variable Rate Cumulative Preferred
Stock, Series E-7 ($100 Per Share Offering
Price and Liquidation Preference)
The Investment Debentures, Series II and Installment Debentures,
Series I (collectively, Debentures) and the shares of Variable Rate
Cumulative Preferred Stock, Series E-7 (Preferred Stock) are being
offered separately and not as units. A holder of Investment
Debentures, Series II may elect to receive interest monthly,
quarterly, semi-annually or annually without compounding, or at the
election of the holder of Investment Debentures, Series II if
interest is left with Metropolitan it will compound semi-annually
until maturity. Installment Debentures Series I will pay equal
monthly installments of principal and interest until maturity
according to an amortization schedule selected by the owner. The
Debentures are unsecured debt instruments, senior in liquidation to
outstanding equity securities, subordinate to collateralized debt, on
parity with unsecured accounts payable and accrued liabilities and on
parity with all previously issued and outstanding debentures. At
September 30, 1996, the Consolidated Group had approximately
$1,033,190,000 of debt senior to and approximately $10,952,000 of
debt in parity with the approximately $192,174,000 of outstanding
debentures. The Debentures will be issued in fully registered form
in fractional denominations of $0.01 or multiples thereof at 100% of
the principal amount paid. Metropolitan Mortgage & Securities Co.,
Inc. (Metropolitan) reserves the right to change prospectively, by
way of a supplement to this Prospectus, the interest rates,
maturities, and minimum investment amounts on unsold Debentures. The
current provisions are set forth below. See "DESCRIPTION OF
DEBENTURES".
<TABLE>
<CAPTION>
MINIMUM TERM TO ANNUAL
INVESTMENT MATURITY INTEREST RATE
_______________ ________________ _____________
INVESTMENT DEBENTURES, SERIES II
<PAGE> Page 8
<S> <C> <C>
$
$
$
$
<CAPTION>
INSTALLMENT DEBENTURES, SERIES I
$
</TABLE>
PREFERRED STOCK, SERIES E-7
PRICE DISTRIBUTION FORMULA
PER SHARE (Applicable Rate)
$100 The greater per annum rate of
the Three-Month U.S. Treasury Bill Rate, or
the Ten Year Constant Maturity Rate, or
the Twenty Year Constant Maturity Rate,
plus .5% (Minimum 6%/Maximum 14%)
The Preferred Stock offered hereunder will be sold in whole or
fractional units. Preferred Stock distributions are cumulative and
are to be declared and paid monthly. See "DESCRIPTION OF PREFERRED
STOCK-Distributions". Preferred Stock may be redeemed, in whole or
in part, at the option of Metropolitan at the redemption prices set
forth herein. Under certain limited circumstances, the Board of
Directors may, in its sole discretion and without any obligation to
do so, redeem shares tendered for redemption by stockholders. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares". In
liquidation, Preferred Stock is subordinate to all debts of
Metropolitan including Metropolitan's Investment and Installment
Debentures, Series II and I, and on parity with other preferred stock
and senior to Metropolitan's common stock. See "DESCRIPTION OF
PREFERRED STOCK-Liquidation Rights".
There is no trading market for the Debentures or the Preferred
Stock and none is expected to be established in the future. See "
RISK FACTORS". A list of persons willing to sell or purchase
Metropolitan's issued and outstanding shares of preferred stock has
been maintained by Metropolitan Investment Securities, Inc. (MIS) as
a convenience to holders of Metropolitan's preferred stock. See
"DESCRIPTION OF
<PAGE> Page 9
PREFERRED STOCK-Redemption of Shares". This offering of Debentures
and Preferred Stock is subject to withdrawal or cancellation by
Metropolitan without notice.
FOR A DISCUSSION OF MATERIAL RISKS ASSOCIATED WITH THE
DEBENTURES AND PREFERRED STOCK OFFERED HEREBY SEE RISK FACTORS ON
PAGE ___ OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS OR ANY PRICING SUPPLEMENT THERETO. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE AND ISSUER OR OTHER
TO PUBLIC COMMISSIONS (1) PERSONS(2)
<S> <C> <C> <C>
Per
Debenture 100% 0% to 6% 100% to 94%
Total: $100,000,000 None - $6,000,000 $100,000,000-$94,000,000
Per
Preferred
Share $100 0% to 6% 100% to 94%
Total: $25,000,000 None - $1,500,000 $25,000,000-$23,500,000
</TABLE>
(1) There is no direct sales charge to the investor.
Debentures earn interest, and Preferred Stock distributions are
calculated on their full respective offering prices, without
deduction. Metropolitan will reimburse its underwriters, for
commissions paid to licensed securities sales representatives. Sales
commission rates on the sale of Debentures depend upon the terms of
the sale and upon whether the sales are reinvestments or new
purchases. See "PLAN OF DISTRIBUTION".
(2) Before deducting other expenses estimated at $190,000.
The Debentures and Preferred Stock are being offered for sale
on a continuous, best efforts basis. There are no minimum amounts of
<PAGE> Page 10
securities that must be sold. See "PLAN OF DISTRIBUTION" & "CERTAIN
RELATIONSHIPS & RELATED TRANSACTIONS". No offering will be made
pursuant to this prospectus subsequent to January 31, 1998. The
offering is subject to NASD Rule 2720 (formerly Schedule E). See
"PLAN OF DISTRIBUTION".
The date of this Prospectus is ____________________.
<PAGE> Page 11
INSIDE FRONT COVER PAGE OF PROSPECTUS
<PAGE> Page 12
No person has been authorized to give any information or to make
any representations not contained or incorporated by reference in
this Prospectus and any Pricing Supplement. Neither the delivery of
this Prospectus and any Pricing Supplement nor any sale made
thereunder shall, under any circumstances, create any implication
that the information therein is correct at any time subsequent to the
date thereof. This Prospectus and any Pricing Supplement shall not
constitute an offer to sell or a solicitation of an offer to buy any
of the Debentures or Preferred Stock offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or
in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make
such offer or solicitation.
AVAILABLE INFORMATION
Metropolitan is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act")and,
in accordance therewith, files periodic reports and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports and other information filed by Metropolitan with the
Commission can be inspected and copied at the public reference
facilities maintained by the Commission in Washington, D.C. at 450
Fifth Street, N.W., Washington, DC 20549 and at certain of its
regional offices which are located in the New York Regional Office,
Seven World Trade Center, Suite 1300, New York, NY 10048, and the
Chicago Regional Office, CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661-2511. In addition, the Commission
maintains a World Wide Web site that contains reports, proxy
statements and other information regarding registrants such as the
Issuer, that filed electronically with the Commission at the
following address: (http:\\www.sec.gov).
Metropolitan has filed with the Securities and Exchange
Commission in Washington, D.C., a Registration Statement on Form S-2
under the Securities Act of 1933, as amended, with respect to the
Debentures and Preferred Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration
Statement, as permitted by the rules and regulations of the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are
incorporated herein by reference in this Prospectus:
<PAGE> Page 13
(a) Annual report on Form 10-K for the fiscal year ended September
30, 1996 (filed January 13, 1997);
(b) Quarterly report on Form 10-Q for the three month period ended
December 31, 1996 (filed February 19, 1997).
Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus.
Metropolitan will provide without charge to each person,
including to whom a Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the information
that has been referenced in this Prospectus other than exhibits to
such documents. Requests for such copies should be directed to
Corporate Secretary, Metropolitan Mortgage & Securities Co., Inc., PO
Box 2162, Spokane, WA 99210-2162, telephone number (509) 838-3111.
<PAGE> Page 14
TABLE OF CONTENTS
PAGE
Available Information.........................................
Incorporation of Certain Documents by Reference...............
Prospectus Summary............................................
Summary Consolidated Financial Data..........................
Risk Factors..................................................
Description of Securities.....................................
Description of Debentures...................................
Summary of Capital Stock....................................
Description of Preferred Stock..............................
Description of Common Stock.................................
Legal Matters.................................................
Legal Opinion...............................................
Legal Proceedings...........................................
Experts.......................................................
Plan of Distribution..........................................
Use of Proceeds...............................................
Capitalization................................................
Selected Consolidated Financial Data..........................
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............
Business......................................................
Overview....................................................
Receivable Investments......................................
Real Estate Development.....................................
Life Insurance and Annuity Operations.......................
Method of Financing.........................................
Competition.................................................
Regulation..................................................
Management....................................................
Executive Compensation......................................
Indemnification...............................................
<PAGE> Page 15
Management Ownership of Company Securities....................
Principal Shareholders........................................
Certain Relationships and Related Transactions
Index to Consolidated Financial Statements....................
<PAGE> Page 16
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to,
and should be read in conjunction with the detailed information and
financial statements appearing elsewhere in this Prospectus. This
offering involves certain considerations to prospective investors
which are set forth in "DESCRIPTION OF SECURITIES" & "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, originating 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. The Receivables collateralized by real estate are
typically non conventional in that they were originated as the result
of seller financing, or they were originated by institutional lenders
who specialize in borrowers with impaired credit histories. See
"Business-Receivable Investments". In addition to Receivables, the
Consolidated Group invests in U.S. Treasury obligations, corporate
bonds and other securities. See "Business-Securities Investments".
The Consolidated Group invests in Receivables using funds
generated from Receivable cash flows, the sale of annuities, the sale
and securitization of Receivables, the sale of debentures and
preferred stock, collateralized borrowing, sale of real estate and
securities portfolio earnings. See "Business-Method of Financing".
Metropolitan provides Receivable acquisition services, for a fee, to
its insurance subsidiary, Western United Life Assurance Company
<PAGE> Page 17
(Western United). Metwest Mortgage Services, Inc. (Metwest) services
the Receivables for Metropolitan and Western United. Metropolitan
and Metwest also provide Receivable acquisition, management and
collection services, for a fee to Summit Securities, Inc. (Summit),
Old Standard Life Insurance Company (Old Standard) and to Arizona
Life Insurance Co. (Arizona Life). See "BUSINESS- Management and
Receivable Acquisition Services" & "CERTAIN RELATIONSHIPS & RELATED
TRANSACTIONS".
The Consolidated Group also owns various other repossessed and
other properties, all of which are held for sale and/or development,
including a timeshare condominium resort in Hawaii. See "BUSINESS-
Real Estate Development."
At September 30, 1996, the Consolidated Group had 393 full time
equivalent 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.
Terms:
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.
Metropolitan: This term refers to the parent company, Metropolitan
Mortgage & Securities, Co., Inc., exclusive of its subsidiaries.
Metwest: Metwest Mortgage Services, Inc., a subsidiary of
Metropolitan.
Preferred Stock: Where this term is capitalized, it refers to the
Series E-7 Preferred Stock being offered herein. Where it is not
capitalized, it refers to preferred stock of Metropolitan generally.
<PAGE> Page 18
Receivables: Investments in cash flows, consisting of obligations
collateralized by real estate (both pre existing obligations
purchased in the secondary market, and obligations originated by
Metwest), structured settlements, annuities, lottery prizes and other
investments.
Western United: Western United Life Assurance Company, a subsidiary
of Metropolitan.
Affiliated Companies: The following companies are affiliated with
Metropolitan through the common control of C. Paul Sandifur, Jr.
Metropolitan and its subsidiaries provide services to these companies
for a fee and engage in various business transactions with these
companies:
Arizona Life: Arizona Life Insurance Company
Summit: Summit Securities, Inc.
MIS: Metropolitan Investment Securities, Inc.
Summit PD: Summit Property Development, Inc.
Old Standard: Old Standard Life Insurance Company.
ORGANIZATIONAL CHART
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
(as of December 31, 1996)
____________________________________|______________________________
| | |
100% | 96.5%*
Metwest | Consumers
Mortgage | Group
Services, Inc. | Holding
| Co., Inc.
| |
| |
| 100%
| Consumers Insurance
| Co., Inc.
| |
| 75.5%
24.5% -> Western United
Life Assurance
Company
<PAGE> Page 19
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
principal 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.
Metwest Mortgage Services, Inc. - Performs loan origination,
collection and servicing functions and is an FHA/HUD licensed
servicer and lender.
Metropolitan is the sole owner of several additional subsidiaries
which own certain individual development properties. See
"Business - Real Estate Development".
* The remaining 3.5% of Consumers Group Holding Co., Inc. is owned by
Summit. See "CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS"
<PAGE> Page 20
THE OFFERING
DEBENTURES:
The Offering . . . . This Debenture offering consists of
$3,500,000 in principal of Installment Debentures, Series I and
$96,500,000 in principal of Investment Debentures, Series II issued
at minimum investment amounts, terms, and rates set forth on the
cover page of this Prospectus. There is no minimum amount of
Debentures which must be sold. Debentures are issued in fully
negotiable certificated form. See "DESCRIPTION OF DEBENTURES".
The Debentures . . . . The Debentures are unsecured indebtedness of
Metropolitan. At September 30, 1996, Metropolitan had outstanding
approximately $192,174,000 (principal and compounded and accrued
interest) of debenture debt, $38,601,000 (principal and accrued
interest) of collateralized debt and similar obligations and had an
obligation to purchase securities previously sold, but not owned, in
an amount of $132,652,000 (market value). See "CAPITALIZATION".
Use of Proceeds . . . . The proceeds of this Debenture offering
will provide funds (in descending order of priority) for Receivable
investments, other investments (which may include investments in
existing subsidiaries, the commencement of new business ventures or
the acquisition of other companies), or, retiring maturing
debentures, preferred stock dividends, property development, and for
general corporate purposes. See "USE OF PROCEEDS" & "BUSINESS".
Principal and Interest Payments . . . . Holders of Investment
Debentures, Series II may elect to receive interest monthly,
quarterly, semi-annually or annually (without compounding) or at the
election of the Holder of Investment Debentures, Series II, if
interest is left with Metropolitan it will compound semi-annually
until maturity. Holders of Installment Debentures, Series I, are
paid equal monthly installments of principal and interest pursuant to
an amortization schedule selected by the holder. The minimum
investment amounts, terms and interest rates on unissued Debentures
offered hereby may be changed from time to time by Metropolitan, by
way of a supplement to this Prospectus. Any such change shall not
affect the rate of interest of any Debentures issued prior to the
change. See "DESCRIPTION OF DEBENTURES-Payment of Principal and
Interest".
PREFERRED STOCK:
<PAGE> Page 21
Offering . . . . The Preferred Stock offering consists of 250,000
shares of Variable Rate Cumulative Preferred Stock, Series E-7 (the
Preferred Stock), offered at $100 per share, and sold in whole and
fractional shares. There is no minimum amount of Preferred Stock
which must be sold. Preferred stock is issued in book entry form.
Distributions . . . . Distributions on the Preferred Stock offered
hereunder are cumulative from the date of issuance, and, when and as
declared, are payable monthly at the rates described on the cover
page of this Prospectus based on the price of $100 per share. All
preferred stock of Metropolitan including this Preferred Stock is
entitled to receive distributions on the same basis. See
"DESCRIPTION OF PREFERRED STOCK-Distributions".
Liquidation Rights . . . . In the event of liquidation of
Metropolitan, the Preferred Stock liquidation rights are $100 per
share of Preferred Stock, plus declared and unpaid dividends. The
liquidation rights of the Preferred Stock is senior to those of the
common stock of Metropolitan, on parity with the liquidation rights
of all other previously issued and outstanding preferred stock and
junior to all debts of Metropolitan, including Metropolitan's
previously issued debentures and the Debentures offered herein. See
"DESCRIPTION OF PREFERRED STOCK-Liquidation Rights".
Redemption: Upon Call by Metropolitan . . . The shares of Preferred
Stock are redeemable, in whole or in part, at the option of
Metropolitan, upon not less than 30 nor more than 60 days' notice by
mail, at a redemption price of $100 per share plus, in each case, any
declared but unpaid dividends to the date fixed for redemption. See
"DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
Redemption: Upon Request of Holder . . . Subject to certain
limitations, Metropolitan may, in its sole discretion and without any
obligation to do so, accept share(s) of Preferred Stock for
redemption upon the receipt of unsolicited written requests for
redemption of share(s) from any holder. Redemption prices in such
event will be established by the Board of Director, in its sole
discretion, plus any declared but unpaid dividends. Metropolitan may
not redeem share(s) at the holder's request during the first three
years after the initial sale of such share(s) except in those cases
involving the death or major medical emergency of the holder ( as
demonstrated to the satisfaction of Metropolitan's management) or any
joint holder. Any such discretionary redemptions will also depend on
Metropolitan's financial condition, including its liquidity position.
See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
Metropolitan, through MIS, intends to use its best efforts to
maintain a trading
<PAGE> Page 22
list for holders of Preferred Stock. See "DESCRIPTION OF PREFERRED
STOCK-Redemption of Shares" & " RISK FACTORS".
Voting Rights . . . . The holders of Preferred Stock have no voting
rights except (i) as expressly granted by the laws of the State of
Washington and (ii) in the event distributions payable on Preferred
Stock are in arrears in an amount equal to twenty-four or more full
monthly distributions, per share. See "DESCRIPTION OF PREFERRED STOCK-
Voting Rights".
Use of Proceeds . . . . The proceeds of this Preferred Stock
offering will provide funds (in descending order of priority) for
Receivable investments, other investments (which may include
investments in existing subsidiaries, the commencement of new
business ventures or the acquisition of other companies) retiring
maturing debentures, preferred stock dividends, property development,
and for general corporate purposes. See "USE OF PROCEEDS" &
"BUSINESS".
Federal Income Tax Considerations. . . . In the event the
Consolidated Group has earnings and profits for federal income tax
purposes in any future year, the distributions paid on Preferred
Stock in that year will constitute taxable income, as dividends, to
the recipient to the extent of such earnings and profits. Management
is unable to predict the future character of its distributions.
Purchasers are advised to consult their own tax advisors with respect
to the federal income tax treatment of distributions made. See
"DESCRIPTION OF PREFERRED STOCK-Federal Income Tax Consequences of
Distributions".
<PAGE> Page 23
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
The consolidated financial data shown below as of September 30, 1996 and
1995 and for the years ended September 30, 1996, 1995, and 1994 (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,
1994, 1993 and 1992 and for the years ended September 30, 1993 and 1992 have
been derived from audited financial statements not included herein. The
consolidated financial statements as of and for the years ended September 30,
1996, 1995, 1994 and 1993 have been audited by Coopers & Lybrand L.L.P. The
consolidated financial statements as of and for the year ended September 30,
1992 has been audited by BDO Seidman.
Three Months Ended
December 31,
(Unaudited) Year Ended September 30,
-------- --------- -----------------------------------------------
----------
1996 1995 1996 1995 1994 1993 1992
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF INCOME
DATE
Revenues $40,585 $34,057 $156,672 $138,107 $138,186 $133,113 $121,22
1
======= ======= ======== ======== ======== ======== =======
=
Income before minority
interest,
extraordinary item and
cumulative effect of
change in accounting $3,916 $312 $ 8,146 $ 6,376 $ 5,702 $ 8,558 $
principle 3,290
Income allocated to
minority interests (35) (9) (108) (73) (224) (255) (363)
-------- -------- -------- -------- -------- -------- -------
-
Income before
extraordinary item and
cumulative effect of
change in accounting
for income taxes 303 8,038 6,303 5,478 8,303 2,927
<PAGE>
Page 24
3,881
Extraordinary item (1) -- -- -- -- -- -- 651
Cumulative effect of
change in accounting
for income taxes (2) -- -- -- -- -- (4,300) --
-------- -------- -------- -------- -------- -------- -------
-
Net income 3,881 303 8,038 6,303 5,478 4,003 3,578
Preferred stock (1,024) (923) (3,868) (4,038) (3,423) (3,313) (3,399)
dividends -------- -------- -------- -------- -------- -------- -------
-
Income (loss)
applicable to common $2,857 $(620) $4,170 $2,265 $2,055 $ 690 $
stockholders ======== ======= ======== ======== ======== ======== 179
=======
=
Ratio of Earnings to
Fixed Charges 1.98 1.46 1.35 1.29 1.43 1.21
Ratio of Earnings to
Fixed Charges and
Preferred Stock 1.57 1.14 1.03 1.04 1.17
Dividends (4)
PER COMMON SHARE DATA
(3):
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting $21,981 $(4,770) $32,073 $ 17,288 $ 14,996 $ 37,239 $(3,579
principle )
Extraordinary items -- -- -- -- -- -- 4,932
(1)
Cumulative effect of
change in accounting
principle (2) -- -- -- -- -- (32,089) --
-------- -------- -------- -------- -------- -------- -------
-
Income (loss)
applicable to common $21,981 $(4,770) $32,073 $ 17,288 $14,996 $ 5,150 $
stockholders (5) ======== ======== ======== ======== ======== ======== 1,353
=======
=
Weighted Average
Number of Common 130 130 130 131 137 134 132
Shares Outstanding(3) ======== ======== ======== ======== ======== ======== =======
=
<PAGE>
Page 25
Cash Dividends Per
Common Share $-- $-- $-- $ 3,800 $ 675 $ 675 $--
======== ======== ======== ======== ======== ======== =======
=
CONSOLIDATED BALANCE
SHEET DATA:
Total Assets $1,142,2 $1,084,743 $1,282,65 $1,078,4 $1,063,2 $1,031,9 $982,25
22 9 68 90 58 9
Debt Securities, Other
Debt Payable and
Securities Sold, Not 209,005 215,968 363,427 226,864 261,500 234,497 230,814
Owned
Stockholders' Equity 50,476 40,498 46,343 40,570 32,625 32,781 28,260
<PAGE> Page 26
</TABLE>
(1) Benefit from utilization of net operating loss carry
forwards.
(2) Change in accounting principles reflects the adoption of
Statement of Financial Accounting Standards No. 109 - "Accounting for
Income Taxes."
(3) All information retroactively reflects the reverse common
stock split of 2,250:1 which occurred during the fiscal year ended
September 30, 1994.
(4) The consolidated ratio of earnings to fixed charges and
preferred dividends was 1.14, 1.03, 1.04 and 1.17 for the years ended
September 30, 1996, 1995, 1994 and 1993, respectively. Earnings were
insufficient to meet fixed charges and preferred dividends for the
year ended September 30, 1992, by approximately $783,000.
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
1.11, 1.05, 1.34 and 1.06 for the years ended September 30, 1996,
1995, 1994 and 1993, respectively. Earnings were insufficient to meet
fixed charges and preferred dividends for the year ended September
30, 1992, by approximately $13,012,000.
The consolidated ratio of earnings to fixed charges excluding
preferred stock dividends was as follows for the years ended
September 30, 1996 - 1.46; 1995 - 1.35; 1994 - 1.29; 1993 - 1.43; and
1992 - 1.21. The ratio of earnings to fixed charges excluding
preferred stock dividends for Metropolitan, assuming no benefit from
the earnings of its subsidiaries with the exception of direct
dividend payments was 1.48, 1.40, 1.36 and 1.31 for the years ended
September 30, 1996, 1995, 1994 and 1993, respectively. Such "parent
only" earnings of Metropolitan were insufficient to meet fixed
charges for the year ended September 30, 1992 by approximately
$7,701,000.
(5) Earnings per common share are computed by deducting
preferred stock dividends from net income and dividing the result by
the weighted average number of shares of common stock outstanding.
There were no common stock equivalents or potentially dilutive
securities outstanding during any year presented.
<PAGE> Page 27
RISK FACTORS
Investment in the Debentures and Preferred Stock offered
hereby involves a certain degree of risk. In the opinion of
Metropolitan all material risks are discussed below. Each
prospective investor should carefully consider the following risk
factors inherent in and affecting the business of the Consolidated
Group and this offering before making an investment decision. This
Prospectus contains forward-looking statements which involve risks
and uncertainties. Discussions containing such forward-looking
statements may be found in the materials set forth under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" as well
as in the Prospectus generally. Actual events or results may differ
as a result of various factors, including without limitation, the
risk factors set forth below and the matters set forth in the
Prospectus generally.
General
1. Risk of Fluctuation in Interest Rates: During the
twelve month period ending September 30, 1997, more of the
Consolidated Group's financial liabilities, principally annuities and
debentures, are scheduled to reprice or mature than are its financial
assets, principally Receivables and fixed income investments.
Consequently, in a falling interest rate environment such as has
recently been experienced, the current level of profitability and the
fair value of the Consolidated Group's equity would be expected to
increase as the spread between interest revenues and expense
improves. Conversely, in a rising interest rate environment, the net
interest income and the fair value of equity for the Consolidated
Group would likely decline. The fair value of equity (as opposed to
book value)is the difference between the fair value of all assets
less the fair value of all liabilities. The impact of a change in
rates will be reflected to the greatest extent in the fair value of
assets and liabilities having the longest maturities or time to their
scheduled repricing date. Additionally, borrowers tend to repay
Receivable loans when interest rates decline and they may be able to
refinance such loans at lower rates of interest. This factor reduces
the amount of interest to be received over time as loans with higher
rates of interest are prepaid more rapidly. The Consolidated Group
purchases the majority of its Receivables collateralized by real
estate at a discount. The yield on these Receivables is improved
when recognition of the discount is accelerated through prepayments.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-Asset/Liability Management". While interest
<PAGE> Page 28
rates evidenced a fairly stable trend as of the date of this
prospectus, management is unable to forecast with any certainty the
fluctuations in interest rates in the future.
2. Dependence Upon Securitization and Direct Sales of
Receivables: Metropolitan and Western United sold pools of
Receivables through direct sales in increased volumes during fiscal
1996 compared to prior years. Also, Metropolitan and Western United
sold Receivables through a securitization for the first time during
1996. The Consolidated Group's profits for fiscal 1996 were
substantially benefited by these sales. See "BUSINESS-Receivable
Sales". The Consolidated Group's future profits may be substantially
impacted by its ability to sell Receivables. Adverse changes in the
markets for the Consolidated Group's Receivables, including but not
limited to fluctuations in interest rates, increased competition and
regulatory changes could impair its ability to sell Receivables. Any
such impairment could have a material adverse effect upon the
Consolidated Group's results of operations and financial condition,
including its profitability and liquidity position.
As a result of securitizations, the Consolidated Group has
acquired residual interests in the securitized loan pools aggregating
approximately $3.5 million at September 30, 1996. These residual
interests are valued by the Consolidated Group, and accrue interest,
based upon assumptions regarding anticipated prepayments, defaults
and losses on the securitized Receivables. Although management
believes that it has made reasonable assumptions, actual experience
may vary from its estimates. The value of the residual interests and
the amount of interest accrued will have been overstated if
prepayments or losses are greater than anticipated. See "BUSINESS-
Receivable Sales"
3. EDependence Upon Insurance Subsidiary Earnings and
Restrictions on Subsidiary Dividends: At September 30, 1996, 88% of
the Consolidated Group's assets were invested in insurance related
assets. Metropolitan is dependent upon its ability to receive
dividends and charge fees for services to subsidiaries and affiliated
companies in order to pay interest, retire debentures and pay
preferred stock distributions. Insurance company regulations
restrict transfers of assets and the amount of dividends that Western
United may pay. Accordingly, to the extent of such restrictions,
assets and earnings of Western United are not available to
Metropolitan without special permission from the insurance
commissioner. This restriction on dividends could affect
Metropolitan's ability to pay interest, retire debentures and pay
preferred stock distributions. The total unrestricted statutory
surplus of Western United was approximately
<PAGE> Page 29
$5,567,000 as of September 30, 1996. See "BUSINESS-Regulation" &
"CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS".
Metropolitan and its subsidiaries charge Western United for
facilities rental, general office services, and for their services in
acquiring and servicing Receivables. Services are provided pursuant
to agreements that are subject to approval by the Office of the
Insurance Commissioner of the State of Washington. To the extent
that such fees could be restricted by the Office of the Insurance
Commissioner, Metropolitan's ability to meet its obligations could be
adversely affected. See "BUSINESS-Life Insurance and Annuity
Operations".
4. Dependence Upon Leverage Financing and the Need for
Additional Financing: The Consolidated Group's primary sources of
new financing for its operations are sales of annuities, sale and
securitization of Receivables, sales of debentures and preferred
stock, and collateralized borrowing. See "BUSINESS-Method of
Financing" & "MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS". The Consolidated Group's
principal sources of cash flow include Receivable payments, proceeds
from the sale of annuities, the sale and securitization of
Receivables, the sale of debentures and preferred stock,
collateralized borrowing, sale of real estate, and securities
portfolio earnings. To the extent the Consolidated Group's cash flow
is insufficient or unavailable for the repayment of debentures which
mature during the period ending January 31, 1998, portions of the net
proceeds of this Debenture and Preferred Stock offering may be used
for such purpose. See "USE OF PROCEEDS". Approximately $47,142,000
in principal amount of debentures will mature between February 1,
1997 and January 31, 1998. Historically, approximately 40% to 60% of
maturing debentures are reinvested, although reinvestment levels for
1996 were approximately 30%, due in part to the limitation imposed by
the state of Washington on total outstanding Debentures and Preferred
Stock. See "Business-Regulation". Metropolitan's ability to repay
its other outstanding obligations, including those created by the
sale of the securities described herein, may be contingent upon the
success of future public offerings of debentures and preferred stock.
The amount of Debentures and Preferred Stock that may be issued and
outstanding may be limited by the State of Washington See "BUSINESS-
Regulation".
The following table summarizes anticipated cash requirements
for principal and interest obligations of Metropolitan's debentures
and other debts payable; and anticipated cash dividend requirements
on its preferred stock for the five-year period ending September 30,
2001
<PAGE> Page 30
based on amounts outstanding at September 30, 1996 and assuming no
reinvestment of maturing debentures:
<TABLE>
<CAPTION>
OTHER PREFERRED
Fiscal Year Ending DEBENTURE DEBT STOCK
September 30, BONDS PAYABLE DIVIDENDS TOTAL
___________________ _________ _______ _________ ______
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1997 $ 56,377 $37,246 $3,880 $ 97,503
1998 59,267 820 3,880 63,967
1999 49,874 303 3,880 54,057
2000 50,063 181 3,880 54,124
2001 6,874 221 3,880 10,975
-------- ------- ------- --------
$222,455 $38,771 $19,400 $280,626
======== ======= ======= ========
</TABLE>
5. Risk of Fluctuation in Life Insurance and Annuity
Termination Rates: An increase in the number of life insurance and
annuity policy terminations will tend to negatively impact the
insurance subsidiary's earnings (and in turn the Consolidated Group's
earnings) by requiring the expensing of unamortized deferred costs
related to policy surrenders. At September 30, 1996, deferred policy
acquisition costs on annuities were approximately 7.7% of annuity
reserves. Surrender charges typically do not exceed 9% of the
annuity contract balance at the annuity contract's inception, and
such surrender charges decline annually from that rate. Annuity
termination rates, adjusted for internal rollovers, for the calendar
years 1995, 1994 and 1993 were 18.9%, 21.5%, and 15.3%, respectively.
Deferred policy acquisition costs on life insurance products were
approximately 13% of life reserves at September 30, 1996. Life
insurance termination rates were 7.7%, 9.8% and 8.0%, respectively,
in calendar 1995, 1994, and 1993. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" & Note 13,
Consolidated Financial Statements.
6. Risks Related to Investments in Receivables:
Receivables Collateralized by Real Estate, Risk of Fluctuation
in Collateral Value and Economic Conditions: The Consolidated Group
is engaged in the purchase of Receivables and the origination of
loans collateralized by real estate. See "BUSINESS-Receivable
Investments".
<PAGE> Page 31
All such Receivable investments are subject to a risk of payment
default and loss in the event of foreclosure. The risk of default
and loss can be affected by changes in local economic conditions,
property values, changes in zoning, land use, environmental laws and
other legal restrictions, including restrictions on timing and
methods of foreclosure. There is no assurance that these Receivables
will be paid according to their terms, or that property values will
be adequate to preclude loss in the event of a foreclosure.
Metropolitan's investment underwriting procedure includes a review
of demographics, market trends, property value, economy, and the
buyer's credit. The Consolidated Group purchases Receivables
nationwide, allowing it to diversify its investments geographically.
Management believes that these procedures minimize the risk of
default or loss in the event of foreclosure. However, there is no
assurance that these procedures will be effective.
Investments in Other Receivables, Risks of Default: In
addition to the purchase of Receivables collateralized by real
estate, the Consolidated Group is engaged nationwide in the purchase
of other types of Receivables including the purchase of annuities
issued in the settlement of disputes, other types of annuities,
lottery prizes, and other investments. All such Receivables are
subject to the risk of default by the payor (generally an unrelated
insurance company, or a state government). Unlike Receivables
collateralized by real estate, these Receivables are generally not
collateralized by a specific asset. Metropolitan's underwriting
procedures vary with the type of investment and generally include a
review of the credit rating of the payor, and other relevant factors
designed to evaluate the risk of the particular investment.
Management believes that its underwriting procedures minimize the
risk of default and loss in the event of a default. However, there
is no assurance that these procedures will be effective to minimize
the occurrence of any default, or loss in the event of a default.
See "Business-Receivable Investments".
As of September 30, 1996, the Consolidated Group's Receivable
investments consisted of the following:
86% Receivables collateralized by real estate
1% Annuities
13% Lotteries and loans collateralized by lotteries
The following table demonstrates the relative concentration of
the Consolidated Group's Receivable investments collateralized by
real estate and other investments as a percentage of total assets.
<TABLE><CAPTION>
September 30,
-------------------------------------
<PAGE> Page 32
1996 1995 1994
---- ---- ---
(Dollars in Thousands)
(Percentage of Total Assets)
<S> <C> >C> <C>
Carrying Value of Real Estate
Held For Sale and/or
Development $84,333 $ 91,105 $ 76,765
7% 8% 7%
Face Value of Real Estate
Receivables* $681,178 $ 617,513 $ 606,324
53% 57% 57%
Other Receivable Investments $107,494 $ 41,591 -
8% 4% -
Face Value of
Receivables in Arrears
for Three Months or More $26,500 $ 17,500 $ 19,000
2% 2% 2%
Carrying value of
Securities
Available for sale
and Held to
maturity $163,303 $ 219,904 $ 289,251
13% 20% 27%
TOTAL ASSETS $1,282,659 $1,078,468 $1,063,290
100% 100% 100%
</TABLE>
As of September 30, 1996, 99% of the Receivables collateralized
by real estate were collateralized by first position liens on real
estate and approximately 83% of the Receivables were non-conventional
in the sense that they were not originated by a financial
institution.
7. Risks Related to Environmental Conditions and
Regulations: In the course of its business, the Consolidated Group
acquires properties, generally through foreclosure. Various state
and federal laws and regulations impose liability upon the owner and
previous owner of property on account of hazardous waste or
substances released onto or disposed of on property. As a result,
the owner or former owner may be liable to the government or a third
party for the clean up costs. The costs of investigation,
remediation and removal can be substantial. While the Consolidated
Group endeavors to avoid the acquisition of Receivables or properties
which may be contaminated, there can be no assurance that significant
losses could
<PAGE> Page 33
not be incurred due to environmental contamination.
8. Conflicts of Interest: Metropolitan and various of its
subsidiaries and affiliates engage in similar business activities
which include investing in Receivables and other related activities.
As a result, certain conflicts of interest may arise between or among
these companies. A common management group directs the activities of
all of the companies in the Consolidated Group. Metropolitan
provides general management and Receivable acquisition services to
Western United. Metwest provides receivable servicing and collection
services to Metropolitan and Western United. Metropolitan and
Metwest also provide these services to Summit, Old Standard, and
Arizona Life. Summit is controlled by C. Paul Sandifur Jr.,
President of Metropolitan and President of most of the companies
within the Consolidated Group. On January 31, 1995, Summit purchased
MIS from Metropolitan, and acquired the Metropolitan property
development division. Also on May 31, 1995, Metropolitan sold Old
Standard to one of Summit's subsidiaries. See "CERTAIN RELATIONSHIPS
& RELATED TRANSACTIONS". As a result of these affiliated
relationships, certain conflicts of interest may now exist and may
arise between or among the Consolidated Group, Summit, Old Standard
and Arizona Life. Investors in Metropolitan's securities must rely
on the integrity and corporate responsibilities of Metropolitan and
its subsidiaries' officers and directors in making business decisions
and directing the operations of Metropolitan and its subsidiaries.
See "BUSINESS-Competition".
9. Reliance on Management: The success of the
Consolidated Group's operations depends to a large degree on the
business skills of its senior management (C. Paul Sandifur, Jr.,
President, CEO; Bruce J. Blohowiak, Executive Vice President, COO;
Michael Kirk, Senior Vice President-Production; Steven Crooks, Vice
President Controller, Acting CFO) in, among other things,
underwriting, servicing and selling Receivables. If for some reason
significant members of senior management were unable to perform their
functions, or left the Consolidated Group's employ, there can be no
assurance that the Consolidated Group could locate capable
replacement(s) in a timely fashion. Currently, the Consolidated
Group does not carry key-man insurance coverage, or have any
employment agreements with any of the above identified senior
management.
10. Government Regulations: The Consolidated Group's
business activities are subject to extensive regulation, including
regulation of its Receivable origination, acquisition and servicing
activities. Metropolitan's sale of debentures is regulated by the
State of Washington pursuant to the Debenture Company Act. During
the securities offering which expired January 31, 1997,
Metropolitan's
<PAGE> Page 34
ability to sell securities was restricted by the state of Washington
to an aggregate outstanding amount of $251,300,000. This limitation
restricted Metropolitan's ability to sell debentures and preferred
stock during the twelve month period ending January 31, 1997. Due in
part to the small volume of Debentures that matured during this
period, Metropolitan's cash position, and Metropolitan's borrowing
ability, this restriction did not materially impair Metropolitan's
liquidity position. However, management is unable to predict with
any degree of certainty whether the state of Washington will impose
similar or additional restrictions during this offering or future
securities offerings or whether any such restrictions would impact
the financial condition, including the liquidity, of Metropolitan.
See "BUSINESS-Regulation".
Relative to Debentures
1. Term Investment; Absence of a Trading Market, Lack
of Liquidity: The Debentures offered hereby will be issued for
specified terms and should not be considered liquid investments. See
"DESCRIPTION OF DEBENTURES." Investors should be prepared to hold the
Debentures until maturity. The Debentures are not traded on any stock
exchange and there is no independent public market for the
Debentures. At present, management does not anticipate applying for a
listing for such public trading.
2. Lack of Indenture Restrictions and Ability to Incur
Additional Indebtedness: The Debentures are issued pursuant to an
Indenture which does not restrict Metropolitan's ability to issue
additional debentures or to incur other debt. The Indenture does not
require Metropolitan to maintain any specified financial ratios,
minimum net worth or minimum working capital. Debenture holders
should not rely on the terms of the Indenture for protection of their
investments, but should look rather to the creditworthiness of
Metropolitan and its ability to satisfy its obligations. Debentures
will not be guaranteed or insured by any governmental agency. There
is no sinking fund for the retirement of Debentures. On September 30,
1996, Metropolitan had outstanding approximately $192,174,000
(principal and compounded and accrued interest) of debentures,
$38,601,000 (principal and accrued interest) of collateralized debt
and had an obligation to purchase securities previously sold but not
owned in an amount of $132,652,000 (market value). See Notes 1, 9 and
10 to the Consolidated Financial Statements. The Debentures are
senior in liquidation to all outstanding equity securities of
Metropolitan. Debentures are subordinate in liquidation only to
Metropolitan's collateralized debt and Metropolitan's obligation to
<PAGE> Page 35
purchase securities previously sold, but not owned, as set forth
above and are on parity with all other outstanding debentures,
unsecured accounts payable and unsecured accrued liabilities. In
the event of liquidation of the Consolidated Group, the policyholders
and creditors of Metropolitan's subsidiaries would be paid prior to
Debentureholders to the extent of the net assets of the
subsidiaries.
Relative to Preferred Stock
1. Subordination and Liquidation Rights: The offering
price and liquidation preference of Preferred Stock offered herein is
$100 per share. In the event of liquidation of Metropolitan,
outstanding shares of Preferred Stock, including shares of additional
sub-series which may subsequently be authorized and sold, are on
parity with the liquidation preference of all other outstanding
series of preferred stock of Metropolitan, and are subordinate to all
outstanding debt of Metropolitan including its Debentures. In the
event of liquidation of Metropolitan, the policy holders and
creditors of Metropolitan's subsidiaries would be paid in priority to
all preferred shareholders (including holders of the Preferred Stock
offered herein) to the extent of the unencumbered assets of the
subsidiaries. Preferred Stock is preferred in liquidation to
Metropolitan's common stock. As of September 30, 1996, total assets
of the Consolidated Group were approximately $1,282,659,000 and the
total liabilities of the Consolidated Group ranking senior in
liquidation preference to Preferred Stock were approximately
$1,236,316,000. The total liquidation preference of the outstanding
shares of previously issued series of preferred stock as of September
30, 1996, was approximately $49,496,000. Consequently, the
liquidation rights of the outstanding preferred stock had a book
value of $.94 for each $1.00 of outstanding liquidation rights as of
September 30, 1996. As a result of unaudited first quarter earnings,
during fiscal 1997, the liquidation rights of each outstanding
preferred stock had a book value of $1.00 for each $1.00 of
outstanding liquidation rights. There can be no assurance that
future performance will be sufficient to maintain such $1.00 book
value for the preferred stock liquidation preference.
The preference in liquidation would not necessarily be
applicable to terms afforded Preferred Stock in the event of other
extraordinary corporate events such as the sale of substantially all
its assets, capital restructuring, merger, reorganization and
bankruptcy. The outcomes thereof could be subject to negotiation
among all interested parties and/or court determinations and are not
presently determinable. In such circumstances, Preferred Stock would
not
<PAGE> Page 36
necessarily enjoy any preference over terms available to common
stock, or even be as favorable.
2. Prior Years' Net Income Insufficient to Cover
Preferred Stock Distributions and Fixed Charges: Net income in 1996,
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 the gains from the sale and
securitization of Receivables and the sales of investments and real
estate, the 1996 income would have been insufficient to cover fixed
charges by approximately $9.7 million. Additionally, the elimination
of similar items in 1994 and 1993 would have resulted in insufficient
earnings to cover fixed charges by approximately $6.8 million and
$4.2, respectively. SEE "RISK FACTORS" & "SELECTED CONSOLIDATED
FINANCIAL DATA". Net income for the years 1984 through 1992 was not
sufficient to meet preferred stock distribution requirements. During
1996, net income was approximately $8.0 million, from which preferred
stock dividends of approximately $3.9 million were paid, which
resulted in $8.7 million of retained earnings at September 30, 1996
compared to $4.6 million, $2.7 million, $778,000, and $179,000 of
retained earnings at September 30, 1995, 1994, 1993 and 1992,
respectively. See "SELECTED CONSOLIDATED FINANCIAL DATA", and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS"
The ratios of earnings to fixed charges and preferred stock
dividends for the Consolidated Group were as follows for the periods
indicated: 1996:1.14, 1995:1.03, 1994:1.04 and 1993:1.17.
Accordingly, adjusted earnings (income before extraordinary items
plus interest expense and income tax expense) were sufficient to
cover fixed charges in 1996, 1995, 1994 and 1993 and insufficient to
cover fixed charges (primarily interest and preferred stock dividend
requirements) in 1992 by approximately $783,000. See "SELECTED
CONSOLIDATED FINANCIAL DATA." No assurance can be given that
earnings will be sufficient to cover preferred stock dividend
requirements in the future.
3. Federal Income Tax Considerations: To the extent
that the Consolidated Group has no current or accumulated earnings
and profits as computed for federal income tax purposes, Metropolitan
believes that distributions made with respect to Preferred Stock
would be characterized as tax free returns of capital for federal
income tax purposes. Metropolitan believes that distributions on its
outstanding common and preferred stock in 1984 through 1992 and 1994
were tax free returns of capital, but were taxable in 1993, 1995 and
1996. Prior
<PAGE> Page 37
years' tax treatment should not be considered indicative of future
years' tax treatment. Management is unable to predict the future
character of its preferred stock distributions but will report
annually to shareholders regarding the tax character of the prior
years distributions. In addition, as each Preferred Shareholders'
individual tax circumstance is unique, Preferred Shareholders are
advised to consult their own tax advisors with respect to the federal
income tax treatment of distributions made. See "DESCRIPTION OF
PREFERRED STOCK-Federal Income Tax Consequences of
Distributions."
4. Risk Relating to Lack of Liquidity and Limited
Marketability of Shares: The Preferred Stock is not expected to be
traded on any National or Regional Stock Exchange and no independent
public market for Preferred Stock is anticipated. At present,
management does not anticipate applying for a listing for such public
trading. In order to provide shareholders with some liquidity, MIS
has operated a trading list to match buyers and sellers of preferred
stock. With limited exceptions, Metropolitan has established a
policy that all preferred shareholders must place their shares for
sale on the MIS trading list for 60 consecutive days before
Metropolitan will entertain a request for redemption. During fiscal
1996, the average waiting time for a Metropolitan shareholder wishing
to sell Metropolitan preferred shares on this trading list was twenty-
five days. However, there can be no assurance that the shares will
be sold within similar time periods in the future. There is no
assurance that Metropolitan will redeem the shares if they have not
sold within the 60 day period. There can be no assurance that this
system will continue to operate, nor that it will provide liquidity
comparable to securities traded on recognized public stock exchanges.
See "DESCRIPTION OF PREFERRED STOCK-Redemption of Shares".
5. Control by Common Stockholders/Lack of Voting
Rights: The Class A Common Stock is the only class of Metropolitan's
stock carrying voting rights. Class A Common stockholders now hold,
and upon completion of this offering will continue to hold, effective
control of Metropolitan except as described below. C. Paul Sandifur,
Jr., effectively controls Metropolitan through ownership and voting
control. See "OWNERSHIP OF MANAGEMENT." The Board resolution
authorizing the Preferred Stock provides that in the event
distributions payable on any shares of preferred stock (including the
Preferred Stock offered herein) are in arrears in an amount equal to
twenty-four or more full monthly dividends per share, then the
holders of Preferred Stock and all other outstanding preferred stock
shall be entitled to elect a majority of the Board of Directors of
Metropolitan. Preferred Stock shareholders may also become entitled
to
<PAGE> Page 38
certain other voting rights as required by law. See "DESCRIPTION OF
PREFERRED STOCK-Voting Rights".
6. Possible Redemption/Call of Preferred Shares by
Metropolitan: The Preferred Stock is redeemable by Metropolitan, in
its sole discretion, at any time at a price of $100 per share plus
any declared and unpaid dividends. If fewer than all of the
outstanding shares are redeemed, Metropolitan may determine the
Shares to redeem in its sole discretion. See "Description of
Preferred Stock-Redemption of Shares."
7. Limitations on Redemption and Restrictions on
Distributions: Preferred Stock is designed as a long term investment
in the equity of Metropolitan, not as a short term, liquid
investment. The Preferred Stock is redeemable solely at the option
of Metropolitan, and with limited exceptions is specifically not
redeemable for three years following its purchase. In addition,
Metropolitan may not purchase or acquire any shares of Preferred
Stock in the event that cumulative dividends thereon have not been
paid in full except pursuant to a purchase or exchange offer made on
the same terms to all holders of Preferred Stock. See "DESCRIPTION
OF PREFERRED STOCK-Redemption of Shares". Metropolitan is restricted
from making distributions on Preferred Stock in the event that any
distributions to which the holders of other series of preferred stock
are entitled to have not been paid. See "DESCRIPTION OF PREFERRED
STOCK-Distributions".
DESCRIPTION OF SECURITIES
DESCRIPTION OF DEBENTURES
The Debentures will be issued under an Indenture dated as of
July 6, 1979 and supplements thereto dated as of October 3, 1980
(with respect to Investment Debentures, Series II) and November 12,
1984 (with respect to Installment Debentures, Series I). The
following statements relating to the Debentures and the Indenture are
summaries and do not purport to be complete. Such summaries are
subject to the detailed provisions of the Indenture and are qualified
in their entirety by reference to the Indenture, a copy of which is
filed as an exhibit to the Registration Statement and is also
available for inspection at the office of the Trustee.
General
The Debentures will represent unsecured general obligations
of Metropolitan and will be issued in fully negotiable form without
<PAGE> Page 39
coupons, in fractional denominations of $0.01 or more subject to the
stated minimum investment amount requirements. The Debentures will be
sold at 100% of the principal amount. The Debentures will have the
minimum investment amounts, maturities and interest rates set forth
on the cover page of this Prospectus. The stated interest rates,
maturities, and minimum investment amounts may be changed at any time
by Metropolitan by way of a supplement to this Prospectus. Any such
change will have no effect on the terms of the previously sold
Debentures.
Debentures may be transferred or exchanged for other Debentures
of the same series of a like aggregate principal amount subject to
the limitations set forth in the Indenture. No service charge will
be made for any transfer or exchange of Debentures. Metropolitan may
require payment of taxes or other governmental charges imposed in
connection with any such transfer or exchange. Interest will accrue
at the stated rate from the date of issue until maturity. The
Debentures are not convertible into capital stock or other securities
of Metropolitan.
The Debentures are not subject to redemption prior to maturity,
but may be prepaid pursuant to the prepayment on death provision
described below. Also, in limited circumstances involving an
investor's demonstrated financial hardship, subject to regulatory
restrictions affecting redemptions and exchanges of securities during
an offering, Metropolitan may, in its sole discretion, entertain a
request for an early payout of a Debenture upon terms mutually agreed
to by the holder of the Debenture and Metropolitan. Such early payout
requests, when received, are reviewed in the order received.
Payment of Principal and Interest
Investment Debentures, Series II: Interest will be paid to
holders under one of several plans. The purchaser may elect to have
interest paid on a monthly, quarterly, semi-annual or annual basis,
without compounding, or may elect to leave the accrued interest with
Metropolitan in which case it will compound semi-annually at the
stated interest rate. Debentureholders may change the interest
payment election at any time by written notice to Metropolitan.
Under the compounding option, upon written notice to Metropolitan,
the Debentureholder(s) may withdraw the interest accumulated during
the last two completed semiannual compounding periods as well as the
interest accrued from the end of the last compounding period to the
date Metropolitan receives the notice. Amounts compounded prior to
the last two compounding periods are available only at maturity.
<PAGE> Page 40
Installment Debentures, Series I: Holders of Installment
Debentures, Series I will be paid monthly installments comprised of
principal and interest until maturity. Payments will commence on the
date specified by the purchaser, which date shall be no less than 30
days from the debenture issue date. The amount of each installment
will be determined by the amortization term designated by the
Debentureholder at the time the Debenture is purchased.
Debentureholders are notified in writing between 15 and 45 days
prior to the date their Debentures will mature. The amounts due on
maturity are placed in a separate bank trust account until paid to
the registered owner(s). Debentures do not earn interest after the
maturity date. Metropolitan will pay the principal and accumulated
interest due on matured Debentures to the registered owner(s) in cash
at Metropolitan's main office in Spokane, Washington or by check
mailed to the address designated by the registered owner.
Prepayment on Death
In the event of the death of a Debentureholder, any party
entitled to receive some or all of the proceeds of the Debenture may
elect to have his or her portion of the principal and any accrued but
unpaid interest prepaid in full in five consecutive equal monthly
installments. Interest will continue to accrue on the declining
principal balance of such portion. No interest penalty will be
assessed. Any request for prepayment shall be made to Metropolitan
in writing and shall be accompanied by evidence satisfactory to
Metropolitan of the death of the registered owner or joint registered
owner. Before prepayment, Metropolitan may require the submission of
additional documents or other material which it may consider
necessary to determine the portion of the proceeds the requesting
party is entitled to receive, or assurances which, in Metropolitan's
discretion, it considers necessary to fulfill its obligations.
Related Indebtedness
The Indenture pursuant to which the Debentures are issued does
not restrict Metropolitan's ability to issue additional debentures or
to incur other debt. The Indenture does not require Metropolitan to
maintain any specified financial ratios, minimum net worth or minimum
working capital. There is no sinking fund for the redemption of the
Debentures. Debentures will not be guaranteed or insured by any
governmental agency. The State of Washington regulates the amount
of debt securities Metropolitan may issue, its debt to equity ratio,
certain of its investments and various other aspects of its business.
See "BUSINESS-Regulation". At September 30, 1996, Metropolitan,
including obligations of subsidiaries, had outstanding approximately
<PAGE> Page 41
$192,174,000 (principal and compounded and accrued interest) of
Debentures, $38,601,000 (principal and accrued interest) of
collateralized debt and had an obligation to purchase securities
previously sold, but not owned, in an amount of $132,652,000 (market
value). The Debentures offered hereby are senior in liquidation to
all outstanding equity securities of Metropolitan. They are
subordinate to Metropolitan's collateralized debt as set forth above
and are on a parity with all other outstanding debentures and
unsecured accounts payable and accrued liabilities. There are no
limitations on Metropolitan's ability to incur additional
collateralized debt. Debentureholders should not rely on the terms of
the Indenture for protection of their investment, but should look
rather to the creditworthiness of Metropolitan and its ability to
satisfy its obligations.
Concerning the Trustee
Seattle First National Bank (Seafirst) was the Indenture Trustee
until March 8, 1996 when Seafirst sold its trust activities to First
Trust National Association which assumed all of the duties of the
Trustee pursuant to the terms of the Trust Indenture, as amended.
The Trustee is obligated under the Indenture to oversee and, if
necessary, to take action to enforce fulfillment of Metropolitan's
obligations to Debentureholders. The Trustee is a national banking
association headquartered in Seattle, with a combined capital and
surplus in excess of $100 million. Metropolitan and certain of its
subsidiaries may maintain deposit accounts and from time to time, may
borrow money from the Trustee and conduct other banking transactions
with it. At September 30, 1996, and as of the date of this
Prospectus, no loans from the Trustee were outstanding. In the event
of default, the Indenture permits the Trustee to become a creditor of
Metropolitan and its subsidiaries, and does not preclude the Trustee
from enforcing its rights as a creditor, including rights as a holder
of collateralized indebtedness.
Rights and Procedures in the Event of Default
Events of default include the failure of Metropolitan to pay
interest on any Debenture for a period of 30 days after it becomes
due and payable; the failure to pay the principal or any required
installment thereof of any Debenture when due; the failure to perform
any other covenant in the Indenture for 60 days after notice; and
certain events in bankruptcy, insolvency or reorganization with
respect to Metropolitan. Upon the occurrence of an event of default,
either the Trustee or the holders of 25% or more in principal amount
of Debentures then outstanding may declare the principal of all the
Debentures to be due and payable immediately.
<PAGE> Page 42
The Trustee must give the Debentureholders notice by mail of any
default within 90 days after the occurrence of the default, unless it
has been cured or waived. The Trustee may withhold such notice if it
determines in good faith that such withholding is in the best
interest of the Debentureholders, except if the default consists of
failure to pay principal or interest on any Debenture.
Subject to certain conditions, any such default, except failure
to pay principal or interest when due, may be waived by the holders
of a majority (in aggregate principal amount) of the Debentures then
outstanding. Such holders will have the right to direct the time,
method and place of conducting any proceeding for any remedy
available to the Trustee, or of exercising any power conferred on the
Trustee, except as otherwise provided in the Indenture. The Trustee
may require reasonable indemnity from holders of Debentures before
acting at their direction.
Within 120 days after the end of each fiscal year, Metropolitan
must furnish to the Trustee a statement of certain officers of
Metropolitan concerning their knowledge as to whether or not
Metropolitan is in default under the Indenture.
Modification of the Trust Indenture
Debentureholders' rights may be modified with the consent of the
holders of 66 2/3% of the outstanding principal amounts of
Debentures, and 66 2/3% of those series specifically affected. In
general, no adverse modification of the terms of payment and no
modifications reducing the percentage of Debentures required for
modification is effective against any Debentureholder without his or
her consent.
Restrictions on Consolidation, Merger, etc.
Metropolitan may not consolidate with or merge into any other
corporation or transfer substantially all its assets unless either
Metropolitan is the continuing corporation or the corporation formed
by such consolidation, or into which Metropolitan is merged, or the
person acquiring by conveyance or transfer of such assets shall be a
corporation organized and existing under the laws of the United
States or any state thereof which assumes the performance of every
covenant of Metropolitan under the Indenture and certain other
conditions precedent are fulfilled.
SUMMARY OF CAPITAL STOCK
<PAGE> Page 43
The authorized capital stock of Metropolitan consists of 222
shares of Class A Common Stock ($2,250 par value), 222 shares of
Class B Common Stock ($2,250 par value), 750,000 shares of Preferred
Stock, Series A ($1 par value), 200,000 shares of Preferred Stock,
Series B ($10 par value), 1,000,000 shares of Preferred Stock, Series
C ($10 par value), 1,375,000 of Preferred Stock, Series D ($10 par
value), 5,000,000 shares of Preferred Stock, Series E ($10 par
value), and 1,000,000 shares of Subordinate Preferred Stock, no par
value. See Note 11 to the Consolidated Financial Statements.
DESCRIPTION OF PREFERRED STOCK
This offering consists of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-7 (hereinafter referred to as
"Preferred Stock"). All of the outstanding shares of preferred stock
and the shares of Preferred Stock offered by Metropolitan hereby,
when issued and sold, will be validly issued, fully paid and
nonassessable. The relative rights and preferences of Preferred
Stock have been fixed and determined by the Board of Directors of
Metropolitan and are set forth in the Preferred Stock Authorizing
Resolution (the Authorizing Resolution). Preferred Stock is issued
in book entry form. Investments in Preferred Stock are evidenced by
receipts and not by negotiable stock certificates.
The following statements relating to the Preferred Stock are
summaries, do not purport to be complete and are qualified in their
entirety by reference to the Authorizing Resolution a copy of which
is filed with the Commission as an exhibit to the Registration
Statement and is also available for inspection at the principal
office of Metropolitan.
Distributions
Distributions on Preferred Stock are cumulative and are to be
declared monthly on the first business day of the month payable to
the shareholders of record as of the fifth calendar day of each
month. Distributions are to be paid in cash on the twentieth
calendar day of each month in an amount equal to the offering price
of $100 per share multiplied by the distribution rate divided by
twelve. The distribution rate will be the "Applicable Rate" as
defined herein subject to the authority of Metropolitan's Board of
Directors to authorize, by resolution, a higher rate.
The Applicable Rate for any monthly distribution period cannot
be less than 6% or greater than 14% per annum. The Applicable Rate
for
<PAGE> Page 44
any monthly distribution period shall be (i) the highest of the
Three-Month U.S. Treasury Bill Rate, the Ten-Year Constant Maturity
Rate and the Twenty-Year Constant Maturity Rate (each as more fully
described in the Authorizing Resolution), plus (ii) one half of one
percentage point. Each of the above rates shall be calculated as the
arithmetic average of the two most recent weekly per annum yields as
published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the ten calendar days immediately
preceding the first day of the distribution period for which the
distribution rate on the Preferred Stock is being determined. Should
Metropolitan determine in good faith that one or more of such rates
cannot be determined for any distribution period, then the Applicable
Rate of such period shall be the higher of whichever of such rates
can be so determined, plus one half of one percentage point. Should
Metropolitan determine in good faith that none of such rates can be
determined for any distribution period, then the Applicable Rate in
effect for the preceding distribution period shall be continued for
such distribution period. The distribution rate for each monthly
distribution period shall be calculated as promptly as practicable by
Metropolitan. Metropolitan will cause notice of the distribution
rate to be enclosed with the next mailed distribution payment check.
In making such calculation, the Three-Month U.S. Treasury Bill Rate,
Ten-Year Constant Maturity Rate and Twenty-Year Constant Maturity
Rate shall each be rounded to the nearest five hundredths of a
percentage point.
Prior to the effective date of this prospectus, Metropolitan's
Board of Directors adopted a resolution to authorize a distribution
rate on the Preferred Stock at one percentage point higher than the
Applicable Rate. Such higher distribution rate will continue from
month to month until the Board elects to terminate it. The Board may
increase, decrease or eliminate the additional percentage point at
any time, in its sole discretion.
Restrictions on Distributions
Metropolitan may not declare or pay a distribution on any share
of Preferred Stock offered herein for any distribution period unless,
at the same time, a like distribution shall be declared or paid on
all shares of preferred stock previously issued and outstanding and
entitled to receive distributions. See "Capitalization".
So long as any shares of the Preferred Stock offered herein are
outstanding, and unless the full cumulative distributions on all
previously issued outstanding preferred shares, including the
Preferred Stock offered herein, shall have been paid or declared and
set apart for all past distribution periods, Metropolitan may not:
(i)
<PAGE> Page 45
declare or pay or set aside for payment any distribution (other than
a distribution in common stock or in any other stock ranking junior
to Preferred Stock as to distributions and upon liquidation and other
than as provided in the foregoing paragraph); (ii) declare or pay any
other distribution upon common stock or upon any other stock ranking
junior to or on a parity with Preferred Stock as to distributions or
upon liquidation; or (iii) redeem, purchase or otherwise acquire
common stock or any other stock of Metropolitan ranking junior to or
on a parity with Preferred Stock as to distributions or upon
liquidation for any consideration (or pay or make available any funds
for a sinking fund for the redemption of any shares of any such
stock) except by conversion into or exchange for stock of
Metropolitan ranking junior to Preferred Stock as to distributions
and upon liquidation.
Metropolitan may make distributions ratably on the shares of
Preferred Stock and shares of any stock of Metropolitan ranking on a
parity therewith with regard to the payment of distributions, in
accordance with the sums which would be payable on such shares if all
distributions, including accumulations, if any, were declared and
paid in full. As of the date hereof, no distributions on
Metropolitan's preferred stock are in arrears. No interest will be
paid for or on account of any unpaid distributions.
Liquidation Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of Metropolitan, the holders of shares of
Preferred Stock will be entitled to receive out of the assets of
Metropolitan available for distribution to stockholders, before any
distribution of assets is made to holders of common stock or any
stock of Metropolitan ranking, upon liquidation, junior to Preferred
Stock, liquidating distributions in the amount of $100 per share plus
declared and unpaid regular monthly distributions. Preferred Stock
is junior in liquidation to outstanding debt of Metropolitan and on
parity with all other issued and outstanding preferred stock to the
extent of its liquidation preference of $100 per share. As of
September 30, 1996, the total liabilities of Metropolitan
(consolidated) ranking senior in liquidation preference to Preferred
Stock were approximately $1,236,315,000. Obligations ranking on a
parity with Preferred Stock upon liquidation (i.e. the total
liquidation preference of the outstanding shares of all previous
series of preferred stock) as of September 30, 1996 were
approximately $49,496,000. The amount of additional unsecured
indebtedness that Metropolitan may incur is regulated by Washington
state law. See "BUSINESS Regulation". There are no limitations on
Metropolitan's
<PAGE> Page 46
ability to incur additional secured indebtedness. See
"Capitalization" & "Risk Factors".
The Preferred Stock Authorizing Resolution provides that,
without limitation, the voluntary sale, lease or conveyance of all or
substantially all of Metropolitan's property or assets to, or its
consolidation or merger with any other corporation shall not be
deemed to be a liquidation, dissolution or winding up of
Metropolitan. If upon any voluntary or involuntary liquidation,
dissolution or winding up of Metropolitan, the aggregate liquidation
preference payable with respect to Preferred Stock and any other
shares of stock of Metropolitan ranking as to any such distribution
on a parity with Preferred Stock are not paid in full, the holders of
Preferred Stock and of such other shares will share ratably in any
such distribution of assets of Metropolitan in proportion to the full
respective preferential amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which
they are entitled, the holders of shares of Preferred Stock will not
be entitled to any further participation in any distribution of
assets by Metropolitan.
Redemption of Shares
Upon call by Metropolitan: Subject to regulatory restrictions
affecting redemptions during an offering, the shares of Preferred
Stock are redeemable, in whole or in part, only at the option of
Metropolitan at a redemption price of $100 per share plus declared
and unpaid dividends to the date fixed for redemption. In the event
that fewer than all of the outstanding shares of Preferred Stock are
to be redeemed, the number of shares to be redeemed shall be
determined by Metropolitan and the shares to be redeemed shall be
determined by such method as Metropolitan in its sole discretion
deems to be equitable.
Discretionary Redemption Upon Request of the Holder: Preferred
Stock is not redeemable at the option of the holder. If, however,
Metropolitan receives an unsolicited written request for redemption
of shares from any holder, Metropolitan may, in its sole discretion,
subject to regulatory restrictions affecting redemptions during an
offering, and subject to the limitations described below, consider
such shares for redemption. Such redemption requests, when received,
are reviewed in the order received. Any shares so tendered, which
Metropolitan in its discretion allows for redemption, shall be
redeemed by Metropolitan directly, (and not from or through a broker
dealer), at a price established by the Board of Directors, from time
to time, in its sole discretion.
<PAGE> Page 47
There can be no assurance that Metropolitan's financial
condition will allow it to exercise its discretion to accept any
particular request for redemption of Preferred Stock. Metropolitan
will not redeem any such shares tendered for redemption if to do so
would, in the opinion of Metropolitan's management, be unsafe or
unsound in light of Metropolitan's financial condition (including its
liquidity position); if payment of interest or principal on any
outstanding instrument of indebtedness is in arrears or in default;
or if payment of any dividend on Preferred Stock or share of any
stock of Metropolitan ranking at least on a parity therewith is in
arrears as to dividends. In the event that cumulative dividends on
Preferred Stock have not been paid in full, Metropolitan may not
purchase or acquire any shares of Preferred Stock otherwise than
pursuant to a purchase or exchange offer made on the same terms to
all holders of Preferred Stock.
As provided in the Preferred Stock Authorizing Resolution, for a
period of three years from the date of initial sale of each share of
Preferred Stock, any redemption of such share, at the sole discretion
of Metropolitan, shall occur only upon the death or major medical
emergency, (as demonstrated to the satisfaction of Metropolitan's
management) of the holder or any joint holder of the share requested
to be redeemed. As further provided in the Authorizing Resolution,
any optional redemption of a share in any calendar year after the
third year from the date of sale of the share, not arising from the
death or medical emergency of the holder or any joint holder shall
occur only when the sum of all optional redemptions (including those
arising out of the death or medical emergency of the holder or any
joint holder) of shares of Preferred Stock during that calendar year
shall not exceed ten percent of the number of shares of Preferred
Stock outstanding at the end of the preceding calendar year. In the
event the ten percent limit is reached in any calendar year, the only
redemptions which may be considered during that calendar year shall
be those arising from the death or medical emergency of the holder or
any joint holder; provided, however, that to the extent that total
optional redemptions in any calendar year do not reach the ten
percent limit, the amount by which such optional redemptions shall
fall short of the ten percent limit may be carried over into ensuing
years; and provided further that to the extent that all redemptions,
including those involving the death or medical emergency of the
holder or any joint holder, exceed the ten percent limit in any year,
the amount by which such redemptions exceed the ten percent limit
shall reduce the limit in the succeeding year for limiting
redemptions not involving the death or medical emergency of a holder
or any joint holder. In no event, shall such optional redemptions of
all types in any single
<PAGE> Page 48
calendar year exceed 20% of the number of shares of Preferred Stock
outstanding at the end of the preceding calendar year.
The Preferred Stock is not expected to be traded on any
National or Regional Stock Exchange and no independent public market
for Preferred Stock is anticipated. Management does not anticipate
applying for a listing for such public trading. In order to provide
shareholders with some liquidity, MIS operates a trading list to
match buyers and sellers of Metropolitan's preferred stock.
Metropolitan does not participate as a buyer or seller on the trading
list. With limited exceptions, Metropolitan has established a policy
that all preferred shareholders (including holders of the Preferred
Shares offered hereunder) must place their shares for sale on the
trading list for 60 consecutive days before Metropolitan will
entertain a request for redemption. During 1996, the average waiting
time for a Metropolitan shareholder wishing to sell Metropolitan
preferred shares on this trading list was 25 days. However, there
can be no assurance that the shares will be sold within similar time
periods in the future. There is no assurance that the shares will be
sold within the 60 day period. There is no assurance that
Metropolitan will redeem the shares if they have not sold within the
60 day period. There can be no assurance that this system will
continue to operate nor that it will provide liquidity comparable to
securities traded on recognized public stock exchanges. See "RISK
FACTORS".
Voting Rights
The Preferred Stock has no voting rights except as provided in
the Authorizing Resolution and except as required by Washington State
law regarding amendments to Metropolitan's Articles of Incorporation
which adversely affect holders of such shares as a class and
requires approval of 66 2/3% of the outstanding shares entitled to
vote.
The Authorizing Resolution provides that holders of Preferred
Stock, together with the holders of Metropolitan's other outstanding
preferred stock and any other preferred stock thereafter authorized,
voting separately and as a single class, shall be entitled to elect a
majority of the Board of Directors of Metropolitan in the event that
distributions payable on any shares of Preferred Stock shall be in
arrears in an amount equal to twenty-four or more full monthly
dividends per share. Such right will continue until all distributions
in arrears have been paid in full.
Federal Income Tax Consequences of Distributions
<PAGE> Page 49
The following discussion of the federal income tax consequences
of distributions is based upon the Internal Revenue Code of 1986 as
amended (the "Code"), existing Treasury regulations, current
published administrative positions of the Internal Revenue Service
(the "Service") contained in revenue rulings, revenue procedures and
notes and existing judicial decisions. No assurance can be given
that legislative or administrative changes or court decisions may not
be forthcoming that could significantly modify the statements in this
discussion. Any such changes may or may not be retroactive with
respect to transactions effected prior to the date of such changes.
Distributions made to the holders of Preferred Stock will either
be taxable or not depending, in part, on the extent to which they are
made out of current or accumulated earnings and profits of
Metropolitan as calculated for federal income tax purposes. To the
extent, if any, that distributions made by Metropolitan to the
holders of Preferred Stock exceed current and accumulated earnings
and profits of Metropolitan, such distributions will be treated first
as a tax-free return of capital, reducing the holder's basis in
Preferred Stock (not below zero), and thereafter, as capital gains
(or ordinary gains if the Preferred Stock is not held by the holder
as a capital asset).
Metropolitan believes that distributions with respect to
Metropolitan's preferred stock paid during the calendar years 1984
through 1992 and 1994 were a return of capital under Section 301 of
the Code. Metropolitan has filed a Report of Nontaxable
Distributions for the years 1984 through 1992 and 1994 with the
Service. Metropolitan believes that distributions paid during 1993,
1995 and 1996 were taxable. Metropolitan is currently unable to
predict the character of its distribution for future years, but as
required by the Code, will report annually to shareholders regarding
the tax character of the prior years distributions.
Each Preferred shareholder's individual tax circumstances is
unique; accordingly, Preferred shareholders are advised to consult
their own tax advisor with respect to the income tax treatment or any
distribution made with respect to the Preferred Stock.
Distributions paid with respect to Preferred Stock, whether
deemed to be dividends, return of capital, or capital gains for
federal income tax purposes, will result in the same federal income
tax consequences to Metropolitan as other payments of dividends.
These distributions are not deductible by Metropolitan under current
tax
<PAGE> Page 50
law. Additionally, distributions to foreign taxpayers are subject to
special rules not discussed herein.
Summary of Preferred Stock Attributes
The following table sets forth several of the primary
differences and relative rights of the various series of outstanding
preferred stock of Metropolitan as of the date of this prospectus
including the Preferred Stock, Series E-7 offered herein:
<TABLE>
<S> <C> <C> <C> <C>
SERIES OFFERING LIQUIDATION REDEMPTION DIVIDEND
PRICE PREFERENCE PRICE (1) RATE (4)
C $10 $10 $9.90 APPLICABLE RATE
D $10 $10 $9.90 APPLICABLE RATE
E-1 $10 $10 $9.90 APPLICABLE RATE
E-2 $100 $10 (2) $99 APPLICABLE RATE
PLUS .5 PERCENT
E-3 $100 $10 (2) $99 APPLICABLE RATE
PLUS .5 PERCENT
E-4 $100 $100 $99 (3) APPLICABLE RATE
PLUS .5 PERCENT
E-5 $100 $100 $99 (3) APPLICABLE RATE
PLUS .5 PERCENT
E-6 $100 $100 (3) APPLICABLE RATE
PLUS .5 PERCENT
E-7 $100 $100 (5) APPLICABLE RATE
PLUS .5 PERCENT
</TABLE>
(1) The Redemption Price shown, is for redemption's at the request
of the shareholder. Redemption of such shares is at the sole
discretion of Metropolitan. In the event of a redemption at the
request of Metropolitan, the redemption price per share for
authorized shares of Series C, D, and E-1 preferred stock is $10 and
for Series E-2 through E-6 preferred stock is $100.
(2) The liquidation preference for classes E-2 and E-3 is $10. In
addition, Metropolitan's Articles of Incorporation, as amended,
provide that the E-2 and E-3 shareholders will receive liquidation
distributions of up to $90 per share prior to any distribution to the
common shareholders.
<PAGE> Page 51
(3) E-4, E-5, E-6 and E-7 stock are not redeemable during the
first three years after their respective issuance except for
instances of death or medical emergency. See "Description of
Preferred Stock-Redemption Rights". If redeemed during the first
year after initial issuance, the redemption price is $97, and
thereafter it is $99.
(4) The Board has authorized, for an indefinite period, a
distribution payment on all series of Preferred Stock of an
additional one percentage point above the Applicable Rate. The Board
may at its sole discretion eliminate the additional percentage point
above the Applicable Rate.
(5) Redemption at the request of a shareholder, and the redemption
price upon such a request, are at the sole discretion of
Metropolitan. In the event of redemption at Metropolitan's request,
the price is $102 until December 31, 1997 and $100 thereafter.
DESCRIPTION OF COMMON STOCK
Holders of shares of Class A Common Stock are entitled to one
vote per share on all matters to be voted on by the shareholders.
Subject to the rights of holders of outstanding shares of preferred
stock, if any, and the Preferred Stock sold hereunder, if any, the
holders of Common Stock are entitled to receive such dividends, as
may be declared from time to time by the Board of Directors in its
discretion from funds legally available, and upon liquidation or
dissolution of Metropolitan are entitled to receive all assets
available for distribution to shareholders. The Common Stock has no
preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to such
shares. Certain Class A and B Common Shares, which are held by
certain officers and board members of Metropolitan, are subject to
resale restrictions and subject to Metropolitan's right to repurchase
in the event of termination of employment. All outstanding shares of
Common Stock are fully paid and nonassessable.
There is no redemption provision for either series of common
stock. Each series of common stock receives dividends in such
amounts as may be declared from time to time by the Board of
Directors. The liquidation preference of Common Stock Series A is
$2,250 per share. It is junior in liquidation preference to Series
B. The liquidation preference of Common Stock Series B is the amount
originally paid for the shares. All series of Common Stock are
subordinate in liquidation to all series of preferred stock,
including the Preferred Stock offered herein.
<PAGE> Page 52
Transfer Agent and Registrar
Metropolitan acts as its own transfer agent and registrar of
Metropolitan's capital stock.
LEGAL MATTERS
LEGAL OPINION
The legality of the Debentures and Preferred Stock offered
hereby is being passed upon for Metropolitan by Susan A. Thomson, who
is employed by Metropolitan as its Assistant Corporate Counsel and
Vice President. She is also Assistant Corporate Counsel for
Metropolitan's subsidiaries. In addition, she is Assistant Corporate
Counsel for Summit and its subsidiaries.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or
threatened against any of the companies within the Consolidated Group
or to which its property is subject.
EXPERTS
The consolidated balance sheets of Metropolitan and its
subsidiaries as of September 30, 1996 and 1995 and the consolidated
statements of income, stockholders' equity and cash flows for each of
the three years in the period ended September 30, 1996 included in
this Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph describing changes in the
method of accounting for impaired loans in fiscal 1996, of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
The Debentures and Preferred Stock are offered directly to
the public on a continuing best efforts basis through MIS, which is
affiliated with Metropolitan through the common control of C. Paul
Sandifur Jr. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ".
Accordingly, the offering has not received the independent selling
agent review customarily made when an unaffiliated selling agent
offers securities. No commission or other expense of the offering
will be paid by the purchasers of the Debentures or Preferred Stock.
A commission will, however, be paid by Metropolitan on most Debenture
purchases up to a maximum amount of 6% of the Debenture price,
<PAGE> Page 53
depending on the term of the Debenture and whether or not the
transaction is a reinvestment or new purchase. A commission in the
maximum amount of 6% of the offering price will also be paid by
Metropolitan on most Preferred Stock purchases. Debentures are
offered only for cash or cash equivalents. Preferred Stock is
offered for cash or other consideration (tangible or intangible
property) which is acceptable to Metropolitan as determined in good
faith by the Board of Directors. MIS will transmit such funds or
other consideration directly to Metropolitan by noon of the next
business day after receipt. Metropolitan will also pay certain other
expenses in connection with the offering (not expected to exceed
$50,000). During the three fiscal years ended September 30, 1996,
MIS has received commissions of $2,954,117 from Metropolitan on sales
of approximately $117,260,000 of Metropolitan's debentures and
preferred stock.
MIS is a member of the National Association of Securities
Dealer's, Inc. (NASD). As such, NASD Rule 2720 (formerly Schedule E)
applies and requires, in part, that a qualified independent
underwriter be engaged to render an opinion regarding the fairness of
the interest rates to be paid on the Debentures and the fairness of
the pricing of the Preferred Stock offered through this Prospectus.
Accordingly, MIS has obtained an opinion from Welco Securities, Inc.,
an NASD member, ("Welco") that the interest rates on the Debentures
using a formula tied to corresponding interest rates paid by the U.S.
Treasury and regional financial institutions meets this fairness
objective based on conditions and circumstances existing as of the
date of the Prospectus. A similar opinion has been obtained from
Welco, which states that the offering price of the Preferred Stock
meets the fairness objective based on conditions and circumstances,
existing as of the date of the Prospectus. Metropolitan undertakes
to maintain the interest rates on Debentures no lower than those
recommended by Welco based on the formula. Accordingly, the yield at
which the Debentures will be distributed will be no lower than that
recommended by Welco and the price offered for the Preferred Stock
will be no higher than Welco would have independently recommended.
Welco has assumed the responsibilities of acting as the qualified
independent underwriter in pricing the offering and conducting due
diligence. For performing its functions as a qualified independent
underwriter with respect to the Debentures and Preferred Stock
offered hereunder, Welco is to be paid $44,000 in fees and $15,000 in
non-accountable expenses plus its accountable expenses, which are not
expected to exceed $2,500.
The Registrant has agreed to indemnify Welco against, or make
contributions to Welco with respect to certain liabilities under the
Securities Act of 1933, as amended and the Securities Exchange Act of
1934, as amended.
<PAGE> Page 54
There is not now and Metropolitan does not expect that there
will be a public trading market for the Debentures or Preferred Stock
in the future. MIS does not intend to make a market for the
Debentures or Preferred Stock. Metropolitan, through MIS, undertakes
to maintain a list of holders of preferred stock who wish to sell
their preferred stock and buyers who wish to purchase previously
issued and outstanding shares of preferred stock. See "Risk Factors-
Risk Related to Lack of Liquidity and Limited Marketability of
Shares & Description of Preferred Stock-Redemption of Shares."
MIS may enter into selected dealer agreements with and reallow
to certain dealers, who are members of the NASD, and certain foreign
dealers who are not eligible for membership in the NASD, a commission
of up to 6% of the principal amount of Debentures and Preferred Stock
sold by such dealers. After the commencement of the offering the
commissions and reallowances, if any, may be lowered.
USE OF PROCEEDS
Debenture Proceeds . . . . If all the Debentures offered are
sold, Metropolitan expects net proceeds from this Debenture offering
of $100,000,000 to $94,000,000 before deducting other expenses
estimated at $190,000 (combined total for both Debentures and
Preferred Stock) and after sales commissions. There can be no
assurance, however, that any of the Debentures can be sold. Sales
commissions will range up to a maximum of $6,000,000 (6%) depending
on maturities of Debentures sold and whether sales are reinvestments
or new purchases. See "BUSINESS - Method of Financing."
Preferred Stock Proceeds . . . .If all the Preferred Stock
offered is sold, Metropolitan expects net proceeds from this
Preferred Stock offering of $25,000,000 to $23,500,000 before
deducting other expenses estimated at $190,000 (combined total for
both Debentures and Preferred Stock) and after sales commissions of
up to $1,500,000 (6%). There can be no assurance, however, that any
of the Preferred Stock can be sold. See "BUSINESS-Method of
Financing."
In conjunction with the other funds available to it through
operations and/or borrowings, Metropolitan will utilize the proceeds
of the Debenture and Preferred Stock offerings for the following
purposes, shown in their descending order of priority: Funding
investments in Receivables and other investments, which may include
investments in existing subsidiaries, the commencement of new
business ventures; or the acquisition of other companies, and
development of real estate now held or which may be acquired. The
Consolidated Group
<PAGE> Page 55
continues to evaluate possible acquisition candidates. Presently
there are no commitments or agreements for material acquisitions. To
the extent internally generated funds are insufficient or unavailable
for the retirement of maturing debentures through the period ending
January 31, 1998, proceeds of this offering may be used for retiring
maturing debentures, preferred stock dividends and for general
corporate purposes (debt service and other general operating
expenses.) Approximately $47.1 million in principal amount of debt
securities will mature between February 1, 1997 and January 31, 1998
with interest rates ranging from 5.75% to 10.25% and averaging
approximately 8.1% per annum. See Note 10 to the Consolidated
Financial Statements & "RISK FACTORS".
Management anticipates that some of the proceeds of this
offering will be invested in money market funds, bank repurchase
agreements, commercial paper, U.S. Treasury Bills and similar
securities investments while awaiting use as described above. See
"BUSINESS-Securities Investments". Due to Metropolitan's inability
to accurately forecast the total amount of Debentures or Preferred
Stock to be sold pursuant to this offering, no specific amounts have
been allocated for any of the foregoing purposes.
In the event substantially less than the maximum proceeds are
obtained, Metropolitan does not anticipate any material changes to
its planned use of proceeds from those described above.
CAPITALIZATION
The following table sets forth the capitalization of
Metropolitan and its consolidated subsidiaries at September 30, 1996.
<TABLE>
<CAPTION> Amount
Class Outstanding
(Dollars in thousands)
<S> <C>
Debt Payable
Reverse repurchase agreements with various
securities brokers;
interest at 5% to 5.8% per annum due and
repaid on October 1, 1996.................. $ 16,835
Reverse repurchase agreements with Paine Webber,
interest at 5.38% per annum; due and
repaid on October 4, 1996.................. 18,650
Securities sold, not owned, at market(1)..... 132,652
Real estate contracts and mortgage notes
payable, interest rates ranging from 3%
<PAGE> Page 56
to 10.9% per annum, due through 2016........ 2,965
--------
Total Debt Payable....................... 171,102
--------
Debenture Bonds
Investment Debentures, Series II, maturing
1996 to 2001, at 5% to 11%.................. 162,438
Investment Debentures Series I, maturing
in 1996 to 2005 at 7.5% to 10.25%........ 596
Compound and accrued interest................. 29,140
--------
Total Debenture Bonds.................. 192,174
--------
Stockholders' Equity
Preferred Stock............................... 21,518
Common Stock.................................. 293
Additional paid-in capital.................... 16,792
Net unrealized losses on investments.......... (991)
Retained earnings............................. 8,731
--------
Total Stockholders' Equity.................... 46,343
--------
Total Capitalization............................ $409,619
========
(1) U.S. Treasury Securities were acquired in November, 1996 to satisfy
this obligation.
<PAGE> Page 57
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION> The consolidated financial data shown below as of September 30,
1996 and 1995 and for the years ended September 30, 1996, 1995, and 1994 (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,
1994, 1993 and 1992 and for the years ended September 30, 1993 and 1992 have
been derived from audited financial statements not included herein. The
consolidated financial statements as of and for the years ended September 30,
1996, 1995, 1994 and 1993 have been audited by Coopers & Lybrand L.L.P. The
consolidated financial statements as of and for the year ended September 30,
1992 has been audited by BDO Seidman.
Three Months Ended
December 31,
(Unaudited) Year Ended September 30,
-------- --------- -----------------------------------------------
----------
1996 1995 1996 1995 1994 1993 1992
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF INCOME
DATE
Revenues $40,585 $34,057 $156,672 $138,107 $138,186 $133,113 $121,22
1
======= ======= ======== ======== ======== ======== =======
=
Income before minority
interest,
extraordinary item and
cumulative effect of
change in accounting $3,916 $312 $ 8,146 $ 6,376 $ 5,702 $ 8,558 $
<PAGE> 3,290
Page 58
principle
Income allocated to
minority interests (35) (9) (108) (73) (224) (255) (363)
-------- -------- -------- -------- -------- -------- -------
-
Income before
extraordinary item and
cumulative effect of
change in accounting
for income taxes 3,881 303 8,038 6,303 5,478 8,303 2,927
Extraordinary item (1) -- -- -- -- -- -- 651
Cumulative effect of
change in accounting
for income taxes (2) -- -- -- -- -- (4,300) --
-------- -------- -------- -------- -------- -------- -------
-
Net income 3,881 303 8,038 6,303 5,478 4,003 3,578
Preferred stock (1,024) (923) (3,868) (4,038) (3,423) (3,313) (3,399)
dividends -------- -------- -------- -------- -------- -------- -------
-
Income (loss)
applicable to common $2,857 $(620) $4,170 $2,265 $2,055 $ 690 $
stockholders ======== ======= ======== ======== ======== ======== 179
=======
=
Ratio of Earnings to
Fixed Charges 1.98 1.46 1.35 1.29 1.43 1.21
Ratio of Earnings to
Fixed Charges and
Preferred Stock 1.57 1.14 1.03 1.04 1.17
Dividends (4)
PER COMMON SHARE DATA
(3):
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting $21,981 $(4,770) $32,073 $ 17,288 $ 14,996 $ 37,239 $(3,579
principle )
Extraordinary items -- -- -- -- -- -- 4,932
(1)
<PAGE>
Page 59 -- -- -- -- -- (32,089) --
-------- -------- -------- -------- -------- -------- -------
Cumulative effect of -
change in accounting
principle (2)
Income (loss)
applicable to common $21,981 $(4,770) $32,073 $ 17,288 $14,996 $ 5,150 $
stockholders (5) ======== ======== ======== ======== ======== ======== 1,353
=======
=
Weighted Average
Number of Common 130 130 130 131 137 134 132
Shares Outstanding(3) ======== ======== ======== ======== ======== ======== =======
=
Cash Dividends Per
Common Share $-- $-- $-- $ 3,800 $ 675 $ 675 $--
======== ======== ======== ======== ======== ======== =======
=
CONSOLIDATED BALANCE
SHEET DATA:
Total Assets $1,142,2 $1,084,743 $1,282,65 $1,078,4 $1,063,2 $1,031,9 $982,25
22 9 68 90 58 9
Debt Securities, Other
Debt Payable and
Securities Sold, Not 209,005 215,968 363,427 226,864 261,500 234,497 230,814
Owned
Stockholders' Equity 50,476 40,498 46,343 40,570 32,625 32,781 28,260
</TABLE>
<PAGE> Page 60
(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 1.14, 1.03, 1.04 and 1.17 for the years
ended September 30, 1996, 1995, 1994 and 1993, respectively.
Earnings were insufficient to meet fixed charges and preferred
dividends for the year ended September 30, 1992, by approximately
$783,000.
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 1.11, 1.05, 1.34 and 1.06 for the years
ended September 30, 1996, 1995, 1994 and 1993, respectively.
Earnings were insufficient to meet fixed charges and preferred
dividends for the year ended September 30, 1992, by approximately
$13,012,000.
The consolidated ratio of earnings to fixed charges
excluding preferred stock dividends was as follows for the years
ended September 30, 1996 - 1.46; 1995 - 1.35; 1994 - 1.29; 1993 -
1.43; and 1992 - 1.21. The ratio of earnings to fixed charges,
excluding preferred stock dividends, for Metropolitan, assuming
no benefit from the earnings of its subsidiaries with the
exception of direct dividend payments was 1.48, 1.40, 1.36 and
1.31 for the years ended September 30, 1996, 1995, 1994 and 1993,
respectively. Such "parent only" earnings of Metropolitan were
insufficient to meet fixed charges for the year ended September
30, 1992 by approximately $7,701,000.
(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
<PAGE> Page 61
potentially dilutive securities outstanding during any year
presented.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
Consolidated Group net income after income taxes and
minority interest was approximately $8.0 million for the fiscal
year ended September 30, 1996 as compared to $6.3 million for the
comparable 1995 period and $5.5 million for the comparable 1994
period. The increase in 1996 over 1995 was primarily
attributable to a net increase of $7.4 million in realized gains
from the sales of investments and Receivables, an increase of
$1.3 million in net interest sensitive income and expense, being
offset by a $1.2 million decrease in gains from real estate
sales, a decrease of $1.5 million in fees, commissions, service
and other income, an increase of $2.2 million in the provision
for losses on real estate assets, a $.8 million increase in other
operating expenses, including salaries and benefits, commissions
to agents, general operating expenses and capitalized costs, net
of amortization and an increase of $1.2 million in income taxes
and income allocated to minority stockholders. The 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, all which were partially 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 Company implements its primary investment goal to
maximize its risk adjusted rate of return by investing in non-
conventional real estate Receivables. Non-conventional
Receivables are typically Receivables not originated by a
regulated financial institution and not underwritten to FNMA or
FHA underwriting guidelines. Normally, either the borrower or
the collateral will not meet sufficient FNMA or FHA underwriting
<PAGE> Page 62
guidelines to qualify for conventional financing and the seller
will be required to provide the financing to complete the sale.
These "seller financed Receivables" or "seller take-back
Receivables" are the types of non-conventional Receivables
normally acquired by the Company. Because borrowers in this
market generally have blemished credit records, the Company's
underwriting practices focus more strongly on the collateral
value as the ultimate source for repayment. In conjunction with
its investment in non-conventional Receivables, while higher
delinquency rates are expected, the Company believes this risk is
generally offset by the value of the underlying collateral and
the superior yields over conventional financing.
During the three year period ended September 30, 1996, the
Consolidated Group operated in an environment of somewhat narrow
fluctuations in interest rate levels with rates trending up in
1996 after declining in late 1995 and with a generally increasing
trend in late 1994. Over the three year period, 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 $11.9 million, $4.4
million and $3.1 million in 1996, 1995 and 1994, respectively.
The net effect of the sales was to recognize the present value of
future income from the Receivables 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 periods of declining rates which increased income by
triggering the recognition of unamortized discounts at an
accelerated rate.
Although the national economy has experienced moderate
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.
<PAGE> Page 63
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 and
discontinued its property development activities. 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 RELATIONSHIPS AND RELATED TRANSACTIONS".
During 1996, construction on a major timeshare development
project in Kauai, Hawaii was completed. At completion,
approximately $21.4 million had been invested. The sales price
of each timeshare week is projected to range between $14,000 and
$18,000 with an expected sellout in approximately early 1998.
See "Business-Real Estate Development-Lawai Beach Resort".
Net income in 1996, 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 1996
income would have been insufficient to cover fixed charges by
approximately $9.7 million. Additionally, the elimination of
similar items in 1995 and 1994 would have resulted in
insufficient earnings to cover fixed charges by approximately
$6.8 million and $4.2 million, respectively. See "RISK FACTORS"
& "SELECTED CONSOLIDATED FINANCIAL DATA".
Revenues and Expenses
Revenue for the Consolidated Group of $156.7 million for
1996 showed a substantial increase from the $138.1 million
reported in the prior year. Revenues 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. The
$18.6 million increase in 1996 was primarily attributable to an
increase of $6.5 million from interest related revenues, a $6.3
million increase in real estate sales and a $8.3 million increase
in realized gains on sales of Receivables. 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
<PAGE> Page 64
investments, offset by an increase of $2.4 million in net gains
from the sale of Receivables.
Expenses of operation for the Consolidated Group were $144.3
million, $128.6 million and $129.5 million for fiscal years ended
September 30, 1996, 1995 and 1994, respectively. The increase in
expenses in 1996 over 1995 included an increase of $2.8 million
in the cost of insurance policy and annuity benefits, an increase
of $2.4 million in interest expense, an increase of $2.2 million
in the provision for losses on real estate assets and a $.8
million increase in other operating expenses, including salaries
and benefits, commissions to agents, general operating expenses
and capitalized costs, net of amortization. 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.
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. As with the impact on operations from
changes in interest rates, the Company's NPV (the Net Present
Value) of financial assets and liabilities is subject to
fluctuations in interest rates. The Company continually monitors
the sensitivity
<PAGE> Page 65
of net income and NPV of its financial assets and liabilities to
changes in interest rates.
<PAGE> Page 66
The following table presents, as of September 30, 1996, the Consolidated
Group's estimate of the change in its NPV of financial assets and liabilities if
interest rate levels generally were to increase or decrease by 1% and 2%,
respectively. These calculations, which are highly subjective and technical,
may differ from actual results. See "Asset/ Liability Management".
<TABLE>
<CAPTION>
Interest Rate Change
Carrying Fair Value Decrease Decrease Increase 1% Increase
Amounts 1% 2% 2%
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $167,879 $167,879 $167,879 $167,879 $167,879 $167,879
Investments 163,303 157,755 170,612 178,393 156,442 149,990
Real estate contracts
and mortgage notes 642,571 668,373 691,541 716,159 646,543 625,954
Other receivable 107,494 109,258 114,885 120,916 104,077 99,232
investments ---------- ---------- ---------- ---------- ---------- ----------
$1,081,247 $1,103,265 $1,144,917 $1,183,347 $1,074,941 $1,043,055
========== ========== ========== ========== ========== ==========
Financial Liabilities:
Annuity reserves $837,366 $837,366 $865,487 $894,936 $810,506 $784,842
Debentures payable 189,321 191,631 193,584 195,566 189,703 187,803
Debt payable 38,450 38,486 39,822 41,266 37,141 35,895
Securities sold-not owned 132,652 132,652 137,386 142,363 128,135 123,836
---------- ---------- ---------- ---------- ---------- ----------
$1,197,789 $1,200,135 $1,236,279 $1,274,131 $1,165,485 $1,132,376
========== ========== ========== ========== ========== ==========
<PAGE> Page 67
Net interest sensitive income was $27.8 million for the
fiscal year ended September, 30, 1996. The comparable results
for 1995 and 1994 were $26.5 million and $28.1 million,
respectively. Interest rates in 1996 remained relatively stable
with slightly increasing rates as the fiscal year closed.
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. Also contributing
to the changes in net interest sensitive income was the
capitalization of approximately $2.5 million, $2.7 million and
$2.2 million for the years 1996, 1995, and 1994, respectively, of
interest associated with various real estate development projects
owned by the Consolidated Group.[/R]
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."
At September 30, 1996, excluding timeshare development
property, approximately 80% of real estate owned by the
Consolidated Group is located in the Pacific Northwest (Alaska,
Washington, Oregon, Idaho, Montana), which has experienced a
stronger more stable 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 $13
million is invested in commercial developments with approximately
$35 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 $1.7
million in 1996, $2.9 million in 1995, and $1.5 million in 1994.
Included in these results are sales of timeshare units with a net
<PAGE> Page 68
loss of $.7 million and $.3 million in 1996 and 1994,
respectively, and a net gain of $.9 million 1995. Metropolitan
has 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 1996, 1995 and 1994 were
approximately $22.8 million, $23.6 million and $17.6 million,
respectively.
Real estate sales, including timeshare unit sales, totaled
$45.6 million for 1996, $39.4 million for 1995 and $40.0 million
for 1994. Sales of repossessed properties have more than kept
pace with yearly additions resulting in a total investment in
repossessed real estate of $36.2 million at September 30, 1996,
$38.0 million at September 30, 1995 and $39.0 million at
September 30, 1994. The aggregate investment in real estate held
for sale and development decreased to $84.3 million at September
30, 1996, from $91.1 million at September 30, 1995, which
increased from $76.8 million at September 30, 1994. The decrease
from 1995 to 1996 is attributable to the final completion of the
timeshare project in Kauai, Hawaii in October 1995 and the sale
of several large commercial properties throughout 1996. The
increase of $14.3 million in 1995 over 1994 is primarily
attributable to the continuing development of the timeshare
project 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, 1996 were a $11.6 million development
located in downtown Spokane adjacent to the central business
district and a $10.5 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,
1996 1995 1994
<PAGE> Page 69
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of delinquencies over
three months at fiscal year end $26,500 $17,500 $19,000
Amount of foreclosures during
the fiscal year $14,271 $13,834 $19,117
Amount of foreclosed real estate
held for sale at fiscal year end $36,158 $38,004 $39,037
Gain (loss) on sale of the property
during the fiscal year $2,469 $1,992 $ 1,793
</TABLE>
The principal amount of Receivables in arrears for more than
ninety days as of September 30, 1996, 1995 and 1994 was 3.9%,
2.8% and 3.1%, 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.
The increase in three month delinquencies from 1995 to 1996
of approximately $9 million was primarily the result of an
increase in the outstanding principal amount of Receivables, a
higher delinquency rate on timeshare Receivable and an overall
increase in the general delinquency rate for all Receivables.
Additionally, as only current Receivables could be sold in the
securitizations, the Consolidated Group focused more closely on
the Receivables to be included in the Receivable securitizations.
Subsequent to the second securitization, which closed in November
1996, the Consolidated Group has renewed its efforts on
controlling the delinquency in its Receivables portfolio. Also,
effective February 1997, the Consolidated Group will bring in-
house the servicing of timeshare Receivables which were
previously serviced by a third party in Hawaii. The Consolidated
Group believes the increased delinquency rates were adequately
reserved as the Consolidated Group has increased the allowance
for loss on real states assets associated with Receivables from
$6.3 million in 1995 to $7.9 million 1996.
<PAGE> Page 70
Provision for Losses on Real Estate Assets
During the years ended September 30, 1996, 1995 and 1994,
the Consolidated Group provided $6.4 million, $4.2 million and
$5.5 million, respectively, for losses on real estate assets. At
September 30, 1996, 1995 and 1994, the Consolidated Group had
aggregate allowances for losses on real estate assets of $10.2
million, $8.1 million and $9.1 million, respectively, on real
estate assets of $735 million, $679 million and $644 million,
respectively. See Notes 3 and 6 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 $4.3
million for the fiscal year ended September 30, 1996, $5.8
million for the fiscal year ended September 30, 1995, and $5.0
million for the comparable period in 1994. 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 decrease of $1.5 million in 1996 from
1995 was primarily the result of ceasing the operations of a
restaurant at Lawai Beach Resort and converting it to a leased
operation, thereby reducing both revenues and related expenses,
while 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 $26.9 million
for the year ended September 30, 1996 compared to $26.1 million
for the fiscal year ended September 30, 1995 and $23.6 million
for the comparable period in 1994. The increase in cost of $.8
million in 1996 over 1995 was primarily attributable to an
increase of $1.4 million in salaries and benefits and a decrease
of $1.9 million in capitalized costs, net of amortization being
only partially offset by a $2.0 million reduction in commissions
to agents and a $.5 million decrease in other operating expenses.
The increase in cost of $2.5 million in 1995 over 1994 was
primarily attributable to an
<PAGE> Page 71
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. See Note 13 to the Consolidated
Financial Statements.
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 losses from the sale
of investments was $.8 million in 1996 with net gains of $.03
million and $1.1 million for the fiscal years ended September 30,
1995 and 1994, 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 4 to the Consolidated Financial
Statements. Such assets are generated through the ongoing
production operations of the Consolidated Group. At times,
Receivables which have increased in value, primarily from a
decreasing interest rate environment, or which exceed internal
demand, may be remarketed either through whole loan sales or
securitizations. See "BUSINESS-Receivable Sales" and "RISK
FACTORS". Net gains from the sale of Receivables were $12.7
million, $4.4 million and $2.0 million for the fiscal years ended
September 30, 1996, 1995 and 1994, 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 cash and cash equivalents, Receivables and fixed
income investments) reprice more slowly than the Consolidated
Group's financial liabilities (primarily securities sold, not
owned, debentures and annuities). In a rising rate environment,
this mismatch will tend to reduce earnings, while in a falling
rate
<PAGE> Page 72
environment, earnings will tend to increase. During fiscal
1997, approximately $256 million of interest sensitive assets are
expected to reprice or mature. These assets consist of
approximately $42 million of Receivables, $46 million of fixed
income investments and $168 million of cash and cash equivalents.
For liabilities, most of the balance of life insurance and
annuity contracts may be repriced during 1997. Management
estimates this amount at $628 million. In addition,
approximately $50 million of debentures, $37 million of other
debt and $133 million of securities sold, not owned, will mature
or reprice during that period. At September 30, 1996, these
estimates result in interest sensitive liabilities in excess of
interest sensitive assets of approximately $592 million, or a
ratio of interest sensitive assets to interest sensitive
liabilities of approximately 330%.
The Consolidated Group is able to manage this liability
to asset mismatch of approximately 3.3:1 by the fact that
approximately 74% 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
$20 million at September 30, 1996. Depending on the remaining
surrender charges, the Consolidated Group has the option to
extend any interest rate increase over a two to three year
period, thereby making it 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. Additionally,
through Receivable securitizations, the Consolidated Group has
increased its ability to raise necessary liquidity to manage the
liability to asset mismatch. If necessary, the proceeds from the
securitization could be used to payoff maturing liabilities.
Effect of Inflation
<PAGE> Page 73
During the three year period ended September 30, 1996,
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 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 adopted
this new standard on October 1, 1995. The adoption of SFAS No.
114 did not have a material effect on the consolidated financial
statements. See Note 1 to the Consolidated Financial Statements.
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
<PAGE> Page 74
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 on 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.
In June 1996, Statement of Financial Accounting Standards
No. 125 (SFAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued.
SFAS 125 provides accounting and reporting standards based on a
consistent application of a financial components approach that
focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial asset when control has been surrendered
and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Company does not expect that the
application of the provisions of SFAS 125 will have a material
effect on the Company's financial condition, results of
operations or cash flows.
Liquidity and Capital Resources
The Consolidated Group's sources of liquidity are tied to
its ability to renew, maintain or obtain existing and 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 $185.9 million
in 1996, $40.8 million in 1995 and $46.0 million in 1994. Cash
utilized by the Consolidated Group in its investing activities
was $54.1 million in 1996, $43.6 million in 1995 and $106.8
million in 1994. Cash provided to the Consolidated Group from its
financing activities was $3.3 million in 1996, $6.3 million in
1995 and
<PAGE> Page 75
$17.2 million in 1994. These cash flows have resulted in year end
cash and cash equivalent balances of $167.9 million in 1996,
$32.8 million in 1995 and $29.3 million in 1994. The increase in
cash and cash equalivents of $137.1 million in 1996 over 1995 was
almost entirely the result of the proceeds from the sale of
securities, not owned of $132.7 million. These securities were
sold "short" as an economic hedge to protect the profits in the
Receivable securitization which closed in November 1996. In
1996, Receivable acquisitions of $382.1 million and $28.5 million
in acquisition and costs associated with real estate held for
sale and development were financed by proceeds from Receivable
sales, securitizations and principal payments of $245.9 million,
$55.5 million in proceeds from maturities and sales less
purchases of investments and other cash proceeds of $53.2 million
from operating activities. Proceeds from operating activities
were primarily from net income of $8.0 million and $45.8 million
from increases in life insurance and annuity reserves. At
September 30, 1996, management considers its cash and cash
equivalent 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 is responsible for
regulating the total amount of debentures and preferred stock
that Metropolitan can have outstanding. During 1994, 1995 and
through September 30, 1996, Metropolitan was authorized to have
no more than an aggregate total of approximately $202.3 million
in outstanding debentures (including accrued and compound
interest) and aggregate outstanding preferred stock (based on
original sales price) of approximately $49.5 million.
Outstanding preferred stock was limited to the amount outstanding
as of June 30, 1996 ($49.0 million) plus reinvested dividends
($.5 million) after that date. At September 30, 1996,
Metropolitan had total outstanding debentures of approximately
$192.2 million and total outstanding preferred stock of
approximately $49.5 million. These regulatory limitations did
not cause the Company to incur any material adverse impact on
liquidity during 1993 through 1996, however, the Company did
forgo various investment opportunities which could have been made
if able to be funded by the additional sales of debentures and
preferred stock.
During 1997, anticipated principal, interest and dividend
payments on outstanding debentures, other debt payments and
preferred stock distributions are expected to be approximately
<PAGE> Page 76
$97.5 million. During 1996, the principal portion of the
payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables was $302.5
million. A decrease in the prepayment rate on these Receivables
or the ability to sell or securitize Receivables would reduce
future cash flows from Receivables and might adversely affect the
Consolidated Group's ability to meet its principal, interest and
dividend payments.
The Consolidated Group expects to maintain high levels of
liquidity in the foreseeable future by continuing its securities
offerings, annuity sales and the sale and securitization of
Receivables. At September 30, 1996, cash or cash equivalents were
$168 million, or 13.1% of assets. Of the $168 million of cash
and cash equivalents, approximately $131 million was restricted
from general use by the Consolidated Group until such time as the
obligation for securities sold, not owned, was satisfied.
Including securities that are available for sale and excluding
restricted cash equivalents, total liquidity was $75 million, $65
million and $118 million as of September 30, 1996, 1995 and 1994,
respectively, or 5.9%, 6.0% and 11.1% of total assets,
respectively.
Access to new "capital markets" through Receivable
securitizations has allowed the Consolidated Group to both
increase liquidity and accelerate earnings through the gains
recorded on the securitizations. The increased ability to raise
liquidity will enable the Consolidated Group to accept certain
asset/liability mismatches which have historically been
beneficial to the Consolidated Group when they have been able
to finance higher earning longer term assets with lower cost of
funds associated with shorter term liabilities.
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 1995, the
results of this cash flow testing process were satisfactory.
Metropolitan alone generated approximately $20.8 million in
cash from operations in 1996. Net cash of approximately $23.5
million was used in investing activities. Funds used included
$32.2 million for the purchase of Receivables, $11.7 million for
the purchase of investments and $17.2 million in additions to
real
<PAGE> Page 77
estate held. An additional $16.3 million was used for investment
in and advances to subsidiaries. Funds provided from investing
activities included $24.3 from the sale of Receivables and $12.5
million of principal payments on such Receivables. Additional
funds of $9.2 million from proceeds on sales of real estate and
$9.1 million from the sale and maturities of investments were
received. Net cash used in financing activities in 1996 of $8.4
million included $22.9 million repayment of debentures and $3.9
million in preferred dividend payments, which were offset by new
debenture sales of $9.1 million, issuance of preferred stock, net
of redemption, of $1.8 million.
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
distributed 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 redemption and retirement of
common stock of approximately $1.0 million. For 1994,
Metropolitan had a
<PAGE> Page 78
decrease in cash and cash equivalents of approximately $4.4
million resulting in a year end balance of approximately $9.4
million.
At September 30, 1996, Metropolitan had approximately
$1.6 million in construction commitments associated with its real
estate development projects. Additionally, Metropolitan had no
knowledge of any environmental liabilities associated with any of
its real estate asset investments. Metropolitan anticipates
other capital expenditures in the normal course of business of up
to $1.5 million including a new telephone system costing
approximately $.6 million. Metropolitan anticipates funding
these commitments through cash provided by operating activities
or cash provided by financing activities including potential
leasing contracts.
The Company will be required to make further enhancements to
its computer software operating systems to enable recognition of
the new century. The program codes within the operating systems
currently store only a two digit character for the year in which
transactions occur. The modification of these program codes to
store four digit years will occur in the near term. The Company
expects that the costs of these modifications will not be
material and all changes will be made by existing personnel
during routine program maintenance. All expenses will be charged
to operations as incurred.
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. Included in the anticipated obligations for the
Consolidated Group during the next fiscal year is the repayment
of approximately $133 million in debt associated with the short
sale of securities. With approximately $131 million in cash and
cash equivalents at September 30, 1996 being held and restricted
from general corporate use, the Consolidated Group expects no
material effect on corporate liquidity from this obligation.
Metropolitan has never defaulted on any of its obligations since
its founding in 1953.
Management's Discussion and Analysis of Financial
<PAGE> Page 79
Condition and Results of Operations
For the Interim Periods Ended December 31, 1996 and 1995
Significant Transactions:
In November 1996, Metropolitan and its subsidiary Western
participated as two of the four co-sellers in a receivable
securitization sponsored by Metropolitan Asset Funding, Inc., an
affiliated company. Approximately $126.7 million of receivables,
with $115.5 million provided by Metropolitian and Western, were
sold in a securitization transaction with proceeds, after costs,
of approximately $121.1 million, which $110.4 million was
allocated to Metropolitan and Western. With an amortized
carrying value of approximately $101.5 million in the receivables
sold in the securitization, Metropolitan and Western recorded
approximately $8.9 million in pre-tax gains from their portion of
the sale. Metropolitan Asset Funding, Inc. sold approximately
$113.4 million in varying classes of mortgage pass-through
certificates. In addition to the certificates sold to the
public, approximately $13.3 million in subordinate class
certificates and residual class certificates were returned to the
various co-sellers of the receivables included in the
securitization. Metropolitan and Western received approximately
$101.6 million, after costs, from the securitization and received
approximately $12.0 million (estimated fair value) in subordinate
class and residual class certificates. As an economic hedge for
this receivable securitization sale, the Consolidated Group had
previously sold short approximately $128 million of U.S. Treasury
securities of varying maturities. Concurrent with the completion
of the securitization transaction, the Consolidated Group
purchased and delivered the borrowed securities. The
Consolidated Group lost approximately $2.5 million on this short
sale. Thereby from an economic standpoint, the Consolidated Group
realized an approximate $6.4 million in pre-tax gains on the
securitization sale.
Financial Condition and Liquidity:
As of December 31, 1996, the Consolidated Group had cash or
cash equivalents of $63.2 million and liquid investments (trading
or available-for-sale securities) of $56.7 million compared to
$167.9 million in cash and cash equivalents and $38.6 million in
<PAGE> Page 80
liquid investments at September 30, 1996. The significant
transaction causing the decrease in cash and cash equivalents was
the approximately $128 million used by the Consolidated Group to
close its short sale at the completion of its receivable
securitization in November 1996. Management believes that cash,
cash equivalents and liquidity provided by other investments are
adequate to meet planned asset additions, debt retirements or
other business operational requirements during the next twelve
months. At December 31, 1996, total cash and investments,
including held-to-maturity securities, were $246.5 million as
compared to $332.7 million at September 30, 1996. During the
three month period ended December 31, 1996, the Consolidated
Group used approximately $116.9 million in its operating
activities including $128 million to close a short sale of U.S.
Treasury securities. Funds provided by investing activities of
$46.0 million resulted primarily from sale proceeds and
collections of receivables of $148.6 million and investment
maturities of $6.6 million being offset by new receivable
acquisitions of $79.6 million, purchase of available-for-sale
securities of $23.7 million and addition to real estate held of
$6.4 million. Funds used in financing activities of $33.8
million, including a $2.0 million net cash inflow from debentures
sales less maturities, were used primarily to payoff short-term
borrowings of $30.3 million, finance a net cash outflow of $5.0
million in life and annuity products and payment of preferred
stock dividends of $1.0 million.
The receivable portfolio totaled $703.2 million at December
31, 1996 compared to $758.4 million at September 30, 1996.
During the three months ended December 31, 1996, the decrease
primarily resulted from the acquisition of receivables totaling
$79.6 million plus an additional $6.1 million in loans to
facilitate the sale of real estate being totally offset by
principal collections on receivables of $29.4 million, reduction
for the cost basis of receivables sold of $109.1 million and
reductions due to foreclosed receivables of approximately $2.7
million.
Real estate held for sale and development decreased to $84.2
million at December 31, 1996 from $84.3 million at September 30,
1996. For the three months ended December 31, 1996, real estate
additions of $9.5 million, including $2.7 million of foreclosed
receivables, were offset by costs of real estate sold of $7.4
<PAGE> Page 81
million, depreciation of $1.5 million and charge-offs to the
allowance for losses of $.7 million.
Life insurance and annuity policy reserves increased $6.7
million during the three months ended December 31, 1996 to
approximately $844.1 million from $837.4 million at September 30,
1996. This increase resulted from credited earnings of $11.8
million offset by a $5.1 million of cash outflow as receipts from
sales of new life and annuity products of $20.3 million were
exceeded by withdrawals of $25.4 million from existing policies.
Net debenture bonds outstanding increased by $3.9 million to
$196.1 million at December 31, 1996 from $192.2 million at
September 30, 1996. Net cash inflow from issuance less
maturities of debentures was approximately $2.0 million plus an
additional $1.9 million increase in credited interest held.
Additionally, the Consolidated Group had cash flow, net of
redemptions, of approximately $550,000 from the sale of preferred
stock and reinvestment of preferred stock dividends during the
three months ended December 31, 1996. During the three month
period ended December 31, 1996, the Consolidated Group decreased
the portion of its other debt payable represented by short term
borrowings by $30.3 million to an approximate outstanding amount
of $5.2 million on December 31, 1996.
Total assets decreased by $140.5 million to $1,142.2 million
at December 31, 1996 from $1,282.7 million at September 30, 1996.
During the three month period, the Consolidated Group primarily
used cash flow from its receivable securitization along with
existing cash and investments to repurchase securities previously
sold and not owned and paydown short-term borrowings. At
December 31, 1996, the Consolidated Group had net unrealized
losses on securities available-for-sale in the amount of $265,000
as compared to unrealized losses of $1.0 million at September 30,
1996. Net unrealized losses on securities available-for-sale is
presented as a separate component of stockholders' equity.
Results of Operations:
The Consolidated Group recorded net income before preferred
dividends for the three months ended December 31, 1996 of
$3,881,000 compared to $303,000 in the prior year's period.
Comparing the current year's three month period with the prior
year's similar period, increases in gains from sales of
receivables, increases in other fees and commission revenues and
a reduction in the provision for losses on real estate assets
<PAGE> Page 82
were only partially offset by a reduction in the net interest
spread, increased losses from the sale of real estate, increased
losses from the sale of investment securities, an increase in
operating expenses and related provision for income taxes.
For the three month period ended December 31, 1996, the
Consolidated Group reported a positive spread on its interest
sensitive assets and liabilities of $6.0 million as compared to
$6.8 million in the prior year's period. The reduction was
primarily the result of a reduction in the receivable portfolio
due to the securitization sale in November 1996. While there has
been some contraction in portfolio investment earnings rates in
the current year's period, the Consolidated Group has also
experienced reduced renewal rates on some of its life and annuity
policies. Currently, the Consolidated Group continues to control
life and annuity policy surrenders by maintaining current market
credited rates. Normally, the Consolidated Group's investment
earnings rates are not as sensitive to market conditions as is
its life and annuity policy rates and thus a sustained rise in
interest rates could have a negative impact on its net interest
spread as its liabilities reprice faster than its assets.
During the three months ended December 31, 1996, the
Consolidated Group realized net losses from the sale of
investments of $2.2 million compared to net gains of $2,800 in
the prior year's period. The current period loss was primarily
the result of a short sale of U.S. Treasury securities. The
short sale was used by the Consolidated Group as an economic
hedge of its receivable securitization in November 1996.
Additionally, in the current year's period, the Consolidated
Group realized gains of $9.8 million from the sale of
approximately $109.4 million of receivable investments, while in
the prior year, sales of approximately $2.3 million of receivable
investments produced realized gains of $84,000. The Consolidated
Group realized losses of $593,000 on sales of $6.8 million of
real estate in the current year's period compared to net gains of
$141,000 on sales of $10.6 million in the prior year. It has
been the policy of management to actively sell its real estate in
order to return the investment to an earning asset. In addition
to returning these assets to earning status, the Consolidated
Group has been able to reduce other operating expenses associated
with its real estate, such as insurance, taxes, maintenance and
amenities.
<PAGE> Page 83
In the three months ended December 31, 1996, the
Consolidated Group recorded other fees and commission revenues of
$1.2 million as compared to $700,000 in the prior year. The
increase in the current year is primarily the result of net
servicing revenues related to the receivable securitizations.
In the three months ended December 31, 1996, the
Consolidated Group made provisions for losses on receivables and
real estate assets of approximately $586,000 as compared to
$935,000 in the prior year's period. The decreased provision is
the result of the decrease in the receivable portfolio and the
real estate asset portfolio. The Consolidated Group has
experienced a slight increase in receivable delinquency rates,
however, a stable to improving real estate market has offset the
effects of the delinquency rate increases.
New Accounting Rules Issued Subsequent to September 30, 1996:
In February, 1997, Statement of Financial Accounting Standards
No. 128 (SFAS 128), "Earnings per Share" was issued. SFAS 128
establishes standards for computing and presenting earnings per
share (EPS) and simplifies the existing standards. This standard
replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS
128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods and
requires restatement of all prior-period EPS data presented. The
Consolidated Group does not believe the application of this
standard will have a material effect on the presentation of its
earning per share disclosures.
BUSINESS
OVERVIEW
Metropolitan was established in 1953. Through growth and
acquisitions, it has developed into a diversified institution,
with assets exceeding one billion dollars. Its subsidiaries
<PAGE> Page 84
include an annuity and life insurance company, Western United,
and a Receivable servicer and loan originator, Metwest.
The Consolidated Group's principal business activity is
investing in Receivables. The Receivables primarily consist of
real estate contracts and promissory notes collateralized by
liens on real estate. The Consolidated Group predominantly
invests in Receivables where the borrower or the collateral does
not qualify for conventional financing. This market is commonly
referred to as the non conventional or "B/C" market. Because
borrowers in this market generally have blemished credit records,
underwriting practices focus more strongly on the collateral
value as the ultimate source for repayment. This contrasts to
the conventional or "A" credit market which focuses on borrowers
with stronger credit records. See "BUSINESS-Receivable
Investments. In addition to investing in existing Receivables,
the Consolidated Group began originating "B/C" loans during late
fiscal 1996 through Metwest. See "BUSINESS-Receivable Investments-
Loan Originations". Metropolitan and its subsidiaries also
acquire other types of Receivables, including but not limited to
lottery prizes, structured settlements and annuities. See
"BUSINESS-Receivable Investments-Lotteries, Structured
Settlements & Annuities"
All 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-Yield and Discount Considerations ". The Consolidated
Group strives to achieve a positive spread between its
investments and its cost of funds.
In addition to the Consolidated Group's Receivable
investments, Western United and to a lesser extent Metropolitan
invest funds in securities which predominantly consist of
investment grade corporate bonds, U.S. Treasury, and government
agency obligations, mortgage backed securities, and other
securities including security hedging investments, and the
subordinate certificate and residual interests created out
Receivable securitizations. See "BUSINESS-SECURITIES
INVESTMENTS" & "BUSINESS-Receivable Sales and Securitizations."
The Consolidated group has developed several funding
sources. These sources include Receivable investment income; the
issuance of annuity and life insurance policies; the sale of
assets
<PAGE> Page 85
including sales through securitizations; the sale of debentures,
and preferred stock; collateralized borrowing; the sale of real
estate and securities portfolio earnings. See "BUSINESS-Method
of Financing".
Metropolitan also sells and develops real estate primarily
as the result of repossessions of Receivables. In addition,
Metropolitan is the developer of a timeshare resort, Lawai Beach
Resort, located on Kauai, Hawaii. See "BUSINESS-REAL ESTATE
DEVELOPMENT".
RECEIVABLE INVESTMENTS
Introduction
Metropolitan has been investing in Receivables for its
own account for over forty years. Metropolitan also provides
Receivable acquisition and underwriting services to its
subsidiary, Western United, and to Old Standard, Summit and
Arizona Life. See "BUSINESS-Receivable Investments-Management &
Acquisition Services" & "CERTAIN RELATIONSHIPS & RELATED
TRANSACTIONS". The evaluation, underwriting, and closing is
performed at Metropolitan's headquarters in Spokane, Washington.
The following information describes the Consolidated Group's
Receivable acquisition and underwriting procedures as of the date
of this prospectus. These practices may be amended, supplemented
and changed at any time at the discretion of the Consolidated
Group.
Types of Receivables:
The Consolidated Group's Receivable acquisitions include two
principal types of Receivables: 1)Receivables collateralized by
real estate (both the acquisition of existing loans and the
origination of loans), and 2)lotteries, structured settlements
and annuities. The majority of the real estate Receivables are
collateralized by first position liens on single family
residences, including land with mobile homes, and condominiums.
To a lesser extent, the Consolidated Group acquires Receivables
collateralized by commercial real estate and undeveloped land.
In addition, it acquires Receivables collateralized by second and
lower lien positions.
Secondary Mortgage Markets:
<PAGE> Page 86
The market for the acquisition of existing real estate
Receivables is commonly referred to as the secondary mortgage
market. The private secondary mortgage market consists of
individual Receivables or small pools of Receivables which are
held and sold by individual investors. These Receivables are
typically the result of seller financed sales of real estate.
The institutional secondary mortgage market consists of the sale
and resale of Receivables which were originated or acquired by a
financial institution and which are sold in groups, commonly
called pools. The Consolidated Group acquires Receivables
through both the private and the institutional secondary mortgage
markets.
Loan Originations:
During late 1996, Metwest began originating loans
collateralized by real estate. See "BUSINESS-Receivable
Investments-loan originations".
Receivable servicing and collections:
Metwest performs all Receivable servicing and collections
for itself, Metropolitan, Western United, the aforementioned
affiliates and for others. See "BUSINESS-Receivable Investments-
Servicing & Collection" & "CERTAIN RELATIONSHIPS & RELATED
TRANSACTIONS".
Receivable Acquisition Volume:
Metropolitan's Receivable acquisition activities (total
activities for itself and for others), grew from approximately
$142.5 million in 1994, and $259.8 million in 1995, to $382.1
million in 1996. During 1996, the average monthly acquisition
volume was approximately $31.8 million. At the same time,
Metropolitan's median closing time has improved to 20 days in
1996, in comparison to 23 days in 1995, and 24 days in 1994.
Management considers closing time to be an important factor in a
seller's decision to sell a Receivable to Metropolitan.
Receivables Acquisitions: Sources, Strategies and Underwriting
Metropolitan has developed marketing techniques and sources,
and underwriting practices for each of the different types of
<PAGE> Page 87
Receivables. In general, the real estate Receivables acquired or
originated by the Consolidated Group consist of non conventional,
"B/C" credit loans. These types of Receivables possess
characteristics which differ from the conventional lending market
in that either the borrower or the property would not qualify for
"A" credit grade lending. This type of lending requires that the
lender focus not only on the borrowers' ability to pay, but also
the quality of the collateral as the ultimate recourse in the
event of the borrower's default.
Private Secondary Mortgage Market Sources
Currently, the majority of the Consolidated Group's
Receivables are acquired through the private secondary mortgage
market. See "BUSINESS-Current Mix of Receivable Investment"
This market principally consists of loans which were originated
through the seller of a property financing the purchaser's
acquisition. Metropolitan's principal source for private market
Receivables are independent brokers located throughout the United
States. These independent brokers typically deal directly with
private individuals or organizations who own and wish to sell a
Receivable.
Private Market Acquisition Strategies
Metropolitan's private secondary market acquisition strategy
is designed to provide flexible structuring and pricing
alternatives to the Receivable seller, and quick closing times.
Metropolitan believes these are key factors to Metropolitan's
ability to attract and purchase quality Receivables. In order to
enhance its position in this market, Metropolitan is implementing
the following acquisition strategies: 1)centralizing acquisition
activities, 2) expanding the use of Metropolitan's Receivable
submission software, BrokerNet, 3) designing and implementing
flexible Receivable acquisition pricing options, 4) designing and
implementing fast closing programs, and 5) designing and
implementing broker incentive programs.
1) Centralization of acquisition activities:
Currently, the Receivable brokers contact one of
Metropolitan's branch offices to submit the Receivable for
evaluation. During the first two quarters of fiscal 1997,
Metropolitan plans to close all of its branch offices and in turn
<PAGE> Page 88
plans to expand the Receivable acquisition staff at its home
office in Spokane Washington, which will be called the Contract
Negotiation Center. This change is being made to decrease
contract acquisition costs, as branch offices are no longer
necessary for identification of appropriate contracts to acquire
due to existing contracts with brokers; to increase the closing
speed due to the ability to centralize the acquisition decisions,
and to further decrease acquisitions costs through, the use of
technological advances including the newly developed BrokerNet
software.
2) BrokerNet software:
BrokerNet was developed by Metropolitan to enhance its
position in the private secondary mortgage market, principally
through streamlining submissions, underwriting and the closing
process. It is a menu driven software program which assists
brokers in preparing accurate and complete Receivable
submissions. It is designed to meet Metropolitan's submission
requirements. In addition, the program assists in analyzing the
characteristics of the Receivable, and provides online purchase
price quotes based upon the Receivable's characteristics and
Metropolitan's yield requirements.
This software was first available for online use by brokers
in March 1996. Current plans for enhancing the software include:
preparing the legal documents used to purchase a Receivable,
providing internet compatibility, providing submission status
tracking (expected to be available mid 1997), assist in
monitoring the closing of a Receivable purchase and ultimately,
transfer the Receivable data directly into the Receivable
servicing and collection system.
Currently, approximately 35% of the privately purchased
Receivables are submitted to Metropolitan through BrokerNet. It
is currently used by approximately 15% of the Metropolitan's
brokers. Management believes that this system is more cost
effective than paper submissions. Metropolitan plans to
encourage broker use of BrokerNet through various financial
incentive programs. The current goal is to have 50% of the
brokers submitting through BrokerNet by the end of fiscal 1997.
3) Development of flexible sales options:
<PAGE> Page 89
Occasionally, a Receivable seller desires a flexible pricing
structure, does not wish to sell the entire Receivable, or the
purchase of the entire Receivable exceeds Metropolitan's
investment to collateral value underwriting standards. In these
circumstances, Metropolitan has developed several options.
Currently, the principal options include 1)"partial"
acquisitions, 2) multiple stage payouts, and 3) the short life
yield programs.
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. Partials include the purchase of the
next series of payments (an immediate partial), the purchase of
future payments or a balloon payment (a reverse partial) or the
purchase of a portion of each payment (a split). Partials
generally result in a reduced level of investment and
commensurate reduction in the risk to the purchaser than if the
entire Receivable cash flow is purchased.
The multiple stage payout and short yield life programs are
pricing programs designed to satisfy variations in seller needs.
The Multiple stage payout involves the payment of the Receivable
purchase price through installment payments over time. The short
life yield program is available for "A" credit quality
Receivables collateralized by owner occupied single family
residences. This program prices Metropolitan's yield requirement
assuming that the loan will balloon with a full payoff in ten
years.
4) Development of faster closing programs:
Metropolitan has developed several submission programs which
are designed to reduce closing times. The principal program
consists of the Fast Track submission program which requires that
the broker obtain and submit a Receivable with a current
appraisal, title policy, and all other documents and
verifications required to analyze, evaluate and close the
transaction. Metropolitan attempts to close all accepted Fast
Track submissions within seven days.
5) Broker Incentive Programs:
<PAGE> Page 90
In order to maintain strong professional ties with its
independent brokers, Metropolitan held its first annual Broker's
Convention during the summer of 1994. The second such convention
is currently planned for late 1997. In addition, various bonus
commission and incentive programs as well as streamlined
Receivable submission procedures have been developed and continue
to be developed in order to reduce closing times.
Currently, the principal incentive programs are the
wholesale pricing program and the Premier Broker Program. The
wholesale pricing program requires that brokers pay the cost of
the Receivable's title policy and appraisal. In return,
Metropolitan reduces its yield requirement (currently by .25%).
Through the Premier Broker program, Metropolitan pays volume
brokers a bonus for every $250,000 in closed Receivable
acquisitions. For Brokers whose volume exceeds one million
annually, Metropolitan reduces its yield requirement (currently
by .25%) for all future acquisitions from the qualifying premier
broker. Both of these programs are designed to provide an
incentive to the volume broker to submit their Receivable to
Metropolitan. Volume brokers are often efficient in the
Receivable packaging and submission, which can result in a lower
acquisition processing cost.
Private Secondary Mortgage Market Underwriting
Because Receivables in the private market are generally
seller financed transactions, these Receivables are typically
subject to terms and conditions which were negotiated to satisfy
the unique needs of the particular private buyer and seller.
Therefore, the underwriting of these loans requires careful
evaluation of the loan documentation and terms. Metropolitan's
acquisition of these Receivables should be distinguished from the
conventional mortgage lending business which involves
standardized documentation and terms, substantial first-hand
contact by lenders with each borrower and the ability to obtain
an interior inspection appraisal prior to granting a loan.
Management believes that the underwriting functions that are
employed in its private secondary mortgage market acquisitions
are as thorough as reasonably possible considering the
characteristics of the Receivables, and considering the volume of
Receivables submitted for review.
When Metropolitan is offered a Receivable through the
private secondary mortgage market, the Receivable information is
<PAGE> Page 91
transmitted to one of Metropolitan's contract buyers either
through an online BrokerNet submission or a traditional paper
submission. Paper submissions are input by the contract buyers
into the BrokerNet system. The contract buyer makes an initial
evaluation of the Receivable's characteristics to verify that it
satisfies the requirements for the particular type of submission.
If the Receivable appears acceptable, it is entered into
Metropolitan's submissions tracking system, and forwarded to the
demography department. The demography department uses a national
computerized database to identify local trends in property
values, personal income, population and other economic
indicators.
The Receivable is then forwarded to the Underwriting
Committee. Metropolitan's underwriting team currently consists
of six individuals with a combined experience of 90 years
evaluating seller financed Receivables. Receivables of $100,000
or less are evaluated by individual underwriters. Loans
exceeding that amount are reviewed by a committee of at least
three underwriters. Additionally, underwriters may obtain a team
review of any Receivable.
The underwriters evaluate the proposed investment to
collateral value, the payor's credit and payment history, the
interest rate, the demographics of the region where the
collateral is located, and the potential for environmental risks.
Currently, the ratio of the investment in a Receivable compared
to the value of the property which collateralizes the Receivable
generally does not exceed 70%-80% (depending upon acquiring
company, collateral type and collateral quality) on Receivables
collateralized by single family residences; 30-70% on Receivables
collateralized by other types of improved property such as
commercial property; and 55% on unimproved land. Management
believes these 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.
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 review. The
investment amount which gives rise to special risk evaluation is
dependent upon the type and quality of collateral, ranging from
<PAGE> Page 92
$250,000 for conventionally financable residential property to
$100,000 for residential property which is not owner occupied,
and $150,000 for Receivables collateralized by commercial
property.
Based upon Metropolitan's underwriting guidelines, the
underwriters may approve the acquisition or change the terms of
the acquisition, such as limiting the acquisition to a partial
purchase in order to decrease the acquiring company's investment
risk. If the terms are changed, the contract buyer is notified,
who in turn contacts the broker to renegotiate the purchase
terms. The underwriters may also approve the loan subject to
certain closing criteria. If the broker and/or seller accepts
the proposed transaction, a written agreement to purchase is
executed, which is subject to Metropolitan's full underwriting
requirements.
Once the Receivable has been approved in principle, a
current market valuation of the collateral is obtained in order
to verify the investment to collateral value. These valuations
can consist of 1)a valuation from a statistical valuation
service, 2) an appraisal by a licensed independent appraiser or
3) an appraisal by one of Metropolitan's licensed staff
appraisers.
Statistical valuations are available in the majority of
counties in the United States. They are based upon property
characteristics and sales trends which can be analyzed through
computer modeling. The cost of statistical valuations average
approximately $35 and are available virtually instantly, compared
to a cost of approximately $250 for standard appraisals and
generally a one week processing time. Metropolitan began using
statistical valuations in 1996. Metropolitan limits its use of
statistical valuations to properties with low investment to value
ratios and single family residential properties. Currently,
Metropolitan is monitoring the quality of the statistical
services through obtaining post closing traditional appraisals on
a minimum of 10% of the acquisitions.
When traditional appraisals are obtained, they are generally
based on a drive-by inspection of the collateral and comparative
sales analysis. The appraiser generally does not have access to
the property for an interior inspection. Each statistical
valuation and independent appraisal is also subject to review by
a staff appraiser.
<PAGE> Page 93
The approved Receivable is provided to Metropolitan's
closing department where the property title is evaluated, the
legal documents are reviewed and the appraisal is reviewed. If
the closer discovers any material discrepancies during the
closing review, or if the Receivable does not satisfy any
specified closing contingencies, then the Receivable is re-
submitted to the underwriting committee for re-evaluation. Upon
completion of the underwriting process and the closer's review,
appropriate closing and transfer documents are executed by the
seller and/or broker, transfer documents are recorded, and the
transaction is funded.
Institutional Secondary Mortgage Market Sources
During fiscal 1996, approximately $73.6 million in
Receivables were institutional acquisitions. These portfolios of
real estate Receivables are acquired from banks, savings and loan
organizations, the Resolution Trust Corporation and the Federal
Deposit Insurance Corporation and other financial institutions.
An institutional seller typically offers a loan pool for
sale in order provide liquidity, to meet regulatory requirements,
to liquidate assets, or other business reasons. Over the years,
Metropolitan has built relationships with several brokers and
lenders who provide a regular flow of potential acquisitions to
the institutional secondary department. In addition, other
brokers learn about Metropolitan through word of mouth and
contact Metropolitan directly. Finally, some leads on loan pools
are generated by cold calling lending institutions or brokers.
These acquisitions are typically negotiated through direct
contact with the portfolio departments at the various selling
institutions, or acquired through bidding at an auction. The
closing costs per loan for institutional acquisitions is
generally lower than private secondary mortgage market
acquisitions. However, the investment yield is also generally
lower than yields available in the private market. During fiscal
1996, approximately 25% of the institutional purchases were
acquired from FSB Mortgage Company (a subsidiary of Federal
Savings Bank of Rogers, Arkansas).
Institutional Secondary Mortgage Market Underwriting
Receivables acquired through the institutional mortgage
market differ from those acquired in the private market in that
<PAGE> Page 94
these Receivables were generally originated by a financial
institution, applying standard underwriting practices and
standardized documentation. Generally, the seller provides an
initial summary of the pool which typically includes the pool
balance, the number of loans, the weighted average interest rate,
the weighted average maturity, weighted average loan-to-value
ratio, delinquency status, collateral addresses, collateral
types, and lien positions. Receivable pools are initially
reviewed by the institutional secondary market staff who
determine whether the pool yield and characteristics are within
the current acquisition guidelines and yield requirements.
The pool characteristics and yield are then reviewed by the
Underwriting Committee. If approved by the Underwriting
Committee, a letter of intent is executed and the institutional
secondary marketing staff perform a due diligence review of the
loan pool which generally includes: 1) review of the
documentation in each individual loan file, 2) determination of
the payment history and delinquency pattern of the loans, 3)
determination of the individual and pool loan-to-value ratios,
and maturity characteristics, and 4) determination of the
economics and demography for the geographic area where the
collateral is located. If the appraisal is over one year old, a
new statistical valuation or traditional appraisal of the
collateral is generally obtained. Any exceptions in the
documentation or Receivable characteristics are noted during the
due diligence review. A summary of exceptions, as determined
from the due diligence, is provided to the seller to resolve
prior to closing. If the exception(s) cannot be resolved, the
corresponding loan(s) may be removed from the pool, the terms of
the acquisition renegotiated, or the transaction canceled.
Following completion of its due diligence, and acceptable
resolution of any exceptions, a purchase and sale agreement is
executed and the acquisition is funded and closed. Generally,
these acquisitions are acquired with servicing released.
Loan Originations Sources
During the last quarter of fiscal 1996, Metropolitan's
subsidiary, Metwest, began originating residential loans and
small commercial loans. The commercial lending focuses on loans
of $1,500,000 or smaller. Metwest is currently licensed as a
lender in twenty six states. Metwest plans to expand its
activities throughout the United States during fiscal 1997.
Metwest
<PAGE> Page 95
originates loans through licensed mortgage brokers who submit
loan applications on behalf of the borrower. Before Metwest will
enter into a broker agreement, the mortgage broker must
demonstrate that it is properly licensed, experienced and
knowledgeable in lending. The volume of Metwest's lending
activities were immaterial to the Consolidated Group in 1996.
Actual growth of this new venture cannot be predicted with
certainty; however, it is currently projected that Metwest could
originate as much as approximately $8-$10 million in residential
loans per month by fiscal year end, which could amount to as much
as approximately 30% of the Consolidated Group's Receivable
investing by the end of fiscal 1997. Metwest's commercial
lending activities are currently in the initial phases, and
management is unable to predict with any level of certainty the
volume of commercial loans which may be originated during fiscal
1997.
Loan Originations Underwriting
Loans originated by Metwest are underwritten applying
criteria which include the following: evaluation of the
borrower's credit, obtaining a current appraisal of the
collateral, and obtaining title insurance. The borrower's credit
determines the down payment and interest rate which Metwest will
require. A lower credit rating would result in a higher required
down payment and higher interest rate. Metwest will lend up to
90% of the collateral's value on "A" credit borrowers, which
decreases to 70% for "D" credit borrowers. Unlike the
Receivables purchased in the private secondary mortgage market,
the loans originated by Metwest have standard documentation and
terms. Currently, Metwest originates fixed rate loans.
Residential loans up to $207,000 are evaluated by an individual
loan underwriter. Loans in excess of $207,000 require the
approval of two approved underwriters.
Lotteries, Structured Settlements and Annuities Sources
Metropolitan also negotiates the purchase of Receivables
which are not collateralized by real estate, such as structured
settlements, annuities and lottery prizes. The lottery prizes
generally arise out of state operated lottery games which are
typically paid in annual installments to the prize winner. The
structured settlements generally arise out of the settlement of
legal disputes where the prevailing party is awarded a sum of
money, payable over a period of time, generally through the
creation of an annuity. Other annuities generally consist of
<PAGE> Page 96
investments which cannot be cashed in directly with the issuing
insurance company. Metropolitan's source for these investments
is generally private brokers who specialize in these types of
Receivables.
Lottery, Structured Settlement and Annuity Underwriting
In the case of structured 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 annuity seller, the credit rating of the
annuity payor (generally an insurance company), and a review of
other factors relevant to the risk of purchasing a particular
annuity as deemed appropriate by management in each circumstance.
Typically, Metropolitan limits its acquisition of structured
settlements and annuities to the purchase of a maximum of the
next seven year's payments.
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 confirmation with the
respective lottery commission of the prize winner's 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.
Yield and Discount Considerations
Metropolitan negotiates all Receivable acquisitions 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. Yield requirements are
established in light of capital costs, market conditions, the
<PAGE> Page 97
characteristics of particular classes or types of Receivables and
the risk of default by the Receivable payor. See "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.
Management establishes the yield requirements for Receivable
investments by assuming that all payments on the Receivables will
be paid as scheduled.
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.
Current Mix of Receivable Investment Holdings
The Consolidated Group's investments in Receivables is
concentrated in 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
<PAGE> Page 98
relatively small Receivables, the geographic dispersion of the
collateral, and the collateral value to investment amount
requirements.
At the time of acquisition, the face value of all
Receivables collateralized by real estate generally range in size
from approximately $15,000 to $300,000. During fiscal 1996, the
average Receivable balance at the time of acquisition by the
Consolidated Group was approximately $52,000. See Note 2 to
Consolidated Financial Statements.
Management continually monitors 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.
The following charts present information on the Consolidated
Group's portfolio of outstanding Receivables as of September 30,
1996 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
1. This page contains three pie charts with the following
headings and breakdowns in the charts:
a. Distribution of Receivable By Collateral Type (September
30, 1996)
Residential 69%
Commercial 19%
Farms, land
Other 12%
b. Distribution of Receivables (collateralized by real estate)
By Security Position (September 30, 1996)
First Lien Position 99%
Second Lien or Lower
Position 1%
<PAGE> Page 99
c. Distribution of Assets
Cash and Cash
Equivalents 3%
Investments 21%
Receivables Collateralized
by real estate 54%
Other Receivables (structured
settlements, lotteries and
annuities) 4%
Real Estate Held 8%
Deferred Costs 7%
Other 3%
<PAGE> Page 100
GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABL
E INVESTMENTS BY STATE:
2. This graph contains a map of the United States and indicates
the branch and headquarter offices and identifies the percent of
distribution of the principal amount of Receivable investments
(collateralized by real estate) as of September 30, 1996 by
state, for the states with 1% or more invested.
The following amounts are shown for the following states:
Washington 17.1%
Oregon 5.4%
California 10.3%
Arizona 8.4%
Idaho 2.5%
New Mexico 3.2%
Texas 11.3%
Colorado 1.1%
Michigan 2.1%
Georgia 1.6%
Florida 5.6%
New York 3.2%
Hawaii 4.8%
Minnesota 1.1%
Nevada 1.1%
<PAGE> Page 101
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
LOANS ON REAL ESTATE
September 30, 1996
Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States.
At September 30, 1996, the Consolidated Group held first position
liens associated with contracts and mortgage notes receivable with
a face value of approximately $675 million (99%) and second or
lower position liens of approximately $6 million (1%).
Approximately 23% 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 10% in the Southeast (Florida, Georgia, North
Carolina and South Carolina) , approximately 10% in Atlantic
Northeast (New York, Pennsylvania, New Jersey, Connecticut and
Maryland) and approximately 16% 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 52 receivables, aggregating
approximately $29.4 million in excess of this range. No individual
contract or note is in excess of 0.4% of the total carrying value
of real estate contracts and mortgage notes receivables, and less
than 3% of the contracts are subject to variable interest rates.
Contractual interest rates principally range from 6% to 13% per
annum with approximately 91% of the face value of these receivables
within this range. The weighted average contractual interest rate
on these receivables at September 30, 1996 is approximately 9.4%.
Maturity dates range from 1996 to 2026.
<PAGE> Page 102
<TABLE>
<CAPTION>
Number of Carrying Delinquent Non Number of
Description Receivable Interest Amount of Principal Accrual Non Accrual
s Rates Receivables Amount Principal Receivables
Amount
RESIDENTIAL Principal
ly
<S> <C> <C> <C> <C> <C> <C>
First Mortgage > 738 6%-13% $108,873,69 $ 5,687,601 $ 7
$100,000 7 1,548,124
First Mortgage > 2,500 6%-13% 161,285,463 7,443,607 -- --
$50,000
First Mortgage < 13,568 6%-13% 261,018,755 9,129,035 -- --
$50,000
Second or Lower > 1 7.5% 243,213 -- -- --
$100,000
Second or Lower > 6 9%-10% 384,654 -- -- --
$50,000
Second or Lower < 358 6%-13% 3,487,974 191,504 -- --
$50,000
COMMERCIAL
First Mortgage > 248 6%-13% 52,072,095 1,248,896 -- --
$100,000
First Mortgage > 252 6%-13% 18,218,639 500,571 -- --
$50,000
First Mortgage < 447 6%-13% 11,837,475 107,111 -- --
$50,000
Second or Lower > 4 9%-10.5% 1,564,708 -- -- --
$100,000
Second or Lower> 3 8%-9.5% 204,917 -- -- --
$50,000
Second or Lower < 9 8%-11% 192,717 -- -- --
$50,000
FARM, LAND AND OTHER
First Mortgage > 67 8%-12% 14,551,734 1,101,876 1,101,876 2
$100,000
First Mortgage > 151 6%-13% 9,697,972 220,731 -- --
$50,000
First Mortgage < 2,178 6%-13% 36,929,717 841,020 -- --
$50,000
Second or Lower > 1 14% 100,000 -- -- --
$100,000
Second or Lower> 2 9%-10% 164,743 -- -- --
$50,000
Second or Lower < 40 9%-12% 349,674 28,048 -- --
$50,000
Unrealized discounts,
net of unamortized
acquisition costs, on
receivables purchased (38,607,376
at a discount )
Accrued Interest 8,362,559
Receivables ----------- ----------- --------- --------
-- - -- --
CARRYING VALUE $650,933,33 $26,500,000 $2,642,00
0 =========== 0
=========== =========
= =
<PAGE> Page 103
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities of the aggregate amounts of Receivables (face
amount) are as follows:
Residential Commercial Farm, Land, Total
Principal Principal Other Principal
Principal
------------ -------------- -------------- --------------
------ ---- --
<S> <C> <C> <C> <C>
October 1996 - September $ 43,589,264 $10,647,400 $10,083,453 $ 64,320,117
1999
October 1999 - September 50,673,223 10,160,940 8,005,953 68,840,116
2001
October 2001 - September 53,408,352 8,270,489 5,145,528 66,824,369
2003
October 2003 - September 62,945,018 15,076,814 10,890,593 88,912,425
2006
October 2006 - September 100,196,799 13,896,939 13,898,207 127,991,945
2011
October 2011 - September 72,017,732 7,719,548 6,273,944 86,011,224
2016
October 2016 - Thereafter 152,463,368 18,318,421 7,496,162 178,277,951
----------- ---------- ---------- -----------
$535,293,756 $84,090,551 $61,793,840 $681,178,147
============ =========== =========== ============
</TABLE>
<PAGE> Page 104
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.
<PAGE> Page 105
<TABLE>
<CAPTION>
Number of Interes Maturity Carrying Delinquen Non Number of
Description Receivable t Rates Dates Amount of t Accrual Non
s Receivables Principal Principal Accrual
Amount Amount Receivable
s
RESIDENTIAL Principally
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgage > 582 7%-14% 1995- $ $2,842,17 $ 642,384 3
$100,000 2025 87,229,481 8
First Mortgage > 2,032 7%-14% 1995- 136,531,451 3,675,440 -- --
$50,000 2025
First Mortgage < 13,770 7%-14% 1995- 279,102,436 7,619,058 -- --
$50,000 2025
Second or Lower > 3 7%-11% 2005- 686,087 339,801 -- --
$100,000 2018
Second or Lower > 11 8%-12% 2002- 672,012 166,846 -- --
$50,000 2017
Second or Lower < 313 7%-14% 1995- 4,123,093 73,302 -- --
$50,000 2025
COMMERCIAL
First Mortgage > 175 7%-14% 1995- 35,889,341 741,083 -- --
$100,000 2025
First Mortgage > 194 7%-14% 1995- 13,948,069 295,408 -- --
$50,000 2025
First Mortgage < 354 7%-14% 1995- 8,967,314 131,197 -- --
$50,000 2025
Second or Lower > 3 7%-9% 2010- 852,197 -- -- --
$100,000 2025
Second or Lower> 4 8%-9% 2000- 281,043 -- -- --
$50,000 2016
Second or Lower < 5 8%-10% 1997- 63,809 -- -- --
$50,000 2000
FARM, LAND AND OTHER
First Mortgage > 54 7%-10% 1995- 12,173,717 1,026,615 226,116 1
$100,000 2025
First Mortgage > 104 8%-11% 1995- 6,865,287 -- -- --
$50,000 2025
First Mortgage < 1,948 7%-14% 1995- 29,093,311 554,713 -- --
$50,000 2025
Second or Lower > 1 6% 2009 336,544 -- -- --
$100,000
Second or Lower> 2 7%-9% 2005- 153,066 -- -- --
$50,000 2020
Second or Lower < 53 9%-12% 1996- 544,695 34,359 -- --
$50,000 2022
Unrealized discounts,
net of unamortized
acquisition costs, on
receivables purchased (37,354,378 -- -- --
at a discount )
Accrued Interest
Receivables 7,335,039 -- -- --
----------- --------- -------- ------
CARRYING VALUE $587,493,61 $17,500,0 $868,500
4 00 ========
=========== =========
= =
<PAGE> Page 106
</TABLE>
[/R]
<PAGE> Page 107
The following tables present certain statistical information
about the Consolidated Group's Receivable investment activity during
the three fiscal years ended September 30, 1996.
<TABLE>
<CAPTION> Year Ended or at September 30
-----------------
- ------------
1996
1995 1994
--------------
- ---------------
(Dollars
in thousands)
<S> <C> <C>
<C>
DISCOUNTED REAL ESTATE RECEIVABLES
PURCHASED DURING PERIOD
Number..................... 4,969
4,130 2,906
Average Face Amount........ $ 52 $
45 $ 52
------- ------
- - -------
Face Amount............... $256,486
$187,305 $150,709
Unrealized Discounts, Net of
Acquisition Costs....... (24,718)
(15,338) (21,186)
Underlying Obligations
Assumed (1)............. (3,634)
(527) (191)
-------- -------
- - --------
$228,134
$171,440 $129,332
========
======== ========
DISCOUNTED REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD
Number..................... 13,358 13,4
36 13,994
-------- -------
- - --------
Face Amount................ $548,538
$505,441 $502,314
Unrealized Discounts, Net
of Unamortized Acquisition
Costs................... (38,607)
(37,354) (46,989)
-------- --------
- --------
Net Balance................ $509,931
$468,087 $455,325
========
======== ========
TOTAL REAL ESTATE RECEIVABLES
OUTSTANDING AT END OF PERIOD (2)
Number..................... 20,573
19,608 18,820
-------- -------
- - --------
Face Amount Discounted
Receivables............. $548,538
$505,441 $502,314
Face Amount Non-Discounted
Receivables............ 132,641
112,072 104,011
-------- -------
- - --------
Total Outstanding Receivables 681,179
617,513 606,325
Unrealized Discounts, Net of
Unamortized Acquisition Costs (38,607)
(37,354) (46,989)
Accrued Interest Receivable 8,361
7,335 7,920
-------- -------
- - --------
Net Balance................ $650,933
$587,494 $567,256
========
======== ========
Average Net Balance per
Receivable (Excluding
Accrued Interest) $31.2
$29.6 $29.7
<PAGE> Page 108
Average Annual Yield on
Discounted Receivables (3) 11.9% 12.
8% 13.6%
<FN>
</TABLE>
(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 19% of the portfolio at September 30, 1996, 18% of
the portfolio at September 30, 1995 and 17% of the portfolio at
September 30, 1994 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) securitization and sale of Receivables;
(iii) the changing mix of Receivable purchases between those
originated from Metropolitan's network of offices and those purchased
in bulk; (iv) the amortization of the existing portfolio; and (v) the
amount of discount on Receivables purchased.
At September 30, 1996, the average contractual interest rate on
Receivables collateralized by real estate (weighted by principal
balances) was approximately 9.4%.
Servicing and Collection Procedures, and Delinquency Experience
The servicing and collection of Receivables of all types owned
by the Consolidated Group is performed by Metwest. Metwest also
services the Receivables of Summit, Old Standard, and Arizona Life,
and the Receivables sold through securitizations. Metwest uses a
flexible computer software program, Sanchez, to monitor and service
the Receivables. The Consolidated Group considers consistent and
timely collection activity to be critical to successful servicing and
minimization of foreclosure losses, for its predominantly "B/C"
Receivables portfolio.
Fees for providing servicing and collection services to
Metropolitan and Western United had no impact on the results of
operations of the Consolidated Group. Fees for providing servicing
and collection services to Summit, Old Standard and Arizona Life were
approximately $290,000 during 1996. These charges to parties outside
the Consolidated Group provide income to the Consolidated Group.
<PAGE> Page 109
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:
1996 --- 3.9%
1995 --- 2.8%
1994 --- 3.1%
The real estate collateralized Receivables purchased by the
Consolidated Group are predominantly "B/C" credit Receivables.
Accordingly, higher delinquency rates are expected which Management
believes are generally offset by the value of the underlying
collateral. In addition, the Consolidated Group maintains an
allowance for losses on delinquent real estate Receivables as
described below. As a result, management believes losses from
resales of repossessed properties are generally lower than might
otherwise be expected given the delinquency rates. In addition, the
Consolidated Group is compensated for the risk associated with
delinquencies through Receivable yields that are greater than
typically available through the conventional, "A", credit lending
markets.
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), additional collection activity, including
further written correspondence and further telephone contact, is
pursued. If these collection procedures are unsuccessful, the
account is referred to a committee who analyzes the basis for
default, the economics of the Receivable 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 Receivable obligor.
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.
<PAGE> Page 110
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 a statistical valuation or
traditional appraisal of the Consolidated Group's real estate
holdings for 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 real estate valuation policy
requires annual statistical valuations or traditional 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>
1996 1995 1994
<S> <C> <C> <C>
Beginning Balance $ 8,116,065 $9,108,383 $10,598,491
Provisions 6,360,072 4,174,644 5,533,193
Charge-Offs (4,283,553) (5,166,962) (7,023,301)
---------- ---------- ----------
Ending Balance $10,192,584 $8,116,065 $ 9,108,383
========== ========== ==========
Percentage of Ending
Balance of Allowances
to Outstanding
Real Estate Assets 1.4% 1.2% 1.4%
==== ==== ====
Ratio of Net Charge-Offs
to Average Real Estate
Assets Outstanding
<PAGE> Page 111
During the Period 0.6% 0.8% 1.1%
==== ==== ====
</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
marketing status of all properties is reviewed at least monthly by a
committee which includes both sales personnel and management.
The carrying value of a repossessed property is determined as of
the date of repossession of the property and is based on a
statistical valuation, an appraisal by a licensed independent
appraiser or by 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.
<PAGE> Page 112
<TABLE>
<CAPTION>
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, 1996 and/or
September 30, 1995. 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.
<S> <C> <C> <C>
<C> <C>
Carrying Carrying Market
Year of Gross
Property Type/ Value Value Value
Fore- Monthly
State Location 9/30/95 9/30/96 9/30/96
closure Income
26.73 Commercial Acres $ 252,875 $ 238,036 $ 238,036
1983 (1)
Farm/Ranch 1,927 Acres,
Washington 285,690 285,690 329,500
1988 (2) $3,879
50,000 sq. Ft Commercial
Building, Washington 850,000 Sold A
1989
34 Acres, Washington 3,071,006 3,145,113
3,350,000 1991 (3)
Land, California 225,360 225,360 250,400
1994
K-5 Grade School,
California 202,500 202,500 225,000
1994
House, California 117,000 90,000 100,000
1994
Duplex, New Jersey 103,500 Sold B
1994
House, California 103,500 Sold C
1994
House, New Jersey 121,500 Sold D
1995
House, Michigan 116,100 Sold E
1995
House, New York 138,600 Sold F
1995
House, New York 189,000 Sold G
1995
House, California 162,000 Sold H
1995
House, California 127,800 Sold I
1995
House, Arizona 146,700 Sold J
1995
House, California 256,500 Sold K
1995
House, California 130,500 110,700 123,000
1995
House, Connecticut 187,200 114,750 127,500
1995
House, Washington 135,900 Sold L
1995
House, New York 140,400 Sold M
1995
14 Unit Apartment
Bldg., Washington 108,000 120,000
1996
House, Maryland 108,000 120,000
1996
Condo, California 137,105 152,339
1996
Multi Unit Professional
Bldg., New Jersey 162,000 180,000
1996
House, California 261,000 290,000
1996
House, Washington 126,000 140,000
1996
House, Washington 115,885 128,761
1996
House, Florida 120,706 134,118 1996
<PAGE> Page 113
House, New York 100,800 112,000
1996
House, California 113,207 125,786
1996
House, Massachusetts 124,200 138,000
1996
---------- ---------- ----------
- ------
$7,063,631 $5,889,052 $6,384,440
$3,879
========== ========== ==========
======
The sales prices of the referenced properties were as follows:
$930,000 A
55,000 B
90,000 C
120,000 D
122,500 E
120,000 F
210,000 G
180,000 H
105,000 I
163,000 J
270,000 K
115,000 L
135,000 M
- ---------
$2,615,500
The following are descriptions of the marketing status of all properties
listed above which were acquired by the Consolidated Group prior to
fiscal 1993:
(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) See discussion regarding "Renton" in "Real Estate Development-Other
Development Properties".
For further information regarding the Consolidated Group's
activity in properties held for development, See "REAL ESTATE
DEVELOPMENT".
</TABLE>
Management & Receivable Acquisition Services
Metropolitan provides management, and Receivable acquisition
services for a fee to its subsidiaries and to Summit, Old
Standard and Arizona Life. The Receivable acquisition fees are
<PAGE> Page 114
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 1996 on purchases of $327.6 million,
including origination expenses, net of purchase discount was
$12.54 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. With the elimination of these intercompany
guarantees and yield adjustments in consolidation, the yields
recognized by the Consolidated Group are the same as though there
were no guarantee or yield adjustments.
The acquisition fees are amortized into Metropolitan's
income, over the same period and in the same amount as they are
amortized into expenses by the insurance subsidiary. During
1996, 1995 and 1994, Metropolitan charged Western United fees of
approximately $29.4 million, $14.6 million and $12.8 million,
respectively. The 1996, 1995 and 1994 charge was before loss
reserves of $12.54 million, $6.95 million and $4.75 million,
respectively. Underwriting fees charged to Summit, Old Standard
and Arizona Life are recognized as revenues when the related fees
are charged to those companies. During 1996, Metropolitan charged
Summit, Old Standard and Arizona Life fees of $310,000,
$1,032,000 and $22,000, 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, Old
Standard and Arizona Life provided fee income to Metropolitan.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
Receivable Sales
<PAGE> Page 115
The Consolidated Group sells pools of Receivables when it
considers it profitable to do so. Such sales generally occur
through one of two methods: (1) securitization or (2) direct
sales. Management believes that the sale of Receivables provides
a number of benefits including allowing the Consolidated Group to
diversify its funding base, provide liquidity and lower its cost
of funds. In addition to providing liquidity and profits, the
sale of Receivables is a source of cash which can be reinvested
into additional Receivables. The sale of Receivables allows the
Consolidated Group to continue to expand its investing activities
without increasing its asset size.
During May 1996, Metropolitan and Western United
participated with Old Standard and Summit as sellers in the
securitization of approximately $ 122.9 million in Receivables
collateralized by real estate, principally consisting of seller
financed first lien residential Receivables. The second such
securitization of approximately $ 126.7 million of first lien
residential and commercial real estate lien Receivables, of which
approximately 54% were seller financed Receivables, occurred in
November 1996. Currently, it is proposed that the next
securitization of Receivables collateralized by real estate will
not occur until the second half of fiscal 1997. The Consolidated
Group is also evaluating the market, economic and legal
implications of selling its non real estate Receivables through
securitizations. There can be no assurance that such
securitizations will be pursued, or if pursued, that they will be
profitable.
Generally, a securitization involves the transfer of certain
specified Receivables to a single purpose trust. The trust
issues certificates which represent an undivided ownership
interest in the Receivables transferred to the trust. The
certificates consist of different classes, which include classes
of senior certificates, and a residual interest and may also
include intermediate classes of subordinated certificates. The
rights of the senior certificate holders can be enhanced through
several methods which include subordination of the rights of the
subordinate certificate holders to receive distributions, or the
establishment of a reserve fund. In connection with
securitizations, the senior certificates are sold to investors,
<PAGE> Page 116
generally institutional investors. The companies which sold
their Receivables to the trust receive a cash payment
representing their respective interest in the sales price for the
senior certificates and any subordinate certificates sold. The
selling companies receive an interest in any unsold subordinate
certificates, and also typically receive an interest in the
residual interest. Such interests are generally apportioned
based upon the respective companies contribution of Receivables
to the pool of Receivables sold to the trust.
In the typical securitization structure, the Receivable
payments are distributed first to the senior certificates, next
to the subordinated certificates, if any, and last to the
residual interests. As a result, the residual interest is the
interest first affected by any loss due to the failure of the
Receivables to pay as scheduled. The holders of the residual
interest values such interest on their respective financial
statements based upon certain assumptions regarding the
anticipated losses and prepayments. To the extent actual
prepayments and losses are greater or less than the assumptions,
the companies holding the residual interests will experience a
loss or gain.
In the securitizations which occurred in May and November
1996, the rights of the senior certificate holders were enhanced
through subordinating the rights of subordinate certificate
holders to receive distributions with respect to the mortgage
loans to such rights of senior certificate holders. The selling
companies retained their respective residual interests. At
September 30, 1996, the residual interests held by the
Consolidated Group for the May 1996 securitization aggregated
approximately $3.6 million. At the close of the November 1996,
securitization the Consolidated Group held residual interests
aggregating approximately $7.1 million.
In addition to sales through securitizations, the
Consolidated Group sells pools of Receivables directly to
purchasers. These sales are typically without recourse, except
that for a period of time the selling company is generally
required to repurchase or replace any Receivables which do not
conform to the representations and warranties made at the time of
sale. During 1996, the Consolidated Group sold portfolios of
real estate Receivables through securitizations with proceeds of
<PAGE> Page 117
approximately $108.4 million, and gains of $8.6 million. During
that same period, the Consolidated Group sold other Receivables
with proceeds of approximately $73.8 million and gains of $4.1
million.
LIFE INSURANCE AND ANNUITY OPERATIONS
Introduction
The Consolidated Group raises the majority of its new 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
$1.1 billion and the number of policyholders and annuitants have
increased from 200 to about 45,000. 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 1995, the most recent year for which statistical
information is available, Western United's annuity market share
was 5.8% (ranking it third in production) in the six states in
which approximately 81% 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.
Western United currently has insurance license applications
pending in the states of Kansas, Minnesota, New Mexico, Oklahoma
and Wisconsin. The application process generally extends over
several years. Accordingly, Western United does not presently
anticipate expanding its sales into these markets during fiscal
1997.
Metropolitan provides management and Receivable acquisition
services for a fee to Western United. See "BUSINESS-RECEIVABLE
INVESTMENTS-Management & Receivable Acquisition Services".
<PAGE> Page 118
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".
Generally, loans which are acquired through the
institutional secondary mortgage market qualify as "mortgage
related securities" pursuant to the Secondary Mortgage Market
Enhancement Act (SMMEA). SMMEA generally provides that
qualifying loans may be acquired to the same extent that
obligations of which are issued by or guaranteed as to principal
and interest by the United States Government, its agencies and
instrumentalities can be acquired. As a result, Western United
can acquire qualifying Receivables in amounts which exceed the
above referenced 65% limitation. Such acquisitions are also
exempt from other state insurance regulations including loan to
value and appraisal regulations.
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 is
currently developing several new annuity product types. One of
new products is an equity indexed annuity. The interest which is
credited on this product will vary as a selected equity index
(currently expected to be the S & P 500) performs. This product
type is designed to meet the needs of investors who are reluctant
to make a long term fixed interest annuity investment during the
current economic period of relatively lower interest rates.
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 organizations' retirement
<PAGE> Page 119
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 in order
to achieve a spread between its available Receivable investments,
while considering current annuity market rates of interest and
competitive pressures. Flexible and single premium annuities are
offered with surrender periods varying from one year to ten
years.
At September 30, 1996, deferred policy acquisition costs
were approximately 8.1% of life and annuity reserves. Since
surrender charges typically do not exceed 9%, 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>
1995 1994 1993
Three Year
Average
-------- --------- ---------
- ----------
<S> <C> <C> <C>
<C>
Net Investment
Earnings Rate 8.30% 8.49% 9.11%
8.63%
Average Credited
Interest Rate 6.06% 5.59% 6.38%
6.01%
Spread 2.24% 2.90% 2.73%
2.62%
</TABLE>
During 1996, 1995 and 1994, amortization of deferred policy
acquisition costs was $9.1 million, $10.3 million and $7.0
<PAGE> Page 120
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 1995, 1994 and 1993, lapse rates were
18.9%, 21.5%, and 15.3%, respectively. Based upon results for
the nine months ended September 30, 1996, lapse rates were 16.6%.
Life Insurance
Approximately 1.8% 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,
1996, the face amount of life insurance policies written and
outstanding, totaled $295,692,000, 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 regarding the Company's insurance subsidiaries. The
information includes Western United for all periods and Old
Standard through May 31, 1995, the date on which it was sold.
<TABLE>
<CAPTION>
Year Ended at
September 30,
----------------
- -----------
1996 1995
1994
-------- --------
- --------
(Dollars in
thousands)
<S> <C> <C>
<C>
Insurance In Force
Individual Life $ 354,371
$373,573 $398,837
Less Ceded to other
Companies (58,679) (62,906)
(69,311)
---------- -------
- - --------
$ 295,692
$310,667 $326,526
==========
======== ========
<PAGE> Page 121
Life Insurance Premiums $ 3,355 $
3,365 $ 3,346
Less Ceded Premiums (355) (365)
(388)
---------- ------
- -- --------
Net Life Insurance Premiums $ 3,000 $
3,000 $ 2,958
==========
======== ========
Net Investment Income $ 65,561 $
64,970 $ 65,944
==========
======== ========
Benefits, Claim Losses and
Settlement Expenses $ 48,301 $
45,484 $ 41,919
==========
======== ========
Deferred Policy Acquisition
Costs $ 71,933 $
71,131 $ 71,075
========== ========
========
Reserves for Future Policy
Benefits, Losses,
Claims and Loss Expenses $ 837,366 $781,716
$744,645
========== ========
========
Total Assets $1,128,237 $922,556
$924,822
========== ========
========
Capital and Surplus $ 81,606 $ 78,827
$ 77,142
========== ========
========
</TABLE>
The life insurance subsidiaries of the Consolidated Group are
required to file statutory financial statements with state
insurance regulatory authorities in their states of domicile.
Accounting principles used to prepare these statutory financial
statements differ from generally accepted accounting principles
(GAAP). A reconciliation of GAAP net income to statutory net
income for the years ended September 30, 1996, 1995 and 1994,
respectively, is as follows:
1996 1995 1994
[S] [C] [C] [C]
Net Income - GAAP
$3,076,252 $2,717,89 $8,449,317
3
Adjustments to reconcile:
Deferred policy acquisition
costs (774,906) (807,667) 85,324
State insurance guaranty
fund 257,686 105,753 (313,660)
Annuity reserves and
benefits (304,688) (5,759,00 218,975
9)
Capital gains and IMR
amortization 336,258 3,790,892 (4,132,940
)
Allowance for losses
3,046,274 1,923,161 4,368,159
Federal income taxes
1,587,522 1,154,586 3,930,215
Other
(39) (458,943) (61,320)
--------- -------- --------
- -- --
Total $12,544,07
$7,224,359 $2,666,66 0
6 ==========
<PAGE> =
Page 122 =========
=
==========
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.
Annuity Reinsurance
Western United has negotiated a reinsurance agreement with
Old Standard whereby 75% of the risk on six different annuity
products will be reinsured through Old Standard. It is presently
anticipated that this will result in reinsurance of approximately
five million in premiums per month. This procedure will allow
Western United to continue its market presence and relationship
with its insurance agents, while moderating its rate of growth.
The agreement is pending regulatory approval and is expected be
become effective during January 1997.
Life Policy Reinsurance
Western United reinsured $58,679,000 of life insurance risk
at September 30, 1996 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 $354,371,000. 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, 1996,
approximately $30,652,000 of reinsurance coverage. The majority
of the remaining coverage is with Business
<PAGE> Page 123
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, 1996 were
$354,830.
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, 1996
such reserves were $837,366,000. 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, 1996, 1995 and 1994, 94.3%, 96.8% and 99.3%
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,
1996:
<TABLE>
<S> <C> <C> <C> <C>
Available Held To
Total
For Sale Maturity
Portfolio Portfolio
---------- -------- -
- ------- --------
(Dollars in Thousands)
Total Amount $ 31,209 $122,768
$153,997 100.0%
========== ========
======== ======
<PAGE> Page 124
%Invested in:
Fixed Income $ 31,205 $122,768
$153,973 100.0%
Equities 4 --
4 0.0%
---------- -------- -
- ------- ------
$ 31,209 $122,768
$153,977 100.0%
========== ========
======== ======
% Fixed Income:
Taxable $ 31,205 $122,768
$153,973 100.0%
Non-taxable - -
- - 0.0%
---------- -------- -
- ------- ------
$ 31,205 $122,768
$153,973 100.0%
========== ========
======== ======
% Taxable:
Government/
Agency $ 8,480 $ 58,025 $
66,505 43.2%
Corporate 22,725 64,743
87,468 56.8%
---------- -------- -
- ------- ------
$ 31,205 $122,768
$153,973 100.0%
========== ========
======== =====
% Corporate Bonds:
AAA $ 709 $ 39,700 $
40,409 46.2%
AA 1,989 4,030
6,019 6.9%
A 13,817 7,494
21,311 24.4%
BBB 1,925 997
2,922 3.3%
Below Investment Grade 4,285 12,522
16,807 19.2%
---------- -------- -
- ------- ------
$ 22,725 $ 64,743 $
87,468 100.0%
========== ========
======== ======
% Corporate:
Mortgage-backed $ 4,285 $ 44,688 $
48,973 56.0%
Asset-backed -- 3,009
3,009 3.4%
Finance 8,560 9,543
18,103 20.7%
Industrial 6,913 2,514
9,427 10.8%
Utility 2,967 4,989
7,956 9.1%
---------- --------
- -------- -----
$ 22,725 $ 64,743 $
87,468 100.0%
========== ========
======== ======
</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".
Western United's securities investments are principally in
investment grade corporate, government agency, or direct
government obligations, in order to substantially limit the
credit risk in the portfolio.
<PAGE> Page 125
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. Securities are also sold "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, to benefit from an
anticipated movement in the financial markets. At September 30,
1996 there were seven open short sale positions with a carrying
value of $132,652,000.
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 1994.
The Consolidated Group purchases collateralized mortgage
obligations (CMO's) for its investment portfolio. Such purchases
have been limited to tranches that perform in concert with the
underlying mortgages, i.e., improving in value with falling
interest rates and declining in value with rising interest rates.
The Consolidated Group has not invested in "derivative products"
that have been structured to perform in a way that magnifies the
normal impact of changes in interest rates or in a way dissimilar
to the movement in value of the underlying securities. At
September 30, 1996, the Consolidated Group was not a party to any
derivative financial instruments.
At September 30, 1996, 1995 and 1994, amounts in the
available for sale portfolio on a consolidated basis were $38.6
million, $31.8 million, and $89.1 million, respectively. The
available for sale portfolio had net unrealized losses of
approximately $946,000 at September 30, 1996, $423,000 at
<PAGE> Page 126
September 30, 1995 and $3,351,000 at September 30, 1994,
respectively. In the held to maturity portfolio, net unrealized
losses were approximately $5,548,000 at September 30, 1996,
$6,010,000 at September 30, 1995, and $15,440,000 at September
30, 1994, respectively. See Note 8 to Consolidated Financial
Statements.
METHOD OF FINANCING
The Consolidated Group finances its business operations and
growth with the proceeds of Receivable cash flows, the sale of
life insurance and annuity products, the sale and securitization
of Receivables, the sale of debentures and preferred stock,
collateralized borrowing, sale of real estate and securities
portfolio earnings. 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
1996 1995
1994
-------- -------
- - -------
(Dollars in
Thousands)
<S> <C> <C>
<C>
Principal Amount
Outstanding $163,034 $176,815
$172,666
Compound and Accrued
Interest 29,140 24,497
26,711
-------- ---------
- --------
TOTAL $192,174 $201,312
$199,377
======== =========
========
Weighted Average
Interest Rate 8.18% 8.24%
8.43%
======== =========
========
Range of Interest
Rates 5% - 11% 5% - 11%
5% - 11%
======== =========
========
</TABLE>
Substantially all of the debt securities outstanding at
September 30, 1996 will mature during the five-year period ending
<PAGE> Page 127
September 30, 2001. 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,
1996, approximately 30% 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 1996: $296,425,000
Fiscal 1995: $197,069,000
Fiscal 1994: $134,010,000
Proceeds of preferred stock issuances less redemptions were
$1,765,000 in 1996, $4,250,000 in 1995 and $1,274,000 in 1994.
The liquidation preference of outstanding preferred stock at
September 30, 1996 was $49,496,000. Preferred shareholders are
entitled to monthly distributions at a variable rate based on
U.S. Treasury obligations. The average monthly distribution rate
during fiscal 1996 was 7.91%. Preferred stock distributions paid
by Metropolitan were $3,868,000 in 1996, $4,038,000 in 1995 and
$3,423,000, in 1994. See Note 1 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, 1996,
assuming no reinvestments of maturing debentures:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Debenture Other
Preferred
Fiscal Year Ending Bonds Debt Stock
September 30, Payable Dividends
Total
- ------------------ ---------- ----------- -------
- ---- ---------
(In Thousands of
Dollars)
1997 $ 50,030 $37,023
$4,207 $ 91,260
1998 52,163 710
4,207 57,080
1999 41,335 242
4,207 45,784
2000 40,408 137
4,207 44,752
2001 5,877 187
4,207 10,271
------- ------- ------- --------
<PAGE> Page 128
$189,813 $38,299
$21,035 $249,147
======= =======
======= ========
</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.
REAL ESTATE DEVELOPMENT
Lawai Beach Resort
Description
Metropolitan 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, owns a restaurant
operating company.
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 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, 1996 was
$17,636,000.
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 $1,059,000, a
four-plex condominium timeshare building with 4 weekly intervals
remaining and a carrying value of approximately $21,000; and a
restaurant site with a carrying value (land and building) of
approximately $3,826,000 as of September 30, 1996. The
restaurant
<PAGE> Page 129
is currently operated by Pacific Cafe. The restaurant rental
income was $69,000 in fiscal 1996.
Marketing
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 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. In 1996, timeshare sales totaled
approximately $22.8 million for monthly average sales of $1.9
million. Management believes that sales decreased in 1996 due to
increased competition, principally due to the addition of several
new time share resorts within the Poipu area of Kauai. 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 early 1998.
Additional Information
The tables below set forth additional historical information
about the timeshare sales and revenue of Lawai Beach Resort. 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.
<PAGE> Page 130
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
SEPTEMBER
30,
--------------------------------
- --------------
1996 1995
1994
------------- -------------
- -------------
<S> <C> <C>
<C>
TIMESHARE SALES
Number of Sales 1,441 1,485
1,500
Amount of Sales $22,799,107 $23,120,888
$17,642,544
Costs (8,051,102) (7,353,510)
(7,171,159)
Expenses (15,480,230) (14,996,260)
(10,737,591)
------------ -----------
- -----------
Profit(Loss) $ (732,225) $ 771,118
$ (266,206)
============ ===========
===========
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, 1996,
Metropolitan's outstanding Lawai Beach Resort timeshare
Receivables balance was approximately $36.4 million. The loan
delinquency rate (based on the principal balances of loans more
than ninety days in arrears) on that date was approximately 4.6%.
Skier's Edge Resort
Metropolitan, owns approximately 376 timeshare use periods
at Skier's Edge, a timeshare condominium located near
Breckenridge, Colorado, together with approximately eighteen
acres of undeveloped land adjoining the resort. The carrying
value at September 30, 1996 was $972,500. The total timeshare
use periods
<PAGE> Page 131
in the project were approximately 1,200 at September 30, 1996.
Unsold timeshares, while being held for sale, are included in a
rental pool operated by the resort owner's association. Net
rental revenue was $6,629 in 1996, $21,956 in 1995 and $31,454 in
fiscal 1994. The market value of the property is estimated at
$1,100,000 at September 30, 1996 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. In addition, Metropolitan may acquire
property for development. These acquisitions may include
properties adjoining one already owned in order to enhance the
value of the original parcel, or the acquisition of properties
unrelated to existing holdings. The development or improvement
of properties is undertaken for the purposes of enhancing values,
to increase salability and to maximize profit potential.
Substantially all of the Development activity is performed
for Metropolitan by Summit Property Development, a subsidiary of
Summit. During 1996, Metropolitan paid Summit Property
Development fees of approximately $2.0 million.
Significant development properties, sales activities for
1996 and plans for 1997 are described below. There can be no
assurance that Metropolitan will be successful in its 1997
development and sales plans and Metropolitan may modify its plans
at its sole discretion.
* 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. During fiscal 1996, the property included one
residential development parcel and two business parcels, each of
which is described more fully below. The area where these
parcels are located includes residential, commercial and
industrial properties including a business park.
<PAGE> Page 132
MeadowWood Business Park Phase I: This site consisted of
24.7 acres. The sale of the last property in this phase was
"Madsen Court". This property consisted of a 46,351 square foot
commercial building which was built and leased by Metropolitan
and sold for $3,350,000 in March 1996.
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. It is currently planned
to finalize engineering and proceed with the development of a
portion of this property during 1997. At September 30, 1996,
Metropolitan's carrying value in the property was $3,641,261.
MeadowWood Residential: This residential parcel, The Glen,
consisted of 37 acres of which 32 acres were sold in February
1996 for $755,000. At September 30, 1996, Metropolitan's
carrying value for the remaining five acres was $80,571.
* The Summit Property
This property consists of approximately 88 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 1996. 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 1997. At September 30, 1996, the carrying value of
the property was $11,553,466.
* Airway Business Centre
As of September 30, 1996, this property includes a 110 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. 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
<PAGE> Page 133
thirteen lots on 47 acres. Two lots sold in 1996 for $63,000 and
$225,000. At September 30, 1996, the carrying value was
$2,047,828. The site was appraised at $2,800,000 as of September
30, 1996.
* 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, 1996 of
$135,267. During 1995, Metropolitan sold an option to purchase
the property. 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 near the Sullivan Road and
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.
The property was acquired in 1990 using repossessed property as
consideration. During 1996, Metropolitan sold a 12.65 acre
portion of this parcel to Wal-Mart for $2,798,351. As part of
the consideration for the sale, Metropolitan entered into a
codevelopment agreement to develop on-site infrastructure at a
cost to Metropolitan of approximately $900,000. At September 30,
1996, 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. The
Mall is 107,000 square feet, and over 81% leased as of September
30, 1996. The carrying value of the property as of September 30,
1996 is $10,525,471. The appraised value was $13,325,000 as of
December 15, 1995. Lease payments from the initial tenants
commenced August, 1995. The mall generated approximately $24,000
<PAGE> Page 134
of rental income in fiscal 1995 and approximately $695,000 during
fiscal 1996.
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. Two parcels were sold during fiscal 1996 for
$569,765. The carrying value as of September 30, 1996 is
$3,195,813. The appraised value was $10,800,000 as of September
30, 1996. 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. Sewer capacity issues are currently impacting the
marketability of this property. At September 30, 1996, the
carrying value was $1,448,929. Its appraised value was
$1,740,000 as of September 30, 1996.
* Everett
This property is a 98 acre parcel of industrial-zoned
property located adjacent to Boeing's Paine Field plant at
Everett, Washington. 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, 1996, the carrying value in the
property was $4,908,806. The appraised value is $7,635,000 as of
September 30, 1996. 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. 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. At September 30, 1996, the
carrying value in the property was $3,145,113. The appraised
value was $3,425,000 as of September 30, 1996.
<PAGE> Page 135
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 Washington State, 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 total development property sales were $9,535,068 during
fiscal 1996.
The following table presents additional information about
the Consolidated Group's investments in and sales of real estate
held for sale and development:
<PAGE> Page 136
<TABLE>
<CAPTION>
Year Ended or at September 30,
-----------------------------
REAL ESTATE HELD FOR 1996 1995 1994
SALE AND DEVELOPMENT --------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Property Held For
Sale and Development $48,175 $53,101 $37,729
Real Estate Acquired in
Satisfaction of Debt and
Foreclosures in Process 36,158 38,00 4 39,037
-------- -------- --------
Net Balance $84,333 $91,105 $76,766
======== ======== ========
SUMMARY OF CHANGES
Balance at Beginning of Year $91,105 $76,766 $76,269
Additions and Improvements:
Condominiums 18,795 26,276 19,563
Repossessed & Development
Real Estate 21,392 24,644 19,950
Transfer from Fixed and Other
Assets -- 1,599 259
Depreciation (3,048) (1,731) (778)
Cost of Real Estate Sold:
Condominium Units (23,531) (22,674) (17,909)
Real Estate (20,380) (13,775) (20,588)
-------- ------- --------
Balance at End of Year $84,333 $91,105 $76,766
======== ======= ========
GAIN (LOSS) ON SALE OF REAL ESTATE
Condominiums:
Sales $22,799 23,621 $17,643
Unit Costs (8,051) (7,676) (7,171)
Associated Selling Costs (15,480) (14,998) (10,738)
-------- ------- --------
Condominium - Gain (Loss) (732) 947 (266)
-------- ------- --------
Real Estate:
Sales 22,849 15,767 22,381
Equity Basis (20,380) (13,775) (20,588)
-------- ------- --------
Real Estate - Gain 2,469 1,992 1,793
-------- ------- --------
<PAGE> Page 137
Total Gain on Sale of Real Estate $ 1,737 $ 2,939 $ 1,527
======== ======= ========
</TABLE>
COMPETITION
The Consolidated Group competes with other financial
institutions including various real estate financing firms, real
estate brokers, banks and individual investors for the
Receivables it acquires. In the private secondary mortgage
market the largest single competitors are subsidiaries of much
larger companies while the largest number of competitors are a
multitude of individual investors. In all areas of Receivable
acquisitions, the Consolidated Group competes with financial
institutions many of which are larger, have access to more
resources, and greater name recognition. 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 BrokerNet
software; its ability to purchase long-term Receivables; its
availability of funds; its flexibility in structuring Receivable
acquisitions; 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 private secondary market Receivables 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, Western and Metwest compete in the secondary
market as seller's of pools of receivables (both direct sales and
sales through securitization). This market is a multi-billion
dollar market and includes competitors with access to greater
resources, greater volumes and economics of sales and better name
recognition.
Metropolitan's securities products face competition for
investors from other securities issuers many of which are much
larger, and have greater name recognition.
The life insurance and annuity business is highly
competitive. Western United competes with other financial
<PAGE> Page 138
institutions including ones with greater resources and greater
name recognition. 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" in 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, 1996,
Metropolitan's required net worth for this purpose was
approximately $14,709,000 while its actual net worth
(stockholders' equity) was approximately $46,343,000. 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
<PAGE> Page 139
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 securities offering which expired January 31,
1997, 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 restricted Metropolitan's ability
to sell debentures and preferred stock during the 12 month
offering period ending January 31, 1997. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
All areas of the Consolidated Group's Receivable acquisition
and servicing activities are highly regulated by Federal and
State laws designed principally to protect the payor. Metwest's
lending and servicing activities must comply with, among other
regulations, Truth in Lending Act (TILA), Real Estate Settlement
Procedures Act (RESPA), Regulation X, and Z. Metwest is licensed
with FHA and HUD as a lender and servicer, as such it must comply
with applicable FHA and HUD regulations and guidelines.
Metropolitan 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
<PAGE> Page 140
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, 1996, 1995 and 1994 were $900,000, $782,000 and
$192,000, 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 1994. Management does not believe
that the amount of future assessments associated with known
insolvencies after 1994
<PAGE> Page 141
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 years ended September 30, 1996
and 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 8.25% discount rate applied to the
estimated payment term of approximately seven years. The
remaining unamortized discount associated with this accrual was
approximately $832,000 at September 30, 1996.
Dividend restrictions are imposed by regulatory authorities
on Western United. The unrestricted statutory surplus of Western
United totaled approximately $5,567,000 as of September 30, 1996,
$1,986,000 as of September 30, 1995 and $5,499,000 as of
September 30, 1994. The principal reason for the decrease during
fiscal 1995 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, 1996 1995
1994 1993
------------------- ------ -------
- ------- ------
<S> <C> <C>
<C> <C>
Capital and Surplus
(Millions) $48.7 $46.2
$43.8 $43.0
Ratio of Capital and
Surplus to Admitted
Assets 5.2% 5.3%
5.5% 5.7%
</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
<PAGE> Page 142
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, 1996.
MANAGEMENT
Directors, Executive Officers and Certain Employees
(Age Information Current as of December 31, 1996)
Name Age Position
C. Paul Sandifur, Jr. * 55 President, CEO and
Chairman of the Board
Bruce J. Blohowiak * 43 Executive Vice President, Corporate
Counsel and Director
Michael Kirk 45 Senior Vice President/Production
Jay Caferro* 49 Senior Vice President/Underwriting
Steven Crooks* 50 Vice President, Controller and
Acting Chief Financial Officer
Susan Thomson* 36 Vice President and Assistant
Corporate Counsel
Tracy Z * 30 Vice President-Production
Doug Greybill 47 Vice President
John McCreary 28 Acting Treasurer
Reuel Swanson 58 Secretary and Director
John Van Engelen 44 President, Western United
Irv Marcus 72 Director
Charles H. Stolz 87 Director
________________________
Neil Fosseen 78 Honorary Director
* Member of Executive Committee
Directors and officers are elected to one-year terms.
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
<PAGE> Page 143
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.
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 a 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, Vice President in 1994, and Acting Chief
Financial Officer in 1996. 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. From 1992 through 1996, she
was Vice President and Compliance Officer with MIS, 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.
Tracy Z joined Metropolitan in 1988 as a member of the
closing staff. She was later promoted to the underwriting
committee and is now a member of the Receivable Production Team.
She was appointed Vice President during 1995. For approximately
three months during 1994, she was employed by English Mortgage, a
subsidiary of Citicorp as a mortgage originator.
<PAGE> Page 144
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.
John McCreary joined Metropolitan in 1993 as a Treasury
Analyst and is currently the Acting Treasurer. Mr. McCreary has
six years experience in portfolio management, financial analysis
and accounting. He has previously been employed by Electronic
Data Systems as a Financial Analyst and Public Utility District
No. 2 of Grant County as an Accountant. Mr. McCreary is a CFA,
CPA and CMA and holds a BS in Finance from Central Washington
University.
John Van Engelen joined Metropolitan's insurance
subsidiary, Western United in 1984 as its underwriting manager,
and shortly thereafter was appointed Vice President-Underwriting.
From 1987-1994, he was the marketing manager. During 1994, he
was appointed President. Prior to working for Western, he had
worked in the insurance industry and in corporate and public
accounting. He holds the following certifications
CPA,CFP,CLU,CHFC,FLMI.
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 of experience in banking and finance.
<PAGE> Page 145
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 or her 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 March 31, 1997.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially
Name Title of Class Owned %of
Class
<S> <C> <C> <C>
<PAGE> Page 146
C. Paul Sandifur, Jr. Metropolitan Preferred
929 West Sprague Stock All Series 246 0.05%
Spokane, WA.... Metropolitan Class A
Common Stock 11.5258 8.84%
C. Paul Sandifur, Jr.
Trustee(1).............. Metropolitan Class A
929 West Sprague Common Stock 82.4667(1) 63.24%
Spokane, WA
Summit Securities, Inc.(2) Metropolitan Preferred
929 West Sprague Avenue Stock, All Series 248,025(2) 5.26%
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 0.39%
Spokane, WA
All officers and
directors as a
group .. Metropolitan
Preferred Stock, All Series 268,154 5.60%
Metropolitan Class A 106.2408 81.47%
Common Stock
<FN>
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J.
Evelyn Sandifur irrevocable trust and has sole voting and sole
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. As a result, Mr. Sandifur effectively has sole
voting and investment control over these shares.
</TABLE>
<PAGE> Page 147
Executive Compensation
The following table sets forth the aggregate compensation
paid by Metropolitan during the fiscal years 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,
1996. 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 $84,000 was
paid by Metropolitan pursuant to the 401(k) plan during the year
ended September 30, 1996. As of September 30, 1996, Metropolitan
had no compensation plans or stock option plans in effect.
Directors of Metropolitan are paid $500 per meeting.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------
- ---------(a)---------------------(b)----------------(c)---------------(d)
Name and Principal Year Salary ($) Bonus/
Position
Commissions
- ------------------------------------------------------------------------
<S> <C> <C> <C>
C. Paul Sandifur, Jr. 1996 $147,145
Chief Executive Officer 1995 $128,869 $1,004
1994 $107,063
Bruce Blohowiak 1996 $105,000
Executive Vice President 1995 *
General Counsel 1994 *
Michael Kirk 1996 $85,000 $91,867
Senior Vice President 1995 $65,813 $38,050
-Production 1994 *
Tracy Z 1996 $80,000 $78,743
Vice President-Production 1995 *
<PAGE> Page 148
1994 *
John Van Engelen 1996 $105,500 $19,747
President, Western United 1995 *
1994 *
* Salaries and other compensation were less than $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 March 31, 1997.
<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%
<PAGE> Page 149
(1) C. Paul Sandifur, Jr., is trustee of the C. Paul Sandifur and J.
Evelyn Sandifur irrevocable trust and has sole voting and sole
investment control over these shares of stock. The trust
beneficiaries are C. Paul Sandifur, Jr., Mary L. Sandifur and William
F. Sandifur.
</TABLE>
<PAGE> Page 150
CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS
Transactions with and between Metropolitan and Subsidiaries.
In the normal course of business, Metropolitan and its
subsidiaries engage in intercompany transactions. All
subsidiaries are wholly owned by Metropolitan except Western
United, in which Metropolitan owns 24.5% directly and 75.5%
indirectly. See "PROSPECTUS SUMMARY-Organizational Chart".
During the three year period ended September 30, 1996,
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 1996, 1995 and 1994, respectively,
Metropolitan charged Receivable acquisition fees of $29.4
million, $14.6 million and $12.8 million to Western United. The
charge to Western United for 1996, 1995 and 1994 is a gross
amount before a loss reserve of $12.54 million in 1996, $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 8.2% in 1996, 9.3% in 1995
and 8.3%, in 1994. The estimated value of the loss guarantee
reserve, increases the effective yield to Western United to
approximately 9.6% in 1996, 10.7% 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.
<PAGE> Page 151
Metwest provides Receivable servicing and collection for
Metropolitan and Western. See "BUSINESS-Receivable Investments-
Servicing and Collection Procedure and Delinquency Experience."
In the normal course of its business, Western United loans
cash to Metropolitan and Metwest. These loans, when made, are
generally collateralized by Receivables or real property. At
September 30, 1996, there were $9.7 million in loans outstanding.
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, 1996, these loans
outstanding totaled $3,800,000 and currently bear no interest.
In the three years ended September 30, 1996, Consumers sold
credit guaranty insurance to Metropolitan for $540,000 in total
premiums.
Transactions with affiliates.
In the normal course of business, Metropolitan engages in
transactions with companies which were former subsidiaries and
which are currently affiliated through the common control of C.
Paul Sandifur, Jr.
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, 1996, 1995, and 1994, Metropolitan paid
commissions to MIS in the amounts of $203,946, $1,461,033, and
$1,111,044, on sales of debt securities in the amounts of
$9,125,303, $53,120,179, and $46,414,738, respectively. During
the fiscal years ended September 30, 1996, 1995, and 1994,
Metropolitan paid commissions to MIS in the amounts of $8,216,
$152,427, and $17,451 on sales of preferred stock in the amounts
of $2,143,930, $4,665,720, and $1,790,100, respectively.
Additionally, in 1996, 1995, and 1994, Metropolitan paid
commissions to MIS in the amounts of $156,918, $140,555, and
$198,180 on sales of preferred stock through an in-house trading
list.
<PAGE> Page 152
Metropolitan provides Management and Receivable Acquisition
Services for a fee to Summit, Old Standard and Arizona Life.
During 1996, such fees were approximately $1.364 million. Also
See "BUSINESS-Receivable Investments-Management & Receivable
Acquisition Services".
Metwest provides Receivable Collection services for a fee to
Summit, Old Standard and Arizona Life. During 1996, such fees
were approximately $290,000. Also See "BUSINESS-Receivable
Investments-Servicing and Collection Procedure and Delinquency
Experience."
Management believes that the terms of the service agreements
are at least as favorable as could have been obtained from non-
affiliated parties.
Western has negotiated a Reinsurance Agreement with Old
Standard which became effective in January 1997 for reinsurance
of 75% of specified annuity policies. As a result of this
agreement, approximately $2 to $5 million in premiums are
reinsured monthly with Old Standard. The actual amount reinsured
varies depending upon Western's annuity sales volume. See
"BUSINESS-Life Insurance and Annuity Operations-Reinsurance".
Metropolitan's property development activities are
provided by Summit Property Development. Metropolitan paid Summit
Property Development $2.0 million in development fees during
1996. See "REAL ESTATE DEVELOPMENT".
<PAGE> Page 153
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1996, 1995 and 1994
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Operations
Consolidated Condensed Statements of Changes in Cash Flows
Notes to Consolidated Condensed Financial Statements
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1996, 1995 and 1994
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
We have audited the accompanying consolidated balance sheets of
Metropolitan Mortgage & Securities Co., Inc. and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1996. 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, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company changed its method of accounting
for impaired loans in 1996.
/s/COOPERS & LYBRAND L.L.P.
Spokane, Washington
December 6, 1996
F-1
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
ASSETS 1996 1995
-------------- --------------
Cash and cash equivalents $ 35,226,746 $ 32,798,627
Restricted cash and cash equivalents 132,652,334
Investments:
Available-for-sale securities,
at market 38,554,498 31,829,980
Held-to-maturity securities, at
amortized cost 124,748,490 188,073,542
Accrued interest on investments 1,516,390 2,372,891
-------------- --------------
Total cash and investments 332,698,458 255,075,040
-------------- --------------
Real estate contracts and mortgage
notes receivable, net, including
real estate contracts and mortgage
notes receivable held for sale of
approximately $106,575,000 in 1996 650,933,330 587,493,614
Real estate held for sale and
development, including foreclosed
real estate received in satis-
faction of debt of $36,158,099
and $38,004,011 84,333,288 91,105,003
-------------- --------------
Total real estate assets 735,266,618 678,598,617
Less allowance for losses on real
estate assets (10,192,584) (8,116,065)
-------------- --------------
Net real estate assets 725,074,034 670,482,552
-------------- --------------
Other receivable investments 107,494,150 41,591,415
-------------- --------------
Other assets:
Deferred costs 74,530,361 74,521,803
Land, buildings and equipment,
net of accumulated depreciation 8,516,598 8,148,850
Other assets including receivables
from affiliates, net of allow-
ances of $180,954 and $77,039 34,345,227 28,648,340
-------------- --------------
Total other assets 117,392,186 111,318,993
-------------- --------------
Total assets $1,282,658,828 $1,078,468,000
============== ==============
F-2
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1996 and 1995
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1995
-------------- --------------
Liabilities:
Life insurance and annuity
reserves $ 837,366,108 $ 781,716,153
Debenture bonds and accrued
interest 192,173,751 201,311,873
Debt payable 38,601,146 25,552,451
Securities sold, not owned, at
market 132,652,334
Accounts payable and accrued
expenses 18,082,782 15,558,818
Deferred income taxes 15,894,831 12,254,475
Minority interest in consolidated
subsidiaries 1,544,544 1,503,788
-------------- --------------
Total liabilities 1,236,315,496 1,037,897,558
-------------- --------------
Commitments and contingencies
(Notes 5 and 14)
Stockholders' equity:
Preferred stock, (liquidation
preference $49,495,906 and
$47,825,310) 21,518,198 21,627,106
Subordinate preferred stock, no par -- --
Common stock, $2,250 par 293,417 293,417
Additional paid-in capital 16,791,670 14,917,782
Retained earnings 8,731,070 4,561,554
Net unrealized losses on invest-
ments, net of income taxes of
$510,530 and $427,283 (991,023) (829,417)
-------------- --------------
Total stockholders' equity 46,343,332 40,570,442
-------------- --------------
Total liabilities and stock-
holders' equity $1,282,658,828 $1,078,468,000
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Insurance premiums $ 3,000,000 $ 3,000,000 $ 2,958,000
Interest on receivables 58,529,828 56,553,869 56,420,184
Earned discount on receivables 18,036,075 13,786,977 13,790,211
Other investment interest 15,291,496 15,039,706 16,715,517
Real estate sales 45,648,264 39,388,086 40,023,974
Gain on insurance settlement 50,922 203,691
Fees, commissions, service and other
income 4,300,381 5,847,020 4,992,505
Realized net gains (losses) on sales
of investments (821,481) 34,565 1,111,974
Realized net gains on sales of
receivables 12,687,616 4,406,338 1,969,907
----------- ----------- -----------
Total revenues 156,672,179 138,107,483 138,185,963
----------- ----------- -----------
Expenses:
Insurance policy and annuity benefits 48,301,010 45,483,802 41,918,907
Interest, net 18,787,655 16,381,004 19,895,252
Cost of real estate sold 43,910,654 36,449,309 38,496,776
Provision for losses on real estate
assets 6,360,072 4,174,644 5,533,193
Salaries and employee benefits 10,199,812 8,803,131 8,846,677
Commissions to agents 10,574,049 12,588,546 8,430,654
Other operating and underwriting 6,958,938 7,414,502 7,420,022
Less amount capitalized as deferred
costs, net of amortization (801,825) (2,671,195) (1,050,279)
----------- ----------- -----------
Total expenses 144,290,365 128,623,743 129,491,202
----------- ----------- -----------
Income before income taxes and minority
interest 12,381,814 9,483,740 8,694,761
Provision for income taxes (4,235,469) (3,107,897) (2,992,476)
----------- ----------- -----------
Income before minority interest 8,146,345 6,375,843 5,702,285
Income of consolidated subsidiaries
allocated to minority stockholders (108,681) (73,197) (224,529)
----------- ----------- -----------
Net income 8,037,664 6,302,646 5,477,756
Preferred stock dividends (3,868,148) (4,037,921) (3,423,326)
----------- ----------- -----------
Income applicable to common stockholders $ 4,169,516 $ 2,264,725 $ 2,054,430
=========== =========== ===========
Income per share applicable to common
stockholders $ 32,073 $ 17,288 $ 14,996
=========== =========== ===========
Weighted average number of shares of
common stock outstanding 130 131 137
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30, 1996, 1995 and 1994
<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, 1993 $21,402,599 $ 310,485 $ 9,754,510 $ 535,635 $ 778,260
Net income 5,477,756
Net change in unrealized (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 (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
Net income 6,302,646
Net change in unrealized gains 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 52,733
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995 21,627,106 293,417 14,917,782 (829,417) 4,561,554
</TABLE>
F-5
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<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, 1995 21,627,106 293,417 14,917,782 (829,417) 4,561,554
Net income 8,037,664
Net change in unrealized (losses) on
available-for-sale securities, net
of income taxes of $83,247 (161,606)
Cash dividends, preferred (variable rate) (3,868,148)
Redemption and retirement of stock
(32,330 shares) (323,301) (47,433)
Sale of variable rate preferred
stock, net (21,439 shares) 214,393 1,921,321
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 $21,518,198 $ 293,417 $16,791,670 $ (991,023) $ 8,731,070
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
Adjustments to reconcile net income
to net cash provided by operating
activities:
Proceeds from sale of trading
securities 67,093,831 515,677,468 1,064,997,088
Purchase of trading securities (67,448,595) (515,570,230) (1,064,712,932)
Realized net gains on sales of
investments and receivables (11,866,135) (4,440,903) (3,081,881)
Gain on sales of real estate (1,737,610) (2,938,777) (1,527,198)
Gain on insurance settlement (50,922) (203,691)
Provision for losses on real
estate assets 6,360,072 4,174,644 5,533,193
Provision for losses (recover-
ies) on other assets 70,500 (35,657) 204,650
Depreciation and amortization 4,617,664 3,023,233 2,066,365
Minority interests 108,681 73,197 224,529
Deferred income tax provision 3,640,356 2,747,990 2,644,170
Changes in assets and liabili-
ties, net of effects from
sale of subsidiaries:
Life insurance and annuity
reserves 45,782,339 42,033,038 39,322,517
Deferred costs, net (8,558) (3,034,857) (1,349,405)
Compound and accrued
interest on bonds 4,642,760 (2,214,261) (2,096,810)
Securities sold, not owned 132,652,334
Other (6,089,670) (4,910,909) (1,537,118)
------------- ------------- -------------
Net cash provided by
operating activities 185,855,633 40,835,700 45,961,233
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of subsidiaries,
net of cash (1,406,873)
Change in restricted cash and cash
equivalents (132,652,334)
Principal payments on real estate
contracts and mortgage notes
receivable 107,702,333 118,869,137 107,040,612
Principal payments on other
receivable investments 6,049,097 1,664,132
Proceeds from sales of real estate
contracts and mortgage notes
receivable and other receivable
investments 182,177,259 72,914,006 20,407,270
Acquisition of real estate contracts
and mortgage notes receivable (282,313,300) (203,525,666) (142,479,298)
Acquisition of other receivable
investments (99,804,805) (56,229,758)
Proceeds from insurance settlement 50,922 203,691
Proceeds from sales of real estate 6,545,323 5,285,839 6,562,008
Proceeds from maturities of held-
to-maturity investments 2,598,081 4,696,003 8,875,268
</TABLE>
F-7
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities,
Continued:
Proceeds from maturities of
available-for-sale investments 37,496,910
Purchases of held-to-maturity
investments (12,181,445) (1,557,219) (5,263,021)
Proceeds from sales of available-
for-sale investments 31,686,315 92,779,569 367,846,050
Purchases of available-for-sale
investments (4,138,391) (34,387,059) (441,965,194)
Purchases of and costs associated
with real estate held for sale
and development (28,499,006) (41,841,982) (27,544,340)
Capital expenditures (1,369,802) (894,673) (471,097)
------------- ------------- -------------
Net cash used in
investing activities (186,703,765) (43,583,622) (106,788,051)
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in short-term
borrowings 11,353,125 (36,598,375) 59,730,000
Repayments of debt payable (2,060,440) (524,046) (2,468,655)
Receipts from life and annuity
products 112,894,347 145,066,891 85,332,591
Withdrawals of life and annuity
products (103,026,731) (105,469,442) (124,642,366)
Issuance of debenture bonds 9,125,303 53,120,179 56,954,423
Repayment of debenture bonds (22,906,185) (48,970,828) (55,193,403)
Issuance of preferred stock 2,135,714 4,513,293 1,772,649
Redemption and retirement of stock (370,734) (327,336) (775,742)
Cash dividends (3,868,148) (4,539,503) (3,510,338)
------------- ------------- -------------
Net cash provided by
financing activities 3,276,251 6,270,833 17,199,159
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 2,428,119 3,522,911 (43,627,659)
Cash and cash equivalents:
Beginning of year 32,798,627 29,275,716 72,903,375
------------- ------------- -------------
End of year $ 35,226,746 $ 32,798,627 $ 29,275,716
============= ============= =============
</TABLE>
See Note 16 for supplemental cash flow information.
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
<PAGE>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION
Metropolitan Mortgage & Securities Co., Inc. (the Company and
Metropolitan) invests in real estate contracts and mortgage
notes receivable and other investments, including real estate
development, with proceeds from investments and securities
offerings.
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 was based upon Summit's estimated fair value, which
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 period 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 net book value
of MIS at closing. MIS is a broker/dealer and the exclusive
broker/dealer for the securities sold by Metropolitan and
Summit. This sale did not materially affect the business
operations of MIS. The results of operations of MIS are
included in the consolidated financial statements for periods
prior to January 31, 1995.
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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
BUSINESS AND ORGANIZATION, CONTINUED
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. The cash price
was $2,722,000, the approximate historical net book value of
OSL at closing, with future contingency payments equal to 20%
of statutory income prior to the accrual of income taxes for
the fiscal years ending December 31, 1995, 1996 and 1997. The
cash sales price plus estimated future contingency payments
approximated 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 was recorded as an increase to
retained earnings in the periods in which the sales occurred.
Metropolitan is effectively controlled by C. Paul Sandifur, Jr.
through his common stock ownership and voting control.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Metropolitan Mortgage & Securities Co., Inc. and its majority-
owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
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
balances periodically exceed the FDIC insurance limit.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS
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:
AVAILABLE-FOR-SALE SECURITIES: Available-for-sale
securities, consisting primarily of government-backed
securities, public utility and corporate bonds, are carried
at market value. Unrealized gains and losses on these
securities 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 public utility and corporate 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 SECURITIES: 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.
Realized gains and losses on investments are calculated on the
specific-identification method and are recognized in the
consolidated statements of income in the period in which the
investment is sold.
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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE
Real estate contracts and mortgage notes receivable 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 receivables 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 receivables. For receivables
acquired before October 1, 1992, the Company accounts for its
portfolio of discounted receivables using anticipated
prepayment patterns to apply the level yield (interest) method
of amortizing discounts. Discounted receivables are pooled by
the fiscal year of purchase and by similar receivable 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 receivables and the Company's
expectations.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD
FOR SALE
Real estate contracts and mortgage notes receivable held for
sale are carried at the lower of cost (outstanding principal
adjusted for net discounts and capitalized acquisition costs)
or market value, determined on an aggregate basis by major type
of loan. Gains or losses on such sales are recognized utilizing
the aggregation method for financial reporting and income tax
purposes at the time of sale. Interest on these receivables is
included in interest income. Deferred net discounts and
capitalized acquisition costs are recognized at the time the
related receivables are sold to third-party investors or
securitized through transfer to a real estate investment trust.
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.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE HELD FOR SALE AND DEVELOPMENT
The Company holds real estate, stated at the lower of cost or
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 the date of foreclosure less estimated selling costs, or (b)
cost (unpaid receivable 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. As a result of changes in the
real estate markets in which these properties are located, it
is reasonably possible that these carrying values could change
in the near term.
Occasionally, these real estate properties are rented, with the
revenue being included in other income and related costs are
charged to expense.
In March 1995, SFAS No. 121 (SFAS 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 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 on 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 transferred all the risks and rewards of ownership to the
buyer.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
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 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 receivables,
including accrued interest, determined in accordance with the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan." The Company adopted this new standard on October 1,
1995, which did not have a material effect on the consolidated
financial statements.
The Company continues to accrue interest on delinquent loans
until foreclosure, unless the principal and accrued interest on
the receivable 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.
DEFERRED COSTS
Commission expense and other insurance policy, annuity and
debenture issuance costs are deferred. For debenture issuance
costs, 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 costs, 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. Changes in the amount or timing of estimated
gross profits will result in adjustments in the cumulative
amortization of these costs.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
LAND, BUILDINGS AND EQUIPMENT
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, for buildings and improvements, range from
5 to 40 years, and for furniture and equipment, range from 3 to
10 years. Repairs, maintenance and minor renewals are charged
to expense as incurred. Upon sale or retirement, 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, 1996, total enhancement costs of
approximately $6,566,000 have been capitalized. These costs are
being amortized over 5- and 10-year periods, depending on the
estimated useful life of the enhancement, using the straight-
line method. It is reasonably possible that the remaining
estimated useful lives could change in the near term. As a
result, the carrying value of these enhancements may be
reduced.
The Company will be required to make further enhancements to
its computer software operating systems to enable recognition
of the new century. The program codes within the operating
systems currently store only a two digit character for the year
in which transactions occur. The modification of these program
codes to store four digit years will occur in the near term.
The Company expects that the costs of these modifications will
be material and will be charged to operations as incurred.
INSURANCE AND ANNUITY RESERVES
Premiums for universal life contracts and annuities are
reported as life insurance and annuity reserves under the
deposit method. 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. As a result in changes in the
factors considered in the actuarial calculations, it is
reasonably possible that the reserves for insurance and
annuities could change in the near term.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
RECOGNITION OF INSURANCE AND ANNUITY REVENUES
Revenues for universal life contracts are recognized upon
assessment. Revenues for annuity contracts are recognized over
the estimated policy term. These revenues consist of charges to
policyholders primarily for of mortality expenses and surrender
charges. Annuity revenues consist of the charges assessed
against the annuity account balance for services and surrender
charges. Charges for future services are assessed; however, the
related revenue is deferred and recognized in income over the
period benefitted using the same assumptions as are used to
amortize deferred policy acquisition costs.
GUARANTY FUND ASSESSMENTS
The Company's life insurance subsidiary 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,
1996 and 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,
1996, 1995 and 1994, the Company capitalized interest of
$2,468,411, $2,730,373 and $2,151,651, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability
method, which requires that deferred tax assets and liabilities
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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES, CONTINUED
The Company files a consolidated federal income tax return with
its includable affiliates. The consolidating companies have
executed a tax allocation agreement. Under the agreement, the
Companies' income tax provisions are computed on a separate
return basis and consolidated affiliates receive a reim-
bursement to the extent that their losses and other credits
result in a reduction of the consolidated tax liability.
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 11). There
were no common stock equivalents or potentially dilutive
securities outstanding during any of the three years in the
period ended September 30, 1996.
HEDGING ACTIVITIES
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 and in anticipation of sales and
securitizations of real estate contracts and other receivable
investments. The insurance subsidiary 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 managing interest rate risk or
to benefit from an anticipated movement in the financial
markets.
The Company also purchases collateralized mortgage obligations
(CMOs), pass-through certificates and other asset-backed
securities for its investment portfolio. Such purchases have
been limited to tranches that perform in concert with the
underlying mortgages or assets; i.e., improving in value with
falling interest rates and declining in value with rising
interest rates. The Company has not invested in "derivative
products" that have been structured to perform in a way that
magnifies the normal impact of changes in interest rates or in
a way dissimilar to the movement in value of the underlying
securities.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
HEDGING ACTIVITIES, CONTINUED
Unrealized gains or losses associated with financial future
contracts that meet the hedge criteria prescribed in Statement
of Financial Standards No. 80 (SFAS No. 80), "Accounting for
Futures Contracts" are deferred and recognized when the effects
of changes in interest rate on the hedged asset are recognized.
Sales of securities, not owned, are recognized as liabilities
and are adjusted to market value with the unrealized gain or
loss recognized currently in operations.
In fiscal 1996, the Company sold U.S. Treasury securities,
which it did not own, to provide an economic hedge for the
anticipated securitization of real estate contracts and
mortgage notes receivable which was completed in November 1996.
At September 30, 1996, the Company was obligated to deliver
U.S. Treasury securities with a market value of approximately
$132,652,000. During the year ended September 30, 1996, the
Company recognized a loss of approximately $820,000 associated
with this obligation. At September 30, 1996, approximately
$131,091,000 of the Company's cash and cash equivalents were
restricted until such time as these obligations are repaid.
INTEREST RATE RISK
The results of operations of the Company may be materially and
adversely affected by changes in prevailing economic
conditions, including rapid changes in interest rates. The
Company's financial assets (primarily real estate contracts and
mortgage notes receivable, other receivables and investment
securities) and liabilities (primarily annuity contracts and
investment certificates) are subject to interest rate risk. In
the year ending September 30, 1997, approximately $848,000,000
of the Company's financial liabilities will reprice or mature
as compared to approximately $256,000,000 of its financial
assets, resulting in a mismatch of approximately $592,000,000.
This structure is beneficial in periods of declining interest
rates; however, may result in declining net interest income
during periods of rising interest rates. Of the financial
liabilities scheduled to reprice or mature, approximately 74%
are annuity contracts which are subject to surrender charges.
Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate
risk, although there can be no assurance regarding the
management of interest rate risk in future periods.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF ACCOUNTING POLICIES, CONTINUED:
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 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.
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, 1996, the Company held first
position liens associated with real estate contracts and mortgage
notes receivable with a face value of approximately $675,000,000
(99%) and second or lower position liens of approximately
$6,000,000 (1%). The Company's real estate contracts and mortgage
notes receivable at September 30, 1996 are collateralized by
property concentrated in the following geographic areas:
Pacific Northwest (Alaska, Idaho, Montana, Oregon
and Washington) 23%
Pacific Southwest (Arizona, California and Nevada) 20
Southwest (New Mexico and Texas) 16
Atlantic Northeast (Connecticut, Maryland, New Jersey,
New York and Pennsylvania) 10
Southeast (Florida, Georgia, North Carolina and South
Carolina) 10
Other 21
---
100%
===
The value of real estate properties in these geographic regions
will be affected by changes in the economic environment of that
region. It is reasonably possible that these values could change
in the near term, which would affect the Company's estimate of
its allowance for losses associated with these receivables.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
The face value of the real estate contracts and mortgage notes
receivable range principally from $15,000 to $300,000. At
September 30, 1996, the Company had 52 receivables aggregating
approximately $29,400,000 which had face values in excess of
$300,000. No individual receivable is in excess of 0.4% of the
total carrying value of real estate contracts and mortgage notes
receivable, and less than 3% of the receivables are subject to
variable interest rates. Contractual interest rates for 91% of
the face value of receivables fall within a range from 6% to 13%
per annum. The weighted average contractual interest rate on
these receivables at September 30, 1996 is approximately 9.4%.
Maturity dates range from 1996 to 2026.
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, 1996 and 1995.
1996 1995
------------ ------------
Face value of discounted
receivables $548,537,547 $505,440,872
Face value of originated
receivables 132,640,600 112,072,081
Unrealized discounts, net of
unamortized acquisition costs (38,607,376) (37,354,378)
Accrued interest receivable 8,362,559 7,335,039
------------ ------------
Carrying value $650,933,330 $587,493,614
============ ============
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.
The principal amount of receivables with required principal or
interest payments being in arrears for more than three months was
approximately $26,500,000 and $17,500,000 at September 30, 1996
and 1995, respectively.
Real estate contracts and mortgage notes receivable with net
carrying values of approximately $38,212,000 were sold, resulting
in gains of approximately $1,255,000, by the Company's life
insurance subsidiary to affiliated entities in fiscal 1996. Sales
of receivables with net carrying values of approximately
$54,388,000 and $18,437,000 were sold without recourse to various
financial institutions resulting in gains of approximately
$2,645,000 and $1,970,000 in fiscal 1995 and 1994, respectively.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, CONTINUED:
Aggregate amounts of receivables (face value) expected to be
received, based upon contractual payments are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 26,327,000
1998 28,911,000
1999 31,748,000
2000 34,865,000
2001 38,287,000
Thereafter 521,040,147
------------
$681,178,147
============
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE:
Real estate contracts and mortgage notes receivable, held for
sale consist of a pool of receivables which are intended to be
securitized and sold without recourse in a private placement. On
November 26, 1996, the Company securitized and sold all real
estate contracts and mortgage notes receivable held for sale at
September 30, 1996, which resulted in a pretax gain of
approximately $8.9 million.
The Company entered into a securitization transaction during the
year ended September 30, 1996. The Company participates in these
securitization transactions with its subsidiaries and affiliates.
These receivables are structured in classes by credit rating and
transferred to a real estate trust, which sells pass-through
certificates to third parties. These securitizations are recorded
as sales of receivables and gains, net of transaction expenses,
are recognized in the consolidated statements of income as each
class is sold.
During the year ended September 30, 1996, proceeds from
securitization transactions were approximately $112,975,000 and
resulted in gains of approximately $7,798,000. The gain realized
included approximately $2,290,000 associated with the estimated
fair value of the mortgage servicing rights retained on the pool,
which is included in other assets in the consolidated balance
sheet. The fair value of these rights was determined based on the
estimated present value of future net servicing cash flows,
including float interest and late fees, adjusted for anticipated
prepayments. The Company evaluates possible impairment in its
mortgage servicing rights by similar type of loan, and to the
extent that carrying value for a stratum exceeds its estimated
fair value, an impairment loss is recognized. It is reasonably
possible that actual prepayment experience could exceed the
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR
SALE, CONTINUED:
estimated prepayment factor in the near term, which would result
in a reduction in the carrying value of retained mortgage
servicing rights.
Of the receivables securitized, the Company has retained an
investment in certain classes of the securities having a fair
value of approximately $4,333,000 at September 30, 1996. These
securities were transferred to the Company's investment portfolio
and classified as available-for-sale. These certificates are the
B-4 and residual certificate classes and are subordinate to the
other offered classes of certificates. These classes receive the
lowest priority of principal and interest distributions and thus
bear the highest credit risk. The Company provides for this risk
by reducing the interest yield on these securities and by
providing a reserve for the principal distributions due on these
subordinate classes which may not be received due to default or
loss. The weighted average constant effective yield recognized by
the Company on these securities was 13.2% at September 30, 1996.
In June 1996, Statement of Financial Accounting Standards No. 125
(SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued. SFAS 125
provides accounting and reporting standards based on a consistent
application of a FINANCIAL-COMPONENTS APPROACH that focuses on
control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and
derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Company does not expect that the
application of the provisions of SFAS 125 will have a material
effect on the Company's financial condition, results of
operations or cash flows.
4. OTHER RECEIVABLE INVESTMENTS:
Other receivable investments include various cash flow
investments, primarily annuities and lottery prizes. Annuities
are general obligations of the payor, which is 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.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
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, 1996 is approximately
8.71%. Maturity dates range from 1996 to 2035.
The following is a reconciliation of the face value of the other
receivable investments to the Company's carrying value at
September 30, 1996 and 1995.
1996 1995
------------ ------------
Face value of receivables $173,280,414 $ 70,965,501
Unrealized discounts, net of
unamortized acquisition costs (65,786,264) (29,374,086)
------------ ------------
Carrying value $107,494,150 $ 41,591,415
============ ============
All such receivables at September 30, 1996 were performing in
accordance with their contractual terms.
During the years ended September 30, 1996 and 1995, the Company
sold approximately $27,853,000 and $14,120,000, respectively, of
these receivables without recourse and recognized gains of
approximately $1,882,000 and $1,761,000, respectively.
The following other receivable investments, by obligor, were in
excess of ten percent of stockholders' equity at September 30,
1996 and 1995.
Aggregate
Carrying
Issuer Amount
---------------------------------------------- ------------
1996:
California State Agency $ 24,718,527
New York State Agency 15,511,891
New Jersey State Agency 10,975,661
Oregon State Agency 10,532,006
Arizona State Agency 10,223,076
Michigan State Agency 8,518,973
Colorado State Agency 4,903,971
1995:
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
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. OTHER RECEIVABLE INVESTMENTS, CONTINUED:
Aggregate amounts of contractual maturities of other receivable
investments (face amounts) are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 15,880,000
1998 15,364,000
1999 16,177,000
2000 16,973,000
2001 15,399,000
Thereafter 93,487,414
------------
$173,280,414
============
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. 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, 1996 is as follows:
<TABLE>
<CAPTION>
Single- Multi-
Family Family
State Land Dwelling Dwelling Commercial Condominium Total
---------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alabama $ 74,500 $ 74,500
Alaska $ 51,710 $ 80,790 132,500
Arizona 550,142 410,472 $ 80,000 1,040,614
Arkansas 81,000 81,000
California 1,100,363 1,999,116 $ 14,543 370,450 546,285 4,030,757
Colorado 160,000 812,471 972,471
Connecticut 301,113 301,113
Florida 28,642 868,778 20,000 125,422 1,042,842
Georgia 47,821 47,821
Hawaii 3,825,791 18,829,598 22,655,389
Idaho 61,564 61,564
Illinois 69,082 69,082
Indiana 16,000 16,000
Iowa 110,309 110,309
Kansas 72,870 72,870
Louisiana 17,796 17,796
Maine 204,896 204,896
Maryland 307,165 307,165
Massachusetts 138,000 138,000
Michigan 259,230 90,000 349,230
Minnesota 195,085 195,085
Mississippi 28,106 58,782 86,888
Missouri 40,500 169,181 119,811 329,492
Montana 27,083 27,083
Nebraska 38,231 38,231
Nevada 62,000 62,000
New Hampshire 171,114 50,000 221,114
New Jersey 84,937 180,000 264,937
New Mexico 10,500 39,449 49,949
New York 7,633 455,070 462,703
North Carolina 10,907 10,907
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. 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 82,400 82,400
Oklahoma 51,045 140,992 192,037
Oregon 75,659 75,659
Pennsylvania 32,400 195,715 228,115
South Carolina 71,400 91,506 30,000 192,906
Tennessee 77,650 77,650
Texas 48,649 910,960 65,000 1,024,609
Utah 26,000 26,000
Virginia 26,500 72,000 98,500
Washington 34,736,817 855,044 13,126,130 57,500 48,775,491
Wyoming 85,613 85,613
----------- ----------- ----------- ----------- ----------- -----------
Balances at
September 30,
1996 $36,884,497 $ 8,861,494 $ 84,543 $17,828,877 $20,673,877 $84,333,288
=========== =========== =========== =========== =========== ===========
Balances at
September 30,
1995 $39,084,721 $ 7,124,907 $ 0 $16,312,303 $28,583,072 $91,105,003
=========== =========== =========== =========== =========== ===========
</TABLE>
At September 30, 1996, the Company had approximately $68,930,000
invested in real estate development projects and approximately
$1,600,000 in commitments for construction associated with these
projects.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. 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,
1996, 1995 and 1994:
1996 1995 1994
----------- ----------- -----------
Beginning balance $ 8,116,065 $ 9,108,383 $10,598,491
Provisions 6,360,072 4,174,644 5,533,193
Charge-offs (4,283,553) (5,166,962) (7,023,301)
----------- ----------- -----------
Ending balance $10,192,584 $ 8,116,065 $ 9,108,383
=========== =========== ===========
At September 30, 1996, the net investment in real estate
contracts and mortgage notes receivable for which impairment has
been recognized in accordance with SFAS 114 was approximately
$2,642,000, of which approximately $118,000, representing the
amounts by which the net carrying value of the receivable exceeds
the fair value of the collateral, has been specifically included
in the allowance for losses on real estate assets.
During the year ended September 30, 1996, the average recorded
investment in impaired receivables was approximately $2,251,000.
Interest income of approximately $212,000 was recognized on these
receivables in fiscal 1996 during the period in which they were
impaired.
7. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings, equipment and related accumulated depreciation
at September 30, 1996 and 1995 consisted of the following:
1996 1995
----------- -----------
Land $ 561,794 $ 561,794
Buildings and improvements 6,850,175 6,486,193
Furniture and equipment 10,365,201 9,415,754
----------- -----------
17,777,170 16,463,741
Less accumulated depreciation (9,260,572) (8,314,891)
----------- -----------
Totals $ 8,516,598 $ 8,148,850
=========== ===========
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS:
A summary of carrying and estimated market values of investments
at September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale Costs Gains Losses (Carrying Values)
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 11,932,337 $ -- $ (477,670) $ 11,454,667
Corporate bonds 20,230,518 1,897 (437,009) 19,795,406
Utility bonds 3,003,075 -- (35,897) 2,967,178
Pass-through certificates 4,333,481 -- -- 4,333,481
------------ ------------ ------------ ------------
Total fixed maturities 39,499,411 1,897 (950,576) 38,550,732
Equity securities 1,592 2,174 -- 3,766
------------ ------------ ------------ ------------
Totals $ 39,501,003 $ 4,071 $ (950,576) $ 38,554,498
============ ============ ============ ============
<CAPTION>
1996
--------------------------------------------------------------
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity Values) Gains Losses Market Values
----------------------------- ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Government-backed bonds $ 60,005,894 $ 11,775 $ (4,006,114) $ 56,011,555
Corporate bonds 12,056,534 -- (202,717) 11,853,817
Utility bonds 4,989,311 -- (189,652) 4,799,659
Mortgage- and asset-backed
securities 47,696,751 38,062 (1,199,760) 46,535,053
------------ ------------ ------------ ------------
Totals $124,748,490 $ 49,837 $ (5,598,243) $119,200,084
============ ============ ============ ============
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Values
Available-for-Sale 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>
1995
--------------------------------------------------------------
Amortized
Costs Gross Gross
(Carrying Unrealized Unrealized Estimated
Held-to-Maturity 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- and asset-backed
securities 37,437,446 -- (815,577) 36,621,869
------------ ------------ ------------ ------------
Totals $188,073,542 $ 53,279 $ (6,062,936) $182,063,885
============ ============ ============ ============
</TABLE>
All bonds and mortgage- and asset-backed securities held at
September 30, 1996 and 1995 were performing in accordance with
their terms.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
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. Interest rates declined,
resulting in a realized loss of $1,600,000 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, 1996 was approximately $1,398,000. At
September 30, 1996 and 1995, the Company was not a party to any
derivative financial instruments relative to its investments in
debt or equity securities.
Net unrealized losses, net of deferred federal income taxes, of
approximately $625,000 and $279,000, respectively, on the
available-for-sale portfolio at September 30, 1996 and 1995 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, 1996, the
remaining unamortized loss of approximately $507,000, net of
deferred income taxes, is reported as a reduction of
stockholders' equity.
During the year ended September 30, 1996, in accordance with a
Special Report issued 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 recognized
over the remaining contractual term of the securities using the
interest method.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
The following individual investments (excluding U.S. government
bonds) held by the Company at September 30, 1996 and 1995, were
in excess of ten percent of stockholders' equity.
Carrying
Issuer Amount
---------------------------------------------- ------------
1996:
Mortgage-backed securities:
Residential Funding Mortgage Securities
(four issues) $ 16,142,719
Chase Mortgage Finance Corp.
(seven issues) 10,620,875
Prudential Home Mortgage Securities
(three issues) 7,160,855
Countrywide Funding Corp. 4,852,322
1995:
Mortgage-backed securities:
Residential Funding Mortgage Securities
(three issues) 14,450,307
Chase Mortgage Finance Corp. 4,992,835
Prudential Home Mortgage Securities
(two issues) 7,350,343
Countrywide Funding Corp. 4,821,305
The amortized costs and estimated market values of held-to-
maturity and available-for-sale debt securities at September 30,
1996, 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.
Amortized Estimated
Cost Market Value
------------ ------------
Available-for-sale debt
securities:
Due in one year or less $ 10,541,669 $ 10,522,470
Due after one year through
five years 13,552,416 13,284,073
Due after five years through
ten years 11,071,845 10,410,708
------------ ------------
35,165,930 34,217,251
Pass-through certificates 4,333,481 4,333,481
------------ ------------
$ 39,499,411 $ 38,550,732
============ ============
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INVESTMENTS, CONTINUED:
Amortized Estimated
Cost Market Value
------------ ------------
Held-to-maturity debt securities:
Due in one year or less $ 7,654,667 $ 7,612,538
Due after one year through
five years 18,557,157 18,137,785
Due after five years through
ten years 50,591,766 46,658,714
Due after ten years 248,149 255,994
------------ ------------
77,051,739 72,665,031
Mortgage- and asset-backed
bonds 47,696,751 46,535,053
------------ ------------
$124,748,490 $119,200,084
============ ============
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).
9. DEBT PAYABLE, CONTINUED:
At September 30, 1996 and 1995, debt payable consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreements with various
securities brokers, interest at 5.0% to
5.8% per annum; due on October 1, 1996;
collateralized by $17,700,000 in U.S.
government-backed bonds $16,834,750
Reverse repurchase agreements with Paine-
Webber, interest at 5.38% per annum; due
on October 4, 1996; collateralized by
$20,000,000 in U.S. Treasury bonds 18,650,000
Reverse repurchase agreements with various
securities brokers, interest at 6.1% to
6.75% per annum; due on October 2, 1995;
collateralized by $25,000,000 in U.S.
Treasury bonds $24,131,625
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. DEBT PAYABLE, CONTINUED:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Real estate contracts and mortgage notes
payable, interest rates ranging from 3.0%
to 10.9%, due in installments through
2016; collateralized by senior liens on
certain of the Company's real estate
contracts, mortgage notes and real estate
held for sale 2,965,107 1,385,568
Accrued interest payable 151,289 35,258
----------- -----------
$38,601,146 $25,552,451
=========== ===========
</TABLE>
Aggregate amounts of principal and accrued interest payments due
on debt payable at September 30, 1996 are as follows:
Fiscal Year Ending
September 30,
------------------
1997 $37,023,000
1998 710,000
1999 242,000
2000 137,000
2001 187,000
Thereafter 302,146
-----------
$38,601,146
===========
10. DEBENTURE BONDS:
At September 30, 1996 and 1995, debenture bonds consisted of the
following:
<TABLE>
<CAPTION>
Principally
Annual Interest Rates Maturing in 1996 1995
--------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
5% to 6% 1997 $ 537,000 $ 2,486,000
6% to 7% 1997, 1998 and 1999 4,979,000 6,911,000
7% to 8% 1999 and 2000 51,261,000 50,165,000
8% to 9% 1997, 1998 and 2000 84,372,000 85,258,000
9% to 10% 1997 20,136,000 30,044,000
10% to 11% 1998 and 1999 1,749,000 1,951,000
------------ ------------
163,034,000 176,815,000
Compound and accrued interest 29,139,751 24,496,873
------------ ------------
$192,173,751 $201,311,873
============ ============
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. DEBENTURE BONDS, CONTINUED:
Unamortized debenture issuance costs incurred in connection with
the sale of debentures aggregated $2,597,477 and $3,390,744 at
September 30, 1996 and 1995, respectively, and are included in
deferred costs on the consolidated balance sheets.
Debenture bonds at September 30, 1996 mature as follow:
Fiscal Year Ending
September 30,
------------------
1997 $ 50,030,000
1998 52,163,000
1999 41,335,000
2000 40,408,000
2001 5,877,000
Thereafter 2,360,751
------------
$192,173,751
============
At September 30, 1996, as required by Washington State
regulation, the parent company could not have more than an
aggregate total of $202,300,000 in outstanding debentures
(including accrued and compound interest) and outstanding
preferred stock (based on original sales price) of $49,540,000.
Outstanding preferred stock is limited to the amount outstanding
June 30, 1996 ($49,000,000) plus reinvested dividends ($540,000)
after that date. At September 30, 1996, the Company had total
outstanding debentures of approximately $192,174,000 and total
outstanding preferred stock of approximately $49,496,000.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY:
A summary of preferred and common shares at September 30, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------------
1996 1995
----------------------- -----------------------
Authorized
Shares Shares Amount Shares Amount
---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Preferred Stock
Series A 750,000 -- $ -- -- $ --
Series B 200,000 -- -- -- --
Series C 1,000,000 438,343 4,383,432 441,794 4,417,943
Series D 1,375,000 673,915 6,739,150 682,359 6,823,587
Series E 5,000,000 1,039,562 10,395,616 1,038,558 10,385,576
---------- --------- ----------- --------- -----------
8,325,000 2,151,820 $21,518,198 2,162,711 $21,627,376
========== ========= =========== ========= ===========
Common Stock
Class A 222 130 $ 293,417 130 $ 293,417
Class B 222 -- -- -- --
---------- --------- ----------- --------- -----------
444 130 $ 293,417 130 $ 293,417
========== ========= =========== ========= ===========
Subordinate
Preferred
Stock 1,000,000 -- $ -- -- $ --
========== ========= =========== ========= ===========
</TABLE>
The Series E preferred stock has been issued in the following
sub-series:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
-------------------------------------------------
1996 1995
----------------------- -----------------------
Shares Amount Shares Amount
----------------------- --------- -----------
<S> <C> <C> <C> <C>
Series E-1 728,698 $ 7,286,982 748,578 $ 7,485,783
Series E-2 45,579 455,790 45,621 456,208
Series E-3 107,874 1,078,736 108,369 1,083,685
Series E-4 62,978 629,776 62,993 629,929
Series E-5 13,744 137,443 13,747 137,475
Series E-6 80,689 806,889 59,250 592,496
--------- ----------- --------- -----------
1,039,562 $10,395,616 1,038,558 $10,385,576
========= =========== ========= ===========
</TABLE>
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
PREFERRED STOCK
Series A preferred stock has a par value of $1 per share, is
cumulative and the holders thereof are entitled to receive
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 preferred
stock 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 the declaration date. The Board
of Directors may, at its sole option, declare a higher dividend
rate; however, dividends shall be no less than 6% or greater
than 14% per annum. Series E-2, E-3, E-4, E-5 and E-6 preferred
stock 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, 1996, as required by state regulation, the
amount of the Company's aggregate total outstanding preferred
stock and debentures was limited (see Note 10).
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' EQUITY, CONTINUED:
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, 1996 and 1995, no subordinate preferred
stock had been issued.
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 $5,567,000 at
September 30, 1996 (see Note 15).
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
-------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Allowance for losses on real estate assets $ 2,678,016
Reserves on repossessed real estate 707,643
Deferred contract acquisition costs and
discount yield recognition $16,715,163
Office properties and equipment 1,776,499
Deferred policy acquisition costs 22,964,052
Life insurance and annuity reserves 9,018,029
Guaranty fund liability 1,353,320
Investments 636,939
Tax credit carryforwards 1,742,000
Other 959,206
Net operating loss carryforwards 9,739,608
----------- -----------
Total deferred income taxes $26,197,822 $42,092,653
=========== ===========
<CAPTION>
1995
-------------------------
Assets Liabilities
----------- -----------
<S> <C> <C>
Allowance for losses on real estate assets $ 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
Life insurance and annuity reserves 6,395,750
Guaranty fund liability 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
=========== ===========
</TABLE>
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED:
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. Realization is dependent on the
generation of sufficient taxable income prior to expiration of
the net operating loss carryforwards. The amount of the deferred
tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the
carryforward period are reduced.
Following is a reconciliation of the provision for income taxes
to an amount as computed by applying the statutory federal income
tax rate to income before income taxes:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at statutory
rate $ 4,209,817 $ 3,224,472 $ 2,956,219
State taxes and other 25,652 (116,575) 36,257
----------- ----------- -----------
Income tax provision $ 4,235,469 $ 3,107,897 $ 2,992,476
=========== =========== ===========
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 595,113 $ 359,907 $ 348,306
Deferred 3,640,356 2,747,990 2,644,170
----------- ----------- -----------
$ 4,235,469 $ 3,107,897 $ 2,992,476
=========== =========== ===========
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED, CONTINUED:
At September 30, 1996, the Company and its subsidiaries had
unused net operating loss carryforwards, for income tax purposes,
as follows:
<TABLE>
<CAPTION>
Life
Non-Life Company
Group Net Net Net
Operating Operating Operating
Expiring in Losses Losses Losses
----------- ----------- ----------- ------------
<S> <C> <C> <C>
2004 $ 3,766,219 $ 3,766,219
2005 6,409,762 6,409,762
2006 5,612,555 5,612,555
2007 945,516 945,516
2008 $11,911,853 11,911,853
----------- ----------- -----------
$16,734,052 $11,911,853 $28,645,905
=========== =========== ===========
</TABLE>
Federal tax regulations require non-life net operating losses to
be offset first against non-life income for the tax year and then
against a maximum of 35% of taxable life income for the year, if
any.
At September 30, 1996, the Company has alternative minimum tax
credits of approximately $1,237,000 and general business tax
credit carryforwards of approximately $505,000 available to
reduce regular income taxes payable. The general business tax
credit carryforwards begin to expire in 2004.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. DEFERRED COSTS:
An analysis of deferred costs related to policy acquisition and
debenture issuance for the years ended September 30, 1996, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
Policy Debenture
Acquisition Issuance Total
----------- ----------- -----------
<S> <C> <C> <C>
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
Deferred during the year:
Commissions 6,503,580 191,064 6,694,644
Other expenses 3,438,804 402,360 3,841,164
----------- ----------- -----------
Total deferred 81,073,443 3,984,168 85,057,611
Amortized during the year (9,140,559) (1,386,691) (10,527,250)
----------- ----------- -----------
Balance at September 30, 1996 $71,932,884 $ 2,597,477 $74,530,361
=========== =========== ===========
</TABLE>
The amortization of deferred policy acquisition costs, which is
based on the estimated gross profits of the underlying life and
annuity products, could be changed significantly in the near term
due to changes in the interest rate environment. As a result, the
recoverability of these costs may be adversely affected in the
near term.
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LIFE INSURANCE AND ANNUITY RESERVES:
Life insurance and annuity reserves are based upon contractual
amounts due to the annuity holder, including accrued interest.
Annuity contract interest rates ranged from 4.25% to 10.65% and
4.45% to 10.65% during the years ended September 30, 1996 and
1995, respectively. Interest assumptions used to compute life
insurance reserves ranged from 5.0% to 6.5% and 5.25% to 6.5%
during the years ended September 30, 1996 and 1995, respectively.
The Company's subsidiary has 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 subsidiary is 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 $58,679,000 and $62,906,000 at September 30, 1996
and 1995, respectively. Life insurance premiums ceded were
$354,830 and $364,553 for fiscal 1996 and 1995, 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 life 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, 1996, 1995 and 1994
were $900,000, $782,000 and $192,000, 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 1994. These estimates are subject to future
revisions based upon the ultimate resolution of the insolvencies
and resultant losses. As a result of these uncertainties, the
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LIFE INSURANCE AND ANNUITY RESERVES, CONTINUED:
Company's estimate of future assessments could change in the near
term. The Company does not believe that the amount of future
assessments associated with known insolvencies after 1994 will be
material to its financial condition or results of operations. At
September 30, 1996, the amount of estimated future guaranty fund
assessments of approximately $3,980,000 have been recorded, which
is net of a 8.25% discount rate applied to the estimated payment
term of approximately seven years. The remaining unamortized
discount associated with this accrual was approximately $832,000
at September 30, 1996.
15. STATUTORY ACCOUNTING:
The Company's life insurance subsidiary is 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 insurance subsidiaries as of and
for the years ended September 30, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
Statutory GAAP
------------ -----------
<S> <C> <C>
Stockholders' equity:
1996 $48,721,922 $81,605,742
1995 43,340,817 78,826,654
1994 48,206,960 77,142,373
Net income:
1996 $ 7,224,359 $ 3,076,252
1995 2,634,919 2,717,893
1994 12,544,070 8,449,317
Unassigned statutory surplus and retained earnings:
1996 $ 5,566,922 $38,450,742
1995 1,985,817 38,233,333
1994 6,826,960 38,559,708
</TABLE>
Due to the sale of OSL during fiscal 1995, stockholders' equity
and unassigned statutory surplus and retained earnings amounts
above do not include OSL at September 30, 1996 and 1995. Also,
the 1995 net income above only includes OSL operations through
May 31, 1995.
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. STATUTORY ACCOUNTING, CONTINUED:
Under applicable Washington State Insurance laws and regulations,
the Company's life insurance subsidiary is required to maintain
minimum levels of surplus, determined in accordance with
statutory accounting practices, in the aggregate amount of
$150,000. The Revised Code of Washington defines surplus as "the
excess of statutory assets over statutory liabilities, accounting
for the pear value of capital stock as a liability." At
September 30, 1996, the Company's life insurance subsidiary was
in compliance with this requirement.
The National Association of Insurance Commissioners (NAIC)
currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices.
Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory
accounting practices that insurance enterprises use to prepare
their statutory financial statements. Written approval was
received from the Insurance Department of the state of Washington
to capitalize the underwriting fees charged to the life insurance
subsidiary by Metropolitan and to amortize these fees as an
adjustment of the yield on acquired receivables. Statutory
accounting practices prescribed by the state of Washington do not
describe the accounting required for this type of transaction. As
of September 30, 1996, this permitted accounting practice
increased statutory surplus by approximately $28,700,000 over
what it would have been had prescribed practices disallowed this
accounting treatment.
The regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the
NAIC. The formulas for determining the amount of risk-based
capital (RBC) specify various weighting factors that are applied
to financial balances or various levels of activity based on
perceived degree of risk. Regulatory compliance is determined by
a ratio of the enterprise's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level, RBC, as
defined by the NAIC. Enterprises below specific trigger points or
ratios are classified within certain levels, each of which
requires specified corrective action. The RBC measure of the
insurance subsidiary at September 30, 1996 and 1995 was above the
minimum standards.
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. 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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Interest, net of amounts
capitalized $12,653,377 $20,214,329 $23,541,173
Income taxes 2,503,482 1,157,155 333,154
</TABLE>
Non-cash investing and financing activities of the Company during
the years ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate held $39,102,941 $34,102,247 $33,461,966
Transfers between annuity
products 17,051,327 58,012,857 22,248,418
Transfer of investments from
available-for-sale portfolio
to held-to-maturity portfolio 79,001,795
Transfer of investment from
held-to-maturity portfolio
to available-for-sale portfolio 72,572,322
Transfer of property from land,
buildings and equipment
to real estate held for sale
and development 1,598,999 258,894
Change in net unrealized (losses)
gains on investments, net (244,853) 2,005,960 (3,371,012)
Real estate held for sale and
development acquired through
foreclosure 14,270,520 13,850,388 19,245,977
Debt assumed upon foreclosure of
real estate contracts 16,059 129,062
Assumption of other debt payable
in connection with the acqui-
sition of real estate contracts
and mortgage notes 3,633,657 526,868 191,213
</TABLE>
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Reduction in assets and liabili-
ties associated with sale of
subsidiaries:
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
</TABLE>
17. 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.
REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE - For
loans, the discount rate is estimated using rates currently
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
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.
SECURITIES SOLD, NOT OWNED - Fair value is determined by quoted
market prices, including accrued interest necessary to settle
repurchase.
OTHER FINANCIAL ASSETS AND LIABILITIES - The carrying amount of
financial instruments in these classifications, including
insurance policy loans approximates 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $167,879,080 $167,879,080
Investments:
Available-for-sale securities 38,554,498 38,554,498
Held-to-maturity securities 124,748,490 119,200,084
Real estate contracts and mortgage
notes receivable 642,570,771 668,373,000
Other receivable investments 107,494,150 109,258,000
Financial liabilities:
Debenture bonds - principal and
compound interest 189,320,833 191,631,000
Debt payable - principal 38,449,857 38,486,000
Securities sold, not owned 132,652,334 132,652,334
</TABLE>
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
<TABLE>
<CAPTION>
1995
---------------------------
Carrying
Amounts Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 32,798,627 $ 32,798,627
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
</TABLE>
LIMITATIONS - The fair value estimates are made at a discrete
point in time based on relevant market information and
information about the financial instruments. Because no market
exists for a significant portion of these financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. RELATED-PARTY TRANSACTIONS:
During the years ended September 30, 1996 and 1995, the Company
had the following related-party transactions with Summit and
other affiliates:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Real estate contracts and mortgage notes
receivable and other receivable invest-
ments sold to Summit and OSL $ 45,137,473 $ 59,578,347
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 1,753,206 1,967,409
Gains on real estate contract and mortgage
notes receivable and other receivable
investments purchased from Summit and OSL 335,469
Service fees paid to Summit Property
Development 2,038,202 1,250,017
Commissions and service fees paid to MIS 369,080 1,124,481
Dividends paid to Summit on preferred stock 200,256 256,991
</TABLE>
At September 30, 1996 and 1995, the Company had payables due to
affiliates of $1,205,920 and $1,962,923, respectively, related
primarily to advance payments on receivable acquisitions.
F-49
<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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,807,147 $ 15,965,359
Investments 8,840,977 6,153,393
Real estate contracts and mortgage notes
receivable and other receivable investments 72,018,452 30,429,638
Real estate held for sale and development 69,360,885 48,574,018
Allowance for losses on real estate assets (6,297,676) (3,108,597)
Equity in subsidiary companies 97,302,358 117,281,602
Land, buildings and equipment, net 9,376,863 9,049,942
Prepaid expenses and other assets, net 12,620,101 10,243,463
Accounts and notes receivable, net 5,190,592 893,983
Receivables from affiliates 24,626,214 43,812,436
------------ ------------
Total assets $297,845,913 $279,295,237
============ ============
LIABILITIES
Debenture bonds and accrued interest $192,173,751 $201,311,873
Debt payable 13,155,334 5,645,410
Accounts payable and accrued expenses 7,463,342 2,917,769
Deferred underwriting fee income 38,710,154 28,849,743
------------ ------------
Total liabilities 251,502,581 238,724,795
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation
preference, $49,495,906 and $47,825,310,
respectively) 21,518,198 21,627,106
Subordinate preferred stock, no par -- --
Common stock, $2,250 par 293,417 293,417
Additional paid-in capital 16,791,670 14,917,782
Retained earnings 8,731,070 4,561,554
Net unrealized losses on investments (991,023) (829,417)
------------ ------------
Total stockholders' equity 46,343,332 40,570,442
------------ ------------
Total liabilities and stockholders'
equity $297,845,913 $279,295,237
============ ============
</TABLE>
F-50
<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, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and earned discounts $ 8,303,775 $ 8,721,451 $ 8,756,861
Fees, commissions, service and
other income 28,567,964 21,788,065 15,056,870
Real estate sales 23,499,363 4,700,560 7,607,652
Realized net gains on sales of
investments and receivables 2,357,010 1,134,510 366,409
----------- ----------- -----------
Total revenues 62,728,112 36,344,586 31,787,792
----------- ----------- -----------
Expenses:
Interest, net 15,630,068 16,205,083 17,616,074
Cost of real estate sold 22,266,024 3,719,349 7,330,073
Provision for losses on real
estate assets 4,578,315 2,316,354 737,042
Salaries and employee benefits 12,085,532 10,035,360 9,332,118
Other operating expenses 1,523,541 816,134 2,142,358
----------- ----------- -----------
Total expenses 56,083,480 33,092,280 37,157,665
----------- ----------- -----------
Income (loss) from operations
before income taxes and equity
in net income of subsidiaries 6,644,632 3,252,306 (5,369,873)
Income tax benefit (provision) (2,268,916) (1,105,581) 1,813,051
----------- ----------- -----------
Income (loss) before equity in
net income of subsidiaries 4,375,716 2,146,725 (3,556,822)
Equity in net income of
subsidiaries 3,661,948 4,155,921 9,034,578
----------- ----------- -----------
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
=========== =========== ===========
</TABLE>
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 8,037,664 $ 6,302,646 $ 5,477,756
Adjustments to reconcile
net income to net cash
provided by operating
activities 12,717,338 (3,909,025) (3,679,005)
----------- ----------- -----------
Net cash provided by operating
activities 20,755,002 2,393,621 1,798,751
----------- ----------- -----------
Cash flows from investing
activities:
Principal payments on real
estate contracts and
mortgage notes receivable
and other receivable
investments 12,480,667 5,069,237 10,550,918
Proceeds from sales of real
estate contracts and
mortgage notes receivable
and other receivable
investments 24,297,171 34,946,274
Acquisition of real estate
contracts and mortgage
notes and other receiv-
able investments (32,175,162) (18,449,630) (6,520,436)
Proceeds from real estate
sales 9,221,958 1,876,900 2,915,452
Proceeds from sales of
investments 3,294,326 7,647,099 361,132
Proceeds from maturities of
investments 5,800,000
Purchase of investments (11,689,836) (12,108,637) (399,465)
Additions to real estate
held for sale and develop-
ment (17,191,856) (12,483,117) (7,945,133)
Capital expenditures (1,271,041) (803,302) (469,475)
Net change in investment
in and advances to
subsidiaries (16,293,198) (9,591,121) 6,332,550
----------- ----------- -----------
Net cash provided by
(used in) investing
activities (23,526,971) (3,896,297) 4,825,543
----------- ----------- -----------
</TABLE>
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing
activities:
Net borrowings (repayments)
from banks and others 7,497,807 4,156,501 (3,324,722)
Issuance of debenture bonds 9,125,303 53,120,179 46,414,738
Issuance of preferred stock 2,135,714 4,513,293 1,772,649
Repayment of debenture bonds (22,906,185) (48,970,828) (51,610,174)
Cash dividends (3,868,148) (4,539,503) (3,510,338)
Redemption and retirement of
stock (370,734) (266,460) (775,742)
----------- ----------- -----------
Net cash provided by
(used in) financing
activities (8,386,243) 8,013,182 (11,033,589)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (11,158,212) 6,510,506 (4,409,295)
Cash and cash equivalents at
beginning of year 15,965,359 9,454,853 13,864,148
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 4,807,147 $15,965,359 $ 9,454,853
=========== =========== ===========
</TABLE>
Non-cash investing and financing activities not included in
Metropolitan's condensed statements of cash flows for the years
ended September 30, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Loans to facilitate the sale of
real estate $14,277,405 $ 2,823,660 $ 4,692,200
Real estate acquired through
foreclosure 198,454 1,219,983 2,166,655
Debt assumed with acquisition of
real estate contracts and
mortgage notes and debt assumed
upon foreclosure of real estate
contracts 113,876 81,530
Change in net unrealized gains
(losses) on investments (161,606) 2,005,960 (3,371,012)
Increase in assets and liabili-
ties associated with liquida-
tion of subsidiary:
Real estate contracts and
mortgage notes receivable 30,052,954
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Real estate held for sale 27,915,041
Allowance for losses on
real estate assets 1,107,129
Land, building and equipment,
net 15,518
Other assets 1,911,314
Accounts receivable 2,963,966
Debt payable 13,948
Accounts payable and accrued
expenses 2,759,214
Investments in and advances to
subsidiaries 58,978,502
</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.
At September 30, 1996 and 1995, Metropolitan's debt payable
consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reverse repurchase agreement with a securities
broker, interest at 5.8% per annum, due
October 1, 1996; collateralized by
$2,700,000 in U.S. government-backed bonds $ 2,678,500
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
10.9%, due in installments through 2016;
collateralized by senior liens on certain
of the Company's real estate contracts,
mortgage notes and real estate held for
sale 10,456,496 1,016,616
Accrued interest payable 20,338 22,169
----------- -----------
$13,155,334 $ 5,645,410
=========== ===========
</TABLE>
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Aggregate amounts of principal payments due on the parent
company's debt payable are expected to be as follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 3,040,000
1998 364,000
1999 393,000
2000 356,000
2001 374,000
Thereafter 8,628,334
------------
$ 13,155,334
============
At September 30, 1996 and 1995, Metropolitan's debenture bonds
payable consisted of the following:
<TABLE>
<CAPTION>
Principally
Annual Interest Rates Maturing in 1996 1995
--------------------- ------------------- ------------ ------------
<S> <C> <C> <C>
5% to 6% 1997 $ 537,000 $ 2,486,000
6% to 7% 1997, 1998 and 1999 4,979,000 6,911,000
7% to 8% 1999 and 2000 51,261,000 50,165,000
8% to 9% 1997, 1998 and 2000 84,372,000 85,258,000
9% to 10% 1997 20,136,000 30,044,000
10% to 11% 1998 and 1999 1,749,000 1,951,000
------------ ------------
163,034,000 176,815,000
Compound and accrued interest 29,139,751 24,496,873
------------ ------------
$192,173,751 $201,311,873
============ ============
</TABLE>
Unamortized debenture issuance costs totaled $2,597,477 at
September 30, 1996 and $3,390,744 at September 30, 1995.
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Maturities of the parent company's debenture bonds are as
follows:
Fiscal Year Ending
September 30,
------------------
1997 $ 50,030,000
1998 52,163,000
1999 41,335,000
2000 40,408,000
2001 5,877,000
Thereafter 2,360,751
------------
$192,173,751
============
Metropolitan had the following related party transactions with
its various subsidiaries and affiliated entities:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<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 $ 1,243,950 225,000
Spokane Mortgage Co. 125,000 1,800,000
Western United Life Assurance
Company 441,510 288,208 2,604,875
Beacon Properties, Inc. 185,000 360,000 330,000
Consumers Group Holding Co.,
Inc. 1,880,450 723,250 6,791,358
Metropolitan Mortgage Hawaii,
Inc. 1,770,000
Metropolitan Investment
Securities, Inc. 138,950
Broadmore Park Factory Outlet,
Inc. 85,000
----------- ----------- -----------
$ 3,835,910 $ 3,557,408 $15,643,240
=========== =========== ===========
Fees, commissions, service and
other income $26,969,251 $18,829,557 $13,814,334
Interest income 1,858,521 4,152,257 3,218,813
</TABLE>
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED:
Metropolitan charged various subsidiaries and affiliated entities
for underwriting fees of $29,362,000 in 1996, $14,936,306 in 1995
and $13,248,132 in 1994 related to contracts sold to these
entities. Amounts charged to subsidiaries are deferred and
recognized as income over the estimated life of the contracts.
Amounts amortized into service fee income were $18,323,435 in
1996, $10,416,849 in 1995 and $6,596,877 in 1994.
The underwriting fees are based upon a yield requirement
established by the purchasing entity. For contracts sold to
Western United Life Assurance Co. (Western United), one of
Metropolitan's subsidiaries, the yield is guaranteed by
Metropolitan. In connection with its guarantee, Metropolitan has
holdbacks of $12,538,000 and $6,945,473 at September 30, 1996 and
1995, respectively.
F-57
<PAGE>
<PAGE> Page F-58
MANAGEMENT'S RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The interim condensed financial statements for the Company as of
December 31, 1996 and 1995 are prepared by management of the Company,
and reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of operations and
cash flows for the three-month periods ended December 31, 1996 and
1995, as well as the financial position as of December 31, 1995.
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31,
September 30,
1996
1996
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 63,155,394 $
167,879,080
Investments:
Available-for-Sale Securities,
at market 56,709,148
38,554,498
Held-to-Maturity Securities,
at amortized cost (market value
$120,153,286 and $119,200,084) 124,109,220
124,748,490
Accrued Interest on Investments 2,485,931
1,516,390
-------------- ---
- ----------
Total Cash and Investments 246,459,693
332,698,458
-------------- ---
- ----------
Real Estate Contracts and Mortgage
Notes and Other Receivables 703,215,661
758,427,480
Real Estate for Sale and
Development - Including
Foreclosed Real Estate 84,178,660
84,333,288
------------- ---
- ----------
Total Receivables and
Real Estate Assets 787,394,321
842,760,768
Less Allowance for Losses (9,900,266)
(10,192,584)
------------- ---
- ----------
Net Receivables and
Real Estate Assets 777,494,055
832,568,184
------------- ---
- ----------
Deferred Acquisition Costs, Net 74,151,226
74,530,361
Land, Building and Equipment - net
of accumulated depreciation 8,446,566
8,516,598
Other Assets, net of allowance 35,670,861
34,345,227
-------------- --
- ----------
TOTAL ASSETS $1,142,222,401
$1,282,658,828
==============
==============
</TABLE>
<PAGE> Page F-59
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> Page F-60
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31,
September 30,
1996
1996
<S> <C> <C>
LIABILITIES
Life Insurance and Annuity Reserves $ 844,106,537 $
837,366,108
Debenture Bonds 196,069,990
192,173,751
Other Debt Payable 8,757,554
38,601,146
Securities Sold, Not Yet Purchased 4,177,773
132,652,334
Accounts Payable and Accrued
Expenses 21,610,379
18,082,782
Deferred Income Taxes 15,444,286
15,894,831
Minority Interest in Consolidated
Subsidiaries 1,580,104
1,544,544
------------- --
- ------------
TOTAL LIABILITIES 1,091,746,623
1,236,315,496
------------- --
- ------------
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, B, C, D,
E Cumulative with Variable Rate,
$10 Par Value, Authorized 8,325,000
Issued 2,157,308 Shares and
2,151,820 Shares (Liquidation
Preference $50,044,751 and
$49,495,906, respectively) 21,573,083
21,518,198
Class A Common Stock - Voting,
$2,250 Par Value, Authorized
222 Shares, Issued 130 Shares 293,417
293,417
Additional Paid-In Capital 17,286,228
16,791,670
Retained Earnings 11,588,559
8,731,070
Net Unrealized Losses on
Investments (265,509)
(991,023)
------------ -
- ------------
TOTAL STOCKHOLDERS' EQUITY 50,475,778
46,343,332
------------ -
- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,142,222,401
$1,282,658,828
==============
===============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> Page F-61
<TABLE>
<CAPTION>
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND
SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
REVENUES:
Insurance Premiums Earned $ 750,000 $ 750,000
Interest and Earned Discounts 24,105,516 21,919,875
Real Estate Sales 6,846,700 10,608,025
Fees, Commissions, Service
and Other Income 1,208,087 691,557
Realized Investment Gains (Losses) (2,160,155) 2,800
Realized Gains on Sales of
Receivables 9,834,959 84,490
------------ ----------
TOTAL REVENUES 40,585,107 34,056,747
------------ ----------
EXPENSES:
Insurance Policy and Annuity
Benefits 13,055,411 12,061,640
Interest Expense 5,835,322 3,778,835
Cost of Real Estate Sold 7,440,009 10,466,642
Provision for Losses on Real
Estate Assets 586,221 934,543
Salaries and Employee
Benefits 3,032,934 2,280,868
Commissions to Agents 2,158,770 2,431,199
Other Operating and
Underwriting Expenses 2,299,904 1,628,563
Decease (Increase) in Deferred
Acquisition Costs 237,955 (9,132)
---------- ----------
TOTAL EXPENSES 34,646,526 33,573,158
---------- ----------
Income Before Income Taxes and
Minority Interest 5,938,581 483,589
Provision For Income Taxes (2,022,167) (170,933)
----------- ----------
Income Before Minority
Interest 3,916,414 312,656
Income of Consolidated
Subsidiaries Allocated to
Minority Stockholders (35,560) (9,311)
---------- -----------
NET INCOME 3,880,854 303,345
Preferred Stock Dividends (1,023,365) (923,406)
---------- ------------
<PAGE> Page F-62
Income (Loss) Applicable to
Common Stockholders $ 2,857,489 $ (620,061)
=========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE> Page F-63
METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
Net Cash Provided By (Used In)
Operating Activities $(116,924,803) $
12,326,474
------------ ------
- -----
Cash Flows From Investing Activities:
Principal Payments on Real Estate
Contracts and Mortgage Notes
and Other Receivables 29,383,414
27,684,554
Proceeds From Real Estate Sales 709,061
921,950
Proceeds From Investment Maturities 6,596,423
226,100
Proceeds from Sale of Available
for Sale Securities
28,121,115
Purchase of Available for Sale
Securities (23,684,536)
Proceeds From Sale of Real Estate
Contracts and Mortgage Notes
and Other Receivables 119,209,316
2,335,415
Acquisition of Real Estate Contracts and
Mortgage Notes and Other Receivables (79,616,347)
(77,570,084)
Additions to Real Estate Held (6,351,906)
(8,938,063)
Capital Expenditures (198,228)
(336,713)
----------- -------
- -----
Net Cash Provided By (Used In)
Investing Activities 46,047,197
(27,555,726)
----------- -------
- -----
Cash Flows From Financing Activities:
Net Change Short Term Borrowings from
Brokers and Banks (30,328,500)
(12,646,875)
Receipts From Life and Annuity Products 20,337,089
25,261,674
Withdrawals on Life and Annuity Products (25,369,936)
(20,748,194)
Repayment to Banks and Others (55,545)
(33,496)
Issuance of Debenture Bonds 4,140,969
4,791,350
Issuance of Preferred Stock 549,743
554,336
Repayment of Debenture Bonds (2,096,235)
(7,206,402)
Preferred Stock Dividends (1,023,366)
(923,406)
Redemption of Capital Stock (300)
(57,143)
---------- -------
- ------
Net Cash Used In
Financing Activities (33,846,080)
(11,008,156)
----------- --------
- -----
Net Decrease in Cash and
Cash Equivalents (104,723,686)
(26,237,408)
Cash and Cash Equivalents at Beginning
of Period 167,879,080
32,798,627
------------ --------
- -----
<PAGE> Page F-64
Cash and Cash Equivalents at End
of Period $ 63,155,394 $
6,561,219
=============
============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> Page F-65
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT
1. In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments necessary to present fairly the financial
position as of December 31, 1996, and the results of
operations for the three months ended December 31, 1996 and
1995 and changes in cash flows for the three months ended
December 31, 1996 and 1995. The results of operations for
the three month period ended December 31, 1996 and 1995 are
not necessarily indicative of the results to be expected for
the full year. As provided for in regulations promulgated
by the Securities and Exchange Commission, all financial
statements included herein are unaudited; however, the
condensed consolidated balance sheet at September 30, 1996
has been derived from the audited consolidated balance
sheet. These financial statements should be read in
conjunction with the consolidated financial statements
including notes thereto included in the Company's fiscal
1996 Form 10-K.
2. The principal amount of receivables as to which payments
were in arrears more than three months was $26,750,000 at December 31, 1996
and $26,500,000 at September 30, 1996.
3. Metropolitan Mortgage & Securities Co., Inc. had no
outstanding legal proceedings other than normal proceedings
associated with receivable foreclosures, and/or the general
business activities of the Company.
4. Certain amounts in the prior year's consolidated condensed
financial statements have been reclassified to conform with
the current year's presentation. These reclassifications
had no effect on net income or retained earnings as
previously reported.
5. In November 1996, Metropolitan Mortgage & Securities Co.,
Inc. (Metro or the Company) and its subsidiary Western
United Life Assurance Company (WULA) participated as two of
the four co-sellers in a receivable securitization sponsored
by Metropolitan Asset Funding, Inc, an affiliated company.
Approximately $126.7 million of receivables, with $115.5
million provided by Metro and WULA, were sold in a
securitization transaction with proceeds, after costs, of
approximately $121.1 million, which $110.4 million was
allocated to Metro and WULA. With an amortized carrying
value of approximately $101.5 million in the receivables
sold in the securitization, Metro and WULA recorded
approximately $8.9 million in pre-tax gains from their
portion of the sale. Metropolitan Asset Funding, Inc. sold
approximately $113.4 million in varying classes of mortgage
pass-through certificates. In addition to the certificates
sold to the public, approximately $13.3 million in
subordinate class certificates and residual class
certificates were returned to the various co-sellers of the
receivables included in the securitization. Metro and WULA
received approximately $101.6 million, after costs, from
<PAGE> Page F-66
the securitization and received approximately $12.0 million
(estimated fair value) in subordinate class and residual
class certificates. As an economic hedge for this
receivable securitization sale, the Company had previously
sold short approximately $128 million of U.S. Treasury
securities of varying maturities. Concurrent with the
completion of the securitization transaction, the Company
purchased and delivered the borrowed securities. The
Company lost approximately $2.5 million on this short sale.
Thereby from an economic standpoint, the Company realized an
approximate $6.4 million in pre-tax gains on the
securitization sale.
6. In December 1995, the Company reassessed the appropriateness
of the classifications of its securities investments. Based
on this reassessment, the Company transferred $72,572,322 of
securities from the Held-to-Maturity classification to the
Available-for-Sale classification. This transfer was based
on guidance included in the special report issued by the
Financial Accounting Standards Board, "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities".
7. The preparation of financial statement in conformity with
generally accepted accounting principles require management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results
could differ from those estimates.
<PAGE> Page 154
PART II
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
Form S-2 Registration Statement
Information Not Required in Prospectus
Item 14: Other Expenses of Issuance and Distribution
SEC Registration Fee.......................... $ 8,849
NASD Filing Fee............................... 13,000
* Blue Sky qualification fees and expenses.... 15,000
Independent Underwriter Fee................... 59,000
* Accounting fees and expenses................ 50,000
* Legal fees and disbursements................ 20,000
* Trustee's fees and expenses................. 5,000
* Debenture certificates...................... 2,000
* Printing expenses........................... 15,000
* Miscellaneous expenses...................... 2,151
Total Expenses................................ $190,000
* Estimated
Item 15: Indemnification of Directors and Officers
Article X of the registrant's Articles of Incorporation
provides as follows:
Metropolitan has no contractual or other arrangement with its
controlling persons, directors or officers regarding indemnification,
other than as set forth in its Articles of Incorporation.
Metropolitan's Articles of Incorporation permits indemnification of a
director, officers or employee up to the indemnification limits
permitted by Washington state law which permits indemnification for
judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with an action, suit or proceeding
if the indemnified person acted in good faith and in a manner
reasonable believed to be in and not opposed to the best interest of
the corporation.
Item 16. Exhibits and Financial Statement Schedules
<PAGE> Page 155
(a) Exhibits
1(a). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
August 14, 1980 (Exhibit l(a) to Registration No.
2-70595).
1(b). Amendment to Selling Agreement between
Metropolitan and Metropolitan Investment Securities,
Inc. dated as of August 14, 1980, (Exhibit l(b) to
Registration No. 2-70595).
1(c)(i). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc., dated as of
December 21, 1984, with respect to Installment
Debentures, Series I (Exhibit 1(c) to Registration No.
2-95146).
1(d). Amendment to Selling Agreement between
Metropolitan and Metropolitan Investment Securities,
Inc. dated as of January 10, 1989. (Exhibit 1(f) to
Registration No. 33-25700).
1(e). Selling Agreement between Metropolitan and
Metropolitan Investment Securities, Inc. dated as of
January 31, 1990. (Exhibit 1(c) to Registration No.
33-32586).
*1(f)(ii). Form of Selling Agreement between Metropolitan
and Metropolitan Investment Securities, Inc. with
respect to Preferred Stock Series E-7.
1(g)(i). Form of Agreement to Act as "Qualified Independent
Underwriter," between Metropolitan, Metropolitan
Investment Securities, Inc. and Welco Securities, Inc.
with respect to Debentures to be registered.
1(g)(ii). Form of Agreement to Act as "Qualified Independent
Underwriter," between Metropolitan, Metropolitan
Investment Securities, Inc. and Welco Securities, Inc.
with respect to Preferred Stock to be registered.
4(a). Indenture, dated as of July 6, 1979, between
Metropolitan and Seattle-First National Bank, Trustee
<PAGE> Page 156
(Exhibit 3 to Metropolitan's Annual Report on Form 10-K for
fiscal 1979).
4(b). First Supplemental Indenture, dated as of
October 3, 1980, between Metropolitan and
Seattle-First National Bank, Trustee (Exhibit 4 to
Metropolitan's Annual Report on Form 10-K for fiscal
1980).
4(c). Second Supplemental Indenture, dated as of
November 12, 1984, between Metropolitan and
Seattle-First National Bank, Trustee (Exhibit 4(d) to
Registration No. 2-95146).
*4(d). Statement of Rights, Designations and
Preferences of variable rate cumulative Preferred
Stock, Series E-7.
*5(a). Opinion of Susan A. Thomson, Attorney at
Law, as to validity of Investment Debentures.
*5(b). Opinion of Susan A. Thomson, Attorney
at Law, as to validity of Preferred Stock.
7. Opinion re liquidation preference. See
Exhibit 5(b).
9. Irrevocable Trust Agreement (Exhibit 9(b) to
Registration No. 2-81359).
11. Statement Indicating Computation of
Per-Share Earnings. (SEE "CONSOLIDATED FINANCIAL
STATEMENTS".)
12. Statement of computation of ratio of
earnings to fixed charges.
*23(a). Consent of Coopers & Lybrand,
Independent Accountants.
23(b). Consent of counsel. Reference is made to
Exhibit 5(a) and (b).
*24.(a) Power of Attorney.
24.(b) Certified Board Resolution authorizing board
signatures pursuant to a Power of Attorney
25. Statement on Form T-1 of Seattle-First
National Bank.
(Exhibits to this Exhibit have been filed in
paper pursuant to a continuing hardship exemption
granted January 24, 1994).
<PAGE> Page 157
*27. Financial Data Schedules.
* Filed herewith.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to
this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent post
effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information
with respect to the plan of distribution not
previously disclosed in the registration statement or
any material change to such information in the
registration statement;
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be
permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and
Exchange Commission such
<PAGE> Page 158
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities
(other than the payment by the registrant of expenses
incurred or paid by a director, officer, or
controlling persons of the Registrant in the
successful defense of any action, suit, or proceeding)
is asserted by such director, officer or controlling
person in connection with the securities being
registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(c) For the purpose of determining any liability under
the Securities Act of 1933, the information omitted
from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of
this registration statement as of the time it was
declared effective.
For the purpose of determining any liability under
the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to
the securities offered therein, and the offering of
such securities at that time shall be deemed to be the
initial bona fide offering thereof.
<PAGE> Page 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Spokane, State
of Washington, on this 1st day of May, 1997.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
/S/ C. Paul Sandifur, Jr.
_____________________________________________
C. Paul Sandifur, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
**
_____________________ President, Chief Executive May 1, 1997
C. Paul Sandifur, Jr. Officer, Chairman of
the Board
**
_____________________ Executive Vice President, May 1, 1997
Bruce J. Blohowiak Chief Operating Officer,
Director
**
_____________________ Vice President, May 1, 1997
Steven Crooks Principal Financial
Officer, and Principal
Accounting Officer
**
_____________________ Secretary and Director May 1, 1997
Reuel Swanson
**
_____________________ Director May 1, 1997
Irv Marcus
**
<PAGE> Page 160
_____________________ Director May 1, 1997
Charles H. Stolz
/S/ SUSAN THOMSON May 1, 1997
_________________
** Susan Thomson, by signing her name hereto, signs this document on
behalf of Messrs. Sandifur, Blohowiak, Crooks, Swanson, Marcus and
Stolz, indicated above, pursuant to a power of attorney duly executed
by such persons and previously filed herewith.
FORM OF
VARIABLE RATE CUMULATIVE PREFERRED STOCK
SELLING AGREEMENT
This Agreement made as of the day of ____________, 1997,
by and between METROPOLITAN MORTGAGE & SECURITIES CO., INC., a
Washington corporation ("Metropolitan") and METROPOLITAN INVESTMENT
SECURITIES, INC., a Washington corporation (the "Selling Agent").
WHEREAS, Metropolitan proposes to issue and sell 250,000 shares
WITNESSETH:
Variable Rate Cumulative Preferred Stock, Series E-7 (par value
$10.00 per share) ("Preferred Stock") pursuant to a Registration
Statement (or Registration Statements) and a Prospectus (or
Prospectuses) filed under the Securities Act of 1933; and
WHEREAS, the Selling Agent, for good and valuable consideration
the receipt of which is hereby acknowledged, desires to assist in the
sale of the Preferred Stock upon the terms and in reliance upon the
representations, warranties and agreements set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. APPOINTMENT OF SELLING AGENT.
Metropolitan hereby appoints the Selling Agent as its agent to
offer and sell the Preferred Stock at the prices and in the manner
described in the Registration Statement and the Prospectus and in
compliance with the terms and conditions thereof. Metropolitan
agrees to provide the Selling Agent with such number of Registration
Statements and Prospectuses as it reasonably requests to enable it to
offer the Preferred Stock and authorizes the Selling Agent to
distribute the Registration Statements and Prospectuses.
2. UNDERTAKING OF SELLING AGENT.
<PAGE> Page 162
The Selling Agent agrees to use its best efforts to sell the
Preferred Stock on the terms stated herein and in the Registration
Statement and Prospectus and to notify Metropolitan of the number of
shares of Preferred Stock with respect to which subscription
agreements have been executed by subscribers. It is understood that
the Selling Agent has no commitment to sell the Preferred Stock other
than to use its best efforts. The Selling Agent will deliver all
cash and checks received from subscribers to Metropolitan by noon of
the next business day. All checks received by the Selling Agent from
subscribers shall be made payable to Metropolitan.
The Selling Agent will not maintain discretionary customer
accounts and undertakes that it will not in any event make
discretionary purchases of the Preferred Stock for the accounts of
customers.
3. AMENDMENT OF THE REGISTRATION STATEMENT AND PROSPECTUS.
Metropolitan agrees, at its expense, to amend or supplement that
Registration Statement or the Prospectus and to provide the Selling
Agent with sufficient copies thereof for distribution as
contemplated in the Registration Statement or the Prospectus or
otherwise for purposes contemplated by federal and state securities
laws, if (i) the Selling Agent advises Metropolitan that in its
opinion and that of its counsel, such amendment or supplement is
necessary or advisable, or (ii) such amendment or supplement is
necessary to comply with federal or state securities laws or the
rules or regulations promulgated thereunder or is necessary to
correct any untrue statement therein or eliminate any material
omissions therein which make any of the statements therein
misleading. The representation, warranties, and obligations to
indemnify all parties thereto contained herein relating to the
Registration Statement or the Prospectus shall attach to any such
amendment or supplement.
4. UNDERTAKINGS OR METROPOLITAN.
Metropolitan will promptly notify the Selling Agent in the event
of the issuance by the Securities and Exchange Commission ("SEC") of
any stop order or other orders us pending the Registration of the
Preferred Stock, or in the event of the institution or intended
institution of any action or preceding for that purpose. In the
event that the SEC shall enter a stop order suspending or otherwise
suspend the Registration of the Preferred Stock, Metropolitan will
make every reasonable effort to obtain as promptly as possible the
entry of an appropriate order setting aside such stop order or
otherwise reinstate the Registration of the Preferred Stock.
<PAGE> Page 163
5. REPRESENTATIONS AND WARRANTIES.
Metropolitan represents and warrants to the Selling Agent that:
(i) The Registration Statement and the Prospectus comply
as to form in all material respects with the Securities
Act of 1933; and the rules and regulations of the SEC
thereunder, accurately describe the operations of
Metropolitan and do not contain any misleading or untrue
statements of a material fact or omit to state a material
fact which is necessary to prevent the statements therein
from being misleading.
(ii) Metropolitan is a corporation duly organized and
validly existing under the Washington Business
Corporation Act with full corporate power to perform its
obligations as described in the Registration Statement
and the Prospectus.
(iii) The Preferred Stock, when issued and sold
pursuant to the terms hereof and of the Registration
Statement, Prospectus and subscription agreements, will
be legally issued, fully paid and nonassessable.
(iv) This Agreement has been duly and validly authorized,
executed, and delivered on behalf of Metropolitan and is
a valid and binding agreement of Metropolitan in
accordance with its terms.
6. INDEMNIFICATION.
Metropolitan and the Selling Agent each (a) agree to indemnify and
hold harmless the other (and each person, if any, who controls the
other) against any loss, claim, damage, charge or liability to which
the other or such charge or liability (or actions in respect thereof)
(i) arises out of or is based upon any misrepresentation or breach of
warranty of such party herein or any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or the Prospectus (or any amendment or supplement thereto)
which relates to or was supplied by such party, or (i) arises out of
or is based upon the omission or alleged omission to state therein a
material fact relating to such party required to be stated therein or
necessary to make the statements therein not misleading, including
liabilities under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and (b) agree to
reimburse such other party (and any controlling persons) for any
legal
<PAGE> Page 164
or other fees or expenses reasonably incurred in connection with
investigating or defending any action or claim arising out of or
based upon any of the foregoing.
7. FEES AND EXPENSES.
Metropolitan will pay all expenses incurred in connection with the
offering and sale of the Preferred Stock, including without
limitation, fees and expenses of counsel, blue sky fees and expenses
(including legal fees), printing expenses, and accounting fees and
expenses. Provided, however, that in the event of termination of the
offering, Selling Agent will only be reimbursed for its actual,
accountable, out-of-pocket expenses.
The maximum commissions payable upon sale of the Preferred Stock
shall be 6% of the investment amount.
8. This agreement shall not in any way affect, modify or change
the terms of those certain Selling Agreements, dated August 14, 1980
and December 21, 1984, as amended, between the parties hereto which
provides for the sale of Investment Debentures, Series II and
Installment Debentures, Series I, respectively.
9. GOVERNING LAW.
This Agreement shall be deemed to be made under and governed by the
laws of the State of Washington.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above mentioned.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
________________________________________
C. Paul Sandifur, Jr., President
METROPOLITAN INVESTMENT SECURITIES, INC.
________________________________________
Susan A. Thomson, Vice President
FORM OF
AGREEMENT TO ACT AS "QUALIFIED INDEPENDENT UNDERWRITER"
This agreement made as of the day of
__________________, by and between Metropolitan Mortgage & Securities
Co., Inc., a Washington corporation ("Metropolitan"), Metropolitan
Investment Securities, Inc., a Washington corporation ("MIS"), and
Welco Securities, Inc., a Nevada Corporation ("Welco").
WITNESSETH:
WHEREAS, Metropolitan intends to offer 250,000 shares of
Preferred Stock, designated as "Variable Rate Cumulative Preferred
Stock, Series E-7," (hereinafter referred to as the "Preferred
Stock"), which will be offered in reliance on a post-effective
amendment to a registration statement filed on Form S-2, bearing SEC
file number 333-19755;and,
WHEREAS, MIS, a broker/dealer and a member of the National
Association of Securities Dealers ("NASD"), will be engaged as the
sole selling agent for Metropolitan; and,
WHEREAS, pursuant to subparagraph (c) of Rule 2720 of the
NASD, MIS, as a NASD member, may participate in such underwriting
only if the price at which the Preferred Stock is offered to the
public is no higher than the price recommended by a "Qualified
Independent Underwriter" as that term is defined in subparagraph
(b)(15) of Rule 2720 of the NASD, and who participates in the
preparation of the registration statement and prospectus relating to
the offering and exercises customary standards of due diligence, with
respect thereto; and,
WHEREAS, this agreement ("Agreement") describes the terms
on which Metropolitan is retaining Welco to serve as such a
"Qualified Independent Underwriter" in connection with this offering
of Preferred Stock;
NOW, THEREFORE, in consideration of the recitations set
forth above, and the terms, promises, conditions, and covenants
herein contained, the parties hereby contract and agree as follows:
DEFINITIONS
As hereinafter used, except as the context may otherwise
require, the term "Registration Statement" means the registration
statement on Form S-2(including the related preliminary prospectus,
financial statements, exhibits and all other documents to be filed as
<PAGE> Page 166
a part thereof or incorporated therein) for the registration of the
offer and sale of the preferred stock under the Securities Act of
1933, as amended, and the rules and regulations thereunder (the
"Act") filed with the Securities and Exchange Commission (the
"Commission"), and any amendment thereto, and the term "Prospectus"
means the prospectus including any preliminary or final prospectus
(including the form of prospectus to be filed with the Commission
pursuant to Rule 424(b) under the Act) and any amendment or
supplement thereto, to be used in connection with the offering.
1. SCHEDULE E REQUIREMENT. Welco hereby confirms its agreement
as set forth in subparagraph 15(g)of Schedule E of the Bylaws of the
NASD and represents that, as appropriate, Welco satisfies or at the
times designated in such paragraph (l) satisfies the other
requirements set forth therein or will receive an exemption from such
requirements from the NASD.
2. CONSENT. Welco hereby consents to be named in the
Registration Statement and Prospectus as having acted as a "Qualified
Independent Underwriter" solely for the purposes of Rule 2720
referenced herein. Except as permitted by the immediately preceding
sentence or to the extent required by law, all references to Welco in
the Registration Statement or Prospectus or in any other filing,
report, document, release or other communication prepared, issued or
transmitted in connection with the offering by Metropolitan or any
corporation controlling, controlled by or under common control with
Metropolitan, or by any director, officer, employee, representative
or agent of any thereof, shall be subject to Welco's prior written
consent with respect to form and substance.
3. PRICING FORMULA AND OPINION. Welco agrees to render a
written opinion as to the price above which Metropolitan's Preferred
Stock may not be offered based on the computation of dividends to be
declared on those shares that is set forth in Schedule "A," a copy of
which is attached hereto, and incorporated herein by reference. It
is understood and agreed by Welco that the securities to which this
Agreement relates will be offered on a best efforts basis by MIS, as
the sole selling agent of Metropolitan pursuant to the selling
agreement to be entered into between MIS and Metropolitan which is
filed as exhibit to the Registration Statement referred to above.
Metropolitan, through MIS, will continue to offer the preferred stock
according to the terms and conditions of said agreement, in
accordance with this Agreement. Welco reserves the right to review
and amend its opinion upon the filing of any post-effective amendment
to this Registration Statement or upon occurrence of any material
event which may or may not require such an amendment to be filed, or
at such time as the offering under this registration shall terminate
or otherwise lapse under operation of law.
4. FEES AND EXPENSE. It is understood that Metropolitan shall
reimburse Welco for its expenses on a nonaccountable basis in the
<PAGE> Page 167
amount of $5,000 of which $2,500 has been paid to date, and the
balance to be paid at closing. It is further agreed that Welco shall
be paid an additional amount of $15,000 at the time the pricing
opinion is rendered, concurrent with the closing. Welco agrees to
pay all fees and expenses to any legal counsel whom it may employ to
represent it separately in connection with or on account of its
actions contemplated herein. All mailing, telephone, travel, hotel,
meals, clerical, or other office costs incurred or to be incurred by
Welco in conjunction with Metropolitan's proposed offering which is
the subject of this Agreement shall be reimbursed to Welco by
Metropolitan at closing on an accountable basis upon receipt of an
itemization of said expenses.
5. MATERIAL FACTS. Metropolitan represents and warrants to
Welco that at the time the Registration Statement and, at the time
the Prospectus is filed with the Commission (including any
preliminary prospectus and the form of prospectus filed with the
Commission pursuant to Rule 424(b)) and at all times subsequent
thereto, to and including the date on which payment for, and delivery
of, the Preferred Stock to be sold in the Offering is made by the
underwriter or underwriters, as the case may be, participating in the
Offering and by Metropolitan (such date being referred to herein as
the "Closing Date"), the Prospectus (as amended or supplemented if it
shall have been so amended or supplemented) will contain all material
statements which are required to be stated therein in accordance with
the Act and will conform to all other requirements of the federal
securities laws, and will not, on such date include any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and that all contracts and documents required
by the Act to be filed or required as exhibits to said registration
statement have been filed. Metropolitan further represents and
warrants that any further filing, report, document, release or
communication which in any way refers to Welco or to the services to
be performed by Welco pursuant to this Agreement will not contain any
untrue or misleading statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
Metropolitan further warrants and represents that:
(a) All leases, contracts and agreements referred to in or
filed as exhibits to the Registration Statement to which Metropolitan
or its subsidiaries is a party or by which any of them is bound are
in full force and effect.
(b) Metropolitan and it subsidiaries have good and marketable
title, except as otherwise indicated in the Registration Statement
and Prospectus, to all of their assets and properties described
therein as being owned by them, free and clear of all liens,
encumbrances and defects except such encumbrances and defects which
do not, in the aggregate, materially affect or interfere with the use
made and
<PAGE> Page 168
proposed to be made of such properties as described in the
Registration Statement and Prospectus; and the Company and its
subsidiaries have no material leased properties except as disclosed
in the Prospectus.
(c) Metropolitan is duly organized under the laws of the State
of Washington and, as of the effective date of the Registration
Statement and at Closing Metropolitan will be validly existing and in
good standing under the laws of the State of Washington with full
corporate power and authority to own its properties and conduct its
business to the extent described in the Registration Statement and
Prospectus; Metropolitan and its subsidiaries are duly qualified to
do business as foreign corporations and in good standing in all
jurisdictions in which the nature of the business transacted by them
or their ownership of properties or assets makes their qualification
necessary; the authorized and outstanding capitalization of
Metropolitan is as set forth in the Prospectus and the description in
the Prospectus of the capital stock of Metropolitan conforms with and
accurately describes the rights set forth in the instruments defining
the same;
(d) Metropolitan and its subsidiaries are not in violation of
their respective certificates of incorporation or Bylaws or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any bond, debenture,
note, or other evidence of indebtedness, contract or lease or in any
indenture or loan agreement to which any of them is a party or by
which any of them is bound.
(e) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary corporate action on the
part of Metropolitan and MIS and performance of the foregoing
agreement and the consummation of the transactions contemplated
thereby, will not conflict with or result in a breach of any of the
terms or constitute a violation of the respective certificates of
incorporation or Bylaws of Metropolitan or MIS, or any deed of trust,
lease, sublease, indenture, mortgage, or other agreement or
instrument to which Metropolitan or MIS is a party or by which any of
them or their property is bound, or any applicable law, rule,
regulation, judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction
over Metropolitan or MIS or their properties or obligations; and no
consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated herein and in the other agreements
previously referred to in this paragraph except as may be required
under the Act or under any state securities or Blue Sky Laws.
(f) Any certificate signed by an officer of Metropolitan and
delivered to Welco pursuant to this Agreement shall be deemed a
<PAGE> Page 169
representation and warranty by Metropolitan to Welco, to have the
same force and effect as stated herein, as to the matters covered
thereby.
(g) If any event relating to or affecting Metropolitan or any
of its subsidiaries shall occur as a result of which it is necessary,
in Welco's opinion, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser, Metropolitan
undertakes to inform Welco of such events within a reasonable time
thereafter, and will forthwith prepare and furnish to Welco, without
expense to them, a reasonable number of copies of an amendment or
amendments or a supplement or supplements to the Prospectus (in form
and substance satisfactory to Welco) which will amend or supplement
the Prospectus so that as amended or supplemented it will not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading.
(h) Metropolitan hereby warrants and represents that it will
offer the preferred stock in accordance with the pricing formula set
forth in Schedule "A" which is incorporated by reference herein.
(i) All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of
Metropolitan submitted pursuant hereto, shall remain operative and in
full force and effect, surviving the date of this Agreement.
6. AVAILABILITY OF INFORMATION. Metropolitan hereby agrees to
provide Welco, at its expense, with all information and documentation
with respect to its business, financial condition and other matters
as Welco may deem relevant based on the standards of reasonableness
and good faith and shall request in connection with Welco's
performance under this Agreement, including, without limitation,
copies of all correspondence with the Commission, certificates of its
officers, opinions of its counsel and comfort letters from its
auditors. The above-mentioned certificates, opinions of counsel and
comfort letters shall be provided to Welco as Welco may request on
the effective date of the Registration Statement and on the Closing
Date. Metropolitan will make reasonably available to Welco, its
auditors, counsel, and officers and directors to discuss with Welco
any aspect of Metropolitan which Welco may deem relevant. In
addition, Metropolitan, at Welco's request, will cause to be
delivered to Welco copies of all certificates, opinions, letters and
reports to be delivered to the underwriter or underwriters, as the
case may be, pursuant to any underwriting agreement executed in
connection with the Offering or otherwise, and shall cause the person
issuing such certificate, opinion, letter or report to authorize
Welco to rely thereon to the same extent as if addressed directly to
Welco. Metropolitan represents and warrants to Welco that all such
information and documentation provided pursuant to this paragraph 6
will not contain any untrue statement of a material fact or omit to
<PAGE> Page 170
state a material fact necessary to make the statement therein not
misleading. In addition, Metropolitan will promptly advise Welco of
all telephone conversations with the Commission which relate to or
may affect the Offering.
7. INDEMNIFICATION.
(a) Subject to the conditions set forth below, and in
addition to any rights of indemnification and contribution to which
Welco may be entitled pursuant to any agreement among underwriters,
underwriting agreement or otherwise, and to the extent allowed by
law, Metropolitan hereby agrees that it will indemnify and hold Welco
and each person controlling, controlled by or under common control
with Welco within the meaning of Section 15 of the Act or Section 20
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the rules and regulations thereunder (individually, an
"Indemnified Person") harmless from and against any and all loss,
claim, damage, liability, cost or expense whatsoever to which such
Indemnified Person may become subject under the Act, the Exchange
Act, or other federal or state statutory law or regulation, at common
law or otherwise, arising out of, based upon, or in any way related
or attributed to (i) this Agreement, (ii) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement or Prospectus or any other filing, report,
document, release or communication, whether oral or written, referred
to in paragraph 5 hereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, (iii) any application or
other document executed by Metropolitan or based upon written
information furnished by Metropolitan filed in any jurisdiction in
order to qualify the Debentures under the securities or Blue Sky laws
thereof, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iv) the breach of any
representation or warranty made by Metropolitan in this Agreement.
Metropolitan further agrees that upon demand by an Indemnified Person
at any time or from time to time, it will promptly reimburse such
Indemnified Person for, or pay, any loss, claim, damage, liability,
cost or expense as to which Metropolitan has indemnified such person
pursuant hereto. Notwithstanding the foregoing provisions of this
paragraph 7, any such payment or reimbursement by Metropolitan of
fees, expenses or disbursement incurred by an Indemnified Person in
any proceeding in which a final judgment by a court of competent
jurisdiction (after all appeals or the expiration of time to appeal)
is entered against such Indemnified Person as a direct result of such
person's negligence, bad faith or willful misfeasance will be
promptly repaid to Metropolitan. In addition, anything in this
paragraph 7 to the contrary notwithstanding, Metropolitan shall not
be liable for any settlement of any action or proceeding effected
without its written consent.
<PAGE> Page 171
(b) Promptly after receipt by an Indemnified Person under
paragraph (a) above of notice of the commencement of any action, such
Indemnified Person will, if a claim in respect thereof is to be made
against Metropolitan under paragraph (a), notify Metropolitan in
writing of the commencement thereof; but the omission to so notify
Metropolitan will not relieve Metropolitan from any liability which
it may have to any Indemnified Person otherwise than under this
paragraph 7 if such omission shall not have materially prejudiced
Metropolitan's ability to investigate or to defend against such
claim. In case any such action is brought against any Indemnified
Person, and such Indemnified Person notifies Metropolitan of the
commencement thereof, Metropolitan will be entitled to participate
therein and, to the extent that it may elect by written notice
delivered to the Indemnified Person promptly after receiving the
aforesaid notice from such Indemnified Person, to assume the defense
thereof with counsel reasonably satisfactory to such Indemnified
Person; provided, however, that if the defendants in any such action
include both the Indemnified Person and Metropolitan or any
corporation controlling, controlled by or under common control with
Metropolitan, or any director, officer, employee, representative or
agent of any thereof, or any other "Qualified Independent
Underwriter" retained by Metropolitan in connection with the Offering
and the Indemnified Person shall have reasonably concluded that there
may be legal defenses available to it which are different from or
additional to those available to such other defendant, the
Indemnified Person shall have the right to select separate counsel to
represent it. Upon receipt of notice from Metropolitan to such
Indemnified Person of its election so to assume the defense of such
action and approval by the Indemnified Person of counsel,
Metropolitan will not be liable to such Indemnified Person under this
paragraph 7 for any fees of counsel subsequently incurred by such
Indemnified Person in connection with the defense thereof (other than
the reasonable costs of investigation subsequently incurred by such
Indemnified Person) unless (i) the Indemnified Person shall have
employed separate counsel in accordance with the provision of the
next preceding sentence (it being understood, however, that
Metropolitan shall not be liable for the expenses of more than one
separate counsel in any one jurisdiction representing the Indemnified
Person, which counsel shall be approved by Welco), (ii) Metropolitan,
within a reasonable time after notice of commencement of the action,
shall not have employed counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person, or (iii)
Metropolitan shall have authorized in writing the employment of
counsel for the Indemnified Person at the expense of Metropolitan,
and except that, if clause (i) or (iii) is applicable, such liability
shall be only in respect of the counsel referred to in such clause
(i) or (iii).
<PAGE> Page 172
(c) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in
paragraph 7 is due in accordance with its terms but is for any reason
held by a court to be unavailable from Metropolitan to Welco on
grounds of policy or otherwise, Metropolitan and Welco shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which Metropolitan and Welco
may be subject in such proportion so that Welco is responsible for
that portion represented by the percentage that its fee under this
Agreement bears to the public offering price appearing on the cover
page of the Prospectus and Metropolitan is responsible for the
balance, except as Metropolitan may otherwise agree to reallocate a
portion of such liability with respect to such balance with any other
person, including, without limitation, any other "Qualified
Independent Underwriter"; provided, however, that (i) in no case
shall Welco be responsible for any amount in excess of the fee set
forth in paragraph 4 above and (ii) no person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this paragraph
(c), any person controlling, controlled by or under common control
with Welco, or any partner, director, officer, employee,
representative or any agent of any thereof, shall have the same
rights to contribution as Welco and each person who controls
Metropolitan within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, each officer of Metropolitan who shall have
signed the Registration Statement and each director of Metropolitan
shall have the same rights to contribution as Metropolitan, subject
in each case to clause (i) of this paragraph (c). Any party entitled
to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against the
other party under this paragraph (c), notify such party from whom
contribution may be sought, but the omission to so notify such party
shall not relieve the party from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than
under this paragraph (c). The indemnity and contribution agreements
contained in this paragraph 7 shall remain operative and in full
force and effect regardless of any investigation made by or on behalf
of any Indemnified Person or termination of this Agreement.
8. AUTHORIZATION BY METROPOLITAN. Metropolitan represents and
warrants to Welco that this Agreement has been duly authorized,
executed and delivered by Metropolitan and constitutes a valid and
binding obligation of Metropolitan.
<PAGE> Page 173
9. AUTHORIZATION BY MIS. MIS represents and warrants to Welco
that this Agreement has been duly authorized, executed and delivered
by MIS and constitutes a valid and binding obligation of MIS.
10. AUTHORIZATION BY WELCO. Welco represents and warrants to
Metropolitan that this Agreement has been duly authorized, executed
and delivered by Welco and constitutes a valid and binding obligation
of Welco.
11. NOTICE. Whenever notice is required to be given pursuant to
this Agreement, such notice shall be in writing and shall be mailed
by first class mail, postage prepaid, addressed (a) if to Welco, at
P.O. Box 688, One Belmont Avenue, Suite 105, Bala Cynwyd, PA
19004-3207, Attention: Kenneth S. Shapiro, and (b) if to
Metropolitan, at West 917 Sprague Avenue, Spokane, Washington 99204,
Attention: C. Paul Sandifur, Jr.
12. GOVERNING LAW. This Agreement shall be construed (both as
to validity and performance) and enforced in accordance with and
governed by the laws of the State of Washington applicable to
agreements made and to be performed wholly within such jurisdiction.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above mentioned.
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
By:__________________________________________
C. Paul Sandifur, Jr., President
By:__________________________________________
Reuel Swanson, Secretary
METROPOLITAN INVESTMENT SECURITIES, INC.
By:__________________________________________
C. Paul Sandifur, Jr., President
By:__________________________________________
Reuel Swanson, Secretary
WELCO SECURITIES, INC
<PAGE> Page 174
By:________________________________________
Kenneth S. Shapiro, President
<PAGE> Page 175
SCHEDULE A
The opinion of Welco is conditioned upon Metropolitan's
undertaking to maintain the distribution rate of the Preferred
Stock in accordance with the formula set forth below:
Notwithstanding anything to the contrary herein the
Applicable Rate for any monthly distribution period shall not, in
any event, be less than 6% or greater than 14% per annum. The
Board of Directors may, however, by resolution, authorized
distributions in excess of the Applicable Rate. The Applicable
Rate for any monthly distribution period shall be the highest of
the Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate (each as hereinafter
defined) plus one half of one percentage point for such dividend
period. In the event that the Company determines in good faith
that for any reason one or more of such rates cannot be
determined for any distribution period, then the Applicable Rate
for such period shall be the higher of whichever of such rates
can be so determined.
<PAGE> Page 176
Exhibit B
VARIABLE RATE, CUMULATIVE
PREFERRED STOCK, SERIES E-2, E-3, E-4, E-5, E-6, and E-7
PRICING
For Distributions Payable
On:________________________________________
Distributions Record
Date:________________________________________
Applicable
Effective
Date Date Average Rate Rate*
3 Mo. Treasury Bill ________________________ +.5% +1%
10 Yr Constant Rate ________________________ +.5% +1%
20 Year ________________________ +.5% +1%
HIGHEST APPLICABLE RATE:____________________________
MONTHLY DISTRIBUTION PER SHARE:_____________________
As resolved by the Board of Directors, distribution will be
deemed declared on the 1st day of each month, payable on the 20th
of each month to the holders of record on the 5th of each month.
* Includes any distribution authorized by the Board in excess of
the Applicable Rate.
_______________________________________________________
Authorized Signature
STATEMENT OF RIGHTS, DESIGNATIONS AND PREFERENCES OF
VARIABLE RATE CUMULATIVE PREFERRED STOCK,
SERIES E-7 PURSUANT TO RCW 23B.06.020
1. Name of corporation: Metropolitan Mortgage & Securities
Co., Inc..
2. Copy of resolution establishing and designating Variable
Rate of Cumulative Preferred Stock, Series E-7, and determining
the relative rights and preferences thereof: Attached hereto.
3. The undersigned does hereby certify that the attached
resolution was duly adopted by the Board of Directors of the
corporation on April 28, 1997.
/S/ Reuel Swanson
_________________________
Reuel Swanson, Secretary
<PAGE> Page 178
METROPOLITAN MORTGAGE & SECURITIES CO., INC.
PREFERRED STOCK SERIES E-7 AUTHORIZING RESOLUTION
Resolved, that pursuant to the authority expressly granted and
vested in the Board of Directors (the "Board") of this
Corporation by its Articles of Incorporation, as amended, a sub-
series of Preferred Stock, Series E of the Corporation be, and is
hereby, established which will consist of 250,000 shares of the
par value of $10.00 per share ($2,500,000), shall be designated
"Variable Rate Cumulative Preferred Stock, Series E-7" (hereafter
called "Preferred Stock"), shall be offered at $100.00 per share
and which shall have rights, preferences, qualifications and
restrictions as follows:
1. DIVIDENDS.
a) Dividends (or other distributions deemed dividends for
purposes of this resolution) on the issued and outstanding shares
of Preferred Stock shall be declared and paid monthly at a
percentage rate per annum of the liquidation preference of
$100.00 per share equal to the "Applicable Rate," as hereinafter
defined, or such greater rate as may be determined by the Board.
Notwithstanding the foregoing, the Applicable Rate for any
monthly dividend period shall, in no event, be less than 6% per
annum or greater than 14% per annum. Such dividends shall be
cumulative from the date of original issue of such shares and
shall be payable, when and as declared by the Board, on such
dates as the Board deems advisable, but at least once a year,
commencing May 1, 1997. Each such dividend shall be paid to the
holders of record of shares of Preferred Stock as they appear on
the stock register of the Corporation on such record date as
shall be fixed by the Board in advance of the payment date
thereof. Dividends on account of arrears for any past Dividend
Periods may be declared and paid at any time, without reference
to any regular dividend payment date, to holders of record on
such date as shall be fixed by the Board in advance of the
payment date thereof.
b) Except as provided below in this section, the
Applicable Rate for any monthly dividend period shall be the
highest of the Treasury Bill Rate, the Ten Year Constant Maturity
Rate and the Twenty Year Constant Maturity Rate (each as defined
in Exhibit A attached hereto and incorporated by reference
herein) plus one half of one percentage point. In the event that
the Board determines in good faith that for any reason one or
more of such rates cannot be determined for any dividend period,
than the Applicable Rate for such dividend period shall be the
higher of
<PAGE> Page 179
whichever of such rates can be so determined. In the event that
the Board determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in
effect for the preceding dividend period shall be continued for
such dividend period. The Treasury Bill Rate, the Ten Year
Constant Maturity Rate and the Twenty Year Constant Maturity Rate
shall each be rounded to the nearest five hundredths of a
percentage point.
c) No dividend shall be paid upon, or declared or set
apart for, any share of Preferred Stock for any Dividend Period
unless at the same time a like dividend shall be paid upon, or be
declared and set apart for, all shares of Preferred Stock then
issued and outstanding and all shares of all other series of
preferred stock then issued and outstanding and entitled to
receive dividends. Holders of Preferred Stock shall not be
entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends as herein provided.
No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments which may
be in arrears on Preferred Stock.
d) Dividends payable for each full monthly Dividend
Period shall be computed by dividing the Applicable Rate for such
monthly Dividend Period by twelve and applying such rate against
the liquidation preference of $100.00 per share. Dividends shall
be rounded to the nearest whole cent. Dividends payable for any
period less than a full monthly Dividend Period shall be computed
on the basis of 30 day months and a 360 day year. The Applicable
Rate with respect to each monthly Dividend Period shall be
calculated as promptly as practicable by the Corporation
according to the method provided herein. The Corporation will
cause notice of such Applicable Rate to be enclosed with the
dividend payment check next mailed to the holders of shares of
Preferred Stock.
e) So long as any shares of Preferred Stock are
outstanding, (i) no dividend (other than a dividend in common
stock or in any other stock ranking junior to Preferred Stock as
to dividends and upon liquidation and other than as provided in
the foregoing section 1(c)) shall be declared or paid or set
aside for payment; (ii) no other distribution shall be declared
or made upon common stock or upon any other stock ranking junior
to or on a parity with Preferred Stock as to dividends or upon
liquidation; and (iii) no common stock or any other stock of the
Corporation ranking junior to or on a parity with Preferred Stock
as to dividends or upon liquidation shall be redeemed, purchased
or otherwise acquired by the Corporation for any consideration
(or
<PAGE> Page 180
any monies paid to or made available for a sinking fund for the
redemption of any shares of any such stock) except by conversion
into or exchange for stock of the Corporation ranking junior to
Preferred Stock as to dividends and upon liquidation unless, in
each case, the full cumulative dividends on all outstanding
shares of Preferred Stock shall have been paid or declared and
set apart for all past dividend payment periods.
f) The holders of Preferred Stock shall be entitled to
receive, when and as declared by the Board, dividend
distributions out of the funds of the Corporation legally
available therefor. Any distribution made which may be deemed to
have been made out of the capital surplus of Preferred Stock
shall not reduce either the redemption process or the liquidation
rights as hereafter specified.
2. REDEMPTION.
a) The Corporation, at its option, may redeem shares of
Preferred Stock, in whole or in part, at any time or from time to
time, at redemption prices hereafter set forth plus accrued and
unpaid dividends to the date fixed for redemption.
i) In the event of a redemption of shares pursuant
to this subsection prior to January 1, 1997, the redemption price
shall be $102.00 per share; and the redemption price shall be
$100.00 per share in the event of redemption anytime after
December 31, 1996.
ii) In the event that fewer than all of the
outstanding shares of Preferred Stock are to be redeemed, the
number of shares to be redeemed shall be determined by the
Corporation and the shares to be redeemed shall be determined by
lot, or pro rata, or by any other method, as may be determined by
the Corporation in its sole discretion to be equitable.
iii) In the event that the Corporation shall redeem
shares hereunder, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than 30 days
or more than 60 days prior to he redemption date, to each holder
of record of the shares to be redeemed, at such holder's address
as it appears on the stock register of the Corporation. Each
such notice shall state: (i) the redemption date; (ii) the
number of shares to be redeemed and, if fewer than all shares
held by such holder are to be redeemed, the number of such shares
to be redeemed from such holder; (iii) the redemption price; (iv)
the place or places where certificates for such shares are to be
<PAGE> Page 181
surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on
such redemption date.
iv) Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the redemption
price), dividends on the shares so called for redemption shall no
longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to
receive from the Corporation the redemption price) shall cease.
Upon surrender in accordance with said notice of the certificates
representing shares redeemed (properly endorsed or assigned for
transfer, if the Board shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at the
redemption price aforesaid. In case fewer than all of the shares
represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
b) Discretionary Redemption Upon Request of the Holder:
The shares of Preferred Stock are not redeemable at the option of
the holder. If, however, the Corporation receives an unsolicited
written request for redemption of shares from any holder, the
Corporation may, in its sole discretion and subject to the
limitations described below, accept such shares for redemption.
Any shares so tendered, which the Corporation in its discretion,
allows for redemption, shall be redeemed by the Corporation
directly, and not from or through a broker or dealer, at a price
established by time to time by the Board of Directors in its sole
discretion, plus any accrued but unpaid dividends to date.
For a period of three years from the date of initial sale of
each share of Preferred Stock, any such optional redemption of
such share shall occur only upon the death or major medical
emergency of the holder or any joint holder of the share
requested to be redeemed. Any optional redemption of a share in
any calendar year after the third year from the date of sale of
the share, not arising from the death or medical emergency of the
holder or any joint holder shall occur only when the sum of all
optional redemptions (including those arising out of the death or
medical emergency of the holder or any joint holder) of shares of
Preferred Stock during that calendar year shall not exceed 10% of
the number of shares of Preferred Stock outstanding at the end of
the preceding calendar year. In the event the 10% limit is
reached in any calendar year, the only redemption which may
thereafter occur during that calendar year shall be those arising
<PAGE> Page 182
from the death or medical emergency of the holder or any joint
holder; provided, however, that to the extent that total optional
redemptions in any calendar year do not reach the 10% limit, the
amount by which such optional redemptions shall fall short of the
10% limit may be carried over into ensuing years; and provided
further that to the extent that all redemptions, including those
involving the death or medical emergency of the holder or any
joint holder, exceed the 10% in any year, the amount by which
such redemptions exceed the 10% limit shall reduce the limit in
the succeeding year for limiting redemptions not involving the
death or medical emergency of a holder or any joint holder. In
no event shall such optional redemptions of all types in a single
calendar year exceed 20% of the number of shares of Preferred
Stock outstanding at the end of the preceding calendar year.
The Corporation may not redeem any such shares tendered for
redemption if to do so would be unsafe or unsound in light of the
Corporation's financial condition (including its liquidity
position); if payment of interest or principal on any outstanding
instrument of indebtedness is in arrears or in default; or if
payment of any dividend on Preferred Stock or share of any stock
of the Company ranking at least on a parity therewith is in
arrears as to dividends.
c) Any shares of Preferred Stock which shall at any time
have been redeemed shall, after such redemption, have the status
of authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are designated as part
of a particular series by the Board.
d) Notwithstanding the foregoing provisions of this
Section 2, if any dividends on Preferred Stock are in arrears, no
shares of Preferred Stock shall be redeemed unless all
outstanding shares of Preferred Stock are simultaneously
redeemed, and the Corporation shall not purchase or otherwise
acquire any shares of Preferred Stock; provided, however, that
the foregoing shall not prevent the purchase or acquisition of
shares of Preferred Stock pursuant to a purchase or exchange
offer made on the same terms to holders of all of the outstanding
shares of Preferred Stock.
3. CONVERSION OR EXCHANGE. The holders of shares of
Preferred Stock shall not have any rights to convert such shares
into or exchange such shares for shares of any other class or
series of any class of securities of the Corporation.
4. VOTING. Except as required from time to time by law, the
shares of Preferred Stock shall have no voting powers. Provided,
<PAGE> Page 183
however, not withstanding the foregoing, that whenever and as
often as dividends payable on any shares of Preferred Stock shall
be in arrears in an amount equal to twenty four full monthly
dividends or more per share, the holders of Preferred Stock,
together with the holders of Preferred Stock, Series C, D, E-1, E-
2, E-3, E-4, E-5 & E-6 and any other preferred stock hereafter
authorized, voting separately and as a single class shall be
entitled to elect a majority of the Board of Directors of the
Corporation. Such right shall continue until all dividends in
arrears on preferred stock have been paid in full.
5. LIQUIDATION RIGHTS.
a) Upon the dissolution, liquidation or winding up of the
Corporation, the holders of the shares of Preferred Stock shall
be entitled to receive out of the assets of the Corporation,
before any payment or distribution shall be made on the Common
Stock, or on any other class of stock ranking junior to Preferred
Stock, upon liquidation, the amount of $100.00 per share, plus a
sum equal to all dividends (whether or not earned or declared) on
such shares accrued and unpaid thereon to the date of final
distribution.
b) Neither the sale, lease or conveyance of all or
substantially all the property or business of the Corporation,
nor the merger or consolidation of the Corporation into or with
any other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section.
c) After the payment to the holders of the shares of
Preferred Stock of the full preferential amounts provided for in
this Section, the holders of Preferred Stock as such shall have
no right or claim to any of the remaining assets of the
Corporation.
d) In the event the assets of the Corporation available
for distribution to the holders of shares of Preferred Stock upon
any dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, shall be insufficient to pay in
full all amounts to which such holders are entitled pursuant to
this Section, no such distribution shall be made on account of
any shares or any other series of Preferred Stock or any other
class of stock ranking on a parity with the shares of Preferred
Stock upon such dissolution, liquidation or winding up, unless
proportionate distributive amounts shall be paid on account of
the
<PAGE> Page 184
shares of Preferred Stock, ratably in accordance with the sums
which would be payable in such distribution if all sums payable
in respect of the shares of all series of Preferred Stock and any
such other class of stock as aforesaid were discharged in full.
6. PRIORITIES. For purposes of this Resolution, any stock of
any class or classes of the Corporation shall be deemed to rank:
a) Prior to the shares of Preferred Stock, either as to
dividends or upon liquidation if the holders of such class or
classes shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up
of the Corporation, as the case may be, in preference or priority
to the holders of shares of Preferred Stock.
b) On a parity with shares of Preferred Stock, either as
to dividends or upon liquidation, whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices
per share or sinking fund provisions, if any, are different from
those of Preferred Stock, if the holder of such stock shall be
entitled to the receipt of dividends or of amounts distributable
upon dissolution, liquidation or winding up of the Corporation,
as the case may be, in proportion to their respective dividend
rates or liquidation prices, without preference or priority, one
over the other, as between the holder of such stock and the
holders of Preferred Stock; and
c) Junior to shares of Preferred Stock, either as to
dividends or upon liquidation, if the holders of shares of
Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up
of the Corporation, as the case may be, in preference or priority
to the holders of shares of such class or classes.
7. SHARES NON-ASSESSABLE. Any and all shares of Preferred
Stock issued, and for which the full consideration has been paid
or delivered, shall be deemed fully paid stock and the holder of
such shares shall not be liable for any further call or
assessment or any other payment thereon.
8. PRE-EMPTIVE RIGHTS. Holders of Preferred Stock shall have
no pre-emptive rights to acquire additional shares of Preferred
Stock.
<PAGE> Page 185
EXHIBIT A
Treasury Bill Rate
Except as provided below in this paragraph, the "Treasury Bill
Rate" for each dividend period will be the arithmetic average of
the two most recent weekly per annum market discount rates (or
the one weekly per annum market discount rate, if only one such
rate shall be published during the relevant Calendar Period (as
defined below)) for three-month U.S. Treasury bills, as published
weekly by the Federal Reserve Board during the Calendar Period
immediately prior to the ten calendar days immediately preceding
the first day of the dividend period for which the dividend rate
on Preferred Stock Series E-7, is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per
annum market discount rate during any such Calendar Period, then
the Treasury Bill Rate for the related dividend period shall be
the arithmetic average of the two most recent weekly per annum
market discount rates (or the one weekly per annum market
discount rate, if only one such rate shall be published during
the relevant Calendar Period) for three-month U.S. Treasury
bills, as published weekly during such Calendar Period by any
Federal Reserve Bank or by any U.S. Government department or
agency selected by the Company. In the event that a per annum
market discount rate for three-month U.S Treasury bills shall not
be published by the Federal Reserve Board or by any Federal
Reserve Bank or by any U.S. Government department or agency
during such Calendar Period, then the Treasury Bill Rate for such
dividend period shall be the arithmetic average of the two most
recent weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate shall be
published during the relevant Calendar Period) for all of the
U.S. Treasury bills then having maturities of not less than 80
nor more than 100 days, as published during such Calendar Period
by the Federal Reserve Board or, if the Federal Reserve Board
shall not publish such rates, by any Federal Reserve Bank or by
any U.S. Government department or agency selected by the Company.
In the event that the Company determines in good faith that for
any reason no such U.S. Treasury bill rates are published as
provided above during such Calendar Period, then the Treasury
Bill Rate for such dividend period shall be the arithmetic
average of the per annum market discount rates based upon bids
during such Calendar Period for each of the issues of marketable
non-interest bearing U.S. Treasury securities with a maturity of
not less than 80 nor more than 100 days from the date
<PAGE> Page 186
of each such quotation, as quoted daily for each business day in
New York City (or less frequently if daily quotations shall not
be generally available) to the Company by at least three
recognized primary U.S. Government securities dealers selected by
the Company. In the event that the Company determines in good
faith that for any reason the Company cannot determine the
Treasury Bill Rate for any dividend period as provided above in
this paragraph, the Treasury Bill Rate for such dividend period
shall be the arithmetic average of the per annum market discount
rates based upon the closing bids during such Calendar Period for
each of the issues of marketable interest-bearing U.S. Treasury
securities with a maturity of not less than 80 nor more than 100
days from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations shall not be generally available) to the Company by at
least three recognized primary U.S. Government securities dealers
selected by the Company.
Ten Year Constant Maturity Rate
Except as provided below in this paragraph, the "Ten Year
Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten
Year Average Yields (or the one weekly per annum Ten Year Average
Yield, if only one such Yield shall be published during the
relevant Calendar Period as provided below, as published weekly
by the Federal Reserve Board during the Calendar Period
immediately prior to the ten calendar days immediately preceding
the first day of the dividend period for which the dividend rate
on Preferred Stock, Series E-7 is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per
annum Ten Year Average Yield during such Calendar Period, then
the Ten Year Constant Maturity Rate for such dividend period
shall be the arithmetic average of the two most recent weekly per
annum Ten Year Average Yields (or the one weekly per annum Ten
Year Average Yield, if only one such Yield shall be published
during such Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Bank or by any U.S.
Government department or agency selected by the Company. In the
event that a per annum Ten Year Average Yield shall not be
published by the Federal Reserve Board or by any Federal Reserve
Bank or by any U.S. Government department or agency during such
Calendar Period, then the Ten Year Constant Maturity Rate for
such dividend period shall be the arithmetic average of the two
most recent weekly per annum average yields to maturity (or the
one weekly average yield to maturity, if only one such yield
shall be published during the relevant Calendar Period) for all
of the actively traded
<PAGE> Page 187
marketable U.S. Treasury fixed interest rate securities (other
than Special Securities (as defined below)) then having
maturities of not less tan eight nor more than twelve years, as
published during such Calendar Period by the Federal Reserve
Board or, if the Federal Reserve Board shall not publish such
yields, by any Federal Reserve Bank o by any U.S. Government
department or agency selected by the Company. In the event that
the Company determines in good faith that for any reason the
Company cannot determine the Ten Year Constant Maturity Rate for
any dividend period as provided above in this paragraph, then the
Ten Year Constant Maturity Rate for such dividend period shall be
the arithmetic average of the per annum average yields to
maturity based upon the closing bids during such Calendar Period
for each of the issues of actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date not less than eight nor
more than twelve years from the date of each such quotation, as
quoted daily for each business day in New York City (or less
frequently if daily quotations shall not be generally available)
to the Company by at least three recognized primary U.S.
Government securities dealers selected by the Company.
Twenty Year Constant Maturity Rate
Except as provided below in this paragraph, the "Twenty Year
Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty
Year Average Yields (or the one weekly per annum Twenty year
Average Yield, if only one such Yield shall be published during
the relevant Calendar Period), as published weekly by the Federal
Reserve Board during the Calendar Period immediately prior to the
ten calendar days immediately preceding the first day of the
dividend period for which the dividend rate on Preferred Stock,
Series E-7 is being determined. In the event that the Federal
Reserve Board does not publish such a weekly per annum Twenty
Year Average Yield during such Calendar Period, then the Twenty
Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty
Year Average Yields (or the one weekly per annum Twenty Year
Average Yield, if only one such Yield shall be published during
such Calendar Period), as published weekly during such Calendar
Period by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Company. In the event that
a per annum Twenty Year Average Yield shall not be published by
the Federal Reserve Board or by any Federal Reserve Bank or by
any U.S. Government department or agency during such Calendar
Period, then the Twenty Year Constant Maturity Rate for such
dividend
<PAGE> Page 188
period shall be the arithmetic average of the two most recent
weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield shall be
published during such Calendar Period) for all of the actively
traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not
less than eighteen nor more than twenty-two years, as published
during such Calendar Period by the Federal Reserve Board or, if
the Federal Reserve Board shall not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or
agency selected by the Company. In the event that the Company
determines in good faith that for any reason the Company cannot
determine the Twenty Year Constant Maturity Rate for any dividend
period as provided above in this paragraph, then the Twenty Year
Constant Maturity Rate for such dividend period shall be the
arithmetic average of the per annum average yields to maturity
based upon the closing bids during such Calendar Period for each
of the issues of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) with a
final maturity date not less than eighteen nor more than twenty-
two years from the date of each such quotation, as quoted daily
for each business day in New York City (or less frequently if
daily quotations shall not be generally available) to the Company
by at least three recognized primary U.S. Government securities
dealers selected by the Company.
As used herein, the term "Calendar Period" means a period of 14
calendar days; the term "Special Securities" means securities
which may, at the option of the holder, be surrendered at face
value in payment of any federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax
benefits or which were originally issued at a deep or substantial
discount; the term "Ten Year Average Yield" means the average
yield to maturity for actively traded marketable U.S. Treasury
fixed interest rate securities (adjusted to constant maturities
of ten years); and the term "Twenty Year Average Yield" means the
average yield to maturity for actively traded marketable U.S.
Treasury fixed interest rate securities (adjusted to constant
maturities of 20 years).
OPINION OF SUSAN A. THOMSON
May 1, 1997
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to you in connection with the
proceedings for the authorization and issuance of $100,000,000
principal amount of Investment and Installment Debentures of the
Company and the preparation of a Registration Statement (Form
S-2) under the Securities Act of 1933, as amended, which you have
filed with the Securities and Exchange Commission with respect to
the Debentures. (SEC Registration No. 333-19755).
I have examined the Registration Statement referred to above
and such documents and records of the Company and other documents
as I have deemed necessary for the purpose of this opinion.
Based upon the foregoing, I am of the opinion that upon the
happening of the following events,
(a) due action by the Board of Directors of the Company
authorizing the issuance and sale of the Debentures
pursuant to the Indenture dated as of July 6, 1979, as
amended October 3, 1980 and December 13, 1984, between
the Company and First Trust National Association,
successor Trustee;
(b) the Registration Statement referred to above
becoming effective;
(c) compliance with the terms and conditions of the
Indenture with respect to the creation, authentication
and delivery of the Debentures, the due execution by the
Company and authentication and delivery by the Trustee of
the Debentures, and the sale thereof by the Company as
<PAGE> Page 190
contemplated in the Registration Statement and in accordance with
the above-mentioned corporate and governmental
authorizations,
The Debentures will constitute in the hands of the holders
thereof valid, binding and legal outstanding obligations of the
Company, in accordance with their terms, subject to applicable
bankruptcy and insolvency laws.
I hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to me in the
Prospectus under the caption "Legal Opinion."
Sincerely,
/S/ Susan Thomson
Susan A. Thomson
Assistant Corporate
Counsel
OPINION OF SUSAN A. THOMSON
May 1, 1997
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
West 929 Sprague Avenue
Spokane, WA 99204
Gentlemen:
I have acted as counsel to Metropolitan Mortgage & Securities
Co., Inc. (the "Company") in connection with the proceedings for
the authorization and issuance of 250,000 shares of Variable Rate
Cumulative Preferred Stock, Series E-7 ("Preferred Stock, Series
E") including the preparation of a Registration Statement (Form S-
2) under the Securities Act of 1933, as amended, which has been
filed with the Securities and Exchange Commission. (SEC
Registration No. 333-19755).
I have examined the Registration Statement referred to above
and such other documents and records as I have deemed necessary
for the purpose of this opinion.
Based upon the foregoing, and subject to the Board of
Directors' adoption of Articles of Amendment to the Company's
Article of Incorporation which incorporate the Statement of
Rights, Designation and Preferences of variable Rate Cumulative
Preferred Stock, Series E-7, and the filing of same with the
Secretary of State of the State of Washington in accordance with
RCW 23B.06.020, I am of the opinion that:
(1) the Preferred Stock, Series E-7 of the Company which
is being registered, when issued and sold in the manner
and for the consideration contemplated by the
Registration Statement, will be legally issued, fully
paid and non-assessable; and
(2)in the event of dissolution, liquidation or winding
up of the affairs of the Company, whether voluntary or
involuntary, the holders of Preferred Stock, Series E-7
<PAGE> Page 192
will be entitled to receive, on parity with all other issued and
outstanding preferred stock, before any payment or
distribution is made on the Company's Class A or Class B
Common Stock, the amount of ($100.00 per share plus an
amount equal to all accrued and unpaid dividends thereon
to the date of distribution or payment; and
(3) The liquidation preference of the preferred stock
exceeds the par value thereof. There are no
restrictions upon surplus by reason of such excess and
there are no remedies available to security holders by
reason of such excess before or after payment of any
dividend that would reduce surplus to an amount less
than the amount of such excess and which remedies arise
by reason of such excess.
This opinion is furnished pursuant to the requirements of
Item 601(b)(5) of Regulation S-K.
I hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to me
in the Prospectus under the caption "Legal Opinion."
Sincerely,
/S/ Susan Thomson
Susan A. Thomson
Assistant Corporate Counsel
CONSENT OF
INDEPENDENT ACCOUNTANTS
Metropolitan Mortgage & Securities Co., Inc.
Spokane, Washington
We consent to the inclusion in this Pre-Effective Amendment
No. 1 to Registration Statement on Form S-2 (File No. 333-19755)
of our reports, which include an explanatory paragraph describing
changes in the method of accounting for impaired loans in fiscal
1996, dated December 6, 1996 on our audits of the consolidated
financial statements and financial statement schedules of
Metropolitan Mortgage & Securities Co., Inc. and subsidiaries.
We also consent to the reference to our firm under the caption
"Experts".
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Spokane, Washington
April 30, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Susan Thomson
and Reuel Swanson and each of them, his true and lawful attorney-
in-fact and agent with full power of substitution and
resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement on Form
S-2 and file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto such attorney-in-fact and
agents full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the
premises, to all intents and purposes and as full as they might
or could do in person, hereby ratifying and confirming all that
such attorneys-in-fact and agents, or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1993,
this registration statement has been signed by the following
person in the capacities and on the dates indicated.
Signature Title
Date
/S/ C. Paul Sandifur, Jr.
________________________ President, Chief Executive
C. Paul Sandifur, Jr. Officer, Chairman of the Board
January 10, 1997
/S/ Bruce J. Blohowiak
________________________ Executive Vice President, Chief
Bruce J. Blohowiak Operating Officer, Director
January 10, 1997
/S/ Steven Crooks
________________________ Vice President
Steven Crooks (Principal Financial Officer)
January 10, 1997
/S/ Reuel Swanson
________________________ Secretary and Director
January 10, 1997
Reuel Swanson
/S/ Irv Marcus
________________________ Director
January 10, 1997
Irv Marcus
/S/ Charles H. Stolz
________________________ Director
January 10, 1997
Charles H. Stolz
CERTIFICATE OF ADOPTION OF CORPORATE RESOLUTION
I, Reuel Swanson, hereby certify that I am the Secretary of
Metropolitan Mortgage & Securities Co., Inc. As such officer I
have custody of the records of meetings of the Board of Directors
of said corporation and I hereby certify that the following
resolution was unanimously adopted by the Board of Directors of
the corporation at the Board meeting held on December 30, 1996. I
further certify that the Power of Attorney referred to in the
resolution is the Power of Attorney attached hereto which grants
a Power of Attorney to Susan Thomson and Reuel Swanson to execute
any and all amendments (including post-effective amendments) to
this Registration Statement on Form S-2 and file the same, with
all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission.
WHEREAS, each of the Board members has received a copy of
the power of attorney form for his review and approval;
RESOLVED, the Board hereby authorizes each member of the
Board of Directors of the corporation to execute the power of
attorney.
I further certify that said resolution is still in full
force and effect and is not contrary to any provision of the
charter or bylaws of said corporation.
IN WITNESS WHEREOF, this certification is executed as of
this 21st day of March, 1997.
Reuel Swanson, Secretary
_______________________________
Reuel Swanson, Secretary
State of Washington )
)
County of Spokane )
Personally appeared before me the above-named, Reuel Swanson,
personally known to me, who, being duly sworn, deposes and says
that he executed the above instrument.
<PAGE> Page 196
Subscribed and sworn before me this 21st day of March, 1997.
/S/Jill C. Arnold
(Notary Public)
Residing at Spokane, WA.
My Commission Expires 2/26/2000
<PAGE> Page 197
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 167,879
<SECURITIES> 164,819
<RECEIVABLES> 758,427
<ALLOWANCES> 10,193
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 17,777
<DEPRECIATION> 9,261
<TOTAL-ASSETS> 1,282,659
<CURRENT-LIABILITIES> 0
<BONDS> 363,427
<COMMON> 293
0
21,518
<OTHER-SE> 24,532
<TOTAL-LIABILITY-AND-EQUITY> 1,282,659
<SALES> 0
<TOTAL-REVENUES> 156,672
<CGS> 0
<TOTAL-COSTS> 119,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,360
<INTEREST-EXPENSE> 18,788
<INCOME-PRETAX> 12,382
<INCOME-TAX> 4,236
<INCOME-CONTINUING> 8,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,038
<EPS-PRIMARY> 32,073.00
<EPS-DILUTED> 32,073.00
</TABLE>
